Uranium Equities Once Again Likely To Outperform (NASDAQ:URNJ)

RHJ

Investment Thesis

The Sprott Uranium Miners ETF (NYSEARCA:URNM) and the Sprott Junior Uranium Miners ETF (NASDAQ:URNJ) have so far in 2023 underperformed the overall market, even if the Junior Uranium Miners ETF was launched in the beginning of February first.

Figure 1 - Source: Koyfin — Figure 1 – Source: Koyfin

The underperformance is despite improving fundamentals, where we continue to see both people and governments become more positive about the nuclear industry.

Countries like France, the UK, South Korea, and Japan have done a 180 degree turn over the last few years. They were all discussing phasing out nuclear energy not so long ago and are now looking to build new reactors or restart idle ones.

More recently, we have also had countries like Sweden, Belgium, Italy, Taiwan, and even Denmark talk more positively about nuclear energy. So, my expectation is that we will see more countries come to the realization that nuclear will be a vital component in developed markets’ focus to decarbonize. The growth of nuclear energy in emerging markets continues to be strong, which is where most of the reactors under construction can be found.

Figure 2 - Source: Data from Nuclear Performance Report 2022 — Figure 2 – Source: Data from Nuclear Performance Report 2022

Both the uranium spot and long-term contract prices have continued to tick higher during 2023. So, the weakness in uranium equities has more to do with the sentiment for mining companies and liquidity than fundamentals. Please note that the long-term contract prices in the chart below is typically the lowest bid, even if the contract was signed at a higher price. So, the fundamentals are even more positive as we know some contract prices have been signed above $60/lb in the last year.

Figure 3 - Source: Cameco & Numerco — Figure 3 – Source: Cameco & Numerco

Performance of Uranium & Uranium Equities

The uranium miners ETF did during the first quarter of 2020 dramatically underperform the price of uranium, which was increasing during that period. This led uranium equities to trade at some very depressed levels, once liquidity came back to the industry, the outperformance over the following 18 months was extremely impressive.

Figure 4 - Source: Koyfin — Figure 4 – Source: Koyfin

Figure 5 - Source: Koyfin — Figure 5 – Source: Koyfin

During the first half of 2022, we saw something similar, where uranium equities were once again selling off due to a broad market decline, despite the spot price of uranium ticking higher. From mid-2022, we yet again had an outperformance by the uranium equities during the following 7 months, while the spot price of uranium was about flat.

Figure 6 - Source: Koyfin — Figure 6 – Source: Koyfin

Figure 7 - Source: Koyfin — Figure 7 – Source: Koyfin

From the end of January in 2023, we are once more looking at something similar. The spot price of uranium continues to climb higher, but uranium equities have underperformed due to poor sentiment and low liquidity, even if we have seen a slight rebound during the last week. This certainly has a déjà vu feeling to it, where at least I feel confident we will see uranium equities outperforming once more, even if the exact timing is never certain.

Figure 8 - Source: Koyfin — Figure 8 – Source: Koyfin

ETFs & Conclusion

The North Shore Global Uranium Mining ETF was launched in the end of 2019, it was acquired by Sprott during 2022, and the name was consequently changed to the Sprott Uranium Miners ETF. Total net asset value is about $900M, where the ETF is comprised of most publicly listed uranium equities of a decent size.

It is worth noting that about 50% of the ETF is comprised of the two largest uranium producers in the world and the two largest investment vehicles, where the latter two are passive investment vehicles with indirect exposure to the uranium spot price.

Figure 9 - Source: Sprott.com - Sprott Uranium Miners ETF - Largest Holdings — Figure 9 – Source: Sprott.com – Sprott Uranium Miners ETF – Largest Holdings

The Sprott Junior Uranium Miners ETF was launched in February this year with $2M in net asset value. It has lately grown to $28M, where all of it has come from investment flows. The percentage growth in NAV is impressive even if it is still a very small ETF.

The big difference compared to the Uranium Miners ETF is that the Junior Uranium Miners ETF does not contain the largest producers in the industry nor the passive uranium investment vehicles.

Figure 10 - Source: Sprott.com - Sprott Junior Uranium Miners ETF - Largest Holdings — Figure 10 – Source: Sprott.com – Sprott Junior Uranium Miners ETF – Largest Holdings

I do think both ETFs are excellent alternatives for anyone looking for exposure to the uranium industry and not interested in picking individual stocks. At this point in time, I suspect the Junior Uranium Miners ETF is the slightly more attractive ETF among the two.

However, I would highlight that URNM is a volatile ETF, and URNJ is even more extreme. The below chart illustrates the 1-month volatility from the beginning of last year compared to the S&P 500. So, be prepared for wild swings in both ETFs, but especially the Junior Uranium Miners ETF.

Figure 11 - Source: Koyfin — Figure 11 – Source: Koyfin

I am long individual stocks in the uranium industry, which are discussed in more detail on my investment group, but my uranium segment does now look more like the URNJ than URNM, even if that is likely to change over time.

Having scaled in and out of the investment vehicles and some good stock selections among the miners, has allowed me to outperform the URNM over the last few years.