Assessment of the Uranium Market and Future Outlook -

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1 Assessment of the Uranium Market and Future Outlook June, 2021 TABLE OF CONTENTS Highlights 2 Introduction 3 Sentiment on Nuclear Energy 3 Market Overview 4 Supply and Demand 7 Recent Developments in the Uranium Market 10 COVID-19 Pandemic 10 Political and Policy Developments 10 United States 10 European Union 11 Asia 12 Non-utility Purchasing of Uranium 12 Long-term Contracts 13 Market Performance 16 Upcoming Catalysts 17 Risks and Uncertainty 18 Conclusion 18 Links of Interest 18 2 Disclaimer and disclosure: I am not a financial advisor and none of the below research constitutes investment advice or a recommendation to buy or sell. Always do your own due diligence. I currently have small positions in some of the securities mentioned. Note: Any constructive criticism to improve this DD would be welcome. If you see any red flags or risks I may have missed, please highlight them. Highlights ● After a decade-long bear market spurred by the 2011 Fukushima nuclear disaster, positive sentiment of uranium and nuclear energy is improving. The construction of new reactors is on the rise, particularly in Asia, and nuclear energy is increasingly seen as essential to helping countries meet their decarbonization targets. ● After Fukushima, uranium supply flooded the market and demand fell, particularly in Japan and Germany, leading to low uranium prices for years. In response to these tough market conditions, mining companies have scaled back production in an attempt to balance a market saturated with the metal. Low uranium prices have also prevented miners from committing to large-scale investments in new mining projects, resulting in uncertainty in future supply. ● Uranium is primarily sold not on the open market but through private, long-term contracts. But given an oversupply of uranium and cheap prices on the spot market, contracted volume has been low for several years as utilities and reactor operators draw on the secondary supply, such as purchasing on the spot market, to make up the deficit between what is delivered through older contracts and what reactors require to keep running. ● But as the secondary supply dwindles and miners maintain production discipline, utilities will face a projected supply shortage and will eventually be incentivized to enter into long-term contracts at higher prices. Furthermore, recent physical uranium purchases from junior miners and investment funds—a new development for the market—signal growing investor interest in the metal and put additional pressure on a limited supply. ● Optimistic investors, market analysts, and industry CEOs largely believe the bear market is ending and a new uranium bull market is emerging. They predict that in the coming decade, demand is set to grow as supply tightens, and as a result, uranium prices will rise (indeed, must rise) to incentivize new mining production and fill demand. 3 Introduction This report examines the current uranium market and the thesis that, as demand for nuclear energy grows and supply dwindles, utilities will have to sign new long-term contracts for uranium delivery, causing the price of uranium to increase and initiate a new bull market. While this report covers the uranium market, the politics of nuclear energy, and upcoming catalysts, it does not analyze any specific uranium stocks nor does it recommend any particular investment strategies. Like most mineral commodity markets, uranium has a history of volatility and typically moves with supply and demand as well as geopolitical forces. For context, in 2017, the world’s top uranium producers were Kazakhstan (39% of world production), Canada (22%), and Australia (10%) with Namibia, Niger, and Uzbekistan playing smaller roles in the market. The largest and most significant uranium exploration and mining companies include state-owned Kazatomprom (22% of world production), France’s Orano (11%), Cameco (9%), Uranium One (8%), and CNNC (7%). Finally, the most productive uranium mine is Cigar Lake in Canada (owned by Cameco/Orano with 13% of world production). Notably, Cameco’s McArthur River mine, the world’s largest high-grade uranium deposit, was placed under care and maintenance in 2018 due to low uranium prices. Before uranium can be used as fuel in nuclear reactors, it goes through a process known as the front end of the nuclear fuel cycle where the uranium is (1) mined and milled into U3O8 (also known as yellowcake, a uranium concentrate powder), (2) converted into UF6, (3) enriched, and then (4) fabricated into fuel. This process is time-consuming and geographically spread out; over the course of 1-2 years, uranium might be mined in Canada, converted and enriched in France, and sent to fuel a reactor in the United States, and utility inventories of uranium might be spread out along this cycle with only a small portion of it immediately ready to fuel a reactor. Sentiment on Nuclear Energy As one article puts it, “nuclear power has been something of an unloved stepchild in the energy sector.” Indeed, since the 2011 Fukushima Daiichi nuclear disaster, public opinion has been focused on safety and environmental concerns. In Europe, Germany has reduced their number of reactors from 17 to 6 (and the remaining six are scheduled to be decommissioned by the end of 2022), with the German public broadly opposed to constructing new reactors. In the U.S., according to the Nuclear Regulatory Commission as of November 2019, there were 23 nuclear power reactors in various stages of decommissioning, with only two new reactors being built. So is nuclear energy on its way out? Probably not. In France, where 56 reactors operate, officials recently extended the 40-year lifespan of nuclear plants an additional 10 years. In March, China released its 14th 5-year plan, which aims for 70GW of power generation through nuclear energy before 2025 (it hit 51GW in 2020), and the country is currently building 16 new reactors to meet this goal. In India, 9 new reactors are 4 under construction. In the U.S., described in more detail below, the Biden administration has adopted a positive stance towards nuclear energy, and some U.S. reactors are starting to receive license renewals to operate beyond their original lifespan. Nuclear energy, though controversial even among some experts, is increasingly seen as essential to meeting decarbonization targets.1 Overall, the number of new reactors is expected to outpace shutdowns, and as a result, the demand for uranium is projected to increase 1-3% per year in the coming decades. Market Overview Global demand for uranium rose from the 1950s through the 1970s, largely driven by nuclear weapons procurement programs. Then, in the 1980s, various environmental, safety, and economic concerns over nuclear power plants reduced demand; at the same time, the market was flooded with excess uranium, and prices remained depressed throughout the 1990s. As uranium prices fell, producers began curtailing operations or exiting the business entirely, leaving only a few actively involved in uranium mining and causing uranium inventories to shrink significantly. The chart above shows the spot price (i.e., the current market price) of uranium from 1999 through 2020 along with several key events. Uranium prices reached an all-time low in 2001, costing about $7/lb. This was followed by a period of gradual rise (during which three mines either flooded or suffered extreme weather, tightening supply and causing the price to increase further), followed by a bubble culminating in mid-2007, during which the price peaked at around 1 The question of whether nuclear energy is a clean and sustainable source of energy is beyond the scope of this report, but I do discuss some expert scientific analyses that conclude “nuclear energy has near to zero greenhouse gas emissions.” 5 $137/lb. The higher price during the bubble spurred new prospecting and reopening of old mines. The Fukushima nuclear disaster in March 2011, however, sparked renewed fears about the safety of nuclear reactors and set in motion a decade-long bear market. Demand fell as Japan took all of their reactors offline, and prices ultimately reached a low of around $18/lb. in November 2016 before hitting about $29/lb. in April 2021. The low price of uranium has caused some mining companies to leave the business entirely, such as Westwater Resources (previously Uranium Resources); by some estimates, there were nearly 600 uranium mining companies in 2011, but today there are only about 50. Significantly, prices still remain far below the $50-$60/lb. figure often cited as the all-in cost of production (though some companies can produce for much cheaper), and as long as the spot price remains below the cost of production, mining companies will lack incentive to add more uranium to the market, invest in new mines, or engage in higher-cost production. (Some sources distinguish between the all-in cost of production, which Canada’s Skyharbour Resources estimates at around $40/lb., and the “incentive price,” estimated at $50-$60/lb., needed to spur meaningful new production.) As a result of weak uranium prices and in an effort to reduce available supply, mining companies have strategically cut back on uranium production over the last few years. According to the WSJ, in 2017 both Kazatomprom and Cameco, two of the three largest mining companies, reduced or suspended production at uranium mines, and other high-cost mines have been idled or closed down. For instance, the Ranger Mine in Australia and the Cominak Mine in Niger closed in 2021 due to resource depletion, and the Cigar Lake Mine will be depleted by the end of the decade. Further, mines can take more than a decade to plan, build, and begin operation, but low uranium prices make these kinds of large long-term investments financially unsound. As Cameco put it in their Q1 2021 earnings call, “Given the timelines it takes, we should be investing now to replace that lost production, but at today’s prices, that makes zero sense.” As a result, over the last few years, production of mined uranium (i.e., the primary supply) has not kept up with demand, and utility companies have had to purchase uranium from secondary sources such as the spot market, stockpiles, re-enriched depleted uranium tails, and ex-military weapons-grade uranium to keep their reactors going. The vast majority of uranium is not sold on the open market but through private, long-term contracts between buyers (usually utility companies) and sellers (usually mining companies) with delivery typically beginning about two years after the signing of the contract. In addition, the amount delivered can usually be adjusted plus or minus some percent, depending on the utility companies’ needs, and the price to deliver the uranium may be adjusted with changes in the spot market; Cameco, for instance, targets a ratio of 40% fixed-pricing and 60% market-related pricing in their portfolio of long-term contracts. Roughly 76% of U.S.-purchased uranium delivered in 2020 was bought through long-term contracts and about 24% through spot market purchases. (This is actually historically low; in 2006, it was 90% long term, reflecting the fact that utilities have been relying more on spot purchases in recent years.) There is some speculation 6 that the spot price of uranium will begin to rise when utility companies sign new long-term contracts, a scenario discussed in more detail under “Long-term Contracts.” Interested readers may also find the explanation of the uranium market from a producer’s perspective useful. Here, Cameco describes their incentive to not stockpile uranium, as this contributes to the perception that it is plentiful, and when demand rises, they may purchase uranium from the spot market in order to meet their agreements with utility companies. As Cameco observes, the price of uranium may drive the perception that uranium is plentiful (if prices are low) or scarce (if prices are high), which then impacts the decisions of utility companies to enter into long-term contracts: History demonstrates that in general, when prices are rising and high, uranium is perceived as scarce, and a lot of contracting activity takes place. The heavy contracting that takes place during price runs drives investment in higher-cost sources of production. Once that production is in the market, it tends to stay in the market longer than is economically rational, creating the perception that uranium is abundant and always will be, and prices decline. When prices are declining and low, like we have seen over the past number of years, there is no perceived urgency to contract, and contracting activity and investment in new supply drops off. After years of low investment in supply, as has been the case since 2011, security of supply tends to overtake price concerns at some point, and utilities re-enter the long-term market to ensure they have the reliable supply of uranium they need to run their reactors… At present, we believe there is a significant amount of uranium that needs to be contracted to keep reactors running into the next decade. Cameco’s final claim is backed up if we look at projections for the uncovered utility demand, which is the amount of uranium nuclear power plants require but for which utilities still don’t have contracts. According to UxC, a leading uranium market research firm, global cumulative uncovered uranium requirements are projected to be 1.4 billion lbs. by the end of 2035, and in Cameco’s Q4 2020 call, they noted, “While uncovered requirements are not particularly high in 2021, by 2025 they reach 33% [of total demand]. By 2030, about two-thirds of the utility requirements are uncovered, and that number is 81% in 2035. In contrast, these growing uncovered requirements are occurring at a time when there’s some big question marks about where the uranium will come from to fuel the world’s expanding nuclear fleet.” And since contract deliveries don’t take place until about two years after the contract is signed, we may see utilities enter into contracts in the next few years if there is the perception (or the reality) that secondary supplies of uranium are running low. “Uranium is simply the most asymmetric trade I’ve seen in my life.” —Marcelo Lopez of L2 Capital Partners One of the more informative interviews I’ve come across in my research is between Lyn Alden (an investor and analyst) and Marcelo Lopez (a uranium market researcher who runs an actively 7 managed uranium fund). Over the course of 55 minutes, Lopez gives a thorough overview of why uranium prices have been so low, the buying habits of utilities, production and mining, investment strategies in the uranium market, and possible catalysts and risks to watch for. The uranium market, in his view, is “the most asymmetric trade I’ve seen in my life.” Finally, another attractive feature of the uranium market is its lack of correlation with other equities, commodities, and inflation, making it a useful tool for portfolio diversification. This mostly applies to uranium itself (and holding companies like Yellow Cake and Uranium Participation Corp.) and may be less true for uranium mining companies, which, assuming the spot price remains unchanged, face a number of other risks and costs associated with mining and exploration and are susceptible to a broad economic downturn. Supply and Demand Tracking the current levels of supply and demand of uranium can be extremely useful for determining if utilities will begin to enter long-term contracts or continue to purchase from the spot market or other sources. So, how much supply of uranium is in the market and how much demand is there for that supply?2 Roughly speaking, each year, about 175-180 million lbs. of uranium are consumed globally. Of that, about 120 million lbs. are supplied by miners and the rest is made up from secondary supplies and utility inventories. Though the exact size of the secondary market is difficult to estimate, Uranium 2020: Resources, Production and Demand, a joint report by the Nuclear Energy Agency and the International Atomic Energy Agency, suggests the figure is around 10,000 metric tons per year, or 22 million lbs., suggesting a structural deficit that is made up by drawing on material that utilities already have in inventory. As I mentioned above, in recent years, mining companies have been intentionally reducing the primary supply of uranium on the market. Over the past decade, the primary supply has continually fallen short of global demand, causing a deficit that is filled by a limited and, as the thesis goes, dwindling secondary 2 UxC likely answers this exact question in their 2020 report on global nuclear fuel inventories; unfortunately, it costs $5,000 :( 8 supply. We can see in the table (from the World Nuclear Association) that after the 2017 production cuts, mined uranium only covered about 80% of world demand. Tracking secondary supply is both more difficult and more important as its reserves are a key indicator of when utilities will need to enter into long-term contracts. Secondary supply includes stockpiles and inventories of natural and enriched uranium, both civilian and military in origin; nuclear fuel from the reprocessing of spent reactor fuels and from surplus military plutonium; underfeeding; and uranium produced by the re-enrichment of depleted uranium tails. The World Nuclear Association’s Nuclear Fuel Report notes, “The majority of secondary supplies are derived from uranium that has undergone transformation in reactors, enrichment plants and reprocessing facilities. The second largest potential secondary resource by mass is the world’s inventory of not-yet-treated used nuclear fuel, held largely at reactor sites.” While this inventory normally accounts for only a relatively small portion of total supply, with low uranium prices and limited mining production, this source has become more significant not only for primary producers and utilities but also for traders and holding companies. In the chart below, we can see one firm’s take on how primary and secondary supply compare against demand. Throughout the 2010s, there was more than enough uranium to meet demand, and prices dropped significantly to reflect this. In the 2020s, demand is expected to rise and outpace primary and secondary supplies combined, potentially spurring new mining production to meet that demand. But to incentivize new production, the uranium price has to rise first. BMO Capital Markets, the source of the chart, and Morgan Stanley have also written research notes predicting “a rally in [uranium] prices over the next few years to the ~$50 [per pound] level 9 by 2024.” Importantly, both groups also point to uncertainty surrounding just how long existing inventories will last: Morgan Stanley warns that “the opacity of the inventory situation remains a key uncertainty to price—see for example palladium, which needed almost 7 years of deficit before the price really took off.” BMO says given the still-high levels of inventories, “acute shortages and price squeezes are extremely unlikely, both for this year and the foreseeable future,” adding that “there is no obvious need for new mine supply in the near future.” These are important sources of uncertainty that are worth paying attention to. If the uranium bull thesis of an imminent supply deficit ends up being wrong, a miscalculation of existing inventories and market supply will likely be one of the main reasons why (this would, of course, just delay the thesis, if all other factors remained equal). With that said, I somewhat disagree with BMO’s assessment (or maybe just their use of the phrase “near future”), as there is evidence that new/more primary production will be needed by the middle or end of the decade, meaning companies should be investing in those projects today. Remember, utilities and miners operate on a longer timescale than other markets; they sign contracts for 5-10 years, and a reactor with only two years’ worth of uranium is operating akin to just-in-time delivery. Now, what about demand? According to the International Atomic Energy Agency, there are currently 443 reactors in operation and 52 under construction. Although these reactors require an established, predictable amount of uranium, demand for the metal can still be difficult to estimate, since delays in the construction of new reactors as well as license renewals of old ones can add complications. In the U.S., reactors require about one-fourth of global demand, about 45 million lbs. per year. In February, Bank of America analyst Lawson Winder speculated that the planned closure of 12 U.S. nuclear power plants this decade could be postponed beyond 2030, adding 26 million pounds to 2021-2030 uranium demand.” Indeed, license renewal has been a growing topic of interest among nuclear and policy experts (as an example, Virginia’s Surry Power Station was recently granted a 20-year extension and several more U.S. renewals are under review; even Japan has given the green light to operate three reactors for an additional 20 years, helping reach its goal of having 20-22% of its energy come from nuclear power by 2030). Further, we’ve also seen reports that the Biden administration supports subsidies for nuclear plants to prevent them from closing, and Biden’s climate adviser supports the continued operation of existing nuclear reactors to achieve emissions goals—more on this under “Political and Policy Developments.” Winder adds that a shift “could lead U.S. fuel buyers to move forward plans for major new contracting: Consider that those 26 million pounds are 23% of total U.S. utility inventories at year-end 2019 of 113 million pounds, and inventories today are quite likely lower post 2020’s supply disruptions.” If reactors are kept online longer than expected, utilities would only face greater urgency to sign new contracts for nuclear fuel. 10 Recent Developments in the Uranium Market COVID-19 Pandemic As equities around the world crashed with the onset of the COVID-19 pandemic in March 2020, the price of uranium rose from roughly $24/lb. in March to $33/lb. in May, reflecting uncertainty around the uranium supply as mines were forced to shut down. Due to the pandemic, Cameco closed its Cigar Lake mine (about 12% of annual uranium production) and Kazatomprom reduced its production targets by 10 million lbs. As noted by Denison Mines, COVID created a sudden and unexpected drop in supply, even as demand remained steady and nuclear reactors continued to operate throughout the pandemic. (The link above provides an overview of the uranium market in 2020, which readers may want to explore.) This drop in supply was accompanied by the anticipation of a recovery in the price of uranium: The unexpected supply reaction catalyzed by the pandemic was layered on top of a uranium supply/demand picture that had already begun to change over the past couple of years, with demand outstripping supply from primary production and the shortfall being made up by inventories and other secondary supplies. As this dynamic has played out, sentiment regarding a recovery in the uranium price has improved, particularly with the high-profile shutdown and curtailment of many supply sources across the industry, including the world’s largest and highest grade uranium mine, Cameco Corporation’s (“Cameco”) McArthur River Mine in northern Saskatchewan, Canada, which was placed into care and maintenance indefinitely in July 2018. After making several safety improvements and with the rollout of vaccines, Cameco announced the reopening of Cigar Lake in April 2021. Overall, the supply disruptions due to COVID tightened supply further and likely moved up the timeline of the uranium bull thesis, but we still haven’t seen large amounts of contracting yet. Going forward, I expect COVID to have less importance compared to the supply-demand fundamentals that are at the heart of the bull thesis. Political and Policy Developments United States In the United States, throughout his tenure, President Trump exhibited a positive stance towards nuclear energy. In 2018, two U.S. uranium miners, Energy Fuels Inc and Ur-Energy Corporation, filed a Section 232 petition, essentially asking the government to investigate national security concerns regarding foreign uranium imports and asking that 25% of U.S. uranium consumption be met by U.S. producers. Though the Trump administration ultimately rejected this petition, it established the Nuclear Fuel Working Group to find alternative solutions to “restore American nuclear energy leadership.” Framed as a way to increase national security and revitalize domestic uranium production, the Working Group aimed to “restore America’s competitive nuclear [energy] advantages” and recommended, among other initiatives, to “directly purchase 11 uranium by establishing a uranium reserve.” In December 2020, Congress passed the Consolidated Appropriations Act of 2021 to fund the government through fiscal year 2021, which set aside $75 million for the Uranium Reserve Program, but the project is still in the early stages and it does not appear that any uranium purchases have actually been made by the U.S. government. (More information on the nuclear- and uranium-related provisions of the 2021 appropriations law can be found here.) The Biden administration has taken a similarly positive stance towards uranium and nuclear energy. Though there hasn’t been much headline news on the topic, nuclear energy is included in one of the objectives of the American Jobs Plan to leverage “carbon pollution-free energy provided by existing sources like nuclear and hydropower” and to manufacture “critical technologies like advanced nuclear reactors and fuel.” Separately, Reuters recently reported, “The White House has signaled privately to lawmakers and stakeholders in recent weeks that it supports taxpayer subsidies to keep nuclear facilities from closing and making it harder to meet U.S. climate goals.” Biden’s recently proposed 2022 budget, which will likely change before being signed into law, requests $9.75 billion in credits for “electricity generation from existing nuclear power facilities” and $5 billion to “procure advanced nuclear power” over the next ten years. Furthermore, there is currently a bill in the Senate—S.4897, the American Nuclear Infrastructure Act—that aims to “to reestablish United States global leadership in nuclear energy, revitalize domestic nuclear energy supply chain infrastructure, support the licensing of advanced nuclear technologies, and improve the regulation of nuclear energy.” The bill has been approved by the Senate Committee on Environment and Public Works, but, so far, has not been passed or signed into law. A smaller, but still positive, signal for the uranium market is that Honeywell’s Metropolis Works plant in Illinois—the U.S.’s sole uranium conversion facility—will restart production of uranium hexafluoride (UF6) by early 2023, citing customer demand and the depletion of secondary supplies of UF6. The plant was idled in 2018 due to the weak market. European Union In the European Union, countries are divided on nuclear energy, with Germany and Austria opposing it and France, Hungary, and eastern Europe supporting it. In March 2021, the Joint Research Center of the European Commission on nuclear energy released a report to help the Commission determine whether nuclear energy should be included in the EU taxonomy for sustainable activities, which would help incentivize and scale up investment in the industry. (This report followed a previous assessment from the Technical Expert Group [TEG] that found “nuclear energy has near to zero greenhouse gas emissions” but that more research was needed due to a “lack of operational permanent experience of high-level waste disposal sites.”) The JRC report concludes that there is no evidence that “nuclear energy does more harm to human health or to the environment than other electricity production technologies already included in the Taxonomy.” The report adds, “The nuclear energy-based electricity production and the associated activities in the whole nuclear fuel cycle (e.g. uranium mining, nuclear fuel 12 fabrication, etc.) do not represent significant harm to any of the TEG [Technical Expert Group] objectives.” While this is a positive sign for EU endorsement of nuclear energy, some uncertainty remains. This report is currently being reviewed by two sets of independent experts, the Group of Experts on radiation protection and waste management under Article 31 of the Euratom Treaty and the Scientific Committee on Health, Environmental and Emerging Risks on environmental impacts. The two Committees have three months to issue their assessment, and the two assessment reports, along with the JRC report, will inform the Commission's decision. Asia In Asia, particularly China and India, growth of nuclear energy is at its strongest. There are about 135 operable nuclear power reactors in Asia with about 30-35 under construction. As mentioned above, China recently released its 14th 5-year plan, which aims for 70GW of power generation through nuclear energy before 2025, and the country is currently building 16 new reactors to meet this goal. By 2035, they hope to be at 180GW. In India, 6 reactors are being built. Like China, India has a growing population that, as they move up the economic ladder, are consuming more electricity. At the same time, the country has set carbon emissions goals that wind, solar, and hydropower alone can’t meet. Non-utility Purchasing of Uranium One final significant development in the uranium market is the purchasing and stockpiling of the metal by non-utility companies, particularly miners and physical asset management companies, signaling growing positive sentiment in the market. Mining companies may buy uranium for a variety of reasons, such as in order to meet purchase agreements or to build up collateral, but the recent moves also suggest renewed optimism that uranium prices may finally be ready to move up. In its Q1 2021 financial results, Cameco noted that, in total, “Through April this year junior uranium companies and financial funds had purchased approximately 10.5 million pounds U3O8.” (Additionally, pp. 7-8 of that link provides a good overview of the most recent developments in the uranium market.) Some recent purchases by miners include: ● In March, Australia’s Boss Resources agreed to purchase 1.25 million pounds of U3O8 ● In March, Uranium Royalty Corp. (URC) exercised its option to buy 348,000 lbs from Yellow Cake. Notably, URC has the option to acquire anywhere from $2.5-$10 million worth of uranium per year from Yellow Cake for nine years, so the fact that they bought the maximum amount is an optimistic sign, and investors should watch for a similar purchase in Q1 2022. ● In March, Denison Mines purchased 2.5 million lbs. ● In April, Uranium Energy Corp. purchased 2.1 million lbs. scheduled to be delivered at various points through 2023. Then, in May, they announced an additional 200,000 lb. purchase. ● In April, enCore Energy purchased 200,000 lbs. ● In May, Cameco said that it expects to purchase 11-13 million lbs. of uranium in 2021 to meet contracted demand, which is up from their previous estimate of 8-10 million lbs. 13 Trusts and funds have also been buying up uranium, with London-listed Yellow Cake purchasing nearly 4 million pounds in March 2021 by exercising an option to buy from Kazatomprom, bringing its total holdings to 12.96 million lbs. In April, Sprott Asset Management announced that it would take over management of and restructure the Uranium Participation Corporation to form the Sprott Physical Uranium Trust (SPUT) and list it on the NYSE—UPC currently holds 16.27 million lbs. of U3O8 and 660,000 lbs. of UF6. One of the main effects of these uranium holding companies purchasing the commodity is that they remove supply from the spot market, thus limiting the amount available for miners and utilities to buy and further pressuring utilities to enter into long-term contracts. There is also speculation that Sprott’s upcoming purchases on the spot market will drive the uranium price up, making spot purchases less attractive for utilities. Sprott will likely utilize at-the-market raisings so that if its share price trades at a premium to NAV, it will issue new shares, raise funds, and purchase additional uranium. As one article puts it, “ATM [At-the-market] raisings are a well-worn path for Sprott, having raised around $4B this way into their bullion trusts over the past 15 months. This structure will enable SPUT to consistently nibble (if not gobble) at the bid in the spot market—the perfect way to fray fuel buyer nerves and terrify producers that need to obtain spot uranium for their contracted deliveries.” “[Sprott Physical Uranium Trust] is going to be the vehicle through which financial players can move this market.” —Justin Huhn of Uranium Insider The Sprott transaction is expected to close in the third quarter of 2021 (the shareholder meeting is currently set for July 7) and seek a listing on the NYSE. Sprott already manages four other physical commodity trusts across gold, silver, platinum, and palladium, and the addition of uranium suggests strong investor interest in the commodity. Cameco called the move by Sprott a “game changer” for the spot market. (I’ll add that the Q1 2021 Cameco call had some interesting things to say about Sprott [on pp. 33 and 50] as well as the miner purchases [pp. 32-33, 39-40].) Long-term Contracts As noted above, the majority of uranium purchased by utilities comes from long-term contracts. Based on UxC data (found in a Cameco report), the last significant contracting “cycle” was from 2005-2012 with large numbers of contracting volumes from 2005-2007, 2010, and 2012. Since then, long-term contracting has dropped significantly, particularly from 2019 to 2020, where the volume of long-term contracting went from 95.8 million lbs. to about 53 million lbs. At the same time, spot contracting increased to ~80 million lbs. in 2020, the highest level in the past two decades (I apologize for the less-than-ideal quality of the chart; the fault is Cameco’s or UxC’s). In Cameco’s view, lower contracting volumes in 2020 could be attributed in part to “utilities 14 focusing on operational safety amidst the COVID-19 pandemic.” During 2020, there were also a number of U.S. policy uncertainties stemming from the Nuclear Fuel Working Group and the Russian Suspension Agreement, which limits the amount of uranium that can be imported from Russia. 15 One way of thinking about where utilities are today in terms of contracting is to look at how much uranium utilities anticipate needing each year compared to how much they’ve already contracted for delivery. As I mentioned above, when utilities sign long-term contracts the amount delivered can vary some amount to meet their needs, so there’s a minimum and maximum range that might be delivered to utilities. The U.S. Energy Information Administration’s (EIA) 2020 Uranium Marketing Annual Report, which just came out in May, gives us a helpful chart (above) showing the maximum amount of uranium already under contract as well as the unfilled market requirements (i.e., what utilities need but haven’t contracted for). Combined, these values give us the maximum anticipated market requirements of uranium for U.S. nuclear reactors. We see that even as overall demand remains relatively steady, the maximum contracted amount of uranium falls steeply throughout the decade. For the next one to two years, that shortfall might be able to be made up by purchasing on the spot market or drawing on existing utility inventories, but considering that long-term contracts typically begin uranium delivery two years after the contract is signed, utilities will likely need to sign new contracts soon. We can also track the urgency (or lack thereof) of utilities to sign new long-term contracts by looking at their current uranium inventories. From the table below, the EIA 2020 report tells us U.S. utility inventories have dropped from 128 million pounds in 2016 to about 107 million in 2020. While that may seem like a lot, U.S. reactors consume about 45-50 million pounds of uranium per year. Further, this inventory is spread throughout the nuclear fuel cycle; most is enriched or natural UF6 and very little is fabricated fuel ready to be used in a reactor: 16 To gain further insight into where contracting is at today, it’s helpful to return to Cameco’s Q1 2021 call, where they announced an additional 9 million pounds in long-term sales contracts for a total of almost 60 million pounds since 2019. Though Cameco stressed that future uranium supply is uncertain, they still have not seen large numbers of utilities start to sign contracts. On the call, Cameco CFO Grant Isaac said that the “on-market RFP [request for proposal] side of the business is not at the level it needs to be in terms of the demand coming to deal with that uncovered requirements wedge.” Isaac goes into more detail on contracting in another part of the Q&A: Q: As a second follow-up, just coming back again to your new contracts that you signed in April, representing 9 million pounds. Do you think that represents in your view some kind of inflection point in the re-contracting market, like, do you think that opens the door now or paves the way for others to now start piling on, or do you view this more as an isolated event? GRANT ISAAC: Well, again I’m a little tempted to say it’s a bit of both. The real inflection point, as I said earlier, it comes when we start to see greater frequency of the on-market RFPs going along with the off-market business. The off-market business has historically been a leading indicator, a necessary condition, but it kind of hasn’t been the sufficient condition for a full-blown term contracting cycle. But here’s why we view it as positive. Because utilities, yes, they’re watching the supply-demand dynamic, but the other thing we know they’re watching is each other. It’s tempting to say, well, if my big neighbour here isn’t buying, maybe I don’t need to be buying; but then when the word gets out that some are starting to buy, and they’re starting to buy out in more of that classic term window, you think about the summer of 2010 when the Chinese stepped into the term market for the first time and contracted 150 million pounds basically for 2013, 2014, to 2024. Everybody else who was sitting on the sidelines, feeling they were well-covered for 2011 to 2015, saw the big new entrant come into the market and start gobbling up the pounds that hadn’t yet been called for, and that triggered a contracting cycle.” Ultimately, no one knows when utilities will start to enter into long-term contracts again, but we know their inventories are shrinking, demand is growing, and future supply is becoming more uncertain as miners and investment funds purchase additional uranium from the spot market. Market Performance How has the uranium market responded to all of these events? Generally, equities have run ahead of the spot price to the point where, since December of last year, many miners have doubled or tripled in share price. Year to date (up to May 27), the Global X Uranium ETF (URA) is up 43% and the North Shore Global Uranium Mining ETF (URNM) is up 50%. Other notable uranium stocks are also strong, including Denison Mines (DNN, +78%), Uranium Energy Corp (UEC, +73%), Cameco (CCJ, +46%), NexGen Energy (NXE, +62%), and Energy Fuels (UUUU, +50%) among others. The spot price, on the other hand, has remained around $30/lb. 17 If you look at any of the charts for these equities, you see a spike around December, marking when a Bear Traps Report on uranium went out, and the URNM ETF saw record inflows. Looking at these charts, it can be tempting to think it’s too late to get in. Even buying two or three months ago would put one in a good position leading up to catalysts in the second half of the year. But in a lot of ways the bull market is just getting started. The spot price is still currently sitting around $30/lb., and analysts like Canaccord predict the price may reach $60/lb. by the end of 2025. For me, the run-up in equities and the upcoming catalysts, like the U.S. listing of the Sprott Physical Uranium Trust, mean I can’t be as patient as I’d like when building my positions. Upcoming Catalysts Investors who believe a new uranium bull market is on the horizon or who are looking for additional evidence should keep the following catalysts in mind, in no particular order: ● The European Union is set to decide, around June 2021, whether nuclear energy should be considered as part of its taxonomy of sustainable activities. Though Germany has notably turned away from nuclear energy, if the EU considers nuclear energy to be clean and safe, it would pave the way for more reactors in central and eastern Europe. ● In the U.S., investors should watch for the establishment of a uranium reserve (for which $75 million has already been allocated for 2021) and the passage of the Nuclear Infrastructure Act. ● Watch for updates on mining production. If miners continue to show production discipline, supply will be limited. ● Watch for updates on reactor license renewals. If a reactor/plant receives a license renewal, that will represent an increase in uranium demand that likely did not appear in projections. 18 ● Watch for continued uranium purchases from non-utility entities, as this limits supply on the spot market and will encourage the signing of long-term contracts. ● Watch for the U.S. listing of the Sprott Physical Uranium Trust, expected in the third quarter of 2021—this is the most significant near-term catalyst, in my opinion. ● Watch for news on long-term contracts. I suspect any new contracts would be announced during quarterly financial results, though earlier indicators may come in the form of a rising spot price or share price of a mining stock. Risks and Uncertainty Though a number of market observers anticipate an increase in the price of uranium due to growing demand and tightening supply, some uncertainty and risk remains. ● Uranium inventory and supply may be greater than estimated, which might delay the bull market by years. ● Producer discipline may break down in the next few years, leading to additional uranium supply on the market and reducing the chances of a dramatic price increase. ● In my research, I have yet to come across any articles or interviews from the perspective of utilities that examine why they are delaying signing long-term contracts and risking security of supply. Knowing this would provide a fuller picture of market dynamics. ● Although the World Nuclear Association estimates that roughly 50 nuclear reactors are being constructed today, it’s not uncommon for these projects to be canceled or postponed, reducing the demand for uranium they would have required if they were up and running. ● Black swan event: the possibility of another Fukushima-like nuclear disaster would significantly dampen demand for uranium and nuclear energy. Conclusion After a decade-long bear market spurred by the 2011 Fukushima nuclear disaster, positive sentiment of uranium and nuclear energy is once again improving. But low uranium prices over the past several years have led to underinvestment in the sector, leading to a lack of new mining projects to fill projected demand. As a result, utilities may face a supply crunch in the coming years and will eventually be pressured to enter into long-term contracts at higher uranium prices. Furthermore, recent physical uranium purchases from junior miners and investment funds—a new development for the market—signal growing investor interest in the metal and put additional pressure on a limited supply. Investors hoping to profit from a potential bull market should expect a volatile 2-4-year trade, especially if they choose to hold positions in individual miners and explorers, though they may also choose to mitigate that volatility by holding ETFs or physical asset companies. Links of Interest In addition to the links provided throughout this report, I want to highlight a few resources that I found particularly helpful in my research: 19 ● Uranium Marketing Annual Report: a great governmental source of data about the U.S. uranium market going back decades that is free, public, and credible ● Uranium 2020: Resources, Production and Demand, a joint report by the Nuclear Energy Agency and the International Atomic Energy Agency ● Cameco’s quarterly earnings calls: As one of the world’s largest producers of uranium, I find these calls to be an invaluable perspective on the most significant developments in the market. Cameco’s “Management’s discussion and analysis” documents (like this one) are also great ways to access UxC data that you would typically need to pay a hefty fee for. ● Azarias Capital podcast series: if you prefer listening to, rather than reading, an intro to the uranium market ● A few analyst reports: ○ Canaccord Genuity 2021 Uranium Outlook - Waiting on a (U) train: ○ Canaccord Genuity - 'U' got the love - upgrading our uranium price deck ○ Uranium Stocks are Moving – Juniors Dusting off the Basin- Red Cloud Securities