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Great Question on Uranium and $SRUUF

Great question today from Ben about uranium and $SRUUF:

I am wondering whether you can comment on SRUUF. According to Cameco’s website, it seems, year-to-June, Uranium spot price is trending lower and is converging to the steady rising long-term price. What factors are driving that trend and what implications those factors might have on SRUUF share price in short and longer terms?What are future catalysts that might significantly affect SRUUF share price either positively or negatively?

Thanks to Ben for the smart questions. To other DKI subscribers, please know you’re always welcome to let me know what’s on your mind as well. My response to Ben:

Thanks for the great questions. You’re welcome to post them here, or to IR@DeepKnowledgeInvesting.com. Good either way.

As you noted, uranium has had a huge run and a less-inspiring performance year-to-date. I believe the reason for the recent weakness is concern about a global recession. While it’s true that energy use dips in a recession, the temporary loss of power requirements tends to be small. Long term, most of the world’s population is very interested in living a better material life, and that always means more energy usage. China and India alone have almost 3B of the 8B people on the planet, and they want to use more energy. Here in the US, if we want lots of reliable data centers and AI, that’s going to mean a huge increase in reliable power. (Those AI-enabled $NVDA GPUs have massive power requirements.) Those centers can’t be run on wind or solar. If there is a continued shift to EVs, that’s also going to mean a massive increase in baseload generation capacity.

So, the entire world is heading towards higher long-term energy usage. Environmentalists are going to fight more use of carbon-based energy like oil, natural gas, and coal. Windmills and solar farms can supplement the grid, but aren’t useful as baseload generation. As of now, the only option that satisfies everyone’s political and environmental needs is nuclear. What we’re seeing is existing nuclear plants in the US and Europe having their useful permitted lives extended. Countries like China have plans for huge increases in their number of nuclear plants and are in the process of starting construction.

Reliable statistics on uranium stores are difficult to find, but it’s a good estimate that there was about five years of excess supply available when DKI put on the $SRUUF position a couple of years ago. Now, there’s probably less than three years of excess supply. New demand is coming online faster than new supply so as existing stores decline and new plants get started, there will be more upwards price pressure on uranium. Over time, supply will increase to meet demand, but that’s going to be further in the future. It’s difficult to get permitting for new mines, and even Cameco is under-producing relative to its long-term signed contracts. Rather than produce more uranium, Cameco is currently buying uranium at a loss in the spot market as the current price is above their contracted supply price. That imbalance at this one company will last at least through the end of this year. To emphasize that point, the amount of nuclear fuel required to seed and start a new reactor is about 3x the amount of fuel that plant will consume on an annual operating basis.

It’s important to point out that uranium fuel is a small percentage of the total operating cost of a nuclear plant, and that nuclear plants are difficult to start and stop. That means that even if the price of uranium rises more, existing plants won’t cut back because it’s more profitable for them to continue to produce energy than to reduce plant capacity. Also, much of the new demand is price insensitive. In DKI’s recent webinar with Enrique Abeyta on $TLNE, he talked about Amazon contracting for power at a premium price from a Talen nuclear plant to supply a data center. Other tech companies are intentionally locating data centers close to nuclear plants due to the reliability of that source of power.

So, I think there’s going to be a multi-year imbalance in supply and demand in the uranium market, but with some volatile pricing along the way. My approach to that is to own $SRUUF with a long-term time-horizon. To the extent that you’re interested and able, there is probably an opportunity to trade uranium to take advantage of that volatility. I hope that answers your question, but please feel free to post any follow-ups.

If you want to know more about why I own $SRUUF instead of $CCJ, there’s a post on that here: https://deepknowledgeinvesting.com/whats-your-bet-uranium-edition/ .

 

Information contained in this report, and in each of its reports, is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied.  DKI makes no representation as to the completeness, timeliness, accuracy or soundness of the information and opinions contained therein or regarding any results that may be obtained from their use. The information and opinions contained in this report and in each of our reports and all other DKI Services shall not obligate DKI to provide updated or similar information in the future, except to the extent it is required by law to do so. 

The information we provide in this and in each of our reports, is publicly available. This report and each of our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion in this and in each of our reports are precisely that. Our opinions are subject to change, which DKI may not convey. DKI, affiliates of DKI or its principal or others associated with DKI may have, taken or sold, or may in the future take or sell positions in securities of companies about which we write, without disclosing any such transactions.

None of the information we provide or the opinions we express, including those in this report, or in any of our reports, are advice of any kind, including, without limitation, advice that investment in a company’s securities is prudent or suitable for any investor. In making any investment decision, each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose. 

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