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Sprott Uranium Report

Uranium‘s Mixed February

Uranium‘s Mixed February

Performance as of February 28, 2023

Asset 1 MO* 3 MO* YTD* 1 YR 3 YR 5 YR

U3O8 Uranium Spot Price 1

0.20% 2.87% 5.25% 4.96% 26.87% 18.79%

Uranium Mining Equities (Northshore Global Uranium Mining Index) 2

-7.96% 0.50% 5.63% -9.24% 50.55% 19.33%
Uranium Junior Mining Equities (Nasdaq Sprott Junior Uranium Miners Index TR) 3 -12.87% -7.17% 1.13% -20.96% 59.62% N/A

Commodities (BCOM Index) 4

-5.05% -8.53% 1.13% -7.33% 14.35% 3.79%

 U.S. Equities (S&P 500 TR Index) 5

-2.44% -2.28% 1.13% -7.69% 12.14% 9.82%

U.S. Bonds  (Bloomberg Barclays US Agg Total Return Value Unhedged USD Index) 6

-2.59% -0.04% 1.13% -9.72% -3.77% 0.53%

Sources: Bloomberg and Sprott Asset Management LP. Data as of February 28, 2023.
*Performance for periods under one year not annualized.

Spot Uranium's Relative Resilience in February

Although February saw a reversal of January's positive market performance, spot uranium posted a slight gain of 0.20%. The U3O8 uranium spot price rose from $50.75 to $50.85 per pound in February and remains up 5.25% year-to-date as of February 28. This marks a continuation of U3O8's longer-term positive performance, which has appreciated 136.51% for the five years ending February 28, 2023.1 By contrast, the broader equity, bond and commodity markets generally fell in February on the reversal of expectations that the Federal Reserve would stop its interest rate hikes.

We believe that uranium market fundamentals, which are the most positive in over a decade, will continue to be the primary performance driver, as shown by February's results. The U3O8 uranium spot price maintained its value in February while other metals and commodity prices fell; this also highlights physical uranium's low historical correlation to other major asset classes and its potential to provide diversification in portfolios (see Figure 2).

Figure 1. Uranium Outperforms Other Asset Classes in the Short Term (12/31/2019-02/28/2023)

Uranium Short-Term Performance Chart
Source: Bloomberg and Sprott Asset Management. Data as of 02/28/2023. Uranium Miners are measured by the Northshore Global Uranium Mining Index (URNMX index); U.S. Equities are measured by the S&P 500 TR Index; the U308 Spot Price is measured by a proprietary composite of U3O8 spot prices from TradeTech; U.S. Bonds are measured by the Bloomberg Barclays US Agg Total Return Value Unhedged USD Index (LBUSTRUU); Commodities are measured by the Bloomberg Commodity Index (LLCBCOM); and the U.S. Dollar is measured by DXY Curncy Index. You cannot invest directly in an index. Included for illustrative purposes only. Past performance is no guarantee of future results. 

Uranium Miners Caught in February Drawdown

Uranium mining equities, in contrast to physical uranium, fell 7.96% for the month but remain up 5.63% year-to-date. Like physical uranium, uranium mining equities have had notable performance longer-term with a 142.04% return for the five years ending February 28, 2023.2

Equity markets continued to be affected by rising interest rate expectations in February, as was the case through most of 2022. The U.S. economy showed few signs of slowing, with the U.S. labor markets and consumer spending surprisingly strong in February, defying expectations. Higher inflation concerns and expectations of additional Fed rate hikes were the primary cause of the equity drawdown in February. While broad equities fell 2.44% (S&P 500 Total Return Index), uranium miners lost 7.96%, a reminder of the inherently higher risk of uranium equities.

Uranium juniors, including Encore Energy Corp and Paladin Energy Limited, also announced signing uranium purchase contracts with utilities in recent months.

Junior Uranium Miners Make Progress

Among uranium equities, junior uranium miners were the main detractors in February. The junior miner profile of less liquidity and early stage mine development can increase volatility and lead to larger drawdowns in tough months. These qualities, however, give them the potential for greater upside in uranium bull markets, as shown in Figure 1. Despite the selling pressure in February, junior uranium miners continue to make progress with production restarts, uranium contracting with utilities and exploration programs. Uranium juniors, including Encore Energy Corp and Paladin Energy Limited, also announced signing uranium purchase contracts with utilities in recent months.

Figure 2. U3O8 Uranium Spot Price Correlations (02/28/2003-02/28/2023)

Uranium Low Correlation Chart
Source: Bloomberg and TradeTech LLC. Data for the uranium spot price is from TradeTech LLC. Other asset classes are from Bloomberg and are the SPGSCI Index, SPX Index, LBUSTRUU Index, FNRE Index, Golds Comdty, LBUTTRRUU Index and DXY Curncy. Included for illustrative purposes only. Past performance is no guarantee of future results.

Record Increases in Long-Term Uranium Contracting

Uranium miners have recently been grabbing headlines with significantly sized uranium contracts that reflect higher demand for long-term contracting in the uranium industry. Not only has the volume of long-term contracting increased, but the prices for the uranium that is likely to be supplied under these contracts have generally increased with higher caps and floors. For reference, per TradeTech, the average monthly price of the U3O8 uranium spot price in 2021 was $35 and in 2022 it was $50.

Cameco, Canada's leading uranium producer, announced in February that it had entered into an agreement with Energoatom, Ukraine's state-owned nuclear energy utility, for a major supply contract. Under the agreement, Cameco will provide all of Ukraine's nuclear fuel needs from 2024 to 2036,7 helping the country move away from its dependence on Russian supplies. Ukraine’s supply needs are significant, given that it is the world's seventh-highest nuclear power generator (2021), with about half of its electricity supply reliant on nuclear.8 Cameco is expected to supply approximately 15.3 million KgU as UF6 (uranium oxide, U3O8, is converted into uranium hexafluoride, UF6, so that it can be enriched and then further processed into nuclear fuel). This UF6 supply is equivalent to 40.1 million pounds of U3O8.

In addition, Energoatom has historically operated the Zaporizhzhya nuclear power plant (operating six reactors) which is currently under Russian control. Should Energoatom regain control of the Zaporizhzhya plant, the new Cameco-Energoatom agreement includes an option for Cameco to supply the required roughly 10.4 million KgU as UF6 (approximately 27.2 million pounds of U3O8). Putting Cameco's 40-67 million pound Energoatom agreement in context, there were approximately 114 million pounds of total long-term contracts in 2022 per UxC. We believe this figure is understated given that Cameco alone accounted for 80 million pounds in 2022.9 For perspective, Cameco signed contracts for only 30 million pounds in 2021.

Given Cameco's role as a bellwether uranium miner (based on its relative size and quality of assets), its strong Q4 2022 results announcement in February indicates the industry’s positive fundamentals. Cameco beat Q4 earnings expectations and reported adjusted earnings per share of $0.09, beating the consensus of $0.06. Cameco CEO Tim Gitzel reinforced the industry's positive outlook by stating, "Demand for nuclear power, supported by growth across the near, medium and long term, is driving the best fundamentals we have ever seen for the nuclear fuel market." Cameco has also increased guidance for production at the McArthur River/Key Lake uranium mine and mill to 18 million pounds per year in 2024 (versus 15 million previously). McArthur River/Key Lake resumed production in 2022 and has an estimated 25 million pound capacity. Cameco also upped its Cigar Lake production guidance for 2024 from 13.5  million pounds to 18 million pounds.

Nuclear Energy is Crucial to the Energy Transition

The performance of uranium miners in February was dominated by systemic factors and not a reflection of the sector's increasingly bullish fundamentals. Looking beyond the short-term performance, we believe the uranium bull market still has a long way to run. We believe conversion and enrichment services price increases will likely cascade to the uranium spot price and support uranium miners. Over the long term, increased demand in the face of an uncertain uranium supply will likely support a sustained bull market.

Nuclear energy and uranium's critical role in energy security may likely be paramount going forward. Russia's invasion of Ukraine sparked a global energy crisis that forced many countries to reimagine their energy supply chains. In past years, Western countries' energy policies have predominantly favored renewable energy to reduce reliance on fossil fuels. However, renewables often suffer from intermittency and low capacity and require offsets with baseload energy sources, such as coal, natural gas or nuclear power plants. Of these, nuclear power has the highest baseload capacity. We believe ongoing supply chain risks may likely cause utilities to seek out the baseload reliability of nuclear power.

Governments Continue to Embrace Nuclear Power

The energy transition movement is structural and we believe nuclear energy is a crucial solution for decarbonizing the global energy supply. Growing global recognition by governments, catalyzed by the need for greater energy security, is likely to continue to be a dominant theme. In February, Japan continued this trend by adopting a plan to make maximum use of nuclear power.10 The plan will allow companies to operate reactors beyond the 60-year limit and to build next-generation nuclear reactors to replace decommissioned plants. France also announced that it aims to create a pro-nuclear alliance with 12 other European Union (EU) countries to advocate for nuclear energy in EU politics,11 which may help combat Europe's unlevel playing field for renewables.

We believe the uranium bull market remains intact despite the uncertain macroeconomic environment. There has been an unprecedented number of announcements for nuclear power plant restarts, life extensions and new builds that are likely to create incremental demand for uranium. However, the current uranium price still remains below incentive levels to restart tier 2 production, let alone greenfield development.

Figure 3. Uranium Bull Market Continues (1968-2023)

Please click here to see an enlarged chart.

Uranium Bull Market Chart Feb. 2023
Note: A “bull market” refers to a condition of financial markets where prices are generally rising. A “bear market” refers to a condition in financial markets where prices are generally falling.
Source: TradeTech Data as of 02/28/2023.
Past performance is no guarantee of future results.

 

1 The U3O8 uranium spot price is measured by a proprietary composite of U3O8 spot prices from UxC, S&P Platts and Numerco.
2 The North Shore Global Uranium Mining Index (URNMX) was created by North Shore Indices, Inc. (the “Index Provider”). The Index Provider developed the methodology for determining the securities to be included in the Index and is responsible for the ongoing maintenance of the Index. The Index is calculated by Indxx, LLC, which is not affiliated with the North Shore Global Uranium Miners Fund (“Existing Fund”), ALPS Advisors, Inc. (the “Sub-Adviser”) or Sprott Asset Management LP (the “Adviser”).
3 The Nasdaq Sprott Junior Uranium Miners™ Index (NSURNJ™) was co-developed by Nasdaq® (the “Index Provider”) and Sprott Asset Management LP (the “Adviser”). The Index Provider and Adviser co-developed the methodology for determining the securities to be included in the Index and the Index Provider is responsible for the ongoing maintenance of the Index. The Adviser will provide certain services in connection with the Index including contributing inputs in connection with the eligibility and process to determine the initial selection and ongoing composition of the Index constituents.
4 The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index that tracks prices of futures contracts on physical commodities, and is designed to minimize concentration in any one commodity or sector. It currently has 23 commodity futures in six sectors.
5 The S&P 500 or Standard & Poor's 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.
6 The Bloomberg USAgg Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
7 Source: CCO and Energoatom Agree on Commercial Terms to Supply Ukraine’s Full Natural UF6 Needs through 2035.
8 Source: World-Nuclear.org, Nuclear Power Today.
9 Source: Cameco Reports 2022 Fourth Quarter Results.
10 Source: The Japan News, Japan Adopts Plan to Make Maximum Use of Nuclear Power.
11 Source: Reuters, France seeks pro-nuclear alliance for EU energy talks.
Jacob White
Jacob White, CFA
ETF Product Manager, Sprott Asset Management LP
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