Performance as of January 31, 2023
|Asset||1 MO*||3 MO*||1 YR|
U3O8 Uranium Spot Price 1
Uranium Mining Equities (Northshore Global Uranium Mining Index) 2
Commodities (BCOM Index) 3
U.S. Equities (S&P 500 TR Index) 4
U.S. Bonds (Bloomberg Barclays US Agg Total Return Value Unhedged USD Index) 5
Sources: Bloomberg and Sprott Asset Management LP. Data as of January 31, 2023.
*Performance for periods under one year not annualized.
January was a strong month for uranium markets, along with the broad equity and bond markets, but a mixed month for the commodity complex overall. The U3O8 uranium spot price rose from $48.31 to $50.75 per pound in January, a 5.05% increase, while uranium mining equities gained 14.65%. For the U3O8 uranium spot price, this marked a continuation of notable performance, having appreciated 14.74% in 2022 and 104.23% since December 31, 2019.1 January’s strong performance for uranium mining equities reflects a reversal of their 11.42% decline in 2022. The recent strength of uranium miners represents a return to their pre-2022 notable performance; for the period December 31, 2019, to January 31, 2023, uranium equities have gained 213.63%.
Figure 1. Uranium Outperforms Other Asset Classes in the Short-Term (2019-2023)
Source: Bloomberg and Sprott Asset Management. Data as of 01/31/2023. Gold is measured by GOLDS Comdty Spot Price; S&P 500 TR is measured by the SPX; BCOM is the Bloomberg Commodity Index; US Agg Bond Index is measured by the Bloomberg Barclays US Agg Total Return Value Unhedged USD (LBUSTRUU Index); the U.S. Dollar is measured by DXY Curncy and the U3O8 uranium spot price is measured by a proprietary composite of U3O8 spot prices from TradeTech LLC. Included for illustrative purposes only. Past performance is no guarantee of future results.
In 2022, the fundamentals for uranium and nuclear energy significantly strengthened and were bolstered by a continuous flow of endorsements from global governments. Despite this, uranium mining equities were dragged down in 2022 by their systemic risk to the overall markets, not surprising given last year’s bear market in which the S&P 500 Index fell 18.11%.
January marked a pivotal month in shifting investor sentiment and diminishing headwinds for equity markets, which supported the surge in uranium mining equities. A combination of the “January Effect”,6 lessening fears that the U.S. economy is heading toward recession and declining inflation, buoyed markets. Markets began their move higher on January 6 when the December U.S. Jobs Report showed wage growth was below expectations, and indication that inflation pressures may be weakening.7 This eased concerns that Federal Reserve would continue its aggressive interest rate hikes. Market anxiety over Inflation and rate hikes further quelled on news that the year-over-year U.S. consumer price index fell from 7.1% in November to 6.5% in December.
In January, other market headwinds that dominated 2022 reversed course and helped to boost asset prices. Most notably, Europe’s anticipated energy crisis was mitigated by warmer weather, and China reversed its long-standing zero COVID policy and reopened its economy. The reduction in these headwinds helped uranium mining equities flourish in January. We continue to believe the strong underlying fundamentals of the uranium sector will provide long-term structural support for uranium and uranium miners in the remainder of 2023.
Figure 2. Inflation and Federal Funds Target Rate in the Short-Term (2019-2023)
Source: Bloomberg. Data for Federal Funds Target Rate – Upper Bound as of 01/31/2023. Data for U.S. CPI YoY as of 12/31/2022, latest data available. Federal Funds Target Rate – Upper Bound is measured by FDTR Index and the U.S. CPI YoY is measured by CPY YOY Index. Included for illustrative purposes only. Past performance is no guarantee of future results.
January was also characterized by growing recognition by global governments that nuclear energy plays a vital dual role by supporting the energy transition and enhancing energy security. Belgium continued its U-turn on nuclear energy by extending the life of two nuclear reactors for 10 years8 — a tremendous policy change given that Belgium had planned for a complete nuclear phase-out by 2025. Sweden announced that it is preparing legislation to remove the rule that caps the number of nuclear reactors and prohibits new reactor construction in new locations,7 a noteworthy U-turn given the number of Swedish reactor closures over the past years. Finally, South Korea announced that it downgraded its plans for renewable energy in favor of nuclear energy,8 increasing its nuclear power goals from 24% to 33% of its total energy mix.
Looking beyond January, we believe the uranium bull market still has a long way to run. Over the long term, increased demand in the face of an uncertain uranium supply is likely to support a sustained bull market. For investors, uranium miners have historically exhibited low/moderate correlation to many major asset classes, providing portfolio diversification potential.
Nuclear energy and uranium’s critical role in energy security may likely be paramount going forward. Russia’s invasion of Ukraine sparked a global energy crisis that forced many countries to reimagine their energy supply chains. In past years, Western countries’ energy policies have predominantly favored renewable energy as a way to reduce reliance on fossil fuels. However, renewables often suffer from intermittency and low capacity, and require offsets with base load energy sources, such as coal, natural gas or nuclear power plants. Of these, nuclear power has the highest base load capacity. We believe ongoing supply chain disruptions may likely cause utilities to seek out the base load reliability of nuclear power.
Prices for uranium conversion and enrichment services more than doubled in 2022, a significant outperformance relative to the U3O8 uranium spot price. We believe this upward price pressure will support the uranium spot price. While Russia accounts for a small portion of U3O8 production at 6% of the global total, it controls about 27% of the global uranium conversion capacity and 39% of fuel enrichment.9 Although there have yet to be sanctions on either Russian uranium or conversion and enrichment services, and legacy contracts are being honored, utilities are not signing any new contracts with Russian entities. In response, Western countries are investing in and supporting the expansion of local conversion and enrichment capacity.
A key development expected in the first half of 2023 is the restart of the U.S.’s only domestic conversion facility, ConverDyn. This shift to Western conversion and a lack of enrichment capacity is the bottleneck for higher uranium demand. Once new conversion capacity comes online, we anticipate an industry shift from underfeeding to overfeeding (using more UF6 as feedstock to produce more enriched uranium) should significantly increase uranium demand in 2023 and beyond, which is ultimately supportive of uranium miners. Further, “available for sale” uranium inventories have mostly been sold and may likely not act as a significant source of secondary supply as in the past couple of years.
The energy transition movement is structural and we believe that nuclear energy is a crucial solution for decarbonizing the global energy supply. Growing global recognition by governments, catalyzed by the need for greater energy security, is likely to continue to be a dominant theme. In the U.S., the Inflation Reduction Act, Civil Nuclear Credit Program and the U.S. Federal Strategic Uranium Reserve will provide financial support to nuclear power plants, allowing them to compete more effectively with other energy sources. We also expect to see continued progress toward the build-out of new nuclear reactors in China and India (the world’s two largest countries by population).
We believe the uranium bull market remains intact despite the uncertain macroeconomic environment. There has been an unprecedented number of announcements for nuclear power plant restarts, life extensions and new builds that are likely to create incremental demand for uranium. However, the current uranium price still remains below incentive levels to restart tier 2 production, let alone greenfield development.
Figure 3. Uranium Bull Market Continues (1968-2023)
Please click here to see an enlarged chart.
Source: TradeTech Data as of 01/31/2023. Note: A “bull market” refers to a condition of financial markets where prices are generally rising. A “bear market” refers to a condition in financial markets where prices are generally falling. Included for illustrative purposes only. Past performance is no guarantee of future results.
|1||The U3O8 uranium spot price is measured by a proprietary composite of U3O8 spot prices from UxC, S&P Platts and Numerco.|
|2||The North Shore Global Uranium Mining Index (URNMX) was created by North Shore Indices, Inc. (the “Index Provider”). The Index Provider developed the methodology for determining the securities to be included in the Index and is responsible for the ongoing maintenance of the Index. The Index is calculated by Indxx, LLC, which is not affiliated with the North Shore Global Uranium Miners Fund (“Existing Fund”), ALPS Advisors, Inc. (the “Sub-Adviser”) or Sprott Asset Management LP (the “Adviser”|
|3||The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index that tracks prices of futures contracts on physical commodities, and is designed to minimize concentration in any one commodity or sector. It currently has 23 commodity futures in six sectors.|
|4||The S&P 500 or Standard & Poor's 500 Total Return Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.|
|5||The Bloomberg USAgg Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.|
|6||Source Investopedia: The January Effect is the perceived seasonal tendency for stocks to rise in that month. The January Effect is theorized to occur when investors sell losers in December for tax-loss harvesting, only to re-buy new positions in January.|
|7||Source Reuters: Sweden makes regulatory push to allow new nuclear reactors.|
|8||Source Bloomberg: Korea Curbs Plans for Renewables in Push For More Nuclear.|
|9||Production of U3O8 from UxC LLC for 2021. Conversion and enrichment figures from Cameco Corp|
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