Insights

Sprott Uranium Update 2024

January 26, 2024 | (24 mins 45 secs)

John Ciampaglia, CEO of Sprott Asset Management, joins James Connor at the Bloor Street Capital Virtual Uranium Conference to examine the growing interest in the uranium market, the current state of the spot and contracting markets and Sprott’s movement in the space. 

Watch more Bloor Street Capital videos on Youtube.com/@BloorStreetCapital.

Video Transcript

James Connor: Hi, John. Thank you very much for joining us today. 2023 was a breakout year for uranium, with much of that move coming in the last few months of the year. I always like to start our conversations the same way: to get an update on the Sprott Physical Uranium Trust. When you and your team took it over in July of 2021, the NAV was only $600 million, 18 million pounds of uranium. Where is it now?

John Ciampaglia: Hey, Jimmy. Good to see you. It's hard to believe that we're two and a half years into the life of Sprott, and we're about $6.7 billion. [Sprott Physical Uranium Trust] has grown by a multiple of about 10. Even more interesting is that it's now Sprott's single-largest fund, which is pretty astonishing. We're very pleased. The fund recently was at all-time highs. I think it's fair to say our investors are very pleased with the performance. We have some investors that were very early in this trade, and some of them have seen tremendous growth, which has been great.

James Connor: That's an interesting point. It's your single largest fund now, so that means it overtook the gold fund.

John Ciampaglia: Yes. The interesting thing is that the gold fund has been around since 2010, and the gold fund is very near and dear to our hearts. But uranium has been the star for the last 12 months, with an 89% gain last year. Only partway through January, the fund is up another 15%, so the momentum continues.

There's lots of growing interest, for sure. People are curious why this particular commodity is doing so well when many other commodities are hitting multi-year lows. We've been incredibly busy engaging with institutional investors over the last five or six weeks. I just returned from Europe, where I traveled to London, Milan, and Zurich and met with 36 different funds; some are learning about uranium, and some are existing investors in the sector and wanted updates.

There's still a lot of interest and excitement, even though we've hit 100 bucks. You would think, "Well, the price has hit 100 bucks. Surely people are taking profits and moving on, or they think they've missed it." I would say it's very different. As the price goes up, it helps to validate the thesis. As the price has increased, it has also made the sector more investible in size and liquidity.

I think the reality is there are always more momentum-oriented investors in the world than value investing, which is very difficult to be contrarian, particularly when sectors are deeply out of favor, like uranium, from 2011 right through to 2020.

James Connor: I want to ask you about that marketing trip, but before we do that, I want to continue discussing the flows. A lot of money has flowed into the Sprott Physical Uranium Trust. What about the Uranium Miners ETF or URNM?

John Ciampaglia: We've seen an interesting rotation with our business, specifically concerning a disproportionate share of inflows that have gone into our uranium mining ETFs over the last six months. That's a healthy sign because it reflects, I think, growing interest in the space.

It also reflects institutional investors and retail investors that are more willing to get exposed to the miners, which we know are more volatile and less liquid but do provide a lot of that operating leverage for the producers and near-term producers, as well as optionality for a lot of the developers and explorers.

We've seen this shift back to the miners. Remember, the miners got ahead of themselves in the fourth quarter of 2021. That's when the Reddit mob got a hold of the uranium story and pushed a lot of those stocks to levels that were not sustainable. Over that period, the commodity price kept marching higher, and the stocks did not keep pace.

But we saw this rotation starting to emerge in July of last year when uranium stocks started to perform better. As a result, we've seen larger flows into our uranium mining ETFs than we've had in the physical uranium trust, which is three times the size.

That's a very good indication that interest is broadening back to the equities. It's not just one stock because, we know, last year, a single name drove a lot of those gains. We've seen a widening of interest and a greater breadth of performance across the small and mid-cap names in the space.

James Connor: That's an interesting point because even though spot uranium is making new highs or multi-year highs, a lot of the equities are not factoring in this higher spot price. Are you seeing a closing of that valuation gap?

John Ciampaglia: We've seen better relative performance from the miners, and as I said, not just one name, but a greater breadth of performance. That is helping to encourage more capital flows into those products. Our uranium mining ETF is about $1.8, or $1.9 billion right now, and our junior fund is around $250 million. Our European version of our uranium mining fund has broken through $300.

Somebody recently told me that Sprott, when you add up all our exposure in uranium mining ETFs, we're the single largest holder of uranium mining stocks in the world, which I had no idea about. We now have the largest physical uranium trust and the most exposure to uranium mining stocks. It's impressive. I think it's about $9 billion U.S. dollars altogether.

James Connor: I want to move on now and discuss the spot market. There's a lot of tightness, or there appears to be a lot of tightness, just due to geopolitical concerns and supply disruptions coming out of Kazatomprom and Cameco. What are you seeing? What are you hearing?

John Ciampaglia: I think it kicked off in August. That's when we saw the most recent inflection point. That's when the price broke out of the range we were in, around the mid-$50s per pound. We started September at $60, and everybody was scratching their head, saying, "Why was the price so firm in August, which is typically very quiet?"

We started to find the reasons why when Cameco signaled they were having some short-term production issues at mine and mill. The momentum carried through right through to the fall. We hit $72, and people might say, "Well, what's the significance of $72?" Well, it was the price of uranium right before the earthquake and tsunami in Japan in 2011.

When we broke that threshold, that was finally getting through another psychological barrier for investors. It wasn't too far after that that the Kazakhs announced that they were going to flex up production in both '24 and '25. We saw the price of uranium fall $5 a pound very quickly, back to $67. But within a week or so, it was right through $72 again.

I think that reflects a couple of things. One, there's some skepticism in the market about whether they can actually achieve that. In the last couple of weeks, we've got some confirmation from them that they will probably not hit their number. We've also had very strong underlying demand. We saw utilities back in the spot market last year and producers in the spot market last year. We were in the spot market, albeit at a much further reduced level than the two prior years.

I think it's very important to remind the audience that last year, we bought four million pounds of uranium, which is not a lot of material, yet the price went up 89%. Who's really driving the price? Well, it's end users, in our belief, buying what they could find in the spot market, and obviously, the term market had a very substantial year. But if you pull back the layers of the term market last year—it was about 160 odd million pounds were contracted—but when you pull out what the Ukrainians purchase, which is 60 odd million pounds, I think the rest of the industry is still not at replacement rate contracting.

We still think there's more room for the long-term contracting cycle to accelerate, particularly amongst U.S. utilities who have been dragging their feet in buying more uranium. We don't know why. The European utilities have been more proactive, and we think this year is going to be a catch-up year for U.S. utilities to buy more.

James Connor: You mentioned that in 2023, Sprott only purchased four million pounds. Can you put that into perspective for us? How does that compare to 2022?

John Ciampaglia: In '22, I think we purchased just approximately 20 million pounds. It was just a fraction. It's also interesting to me to know that we had Sprott go up 82% last year of performance, yet the total flows for the entire year were $400 million. I'm not going to belittle $400 million, but in the grand scheme of asset flows around the world, it's a drop in the bucket for an asset that went up 82% in a year where returns were very hard to find.

I think it reflects that we're still at a stage where we don't have investors trampling over themselves, again, in position in the sector. We still do not have the big generalist money there. We still have the small and mid-sized institutions that I think have been the most proactive in terms of getting positioned in the last three years. Another reason I don't think the trade is crowded by any means is that we have not seen a wave of new capital enter the sector relative to other asset classes.

James Connor: That's a good overview of what you see and hear in the spot market. What about the contracting market? Can you give any insights on that?

John Ciampaglia: I think we're hopeful that we break through the 160 mark this year. I think, ultimately, what everybody is expecting is that over the next few years, the contracting cycle will continue, it'll be very healthy, and that we need to get back to levels where utilities are buying 200 million pounds and above, which is indicative of them reloading inventories and then building restocking future fuel supplies.

We're not there yet. We're just treading water. If you look at the last cycle in the mid-2000s, there were years when the industry was buying upwards of 250 million pounds per year on long-term contracts. That collapsed after 2011 and averaged about 70 million pounds per annum over ten years. That's a period of destocking.

What's happening while we've gone from 70 to 120 to 160 million pounds is just a function of time. Inventories have drawn down. It's just natural for utilities to draw down inventory over time as they consume it. Second, I think there's a change in mindset. Now, the security of supply is becoming more important because of potential supply disruptions because some producers are having issues restarting mines or expanding existing ones.

Lingering concerns remain about potential geopolitics and trade wars and whatnot further entangling or complicating the nuclear fuel supply chain. There's a bill that's waiting to get approved in the U.S. Senate that could ban the importation of Russian-enriched uranium and allow for a certain waiver process for the next few years. But there's a lot of uncertainty around how that is going to operate, the time, the waiver process, and then the wild card is always, "Will the Russians retaliate and cut the West off from enriched uranium before the hard deadline of December 31, 2027?"

I think all these things have changed the fuel buyers' psychology and mindset. They're very focused on ensuring they have long-term supply. I think it's well-known in the industry that the top producers have essentially sold out all their production for the next few years. I think if I were a fuel buyer and I called some of the largest producers and got a response that, "Hey, I'm sold out for the next four years," it wouldn't make me feel like we remain in a period of plentiful supply, which they had become incredibly accustomed to for the greater part of the last ten years as we were working down a lot of excess inventory.

I think the psychology changed. At the end of the day, the fundamentals haven't changed at all because we knew there was a supply gap three years ago, five years ago, and today. What's changed? Well, I think it's the mindset, more than anything, the psychology of the market.

James Connor: You raise an interesting point about Russia and whether they might use their leverage because they're so big into enrichment and conversion services. That's an interesting point if they were to weaponize that in the impact it would have on the markets.

John Ciampaglia: I think it's something nobody wants to play out because it will be disruptive in the sector, which has faced several challenges since the war broke out. But if that were to play out, it's going to be a very psychologically driven event. But it could create a short-term calamity in the market. We think it would spike the price of U308. Again, we're not predicting it, but it's something that everybody's watching for.

James Connor: Interesting points. Let's talk about your marketing trip to Europe that you touched on earlier. You went to three cities and you saw 36 clients?

John Ciampaglia: We spent a week, and a bank hosted us. They brought us around to London, Milan and Zurich. London, they're sure up to speed with the uranium. Continental Europe, I would say, is further behind in terms of its understanding and its positioning in the sector. We tend to do more education and research and help them through their research process.

But I think the fundamentals are very appealing and interesting. But there's also this legacy stigma about investing in the sector that is clearly fading away. It's not universal. Pockets in continental Europe still believe they’re not allowed to invest in this sector, which I think is very antiquated and unfortunate.

But we're just not getting the same resistance that we would typically see two or three years ago in terms of, "Is this a safe sector to invest in? Is it morally right to invest in the sector?" I think attitudes are changing enormously. COP28, the pledge by 20-plus countries to triple nuclear power, goes a long way in reducing that stigma and getting past our legacy with nuclear energy.

James Connor: I think a big part of it, too, is if you have the mandate to make money and this commodity is up 80 or 90% and every other commodity is down on there, you pretty well have to be there.

John Ciampaglia: It's very hard to ignore. People are looking for new investment ideas. This is something that I think is unique and fits a whole bunch of different thematics for people. It can fit within a decarbonization trend, and it can fit in an energy and energy security theme. It is the ideal complement to renewable energy, which most people have invested in for the last ten years, more downstream renewable energy, and that's had a really challenging year. People have not done well with those investments. I think it fits in a whole bunch of different buckets.

James Connor: Maybe you can provide some more color on your meetings. Were these long-only clients? Were they hedge funds? Retail? Institutional? Are they new to the space, or are they well-acquainted with the space?

John Ciampaglia: It was a wide variety, which reflects the growing interest in the space. Over the last six months, we've had a much greater number of inquiries from generalist investors. They're doing their homework on the space and trying to figure out how this fits into their portfolio.

But it's everything from family offices to small boutique funds to large particular funds within large asset managers. But it is not the BlackRock of the world. They're not calling and saying, "Hey, we've got billions of dollars to deploy in this space." They're just not there yet. The sector is growing nicely. It's recapitalizing. It's becoming more liquidity.

With all these asset classes, liquidity begets liquidity. We've been very focused on growing the vehicles because we know that's a key requirement to get more and more institutional participation. It wasn't uncommon to talk to European institutions that said, "Look, we're not allowed to invest in anything under a $5 billion market cap." When you think about that in the uranium sector context, you've eliminated all but three or four things.

Some funds have a limited investment universe, but they'll come. They will come in due course as the sector grows. But look, there's lots of capital out there. We remain very focused on educating the market about the sector and helping investors understand how it works.

James Connor: John, before we wrap it up, I want to touch on a few other news events that happened at Sprott, one of which was you were contemplating a redemption feature, and you decided not to do that. Maybe you can provide the rationale for why you took that course.

John Ciampaglia: Sure. In September, we announced publicly that we were contemplating a limited redemption feature for the Sprott Physical Uranium Trust. We were not happy with the way it was trading. We obviously had some air pockets in the summer when the liquidity and market sentiment, generally across the markets, were soft.

It was something we were entertaining. We collected feedback from a lot of institutions. That was in September when the price was $60 a pound. Fast-forward to the end of December, the price had broken through 80 and worked towards 90. We just reflected on the likelihood that shareholders approve a proposal like this, which has a very high threshold.

Two-thirds of all the shares outstanding of the trust would have to vote and approve such a proposal. We think that's a very high hurdle to achieve given the change in the market dynamics and clearly the change in sentiment. We've decided to put it on the back burner for now. That doesn't mean we won't revisit it in the future if market conditions change.

But for the time being, we have such a busy schedule at Sprott for the next six months in terms of events, conferences, and requests. We want to focus all of our energy on that while the sector moves to the next stage of this bull market and not get distracted by a cumbersome and expensive proxy process.

James Connor: Understood. Sprott recently filed a $1.5 billion shelf. Maybe you can give us some color on that.

John Ciampaglia: We also announced in early January that we came to an agreement with our regulator. We renewed our shelf prospectus for $1.5 billion. We then drew a billion of the billion and a half down off the shelf, so to speak, for the at-the-market capital-raising program. We've raised about $55 million so far. That program will last for 25 months.

We've also made an agreement with our regulator that we would not purchase more than nine million pounds of uranium in the spot market for the next two calendar years. This was a compromise to allow us to continue to operate the trust and to grow it while not overwhelming the spot market in terms of our purchases. They think this was a very fair compromise and gives us certainty and clarity around how much capacity we have to work with. To be candid, I think it will be very challenging even to find nine million in this market right now.

James Connor: I want to clarify that means nine million pounds in one year?

John Ciampaglia: Per calendar year, correct.

James Connor: Interesting. Is there anything else you want to highlight before we wrap it up?

John Ciampaglia: No. I would say that even though the price has broken out to $100, we still think that there's a lot of opportunity here because we look at the supply deficit that the industry needs to solve. Whether you take the base case or the more aggressive scenario, it's somewhere in the neighborhood of 1.5 billion to 2.3 billion pounds of uncovered requirements that utilities have between now and 2040.

The only way you solve, that is you need to basically double production globally between now and 2040, which is going to be a huge undertaking and is going to require very robust uranium prices, not just for three months or six months, and then it goes back to some other level. It will have to stay elevated for a very long period of time because of the long lead times and the large CapEx required to get these projects built.

We're very optimistic that the prices are going to remain elevated for an extended period. We don't see a catalyst that can knock this back. The world has clearly pivoted back to nuclear energy in most countries, and it's going to require massive investments if we want to focus on these primary goals of decarbonization, energy security, and reliable baseload power to offset the intermittent renewables. These are the three fundamental drivers of why energy policy has shifted back to nuclear energy.

James Connor: Great comments. John, thank you very much for spending time with us today. If someone would like to learn more about Sprott and its various products, where can they go?

John Ciampaglia: Sprott.com is probably the easiest point to start. We've got information about our funds. We've got a great investor education section, which I would encourage people to spend time reading our reports. We published a report in early January that I think is very timely. We also published some great podcasts with expert speakers in the sector. That will help you get a very good understanding of how the sector works. We have a number of funds that you can explore and understand.

James Connor: Well, that's great. Once again, thanks very much, John.

John Ciampaglia: Thank you for having me. Always nice to talk to you.

Important Disclosure

The Sprott Physical Uranium Trust is generally exposed to the multiple risks that have been identified and described in the Management Information Circular and the Prospectus. Please refer to the Management Information Circular or the Prospectus for a description of these risks.

Past performance is not an indication of future results. All data is in U.S. dollars unless otherwise noted. The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be tax, legal, accounting or professional advice. Readers should consult with their own accountants and/or lawyers for advice on their specific circumstances before taking any action. Sprott Asset Management LP is the investment manager to the Sprott Physical Uranium Trust (the “Trust”). Important information about the Trust, including the investment objectives and strategies, applicable management fees, and expenses, is contained in the Management Information Circular and the Prospectus. Please read the Management Information Circular and the Prospectus carefully before investing. You will usually pay brokerage fees to your dealer if you purchase or sell units of the Trusts on the Toronto Stock Exchange (“TSX”) or the New York Stock Exchange (“NYSE”). If the units are purchased or sold on the TSX or the NYSE, investors may pay more than the current net asset value when buying units or shares of the Trusts and may receive less than the current net asset value when selling them. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. The information contained herein does not constitute an offer or solicitation to anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Management LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.

John Ciampaglia
John Ciampaglia, CFA, FCSI
CEO, Sprott Asset Management
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