Uncovering the World of Uranium
Host Ed Coyne is joined by Tim Rotolo, co-creator of the North Shore Global Uranium Mining Index (URNMX), to discuss the current dynamics of the uranium mining sector and how the Index is constructed to provide exposure to the key components of the uranium mining industry.
Ed Coyne: Hello and welcome to Season 2, Episode #4 of Sprott Gold Talk Radio. I'm your host, Ed Coyne, Senior Managing Director at Sprott Asset Management. Today, we'll be revisiting the topic of uranium by taking a deeper dive into the underlining mining companies. I have asked Tim Rotolo of North Shore Indices to join us and talk about all things uranium. Tim, welcome, and thank you for joining Sprott Gold Talk Radio.
Tim Rotolo: Thanks so much for having me. I think it's a great time to be talking about uranium.
Ed Coyne: I would agree. But before we do, most of our listeners probably aren't familiar with you unless they're following uranium right now, and we certainly have those investors. Tell us a bit about yourself and North Shore Indices and how it all came about.
Tim Rotolo: I took a bit of a roundabout path to focusing on uranium. I started my career in wealth management and really got interested in hedge fund investing. I ultimately went to a fund of funds focused on distressed debt and credit investing and event-driven investing and saw that markets were pretty inefficient, especially if you find these little pockets of left-for-dead sectors. I left and started my own firm focused on markets that exhibited capital scarcity and higher expected returns. Ultimately, fast forward to 2017 — after a short stint doing specialty finance and cannabis — I had the good fortune of crossing paths with Mike Alkin, who was developing this really interesting thesis around uranium. And it just reminded me of some of the best distressed investment themes that I saw when I was at the fund of funds. Uranium was a really orphaned sector, valuations had just been decimated by a multi-year bear market. I partnered with Mike to form an entity called Sachem Cove Partners, which I'm sure many investors are aware of in the uranium space.
Through that, we saw this opportunity really when GlobalX decided to change the mandate of their uranium fund to try and launch a pure-play uranium mining index. Ultimately I formed North Shore Indices with that purpose in mind. We ended up launching that Index in mid-2019. And then, the fund that tracks the index [North Shore Global Uranium Mining Index] was launched in late 2019 [North Shore Global Uranium Mining ETF], and the rest is history. I find myself to be a deeply contrarian, value-focused investor. When Mike's initial thesis was brought to my attention, it had all the hallmarks of a tremendous investment opportunity. And thankfully, it's worked out well.
Ed Coyne: It certainly has. The number one question that most investors ask is, why uranium? But more importantly, why uranium now? And when I say uranium, this is all things uranium, not just the physical side, but specifically for today's call the equity side. Can you walk us through that a bit?
Tim Rotolo: I'll give you two views. If you go back to 2018, the thesis wasn't too dissimilar. There was a very large uranium supply deficit that was forming. Today, it has formed, and now the market agrees with us that it has formed. As someone who got involved in the sector in 2017 and 2018, it was a couple of painful years followed by a couple of great years of the market beginning to appreciate it. Globally, the world has come to appreciate that nuclear power is one of the key components that will help decarbonize our economy. That has been illustrated by what's happening in Europe in terms of the rigidity of its energy system, partially because much of Europe chose to shut down nuclear power and try to shift to renewables.
Why invest in uranium equities today? If you're a little bit of a momentum investor, the story is working. You don't necessarily have to have that long multi-year period where you're waiting for other investors to come and agree. Today is a great example; Cameco has been upgraded three times in the last week. Analysts didn't even cover Cameco, save for maybe one or two Canadian brokerages and Bank of America upgraded them today, and the company stocks are making 11-year highs.
With more investors coming into the sector, it creates this kind of positive feedback loop. And listen, when we first got involved, one of the reasons I thought the ETF and the Index were such important components of the thesis was that you needed incremental general investment dollars to start to move the needle for these companies. And I think that's what you're starting to see. But ultimately, the uranium supply deficit is there. The nuclear demand story is there. The thesis has been dramatically derisked today relative to where we were in 2018 when I think it remained this very deeply contrarian thesis that nuclear power even mattered to the global electric group. I would not say that's a consensus today, but it's beginning to be on the radar of many more investors. For a retail investor or an RIA who wants to put their client into these uranium investments, I think it's a little easier to be involved today than it was two to three years ago.
Ed Coyne: I would certainly agree with that. We always talk about it at Sprott that gold is the original alternative investment. When you think about nuclear, it's really the original green investment when you're talking about going carbon neutral. Uranium is the foundation of that equation. Of course, you have to pull it out of the ground and the mining companies are front and center for that. We would agree that the opportunity there seems pretty tremendous. And it's interesting if you think about what's going on in the U.S. versus the rest of the world. This is one of those cases where we're probably behind the eight ball a bit, if you look at France, for example, and other parts of the world where they've embraced nuclear. The U.S. took a hiatus from nuclear power, and I suspect that will change in the coming decade.
Let's talk about the uranium equities a little further. As you created the Index, give me some examples of the types of things we'd expect to see?
Tim Rotolo: When we looked at what was in the marketplace from an Index perspective, there was a big disconnect between where the opportunity existed and what was available and represented in those indexes. We wanted to create what a traditional investment manager would own when the cycle began to turn. Our Index runs the gamut from $15 billion to $40-50 million market-cap companies. There is a minimum market-cap threshold of $40 million today; it's one of the main criteria for inclusion. Then at the upper end, you have companies that are the world's largest uranium producers. There are really two of those. They're capped at 15%. And one of the reasons why we wanted to cap those large uranium producers is that historically when the uranium cycles go into full bull market mode, the companies that dramatically outperform are not the producers. They are the companies that are near-term producers or exploration companies that have been left for dead. We wanted to make sure that we gave investors a good cross section of exposure. Producers are really important companies. A perfect example is Cameco, which is having a phenomenal year, and so we would never want to exclude a company like that.
But we also recognize that smaller development companies are going to put new mines into production in this cycle that have tremendous upside as they go from cash consumers to cash producers. There's a handful of those companies in the market today. I think there's a growing appreciation that to fill the supply deficit, their uranium mines will be needed sooner rather than later. So those companies have a very important role in the Index. And one of the unique things that I wanted to do — and this goes back to my fund to fund days and doing portfolio construction and thinking about generating a great risk-adjusted return from the index — was, at the end of the day, if you're right about the macro thesis that uranium prices need to move up dramatically because the supply deficit is so large and needs to be filled and you need that and the marginal cost of a new mine is $65-75. To be right there, the price of physical uranium has to go up. So we always wanted to have a fixed exposure to physical uranium. Physical uranium is much less volatile than uranium equities, and so it provides a volatility dampener in big down markets where hopefully physical will outperform the equities. But then it may underperform the equities on the upside, but not dramatically, as you've seen this year. Physical uranium has done very well and outperformed many of the equities. So we have a bifurcated Index. 82.5% will always be invested in uranium miners and 17.5% will be invested in physical uranium and royalty companies. This gives the Index portfolio a little bit of ballast in weaker markets, and it does not cause us to underperform when the markets begin to move up strongly.
Going back to Hedge Fund Investing 101, we wanted to create asymmetry through the actual construction of the Index. We did that in two ways. One is by having these buckets dedicated to physical uranium and miners. We attempted to add further asymmetry by providing additional exposure to the smaller miners and the more development stage companies by capping the producers at 15%. And that's borne out, thankfully.
We also try and be very forward thinking about which new companies are coming into the industry. We take a very fundamental approach to developing our universe rather than a quantitative approach as do many of our peers in the space. They look at a consultant's list of suppliers in the industry. We look at that list, but it's not the end-all-and-be-all to us. We also have some discretion in choosing the constituents that go into the universe and we think we can add value, and Sprott was a perfect example. We were very early to ensure that Sprott Physical Uranium Trust (SPUT) was included in the Index. We knew that SPUT is important to the thesis, not only as a buyer of physical uranium but also the exposure to physical uranium was so important to our Index that we fought to have SPUT included when one of our peers chose to exclude it. The ability to be forward thinking and either remove non-pure play uranium companies like we did in the early days and replace them with these smaller-cap development and exploration companies is one of the reasons why the performance of our Index has been stronger than some of our peers.
Ed Coyne: You give investors a one-stop-shop and cover the waterfront of the uranium investment opportunity. You mentioned some of the larger producers from a market-cap standpoint, which is still small relative to companies like Ford Motor Company, with over $61 billion in market cap through April. McDonald's is about $186 billion in market cap. And then Amazon is over $1.5 trillion in market cap. What is the total size of the opportunity in the uranium sector today relative to those names? I've got to believe it's pretty small in the early days.
Tim Rotolo: To show you the relative improvement of the sector, two years ago, the industry was sub $10 billion in market cap despite being 10% of global electricity. So you have to look at that type of disconnect and to me, that spells opportunity.
Ed Coyne: Say that again. That's amazing what you just said.
Tim Rotolo: Nuclear power generates roughly 10% of global electricity and the entire market cap of the sector is under $10 billion.
Ed Coyne: That's incredible.
Tim Rotolo: Yes, it is just a complete disconnect. As an investor, you look at that and ask, am I missing something? Well, sometimes you're not. Sometimes the market is just really misunderstanding what those assets are and how vital they are. And I think the market is beginning to appreciate just how crucial nuclear power is, not only to today's grid but also to the future grid. So today, the market cap is now about $40 billion. But if you think about where we were in the peak when arguably fundamentals were not nearly as constructive as they are today, there was no supply deficit the last time. There was not the same type of nuclear power growth and there was not a decarbonization effort globally. The market cap was about $150 billion back then. So still meaningful upside just to the growth of the overall market relative to where we were in 2007, 2008. Again, physical uranium prices still haven't made it back to where they were near Fukushima. Even though we've had an incredibly positive backdrop, there's still a lot of skepticism around nuclear power. Just today, one of the German Green Party members was saying, "we don't need nuclear power."
Germany's gas prices are up thousands of percent and its economy is running 20% inflation because they're importing gas and now they're burning coal. And this isn't meant to be a political discussion, but there's a political element here. To me, nuclear power is the rational, pragmatic solution. And for some reason, governments want to fight the rational, pragmatic solution and do the kind of hope-induced, hyperbolic solution despite it not working.
I would add one point, just going back to the earlier discussion about why now. I think there's a second benefit today: over the last decade, not only has there been a bear market in uranium, there's been a bear market in all commodities. That tailwind scared many investors off. We're beginning to see the early stages of recovery and investor interest in commodities broadly. So when you look at all commodities and then think about the energy transition and people wanting to be ESG [environmental, social and governance] friendly or green, uranium has a unique position in that overall opportunity set in that it solves for both of those issues. Uranium gives you exposure to commodities, but it also exposes you to green commodities with a positive fundamental backdrop.
I think that's one of the other big factors that has shifted in favor of uranium today. People are looking for investment opportunities in this space. They weren't two or three years ago; investors weren't looking at how positive the fundamentals were two or three years ago. But now you have investors searching for ways to express a view on nuclear power growth, which is a huge sea change in the investment industry for uranium.
Ed Coyne: I agree. I think that this is something that from a commodity standpoint, speaks volumes, but also from a green energy standpoint, a modern view on commodities. And we've talked a lot about the opportunity in uranium and uranium mining stocks and so forth. In your mind, what are some of the risks that people should be aware of as they go down this path of investing in uranium on the physical and equity sides?
Tim Rotolo: We've seen it just in the last couple of months. The single biggest risk is the tail risk of a significant nuclear power event. The challenge of being an investor in this sector is that it's very hard to understand that probability. I think it's probably smaller than people think. The other challenge is you have a media that has been trained to amplify anything that sounds negative for nuclear. Again, this is not me being a conspiracy theorist. You look at what happened with this Ukraine nuclear power plant. The second it happened, even though the facts were borne out that this was not a nuclear meltdown, the media latched onto these things. That can create a lot of volatility in the sector, and because it's a small commodity sector, it is volatile. And then you have these media amplifications. And there are three or four examples just in the last couple of years. When you saw the most recent earthquake in Japan, it's not "earthquake in Japan." It's "earthquake near Fukushima, and a tsunami warning has been issued." As if we're a foregone conclusion that there will be a second Fukushima nuclear event.
I think that's why position sizing for investors becomes so important. You need to understand the fundamental thesis. You need to have conviction in that thesis to stick with the ultimate outcome, which is higher uranium prices on the back of a large supply deficit and growing nuclear demand. You have to keep reminding yourself of that and size it appropriately for your risk tolerance. You can derisk by owning the physical, not to say that physical uranium prices wouldn't fall just on a knee-jerk reaction around an event, but they'll fall less than the equities. Having that diversification within the sector and even the diversification of owning the highest-quality producers versus owning some of the exciting exploration stories, I think there is a logical rationale for owning a diversified product in the uranium industry makes a lot of sense.
Another significant benefit is this is a very global industry. You have exposure to companies on the Australian Stock Exchange, the Canadian Stock Exchange, the New York Stock Exchange and London. And some of those stocks are fairly thinly traded. And so you can effectively get exposure to all those markets in a single index.
Ed Coyne: We've seen that as a theme across the board, dealing with all mining stocks. Many of these mining companies are relatively small. There's not a lot of float out there. And trying to cherry pick one name is a huge undertaking. And I think having an index in general, particularly in an ETF, makes a lot of sense. Well, before we wrap up this podcast and again, thank you for taking the time to be part of Sprott Gold Talk Radio. This is a great way to educate listeners on a space that maybe they haven't thought about in the past.
Are there any last nuggets or words of wisdom you like to leave a listener with? I always find people like yourself have unique insights into investing. If there's anything you'd like to leave us with before we sign off, that would certainly be appreciated.
Tim Rotolo: Yes. Thank you very much for having me. Again, I think it's a very timely discussion. When we went back two years ago, one of the things we used to talk about a lot was just what if the world came around to nuclear energy? What if all these great things happen? And I think uranium and nuclear power remain somewhat orphaned. It's great that Elon Musk and Mark Andreesen are saying to build nuclear. But I think this is still out of the mainstream media and out of the mainstream consciousness. I tell myself this because I get involved in many orphaned assets. Good things happen to cheap assets. And I think that's the cycle that we're in now where good things are starting to happen in the uranium story. And so, if you haven't been involved, I think taking a close look today makes a lot of sense because we're at the early innings of good things beginning to come to fruition for the uranium in the nuclear power sector.
One thing we haven't talked about is just the whole advanced nuclear reactor story. Again, I think that's bringing more positive attention because it shines the best possible light. Here is the future of not only technology and human innovation, but we're going to take this amazing potential green energy, and we're going to put it in these small little modular units. We're going to make it available to everybody in the world, and we're going to make it more affordable.
When it's framed in that way, people will begin to notice. At the end of the day, there's only one fuel for nuclear power today: uranium. I think the fundamentals are so incredibly bullish. The good news flow is starting to come out, and it's a great time to be involved.
Ed Coyne: Thank you for that. You just gave me another topic to do another podcast later in the year. These small units are fascinating. And it's kind of like you think about banking and unbanked parts of the world, bringing green power and green energy to areas heavily polluted by coal and so forth and it's exciting for all. Tim, it's been a pleasure. Thank you for joining us.
Ed Coyne: For all those listeners out there who are interested in learning more about the world of uranium, both on the physical side, but as well on the underlying equity side, please visit us at sprott.com. And once again, I'm your host, Ed Coyne, and you're listening to Sprott Gold Talk Radio.
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