CANADIAN INVESTMENT FUND SPROTT BOUGHT PHYSICAL URANIUM IN A LARGE QUANTITY BETTING ON 'GREEN' NUCLEAR POWER

Investment funds change the shape of uranium market

10 September 2021

Investment funds are shaping the uranium spot market leading to an unprecedented level of demand. How those funds will affect the availability of secondary supplies of uranium to consumers remains to be seen, and the spot market should not be seen as a reliable source for significant purchases of uranium ore in the long term, according to speakers and panellists at World Nuclear Association Annual Symposium 2021.

L-R: Munro, Lichtenwald, Rizvi and Batyrbayev

These trends were highlighted in a panel discussion following the launch of the latest edition of World Nuclear Association's Nuclear Fuel Report on 8 September and also by Kazatomprom Chief Operating Officer Askar Batyrbayev in a high-level session the next day.

"One thing that's certainly in full gear in the uranium end of the fuel cycle right now is the role of investment funds, and new vehicles that have been set up to raise funds to accumulate for the long term or sequester U3O8 holdings," panel chair Brandon Munro, CEO of Bannerman Resources, said, before inviting panellists to discus the role such funds are now playing and how they might develop in the future.

The Sprott Physical Uranium Trust began trading on the Toronto Stock Exchange in July and this week has reached USD1 billion in assets, with uranium holdings of 24,274,212 pounds U3O8 (9337 tU). Matt Lichtenwald, manager, market research at Cameco, identified Sprott as a main factor in the "run" experienced by the uranium price over recent weeks.

"Some of the numbers are astonishing … it's been quite amazing to see," he said. The constant "bid pressure" resulting from Sprott's activity is something that the uranium market has not previously experienced, and will help with price discovery by giving investors a broader view of both the supply and demand side of the market, he said. "What that will lead to is, hopefully, a true equilibrium to what the uranium price should be, based on [actual] costs", he said.

There has, in general, been an increasing trend of funds participating in the market over recent years, and this is creating a balance in the market, he said. This is leading to a more balanced future and a healthier market going forward.

Shaping the spot market

The Nuclear Fuel Report does not attempt to forecast or estimate what secondary demand could emerge, Munro pointed out.

Riaz Rizvi, a partner at Rice Capital Partners and former chief commercial officer for Kazatomprom, added that the Fuel Report does not consider what amount of material might in future be considered as "strategic" by governments or by commercial players.

"Really, the big story here is how funds are shaping the spot market," he said. "This is an unprecedented level of demand in the spot market - something we haven't really seen before - and what the report does is assume that there is a lot of commercial inventory which is going to fill a gap that already exists between primary and secondary supply versus demand."

Rizvi said he did not "feel strongly" that "a lot of material" would come out of such funds. "That is not what they are designed to do. And when you look around at the rest of the uranium market in terms of commercial inventory, the [World Nuclear Association] report shows that those numbers are going down fairly significantly," he said.

"So when you start to look at it, the impact that these funds have could be very significant in terms of the dynamics of the negotiations between utilities and producers," he said. The "constant bid" for spot market material being driven by the "ever-increasing appetite of investors looking at the fundamentals of our industry" essentially withdrew material that, in the past, could have been used to meet short-term utility demand. "That's going to be harder to do going forward: it's a big, big shift in the way that our industry operates," he said.

Market shift

The spot market became the main avenue of purchase for many uranium market players in 2020 and 2021, when mining companies' response to the COVID pandemic led to some 20 million pounds of U3O8 being "left in ground" Batyrbayev said. "COVID catalysed a transformation of the uranium market and marked a shift from a surplus environment to a deficit one," he said.

Lost production was primarily compensated by increased inventory drawdown but at the same time COVID had exposed the fragility of the spot market, he said. The past two years have seen an increased diversity of buyers on the spot market, with major and junior suppliers entering market in addition to the traditional utilities and traders. These, as well as the entrance of financial players, have contributed to firm "unconventional" demand, he said.

A key question, he said, is whether such interest is an isolated occurrence for the current period, or the forerunner for a much larger demand trend with more new players such as banks and investors entering the market.

Meanwhile, traditional uranium demand remains robust, and growing interest in nuclear in the long term will need more supplies, and the current price environment does not allow for covering future requirements considering the high capital expenditures and long lead times to develop new uranium projects," he said. Multiple factors are in play, including as expiring long term contracts, increasing demand from financial players, and the need to replenish strategic inventories. "Given both conventional and unconventional demand, there might not be enough supply for everybody," he said.

Given the current market fundamentals, he said, Kazatomprom has decided to maintain its 2023 production at a similar level to 2022 which is 20% lower than licensed nominal capacity. Supply chain disruptions as a result of COVID - including shortages of certain production materials and delays to exploration and development works - could result in the decrease in the company's 2021 production being more than 20%, he said.

All of Kazatomprom's supply for 2021 is "guaranteed" to customers and for the first time in many years the company has not needed to sell on the spot market, Batyrbayev said.

"To ensure timely deliveries to our customers, Kazatomprom at times was and will be a buyer on the spot market. However we see that the spot market, due to its fragility and volatility, is not a reliable source for significant purchases of uranium ore. That leaves a question on the security of supply in the long term."

Researched and written by World Nuclear News

News Bites

Uranium price explosion is just the beginning; "You ain't seen nothing yet" says Rick Rule

David Lin David Lin  

Friday September 10, 2021 

(Kitco News) - The uranium market has been plagued by illiquidity, but with the advent of metal-backed funds, like the Sprott Physical Uranium Trust Fund (SRUUF), the problem of liquidity is alleviated, said Rick Rule, director of Sprott.

The Trust was launched in the summer, following the re-organization of the Uranium Participation Corp., and the price of uranium subsequently rose from $30/lb to above $40/lb on Friday.

Rule told David Lin, anchor for Kitco News, said that the current price is still cheap, especially when considering that most uranium producers in North America can't yet restart operations even with $40/lb. Operations have been suspended due to a combination of uneconomical uranium prices and COVID-19.

"Sprott is going to make an application to list that trust on the New York stock exchange, where the overwhelming majority of the volume that [investors] enjoy in their precious metals trusts occurs. If that happens in terms of inflows into the trust, if the material is available to buy in the spot market quote, then you ain't see nothing yet,' he said.

Uranium trust pits ambitious investors against nuclear power industry


A Canadian investment fund almost singlehandedly launched uranium spot prices into orbit with a buying spree that has put the nuclear power industry on alert.

The spot uranium price for deliveries this month leapt 30.8% over 30 days to $39.75/lb as of 1 p.m. on Sept. 7 — a steep rise for a commodity market that previously saw years of sagging prices, according to data from S&P Global Platts. Market analysts credited Sprott Asset Management LP, a uranium trust formed in July to buy up low-cost uranium on the spot market and hold it for the long-term, for jolting the market with a wave of purchases.

The nuclear power industry, which largely buys fuel on long-term contracts, is not panicking as it can absorb even a one-third increase in price, but the industry is wary that the fund could continue to push up fuel costs.

For Sprott, this is all part of the plan.

"We're just a conduit for investors to express their view, right?" Sprott CEO John Ciampaglia told S&P Global Market Intelligence. "Our job is [to] go out and buy more pounds. If that has a knock-on effect on the price, then I guess indirectly we've got that influence on price discovery."



Big fish, small pond

The thesis Sprott provided to investors was simple: If they were given funding, they would purchase material out of a spot market that was flooded with excess supply following the 2011 nuclear disaster at Fukushima Daiichi in Japan.

Between Sept. 2 and Sept. 7, the trust acquired more than 3 million pounds of uranium on the spot market. As of Sept. 7, the trust held 24 million pounds at a market value of more than US$1 billion.

Sprott's Ciampaglia said the investment outfit learned the power of a single market catalyst during the "meme stock" boom earlier in the year. Retail investors made a coordinated purchase of stock in game seller GameStop and sent the stock price soaring despite no change in the fundamentals of the stock. A silver trust held by Sprott benefited when retail investors moved from specific equities to silver-focused market offerings.

The relatively small size of the uranium market could mean an unpredictable level of explosivity if the investor audience broadened, Ciampaglia said.

"You just can't predict how explosive it could be," Ciampaglia said.

The uranium trust benefited from market conditions improving in nuclear energy, as the world moves toward lower carbon energy sources, said Scott Melbye, executive vice president of U.S.-based miner Uranium Energy Corp. However the "correlation" between the trust's buying activity and the rising price is undeniable, Melbye said.

"Sprott coming in has really been the tipping point. It's been very significant."

Nuclear power is watching

After the Fukushima disaster, nuclear power plant operators experienced lower contracting prices. That trend lasted until the coronavirus pandemic knocked major sources of uranium offline, creating a supply shock that drove up prices and incentivized new investment in the space, though that upward trend calmed when the Sprott uranium trust arrived in July.

Power companies with nuclear reactors said they are not worried about price increases resulting from the trust's buying activity — at least not yet.

The fuel cost associated with nuclear energy is far lower than for coal and natural gas generators, so nuclear plants are "relatively insensitive" to a "bump in the spot price," American Nuclear Society president Steve Nesbit told S&P Global Market Intelligence. For nuclear utilities to feel the pain, prices would need to be an "order of magnitude" larger, even twice as high, Nesbit said.

"It takes a while for it to sink in," Nesbit said.

Utilities are monitoring buying activity by the trust, but "it's nothing that's worrying them at this point," Nima Ashkeboussi, senior director of fuel and radiation safety programs at the Nuclear Energy Institute, said.

"Their views [of Sprott] are still forming. They're watching it very closely," Ashkeboussi said.

Analysts see hard times ahead

Ciampaglia said the fund hoped to drive up the price of uranium, but high nuclear fuel costs in the long run could hurt nuclear power's competitiveness against cheaper forms of renewable power. And the industry already faces a declining market for its product going forward: Nuclear power capacity is expected to shrink by more than 20 GW through 2050, according to the U.S. Energy Information Administration.



The entire global nuclear sector could be constrained from future growth, Morningstar analyst Travis Miller said. While nuclear fuel typically makes up a relatively small percentage of utilities' operational costs, a long-term shift in uranium producers' favor could create an issue for any company looking to expand its nuclear fleet, especially in the face of falling renewable power costs.

If uranium prices continue to rise, that puts nuclear power at a competitive disadvantage to other carbon-free sources of energy, Miller said.

"There's a delicate balance here because in the long-run more supply should lead to lower, more stable prices," Miller added. "But in the short-run, higher prices to bring on that supply is going to be a headwind."

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.


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