Beware of the Yellowcake

In this article I will talk about an investable sector, in a more descriptive than technical way. This is a little-followed sector, but compared to the performances of the now all too famous bitcoin it has nothing to envy and is based on decidedly more real foundations even if not yet well defined from a strategic point of view.

Everything is linked to the year 2050, which has become an iconic year for the collective imagination. This date should represent a very important arrival point for the world, because it represents the achievement of an objective of carbon neutrality, i.e. zero emissions, thanks to a new balance between emissions and carbon absorption, obtained using green energy instead of the currently polluting fossil fuels. How to get there, however, is still unclear. And here the path is not the simplest, because it is necessary for political and institutional decision makers to find points of agreement on how to proceed to define a taxonomy of sustainable investments.

The transition process towards a greener world has therefore also become a topic subject to careful evaluations and forecasts by the financial world. In 2021, the multinational Bloomberg created a research platform that studies this phenomenon (Bloomberg NEF). For 2050 it sees three scenarios: the "Green Scenario", represented by a prevalence of green energy of up to 85% (by 2019 fossil energy represented 83%, renewables 12% and nuclear 5%), the “Grey Scenario”, with 48% green energy and 53% energy deriving from fossil fuels (but with the widespread use of carbon capture and storage), and the “Red Scenario”, characterized by a 66 % of energy coming from nuclear.

The reasons for the "Red Scenario" are because several nations are focusing on nuclear programs, in various ways.

The nuclear sector is connected to its raw material par excellence, i.e. uranium, which in its raw form is known as yellowcake, due to the color it takes on during the refining phase which concentrates the uranium oxides.

Several nations are developing and deploying their own nuclear resources, and new technologies are also being developed. A review in this sense would lead to an article that is too long. I will just mention, with regards to nuclear-related policies, that six months after the Russian invasion of Ukraine, the European Union decided to include them in its taxonomy of sustainable finance, and in the American Clean Energy Standard, it was included also nuclear energy. China and India are also very important components for the growth of this sector. Finally, at the recent Dubai climate conference, 22 nations committed to tripling nuclear capacity by 2050. Added to this is the problem that Russia controls a good part of the uranium deposits and therefore this could create volatility on prices if global political relations were to worsen.

As regards the development of new technologies, we have the Russians using floating nuclear power plants such as the Akademik Limosov to provide energy in raw material extraction plants in the Arctic areas, the Natrium reactors promoted by Bill Gates and Hitachi, and the design of small modular reactors that can be manufactured in a factory and subsequently transported to the installation site (SMR - small modular reactors).

The situation is currently very complex and therefore there are no well-defined plans. But the sector must be followed as the price of uranium is very sensitive to imbalances between supply and demand and often creates highly performing mini trends that differ, in terms of correlation, from other asset classes. It's just in recent days the news that Kazatomprom, the world's largest producer of radioactive material, responsible for over a fifth of global production, has warned of decreases on the supply side for the next two years due to the shortage of sulfuric acid, essential for extracting uranium from ore.

From a financial point of view, the uranium price market is not like that of other raw materials: its futures market is not very liquid or developed. Furthermore, the only way to access spot prices is through illiquid vehicles, with premiums or discounts, for example through trusts. Therefore, there are no simple and efficient ways to access spot uranium. Furthermore, 60% of uranium production is concentrated in just two companies: the Canadian Cameco (with a market capitalization of USD 21.66B) and the Kazakh Kazatomprom (with a market capitalization of USD 11.27B).

Since July 2019, investment has been possible through the Canadian asset manager Sprott, founder of the Sprott Physical Uranium Trust, which invests its assets in physical uranium. It is currently listed on the Toronto Stock Exchange and plans to list on the New York Stock Exchange as well.

There is also an American ETF, the largest in the uranium sector, called Global X Uranium ETF (URA), which invests in the main uranium producers, trying to replicate the Solactive Global Uranium & Nuclear Components index. Most of the weight is on Canadian Cameco and the Sprott trust, while the remainder is invested in smaller producers. Its inception occurred in 2010. Sprott created a similar ETF for the American market in 2019, working on a different benchmark (North Shore Global Uranium Mining Index) and achieving superior performance. In 2022, a UCITS version of Global X was created for European investors (URNU). In our article we use for the graphic part the ETF that has a longer history, i.e. the URA ETF.

Let's now come to the graphic part. Let's start by comparing in terms of performance in USD the Sprott's Trust, which replicates the price of uranium futures quite faithfully, with an ETF that follows the composite commodity index (Invesco DB Commodity Index Tracking Fund), over a 5-year time horizon.

We can easily note that, compared to the average of raw materials, uranium occasionally presents short, very violent micro-trends that have considerable profitability (see the areas indicated by the ellipses in the first quarter of 2020, in the third quarter of 2021, in the first quarter of 2022 and starting from the third quarter of 2023). The performance created after the breakout of September 2023 resistance is notable.

Let's now make the same comparison, again in terms of performance, between the Trust, the URA ETF, the S&P 500 index, and the shares of Cameco and Kazatomprom (tradable on the London Stock Exchange). The Cameco share (black line) is very volatile and is the one that most faithfully replicates the price of uranium. The shares of the Kazakh company Kazatomprom (green line) outperformed all the other assets indicated in the graph until the beginning of 2022. Subsequently, Cameco continued to perform. The URA ETF (red line), containing the two stocks, the uranium trust, and other smaller producers, had an average result, but much more interesting than the S&P 500 index (blue line).

If we move to smaller producers, we have curves that in terms of volatility are not suitable for the faint of heart. One of the most interesting companies to follow in my opinion is the American Centrus Energy (LEU). It is a nuclear fuel seller that supplies LEU (Low Essay Uranium) for traditional reactors and has also started producing HALEU (High-essay-low-enriched-uranium), which is used in the new generation of nuclear reactors in the United States. In June 2021 Centrus received the license from the DOE (Department of Energy) to produce HALEU at their new enrichment facility in Ohio and made the first delivery to the US Department of Energy in November 2023. If we compare the performance of this company over the last 5 years compared to that of Cameco and Kazatomprom, I would say that the peak performance it had in 2021 is impressive.

In conclusion, we can ask ourselves at least two questions. Will the performances just seen be replicated in the future? Is the price of uranium already in a bubble phase? Technically I can say that we do not have a great linearity of trends, and these graphs remind me a lot of the periods of high volatility of raw materials in the 60s and 70s. So, the best way to manage a modest position in this sector is to use the DCA (Dollar Cost Average), i.e. small fixed-amount purchases diluted and planned over time and possibly made when the curve goes down and not when it goes up. Technically it is a type of investment to be followed more with breakout strategies than with trend-following methods.

Currently the price has exceeded 100 usd per pound and given the current situation, some brokerage companies predict that the spot price could even rise to 200 usd per pound by 2025. This is why it is worth following this sector, but being extremely careful due to its strong volatility and the uncertainty of government policies that plan it.

About the author

Mario Valentino Guffanti is a board member and Head of the Lugano Chapter. He is a financial advisor, technical analyst and researcher based in Milan, Italy. As an author of technical articles and lecturer as well as instructor in technical analysis courses in Switzerland, he is also dedicated to financial coaching through NLP techniques (neuro-linguistic programming).