How to play the uranium comeback using ETFs

After a decade-long bear market, uranium has made a comeback as governments increasingly believe that nuclear energy remains essential.

Uranium prices rose even before February’s Russian invasion of Ukraine sent energy prices skyrocketing. Ambitious international climate targets have made it clear that the energy transition towards low-emission sources such as wind and solar cannot be managed without the incorporation of nuclear power, which uniquely offers a reliable, zero-emissions supply.

Uranium’s supporters claim that the heavy metal’s rally will continue amid strong market fundamentals. These include annual consumption, which currently exceeds production, and the fact that the stockpile of excess uranium that has inundated users has been exhausted. Also, countries with weak power supplies are restarting mothballed nuclear power plants or extending the life of existing ones, and many countries, led by China and India, are planning to build a fleet of new power plants.

Uranium and nuclear power recently got a boost as Japan said it plans to reactivate many of its decommissioned reactors and California enacted legislation that will extend the life of its only remaining nuclear plant beyond its planned 2025 shutdown.

“This is an area that’s going to generate a lot of interest,” said Neena Mishra, director of ETF research at Zacks Investment Research in Chicago.

“We will invest more in alternative energy and I think nuclear is one of the best forms of green energy with zero emissions and currently only 10 percent of the world’s energy production comes from nuclear.”

Despite being the crucial fuel to run the world’s 440 or so nuclear reactors, the uranium market is relatively small, opaque and more volatile than other commodities, impacted by supply disruptions and geopolitical concerns.

Uranium tends not to rise and fall in lockstep with other commodities and has been one of the top performers over the past two years, with the price falling from US$30 a pound to a high of US$64 in January 2021. dollars more than doubled. Uranium futures are currently trading around $52 a pound.

“Uranium, and some of the other energy commodities, is one of the few things that has posted positive returns this year that’s piqued investor interest,” said John Ciampaglia, Toronto-based chief executive officer of Sprott Asset Management LP.

He notes that existing reactors use 180 million pounds of uranium each year, but only 130 million pounds were mined in 2021. Reserve uranium from countries like Japan and Russia has filled that gap in recent years, but that surplus is disappearing.

Given uranium’s niche role in the resource space and its disfavored status since the 2011 Fukushima disaster in Japan, there are limited opportunities for ETF investors to participate in the anticipated nuclear renaissance.

The Horizons Global Uranium ETF (HURA-T) with an MER of 0.86% and assets of $62 million provides direct exposure to the global uranium companies. The only Canadian uranium ETF has returned 9% so far this year, followed by a 71% return in 2021. (All data is Morningstar total return as of the market close on September 7).

HURA invests in uranium mining companies, three of which (Cameco Corp, Yellow Cake PLC and National Atomic Co. Kazatomprom) account for more than 61 percent of its holdings.

The news of Japan’s nuclear restart and California’s reactor expansion has put the uranium story back in the spotlight, said Nick Piquard, vice president and portfolio manager at Horizons ETFs.

“It seems the time has come for the sector to get light again,” says Mr. Piquard.

Soaring LNG prices in the wake of the Ukraine war have created new urgency for countries like Japan and China to ramp up their nuclear power programs, he adds.

Investors also have two US ETF options: The Global X Uranium ETF (URA-A), which launched in 2010 and has an MER of 0.69 percent and assets of $1.7 billion. It is heavily geared toward uranium miners and has returned 1.12 percent year-to-date, after returns of nearly 58 percent in 2021.

The Sprott Uranium Miners ETF (URNM-A), with an MER of 0.85 percent and assets of $1 billion, has a year-to-date return of 6.8 percent and a return of almost 79 percent in 2021.

What sets HURA’s two US ETFs apart is their holdings of physical uranium through shares in the Sprott Physical Uranium Trust. The Sprott units make up 8.7 percent of the URA portfolio and 10.6 percent of the URNM holdings.

Another option for uranium-focused investors to consider is Sprott’s Physical Uranium Trust (U-UN-T), which trades on the Toronto Stock Exchange in both US and Canadian dollars. The fund, which began trading just over a year ago, is the largest and only currently active publicly traded physical uranium fund. It has an MER of 0.96 percent, $3 billion in assets, and a nearly 19 percent year-to-date return, up from 16 percent last year.

Mr. Ciampaglia says the majority of Sprott’s investors are institutions and hedge funds who believe uranium will play an increasing role in future power generation.

“Many of our institutional investors…believe that the price of uranium needs to rise over time to varying levels of incentives that encourage either restarting existing mines that have had long-term care and maintenance — in many cases four or five years — as well as providing the necessary.” Funding for new projects to be developed,” says Mr. Ciampaglia.