The Elements of Energy: Uranium and Copper

March 7, 2024 | 12 mins 54 secs

Ed Coyne and Steve Schoffstall were recently featured on AssetTV, to discuss the creation of energy, focusing on uranium, and the movement of energy involving copper. They touch on the role of miners, the effect of increased demands on the market and the potential opportunity in both materials.

Video Transcript

Uranium

Ed Coyne: Hello. My name is Ed Coyne, Senior Managing Partner at Sprott Asset Management.

Steve Schoffstall: My name is Steve Schoffstall. I'm the Director of ETF Product Management at Sprott Asset Management.

Ed Coyne: For today's conversation, we will talk about energy, both in its creation and movement. For our viewers today who aren't familiar with Sprott, Sprott is a publicly listed company that trades on the Toronto Stock Exchange and the New York Stock Exchange under the ticker symbol SII.

With over four decades of experience and over $28 billion in assets under management, Sprott is a leader in both precious metals and critical materials. For today's talk, we will focus on critical materials, particularly the creation of energy through uranium and the movement of energy through copper.

Steve, let's start with the creation of energy. Uranium has been hitting the news, or nuclear has been hitting the news lately in the creation of energy. Let's talk about it from an opportunity standpoint. How should investors be thinking about it today?

Steve Schoffstall: That’s one of my favorite stories because it's intuitive. When you look at uranium supply and demand, it paints a good picture and tells a good story. If we just step back and look at where we're at from a supply standpoint, we've come from a period where we oversupplied the market for several decades after the Cold War.

That brought down the prices of physical uranium, so we weren't seeing the investment come into uranium miners in particular. At the same time, as prices decreased, we started to see a growing acceptance of nuclear energy as we moved toward decarbonization goals.

With that, we've seen an increase in the number of planned reactors. If you look at where we're at today on a global basis, we have about 434 currently up-and-running reactors. If we go out through 2050, we're expecting another 170 or so that are either already planned for construction or under construction at this point. [Source: World Nuclear Association as of 1/2024.]

What that's doing is forcing the demand for uranium higher. From where we're at today to where we need to get, we could potentially have a deficit of over 2 billion pounds of uranium out through 2040 alone. We're seeing a lot of investment, particularly in the uranium miners space, to help close that gap because governments are now seeing nuclear as pivotal in their clean energy goals.

Ed Coyne: Okay. Let's talk about the miners briefly because I think that may not be intuitive to most investors. Maybe most investors are thinking, "How do I participate in the uranium trade, the uranium investment or allocation?" When thinking about miners, what should investors consider? What should they be looking out for, and what should they be looking at?

Steve Schoffstall: One of the reasons we like the miners is because they offer a degree of leverage relative to the underlying commodity. Since it has been underinvested in the uranium space, we see a relatively small group of miners in a position to start feeding that supply.

Many uranium miners tend to be in the exploration phase or have mines that they put in care and maintenance as the price of uranium fell historically. But now that we've gotten closer to $100 a pound of uranium from a low of under $20 a pound in 2007, we're seeing much more interest in the mining space. Currently, most uranium is coming out of the ground through Kazatomprom and Cameco, which are the two largest miners.

Ed Coyne: You mentioned we're at or around $100. It's moving around a little bit right now. What price point would it be for someone like you and me to go into the mining business? Are you seeing new companies come in or existing mines that maybe we're mining other materials shift and looking for opportunities to mine uranium?

Steve Schoffstall: We are. We see a couple of things. To answer your first question, at about $100 a pound, pretty much anybody can mine uranium profitably. We're getting to that pivotal point. We're also seeing that many miners are starting to bring mines that they had closed down and put on care and maintenance for a decade while prices were depressed.

They're starting to reopen those mines, and hopefully, they will do so in the near term to get more supply on the market. We're seeing some disruptions as they're trying to do that. It's not very surprising when you shut a mine down for about ten years that, you can't just flip a switch and have it begin producing again.

That's one aspect of it, and that's been very supportive of higher uranium prices, and we expect some growing pains, as you would with any emerging industry. But for us, we're excited about the miner space, particularly the smaller miners that may have more of an exploration footprint as opposed to a production footprint.

Ed Coyne: Speaking of that, are you seeing, as we saw a couple of years ago in the gold and silver mining space, some M&A, some acquisitions happen then with the largest coming in and buying the smaller? What are you seeing in that environment?

Steve Schoffstall: That would be something we expect. Another thing that we see is that miners might have other mining projects, like lithium. They may also have some uranium operations. We're seeing announcements that there's consideration to spin off those uranium miners to make it their standalone company, as people and companies are starting to see the opportunity there.

With any commodity, when there is a rapid price movement, and one that, in this case, we believe to be sustained, we expect to see a degree of M&A activity, and we think that's also fueling the performance that we're seeing with many of the smaller miners in particular.

Ed Coyne: Awesome. Then, from an investment standpoint, how could an investor potentially participate in the uranium opportunity today for our viewers who are watching this right now? How can they invest in it?

Steve Schoffstall: We have three options. We have the Sprott Physical Uranium Trust if you want to go the physical route. It's about a six billion dollar close-end fund that invests directly in physical uranium and stores the uranium. That's its only asset. We also have two ETFs listed here in the United States. We have the Sprott Uranium Miners ETF, ticker URNM, and the Sprott Junior Uranium Miners ETF, ticker URNJ.

The main difference you'll see with those two is that if you look at URNM, there's about a 17% allocation to physical uranium, and it also has those two larger miners because that problem came before in the index.

If you look at URNJ, the junior miners, we take those two large producers out, and we also take out the physical uranium allocation. For us, that was something that we've heard from clients, and they wanted the option to invest in the smaller miners and not necessarily have that direct physical exposure. They've enjoyed the additional leverage that junior miners typically give you over more of a senior miner profile.

Ed Coyne: Fantastic. It sounds like they're both pure plays.¹ They're direct allocations to the space.

Steve Schoffstall: Exactly. We have a threshold for both mining ETFs: at least 50% of a company's assets have to be tied directly to uranium or the production of uranium to be included in the index. When we look at our energy transition suite, a common theme is this pure play mentality where we want to ensure we're giving investors the exposure they want and not going downstream in the supply chain.

Copper

Ed Coyne: Let's shift gears and talk about the copper side. We talked a bit about the creation of energy through uranium. Let's talk about the movement of energy, the movement of electricity. Nothing moves more electricity than copper. Let's talk about what we're seeing from an opportunity standpoint there. How can investors think about copper today? Can you give us a little insight into what's happening in the copper market?

Steve Schoffstall: Aside from uranium, copper is probably the mineral we're hearing about most, and most investors are starting to take a look at it. If you look at the longer-term performance of physical copper, for example, if you go back to the beginning of the century, we were somewhere around $2,000 a ton for copper. Today, we're sitting closer to that $8,000-$9,000 per ton.

It's also a pivotal point in the copper market because we're starting to see some of the same dynamics that we're seeing with uranium, and we're expecting to see constrained supply as we go forward.

Just to give you a little example of what that looks like, if you were to go back through all of human history, we've mined somewhere around 700 billion tons of copper. From now until 2050, we will have to mine twice the copper we've mined in our existence.

At the same time, we have this growing need for copper. We're starting to see some supply issues that have been lingering in the industry for a while now. We're seeing production issues, particularly in relation to ore grades. The ore grades are declining. The more material miners move, the less copper they get out of that, so they must continue to mine more material.

We also see other issues related to social unrest in many parts of the globe where copper is mined, particularly in South America. We see that where the populace tends to be very much involved in the mining of critical minerals, and copper in particular.

Ed Coyne: You mentioned demand. Talk about where that demand for copper is coming from.

Steve Schoffstall: Copper is one of those elements pivotal to everything we do that requires electricity. Outside of silver, it's the most conductible metal out there. We tend to lean toward copper because it's more cost-effective than silver.

Where the demand starts to come into is if you look at where we're at today, about 22% of the overall demand for copper comes from clean energy technology, so if you think of EVs, wind, solar, those types of applications. As we move through the next 2-3 decades, we expect that percentage to drive the growth.

While we'll still see a demand for copper across the economy, real estate and electronics, it's really that transition to cleaner energy where we expect to see a lot of that growth come from. Not only are we changing structurally how we're going to consume and produce energy, but we also see the demand for electricity increasing by about 86% out through 2050.

That's coming on the backs of the Western countries; you're starting to see more technological advances. If you look at more developing countries, you're starting to see a rising middle class. We're seeing that we not only support demand from an overall power generation standpoint but also try to transition to cleaner energy sources, which is its own driver of demand in its own right.

Ed Coyne: Whether it's wind, solar or nuclear, copper is involved with all these things on top of electric vehicles. You name it, copper is involved. The demand is coming from all corners of the world.

Steve Schoffstall: That's correct.

Ed Coyne: From an investment standpoint, how can investors participate if they're interested in copper allocation like uranium? How can they do that today?

Steve Schoffstall: We focus on pure-play¹ miners and think that's a great place to be. There are a lot of large miners that might have copper that may make up 2 or 3% of their overall exposure to mining. We want to take those out of the equation. We have two ETFs that are available to investors.

The first would be the Sprott Copper Miners ETF. That's a relatively new ETF, which will provide exposure to the large, mid, and small-cap miners in the space. Then, we also have a pure-play¹ ETF dedicated to the junior miners. That would be our Sprott Junior Copper Miners ETF. Those are two funds that we're excited about, and we're hearing a lot from investors that as they're looking to allocate toward copper, they're looking for that pure play approach that we provide.

Ed Coyne: You mentioned seniors versus juniors. Most people are familiar with the term large cap versus small cap. Are we talking about the same thing from a market cap standpoint?

Steve Schoffstall: Yes. If we take the junior uranium miners as an example, you would see a much lower market cap than the senior miners. Traditionally, you also see a lot of exploration-type companies in the junior miners. They might not be producing, but they have significant assets in the ground. As you were talking about earlier, those candidates might be potential M&A targets, so we could see a benefit from that.

Ed Coyne: Great. Thank you. Hopefully, all the viewers today found this of interest. We encourage you to visit us at sprott.com. That's S-P-R-O-T-T.com, to learn more about what we do in both the precious metal space and the critical material space, particularly the creation of energy through uranium and the movement of energy through copper. Thank you for watching.