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Sep 16, 2021

Uranium Prices Near Multi-Year High, What’s Next?

By:Ryan Grace

After years in a bear market, uranium prices are ripping on both bullish fundamentals and large speculative buying by the Sprott Physical Uranium Trust.

The bull case for uranium has been made frequently in the past, but now the bull is alive and facing an undersupplied market. Producers decreased output during a prolonged period of depressed prices and now the market could be faced with a supply squeeze, right as the Sprott Physical Uranium Trust has been putting its capital to work, in size.

Spot uranium prices eclipsed $30/pound earlier this summer and now front-month uranium futures are trading north of $40. This puts the price of the key nuclear fuel at levels last seen almost a decade ago. This 40% move over the past year has also helped to put a bid under uranium related stocks such as Cameco (CCJ), which we highlight below.

Why is the Price of Uranium Going Up?

What’s behind the sudden price surge? As it often happens, there are both fundamental and market forces at play. Though sometimes, high prices are simply a function of low prices.

For starters, the price of uranium has been in a nasty bear market since the Fukushima nuclear disaster on March 11, 2011. Amidst heightened risks and the negative connotation associated with nuclear energy, 60 reactors were permanently shut down globally between 2011-20.

Like most commodities, significant demand destruction usually results in a crash, and the uranium market is no exception. Over time, from the spring of 2011, front-month futures prices collapsed by over 70% from $62/lb to a low of $17.50/lb in November 2016.

Uranium Price Chart. Source: Koyfin

As demand dried up, so did capital expenditures and subsequent mining production. Throughout this nuclear winter, global production fell from a peak of 62,379 tonnes in 2016 to 54,752 by the start of 2020, according to the World Nuclear Association.

Globally, this accounts for a drop of about 12%, though in key export countries such as Canada (2nd largest global producer), production fell by almost 50%.

Given the dearth of supply, the market was left exposed to a demand shock, and this looks to be playing out presently.

There are a multitude of bullish arguments related to supply/demand dynamics, from shifting energy policies to the role nuclear might play as the world strives to reduce carbon emissions.

These factors might be supportive of the market over the long-term, but arguably the short-term catalyst squeezing the market higher is the emergence of a new and very large player… Enter the Sprott Physical Uranium Trust.

The $1.1 billion dollar fund launched in July of this year gives investors exposure to uranium prices by purchasing the physical metal. Per Bloomberg data, after upsizing its offering, the fund has already purchased more than 24 million pounds since inception. To put that in context, it’s already purchased around 14% of what’s used by nuclear reactors globally.

So again, not only is the demand picture potentially improving within an undersupplied market, there’s a billion dollar gorilla in the room looking to stack physical uranium to the roof.

Uranium Prices Have Increased by Over 40% This Year

Uranium 1-Year % Return. Source: Koyfin

Ways to Invest in Uranium

Normally we don’t look to chase moves after they’ve happened, but given the market dynamics, this setup has my attention and I’m struggling to lay out much of a bearish thesis, aside from maybe price exhaustion. What goes up, must come down... Right?

Regardless, whether you’re in the bullish uranium camp or think we’re due for a correction, there are a few ways you can get exposure to the price action.

Below we focus on two relatively liquid underlyings The Global X Uranium ETF - URA (always research ETF fund holdings) and Cameco Corp (CCJ), one of the world’s largest uranium miners.

Beyond the ETFs and Cameco (CCJ) There are more speculative positions one could take. Names like NexGen Energy (NXE), Energy Fuels (UUUU), and Uranium Energy Corp (UEC).

These are smaller, less liquid, higher volatility names, but given the activity in the market, they’re seeing increased trading volumes.

All of these symbols have options, but check the bid-ask spread, open interest, and volume of the options you’re trading to gain an understanding of the liquidity risk.

Uranium Stock Performance, Volatility, and Expected Moves

Relative to last year, all of these names have more than doubled, but on a trending 3-month basis (which flipped positive due to the large monthly move), it’s possible this is the beginning of another leg higher.

Volatility in the space is certainly more pronounced across the much smaller mining related stocks (NXE, UUUU, UEC), but note the difference in relative volatility via the IV rank metric. Counterintuitively, the +100% implied volatility in these names is relatively low compared to where vol has traded previously.

9-15-21 3:00 PM CT

1-Month Price Performance Correlations of Uranium Stocks

As you might expect this is pretty straightforward, these names all move together and while we don’t have it on display, we also observe this when looking at 3-month correlations.

9-15-21 3:00 PM CT

Daily, Weekly, and Monthly Market Expectations

While the situation can quickly change given the nature of this market, below we show market +/- market expectations across a daily, weekly, and monthly period given the reference price and implied volatility level.

9-15-21 3:00 PM CT

I think it’s likely the market undergoes some consolidation following recent gains, but I’m leaning bullish and looking for trades with asymmetric risk/reward profiles.

If this is in fact the start of a bigger upside move, given present conditions, I want larger potential profit exposure to that possibility. E.g. long volatility and directional trades in the form of call ratio spreads, vertical call spreads, etc.

Uranium Trading Takeaways

  • The negative connotation around nuclear energy is starting to fade. The price of uranium has broken higher after a nasty bear market and now is near an eight year high.
  • Nuclear power will arguably play a role in the world’s effort to reduce carbon emissions. Uranium is a key element for nuclear power generation.
  • Mining production has declined during a prolonged period of depressed prices and while price has responded, there’s the potential for a squeeze higher given both fundamental catalysts and the emergence of a very large buyer within the physical market in the form of the Sprott Physical Uranium Trust vehicle.
  • Uranium is a relatively opaque and illiquid market, but there are numerous ways to get either bullish or bearish price exposure through uranium ETFs and mining companies.

To discover more trade ideas like this, watch Ryan Grace and Victor Jones every weekday on tastytrade’s show, Jones & Grace at 11:45 PM CT.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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