2 ways to play uranium

Financial journalist
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Uranium began 2023 at US$48.97 a pound, and ended it at US$90.78, a 16-year high – with the depths of US$17.20 in late 2016 a distant memory. The Fukushima nuclear accident in 2011 had seemed like the death knell for uranium.

But now, there is a spring in the step of the yellowcake (uranium oxide) world, with uranium trading at US$106 a pound, a level not seen since October 2007.

There are plenty of reasons for the rebound, and the positivity in the market.

Ironically – and something that makes committed ‘greens’ gnash their teeth – uranium and nuclear power are increasingly seen as crucial in the clean energy transition. Nuclear is coming to be seen in the West as a low-emissions source of baseload power, something that renewable energy forms such as wind and solar struggle to be.

In October 2022, Mark Carney, vice-chair, and head of transition investing at Brookfield (and former governor of both the Bank of Canada and the Bank of England) said: “Every credible net zero pathway relies on significant growth in nuclear power.”

In May 2023, Bank of America published a research report titled “The Nuclear Necessity,” which pointed out the underinvestment in uranium over the past decade, leading to a visible shortage and rising global demand. In the same month, Time Magazine brought out a cover story titled “Nuclear Energy’s Moment Has Come,” detailing the growing acceptance of nuclear power, and featuring the grandson of J. Robert Oppenheimer.

By that time, the uranium bull market was off and running in earnest.

Fortunately, Switzer Report was on to it: refer back to August 2022, “My five top uranium stocks” (https://switzerreport.com.au/my-top-5-uranium-stocks/) and September 2023, “6 ways to play uranium” (https://switzerreport.com.au/6-ways-to-play-uranium/ ).

The market still sees potential capital gain for the uranium sector, with the glaring exception of Boss Energy; here are the stocks mentioned, with the analysts’ consensus price targets, as sourced from Stock Doctor/Refinitiv:

Boss Energy: $5.45, versus price target of $5.19

Deep Yellow: $1.395, versus price target of $1.535

Paladin Energy: $1.22, versus price target of $1.309

Bannerman Energy: $3.54, versus price target of $5.32

Lotus Resources: 31.5 cents, versus price target of 45 cents

Alligator Energy: 7.2 cents, versus price target of 10 cents

There is a huge amount of optimism in uranium, and these price targets are being upgraded.

Consider this, from broking firm Shaw and Partners, which put out a research piece earlier this week, titled “Nuclear Summer,” in which it upgraded its uranium price forecast to US$150 a pound, to peak at some point over 2025—2027. Shaw said: “The spot uranium price has surged through US$100/lb on the back of supply constraints and renewed global interest in nuclear energy. The price rise has been larger and earlier than expected, although at this stage the market remains orderly, and the price increases do not appear to be driven by panic buying. That may change if utilities believe that they will have difficulty covering their fuel demands later this decade. Panic buying could drive the uranium price materially higher. There is a great saying in markets that ‘he who panics first, panics best’ and we recommend investors get ahead of potential panic buying.”

Shaw’s preferred exposures are Paladin Energy (price target $1.50); Peninsula Energy (price target 34 cents); Lotus Resources (price target 72 cents); Bannerman Energy (price target $7.04); and Silex Systems (price target $7.60) – which I will come to shortly.

However, a note of caution should be sounded – especially as two ‘sure thing’ commodity stories, lithium, and nickel, have just gone badly wrong for investors (and journalists, may I say!), showing us yet again that the mining sector is highly volatile and difficult to get right.

None of these ASX uranium stocks are currently producers, although there are plenty of plans for projects to get underway, or re-enter production (in the case of Paladin, which, to be fair, is very close to resuming production at its Langer Heinrich operation in Namibia; and Boss Energy, which likewise is on the verge of a re-start at Honeymoon in South Australia).

Single-stock risk can be fraught with too much danger. There will be plenty of investors for whom the two ASX-listed exchange-traded funds that specialise in uranium will loom as a safer way to participate.

The first is the Betashares Global Uranium ETF (URNM), which aims to track the performance of an index (before fees and expenses) that provides exposure to a portfolio of leading companies in the global uranium industry. URNM is managed for 0.69% a year. At $10.20, URNM has returned 67.7% over the last 12 months.

URNM’s top 10 holdings are:

Sprott Physical Uranium Trust 14.4%
Cameco Corporation 13.9%
Kazatomprom 13.8%
CGN Mining Company 5.8%
Uranium Energy Corporation 5.5%
Paladin Energy Ltd 4.8%
NexGen Energy 4.5%
Yellow Cake plc 4.5%
Denison Mines Corporation 4.4%
Boss Energy Ltd 4.3%

The second ETF, the Global X Uranium ETF (ATOM), is a feeder fund that invests directly in the NYSE-listed Global X Uranium ETF (URA), which is managed by the Global X team. ATOM has earned investors 49.9% over the last 12 months. It also costs investors 0.69% a year.

ATOM’s top ten holdings are:

Cameco Corporation 23.1%
Sprott Physical Uranium Trust 12.5%
NexGen Energy   6.8%
Uranium Energy Corporation   6.2%
Kazatomprom   5.8%
Paladin Energy Ltd (ASX)   4.6%
Yellow Cake plc    3.8%
Denison Mines Corporation    3.4%
Energy Fuels, Inc.    2.5%
Boss Energy Ltd 4.3%

 

As you can see, there is a fair degree of overlap; but both of these stocks offer – in one transaction – instant exposure to a broad range of companies involved in uranium mining and nuclear energy, covering activities such as extraction, refining, exploration, or manufacturing of equipment for the uranium and nuclear industries, or that hold physical uranium or uranium royalties. They are both a simple way to get access the growth potential of the global uranium industry.

Lastly, it is worth looking at Shaw & Partners’ other buy-rated stock, uranium enrichment company Silex Systems, for which the broker has a price target of $7.60.

Silex Systems (SLX, $4.74)

Market capitalisation: $1.1 billion

12-month total return: 2.4%

Three-year total return: 49.1% a year

Analysts’ consensus price target: $6.51 (Stock Doctor/Thomson Reuters, two analysts)

Silex has made a remarkable renaissance: in 2019, the stock was languishing at 16 cents.

The company owns the separation of isotopes by laser excitation (SILEX) technology, which it has been trying to commercialise for years. The SILEX technology was invented by Silex scientists Dr. Michael Goldsworthy (the current chief executive officer) and Dr Horst Struve (retired), in the 1990s at Australia’s only nuclear reactor, at Lucas Heights in Sydney. The technology can be used to produce natural-grade uranium through re-enrichment of mine tailings inventories, and enriched uranium for use as fuel in nuclear power reactors.

Shaw and Partners states that “the company’s third-generation uranium enrichment technology will revolutionise the uranium enrichment industry.” It can make the type of enriched uranium needed in next-generation small modular nuclear reactors (SMRs), which show a lot of promise – these reactors require a higher grade of nuclear fuel.

But Silex is far from a one-trick pony: its unique laser enrichment technology also huge potential in silicon enrichment (for silicon quantum computing); and medical isotope enrichment (for new cancer therapies).

The company says it offers investors exposure to three key growth industries, with strong ESG credentials:

  • Nuclear power for clean energy – potential to support Net Zero 2050 targets, with carbon-free electricity production;
  • Next-generation quantum computing – which is expected to help solve global social and environmental issues; and
  • Advanced nuclear medicine isotopes – with the potential to support front-line cancer diagnosis and treatment.

At the moment, for example, the only country able to enrich uranium to a standard high enough for use in state-of-the art small nuclear reactors is Russia. That is problematic, to say the least, and after 2028, the US will not be able to obtain this material, which is known as high assay low enriched uranium (HALEU). Earlier this month, the US Department of Energy (DOE) put out a request to the private sector asking for proposals on how much it would cost, and how it would work, to make HALEU in the US. Silex believes it can (in joint venture with Canadian uranium giant Cameco) produce the HALEU the United States needs.

Silex Systems is not profitable, and not expected to be for several years at least. But Shaw (and other brokers) are quite bullish on Silex Systems, and just maybe, its time has arrived.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

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