June 25,2022

Uranium and a Nuclear Future

Gold rebounds off first dip below US$1,700 in over a year

Gold rose 1.3% to US$1,725/oz, with an earlier dip in the week below US$1,700/oz, the first since March 2021, as bears focused on a rate hike expected for next week but bulls bought back in assuming that the Fed's current path is unsustainable.

A look at the fundamentals of the uranium market

This week we look at recent moves in the uranium price and the Sprott Physical Uranium Trust and the longer-term outlook for uranium given a global push towards lower emissions which could mean increased use of nuclear generated electricity.

Producers down but juniors rise as gold and equity markets gain

The producing miners declined, with the GDX off -0.7% on the decline in gold, but the GDXJ was up 2.5% and the larger TSXV-listed Canadian junior gold stocks mixed, given a rise in equity markets, with small caps outpacing the broader market.

Producers down but juniors rise as gold and equity markets gain

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Uranium and a Nuclear Future

Gold rose 1.3% for the week to US$1,725/oz, but not before taking its first dip below US$1,700/oz since March 2021. This appeared to be a battle of the bears, looking to the Fed's expected major rate hike next week and driving the earlier sell off, versus the bulls, driving the rebound, not being convinced the US central bank can continue on its current aggressive path as expectations for a recession rise. For the bears, gold could be hit by rising interest rates boosting real bond yields, making gold a relatively less attractive investment, and through a rising US$, with gold tending to move inversely to the currency. The gold bulls might counter that a recession will decrease demand, lower inflation, and increase unemployment, driving the Fed to pull back on rate hikes, given its dual mandate to control inflation but also maximize employment. Also, although the US$ is at a twenty-year high, some major central banks have started to hike rates, and others may follow, pulling funds flows away from the US$.

The uranium price slides in recent months along with other metals

This week we take a look at recent moves in the uranium price but also the longerterm outlook for the nuclear industry which appears set to drive strong demand for uranium over the next several decades. The uranium price peaked in early April 2022, along with many of the other major metals, which reached highs from around March to May 2022. Most have declined substantially since on fears that the US Fed's rate hikes to curb inflation could drive a recession, resulting in lower industrial demand for metals. The uranium price had risen 47% from the start of 2022 to peak at US$64.5/lb and is now down -27% off the highs to just US$47/lb (Figure 4). The uranium price has been driven in part by the huge rebound in economic demand off the global health crisis lows around March 2020, boosting demand for electricity, for which uranium-fuelled nuclear power is a major global source.

The uranium price slides in recent months along with other metals

Sprott Physical Uranium Trust a key driver of uranium price increase

There has also been a very sector specific driver for uranium, that being the introduction of the Sprott Physical Uranium Trust (SPUT) in July 2021, which has aggressively invested in physical uranium since its inception. The price of the SPUT surged 252% from just US$4.1/unit in July 2021 to US$14.6/unit by mid-September, with its price easing for the following six months. It did eventually gain another 9.0%, rising in Q1/22 along with the last big run for the metals space overall, peaking at US$15.9/unit (Figure 5). Since these highs, SPUT has declined -34.0%, down moderately more than the fall in the uranium price since its peak.

Sprott attempted to get the Canadian-listed SPUT also listed in the US on NYSE Arca, but this was rejected by the US SEC in April 2022, because of the trust's structure and nature of the physical uranium market. Nonetheless, SPUT is likely to continue to be a major new force, allowing access to, and improving liquidity for, the physical uranium market, which was previously opaque with very limited options for investment. SPUT's NAV has already more than tripled from US$1.0bn at its launch, to $2.93bn as of its most recent June 30, 2022 report, although this value will likely have declined with the continued drop in the uranium price in July 2022.

Sprott Physical Uranium Trust a key driver of uranium price increase

Remains to be seen if broader uranium upswing can be maintained

A broader upswing in the uranium price began in 2018, long before the formation of the SPUT, although it remains to be seen it this will be maintained given the continued decline for major metals on macroeconomic concerns (Figure 6). The last major bull market for uranium was from 2003-2007, with a peak at US$136.2/lb in June 2007, part of a general commodities bull market which reversed abruptly in the 2008-2009 global financial crisis. While the uranium price started to recover by 2010, the 2011 Fukushima crisis in Japan drove a pullback in nuclear demand, and the price trended down to lows of US$18.6/lb 2018, marking the start of the current uranium bull market.

Remains to be seen if broader uranium upswing can be maintained

Longer-term outlook for nuclear-driven electricity strong

While the uranium price could continue to see short-term pressure, longer-term the outlook looks strong, with demand for the metal likely to rise substantially. Nuclear electricity production globally has risen from just 7.4 quadrillion British Thermal Units (btu), or 2.6% of total global electricity production in 1980 to 27.7 quadrillion btu, or 4.5% of the total in 2019, and reached as high as 6.6% of the total in 2002 (Figure 7). This puts it at less than half the level of other renewable energy sources combined, which generated 11.5% of total worldwide electricity in 2019. With a concerted push to lower carbon emissions agreed to by most major nations, and nuclear having the lowest emissions of any of the fuel sources, even wind or solar, it seems likely that this source of energy could see increased interest over the next decades.

Longer-term outlook for nuclear-driven electricity strong

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While in terms of absolute levels of global nuclear-generated electricity production the US and China lead, for nuclear electricity as a percentage of total electricity generated, the two leaders are in Europe, France, with a huge 69%, and Ukraine with 55% (Figure 8). The move towards nuclear generated electricity may continue in Europe, with even 'Green' political parties there, which have historically been very anti-nuclear, starting to reconsider their stance on nuclear as a potentially 'green' source of energy, given the very low emissions. The current government in Japan also seems to be moving more towards expanding nuclear energy, after a decade of major pullback following Fukushima.

There is expected to be a major increase in uranium demand from 180 mn lbs of concentrate in 2020, versus supply of 187 mn lbs, for a surplus of 7 mn lbs, to demand of 209 mn lbs by 2035, versus supply of 114 mn lbs for a major 95mn lbs deficit, suggesting a major opportunity for junior miners (Figure 9). The majority of the new demand is to come from China, which already has the largest capacity of nuclear reactors operable, under construction and planned, at 110 TW (Figure 10).

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However, China is expected to nearly triple even this already high number, with an additional 197 TW of capacity. The expansion of nuclear energy generation is also expected to move towards emerging countries, many of which have not previously had substantial nuclear energy. The total 'other' countries beyond the top eleven have 99 TW of capacity operable, under construction, or planned, which could double, with 109 TW of capacity proposed. The majority of these are in Saudi Arabia, South Africa, Turkey, Poland and Brazil, most of which currently have limited nuclear capacity.

Production and reserves of uranium is concentrated in a few countries, with Kazakhstan, Australia, Canada, Namibia and Russia having very high shares of both (Figure 11). Canada has the largest uranium mine in the world, Cigar Lake, accounting for 8.1% of production in 2020 (Figure 12), and a Canadian uranium processing company, Cameco, had the world's second highest output in 2020, at 9,000 tonnes, after Russia's Rosatom, with output of 12.0 thousand tonnes (Figure 13). Uranium opportunities abound for junior miners in Canada, given its major industry presence.

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Producing miners mixed even as gold rises

The producing gold miners were mixed even as the gold price rose, with the three industry giants Newmont, Barrick and Agnico-Eagle all down (Figure 14). Barrick reported that it had met with the Pakistan government to confirm its strategy to restart the Eko Diq copper-gold project, after an agreement was made earlier this year. Equinox reported that production at its Mesquite mine has reached over a cumulative 5 mn ounces gold as of July 20, 2022, and Lundin announced that it started near mine exploration at the Fruta del Norte with a 6k meter program, and that its shares were now eligible for electronic clearing and settlement in the US through the Depository Trust Company (Figure 16).

Canadian juniors mixed as gold and equity markets up

The Canadian juniors were mixed even as both gold and equity markets were up (Figure 15). For the Canadian juniors operating mainly domestically, Tudor Gold reported drill results from Goldstorm at Treaty Creek (Figure 17). For the Canadian juniors operating mainly internationally, Minera Alamos announced that it had closed its non-brokered private placement of 7.95 mn shares at $0.55/share for proceeds of $4.37mn, and Mako Mining reported Q2/22 gold production from its San Albino mine. Prime Mining reported results from step-out and infill drilling from the San Miguel East deposit in the western part of its Los Reyes project and Lumina Gold reported drill results from both Gran Bestia and Cangrejos (Figure 18).

Canadian juniors mixed as gold and equity markets up

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Disclaimer: This report is for informational use only and should not be used an alternative to the financial and legal advice of a qualified professional in business planning and investment. We do not represent that forecasts in this report will lead to a specific outcome or result, and are not liable in the event of any business action taken in whole or in part as a result of the contents of this report.

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