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Uranium trust pits ambitious investors against nuclear power industry

A Canadian investment fund almost singlehandedly launched uranium spot prices into orbit with a buying spree that has put the nuclear power industry on alert.

The spot uranium price for deliveries this month leapt 30.8% over 30 days to $39.75/lb as of 1 p.m. on Sept. 7 — a steep rise for a commodity market that previously saw years of sagging prices, according to data from S&P Global Platts. Market analysts credited Sprott Asset Management LP, a uranium trust formed in July to buy up low-cost uranium on the spot market and hold it for the long-term, for jolting the market with a wave of purchases.

The nuclear power industry, which largely buys fuel on long-term contracts, is not panicking as it can absorb even a one-third increase in price, but the industry is wary that the fund could continue to push up fuel costs.

For Sprott, this is all part of the plan.

"We're just a conduit for investors to express their view, right?" Sprott CEO John Ciampaglia told S&P Global Market Intelligence. "Our job is [to] go out and buy more pounds. If that has a knock-on effect on the price, then I guess indirectly we've got that influence on price discovery."

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Big fish, small pond

The thesis Sprott provided to investors was simple: If they were given funding, they would purchase material out of a spot market that was flooded with excess supply following the 2011 nuclear disaster at Fukushima Daiichi in Japan.

Between Sept. 2 and Sept. 7, the trust acquired more than 3 million pounds of uranium on the spot market. As of Sept. 7, the trust held 24 million pounds at a market value of more than US$1 billion.

Sprott's Ciampaglia said the investment outfit learned the power of a single market catalyst during the "meme stock" boom earlier in the year. Retail investors made a coordinated purchase of stock in game seller GameStop and sent the stock price soaring despite no change in the fundamentals of the stock. A silver trust held by Sprott benefited when retail investors moved from specific equities to silver-focused market offerings.

The relatively small size of the uranium market could mean an unpredictable level of explosivity if the investor audience broadened, Ciampaglia said.

"You just can't predict how explosive it could be," Ciampaglia said.

The uranium trust benefited from market conditions improving in nuclear energy, as the world moves toward lower carbon energy sources, said Scott Melbye, executive vice president of U.S.-based miner Uranium Energy Corp. However the "correlation" between the trust's buying activity and the rising price is undeniable, Melbye said.

"Sprott coming in has really been the tipping point. It's been very significant."

Nuclear power is watching

After the Fukushima disaster, nuclear power plant operators experienced lower contracting prices. That trend lasted until the coronavirus pandemic knocked major sources of uranium offline, creating a supply shock that drove up prices and incentivized new investment in the space, though that upward trend calmed when the Sprott uranium trust arrived in July.

Power companies with nuclear reactors said they are not worried about price increases resulting from the trust's buying activity — at least not yet.

The fuel cost associated with nuclear energy is far lower than for coal and natural gas generators, so nuclear plants are "relatively insensitive" to a "bump in the spot price," American Nuclear Society president Steve Nesbit told S&P Global Market Intelligence. For nuclear utilities to feel the pain, prices would need to be an "order of magnitude" larger, even twice as high, Nesbit said.

"It takes a while for it to sink in," Nesbit said.

Utilities are monitoring buying activity by the trust, but "it's nothing that's worrying them at this point," Nima Ashkeboussi, senior director of fuel and radiation safety programs at the Nuclear Energy Institute, said.

"Their views [of Sprott] are still forming. They're watching it very closely," Ashkeboussi said.

Analysts see hard times ahead

Ciampaglia said the fund hoped to drive up the price of uranium, but high nuclear fuel costs in the long run could hurt nuclear power's competitiveness against cheaper forms of renewable power. And the industry already faces a declining market for its product going forward: Nuclear power capacity is expected to shrink by more than 20 GW through 2050, according to the U.S. Energy Information Administration.

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The entire global nuclear sector could be constrained from future growth, Morningstar analyst Travis Miller said. While nuclear fuel typically makes up a relatively small percentage of utilities' operational costs, a long-term shift in uranium producers' favor could create an issue for any company looking to expand its nuclear fleet, especially in the face of falling renewable power costs.

If uranium prices continue to rise, that puts nuclear power at a competitive disadvantage to other carbon-free sources of energy, Miller said.

"There's a delicate balance here because in the long-run more supply should lead to lower, more stable prices," Miller added. "But in the short-run, higher prices to bring on that supply is going to be a headwind."

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.