Is It Time for a Melt-Up in the Uranium Sector?

By Eric Fry
Contributor

Metals

The comatose uranium sector is suddenly coming to life. The Global X Uranium ETF (NYSE: URA) has rocketed 18% higher during the last three weeks.

Despite this recent gain, the fund is still down on the year… and still way down from the highs it reached seven years ago. Even so, this recent upward blip is noteworthy.

The news that jolted the uranium sector to life a few days ago was a surprising announcement from Russia. This story had nothing to do with new U.S. sanctions against Russia. But it did have something to do with new sanctions… byRussia against the U.S.

One week ago, the Russian national parliament (the State Duma) introduced a draft law that calls for stopping international cooperation in the nuclear and aircraft industries with not only the U.S. but also “other foreign states” that support U.S. sanctions against Russia and “those who support Washington’s position on Syria.”

This new legislation could become law as early as this week. If so, the U.S. utility industry could be in for a bit of a shock. The U.S. generates about 20% of its electricity from nuclear power, and it imports about 40% of its uranium requirements from Russia, Kazakhstan and Uzbekistan.

The U.S. Energy Information Administration provides the following details:

The United States imports most of the uranium it uses as fuel. Owners and operators of U.S. nuclear power reactors purchased the equivalent of 50.6 million pounds of uranium in 2016 [2017 data are not yet available]. About 11% of the uranium delivered to U.S. reactors in 2016 was produced in the United States and 89% came from other countries.

Sources and shares of purchases of uranium produced in foreign countries in 2016:

  • Canada – 25%
  • Kazakhstan – 24%
  • Australia – 20%
  • Russia – 14%
  • Uzbekistan – 4%
  • Malawi, Namibia, Niger and South Africa – 10%
  • Brazil, Bulgaria, China, Czech Republic, Germany and Ukraine – 2%

Ironically, this new proposal from Russia would accomplish what a recent trade complaint from the U.S. uranium industry is hoping to accomplish.

A few weeks ago, a couple of U.S. uranium producers submitted a petition with the Department of Commerce’s Bureau of Industry and Security, seeking protection for the domestic uranium industry.

The petition invokes the same “national security” section of the Trade Expansion Act the Trump administration used as a pretext to impose tariffs on steel and aluminum imports.

In other words, the domestic uranium petitioners were hoping the administration would embrace the national security argument once again to slap tariffs on uranium imports from Russia and elsewhere.

But imposing tariffs on imported uranium would be child’s play compared with the complete disruption of Russian uranium imports. The impact on uranium prices could be significant. That’s why the Global X Uranium ETF has been in rally mode.

But we’ve seen this movie before… several times. And each time, the final scene is a tear-jerker for investors in the uranium sector.

At the start of last year, for example, Kazakhstan uranium company Kazatomprom announced it would be slashing its uranium output by 10%. Coming from the world’s largest uranium producer, this announcement seemed liked a pretty big deal to investors. The Global X Uranium ETF soared 50% in less than two months. But by May of last year, the fund had surrendered all of those gains.

Then, in early November of last year, Cameco Corp. (NYSE: CCJ), the largest publicly-traded uranium producer, announced it would be suspending operations at two of its mines in Saskatchewan. A few weeks later, Kazatomprom announced it would be doubling its previously announced production cuts.

These maneuvers slashed projected global uranium production by a whopping 16%. Again, the Global X Uranium ETF soared – this time by nearly 30% in less than a month. But once again, this beleaguered fund surrendered all of its gains. At the start of this month, the Global X share price had fallen back to where it was in November of last year.

Now we are sitting through a third showing of the same movie. And we all know the tired plot: Surprising announcement of supply disruption shocks the uranium market… Uranium stocks soar on the hope of an enduring upswing… The price of uranium continues languishing, and uranium stocks fall on the loss of hope.

So will the movie end differently this time? Will the director listen to the focus groups and replace the sad ending with a much more hopeful one?

Maybe. But the uranium sector has been “dead money” for several years. So a dose of skepticism is warranted. That said, production cuts and supply disruptions are not to be ignored. They can wield a big impact on a commodity market – and can sometimes do so very quickly.

To illustrate the point, direct your eyes to the base metals sector, where prices are soaring to multiyear highs this week on the fear of disrupted supplies from Russia. Over the last two weeks alone, nickel is up 16% to a three-year high and aluminum is up 25% to a six-year high.

Eventually, supply reductions matter… especially when the prospect of large future supply disruptions becomes a credible risk. That moment in the uranium market may have arrived.

But let’s watch this movie to the end.

Good investing,

Eric