It's the fastest rise in uranium spot price in the 21st century.

On August 17th the Sprott Physical Uranium Trust (SPUT), a “true” physical commodity fund giving investors the opportunity to own physical uranium, announced the launch of its “At-the-market” equity program. The spot price of uranium (i) has since risen by 40% from $30.75 on August 17th to $43.05 on September 27th, with a high of $50.80 on September 17th. The recent rise of 40% over 40 days is the fastest rise of uranium spot prices in the 21st century, and possibly ever.

1. How is uranium usually traded?

The spot price is not representative of the price at which uranium is bought and sold. A majority of the uranium traded is linked to long-term supply contracts between uranium/nuclear fuel producers and utilities that operate nuclear power plants. The prices at which these long-term supply contracts are fulfilled are often much different from the spot prices.

2. How has SPUT affected the spot market?

SPUT is a close-ended fund which gives investors the opportunity to own physical uranium. Since July 17th, it has been raising capital to buy uranium in the spot market. This has caused the spot price of uranium to rise dramatically. SPUT now holds over 29 million pounds of U3O8 (ii). That is enough to satisfy the nuclear fuel requirement for all the nuclear power plants in France for roughly a year (iii).

3. How do SPUT investors benefit from SPUT’s investment strategy?

SPUT is a “true” commodity fund. Its value is linked to the price and quantity of the uranium it holds. SPUT Investors will experience the usual benefits of investing in commodity funds (e.g. diversification, liquidity, etc.). Presently SPUT is the only investment vehicle that allows retail investors to own physical uranium – other uranium ETFs may invest in mining/exploration companies’ equity and debt or SPUT itself. The following features of SPUT affect the nature of SPUT investors’ returns

• SPUT will not use leverage other than short term borrowings to settle trades (iv)
• SPUT may also engage in loaning and swaps/exchanges using the uranium it holds (v) but this may not be a major component of their returns just as they have not contributed much to other physical commodity funds managed by Sprott Asset Management LP
• Uranium cannot be redeemed by investors; SPUT will only buy and store uranium in perpetuity (vi)

The benefit to SPUT Investors should, therefore, be in the form of capital gains on their units and in proportion to the rise in the price of uranium after their purchase.

4. How does this affect uranium availability in the spot market?

SPUT fund managers do not think that they have cornered the uranium market (vii). Utilities may be concerned about long-term availability of uranium during their next procurement cycles.

Additionally, supply of uranium to the market can be increased in the medium term through the expansion of mines and through resumption of production of uranium from mines that are currently under care and maintenance.

Cameco stopped producing uranium ore from its McArthur River mine in 2018, putting it under "care and maintenance". If operational, this mine alone can supply 10-15% of the world's annual uranium demand. To fulfill its long-term contractual commitments, Cameco has instead been relying on its producing mines - Cigar Lake and Inkai, its inventory of uranium and on uranium bought in the the spot market.

If the decision is made to operationalize McArthur River, ramping up production could take ~2 years; Cameco will have to keep purchasing uranium in the spot market while they are ramping up production. Cameco has not yet announced the resumption of production in McArthur River. To me this indicates that according to their current analysis, there will be enough uranium in the spot market for them to buy and they can rely on their inventories if spot prices get too high for short periods of time.

A few days ago, Cameco posted new jobs on its website. This has led to some speculation that they are planning to resume operations in McArthur River. An official announcement of a change in their policy should be seen as a signal of there being a deficit of uranium in the market.

5. Is the uranium squeeze on?

What do you think?

References

(i) All prices are from Business Insider: https://markets.businessinsider.com/commodities/uranium-price Uranium does not trade in transparent markets. Hence, the prices vary across data providers.

(ii) From https://sprott.com/investment-strategies/physical-commodity-funds/uranium/ retrieved on 28th September 2021

(iii) From https://sprott.com/insights/webcast-replay-uranium-a-key-element-for-a-net-zero-carbon-future/ retrieved on 28th September 2021

(iv) https://sprott.com/media/4122/uranium-management-information-circular.pdf pp 74

(v) https://sprott.com/media/4122/uranium-management-information-circular.pdf pp 75

(vi) https://www.ft.com/content/381fc11b-5cc1-499e-b580-d046aa91d04c

(vii) https://www.ft.com/content/381fc11b-5cc1-499e-b580-d046aa91d04c