“You can take advantage of the volatility in the market if you understand what you own” - Peter Lynch
The Hoot This Week: 3rd - 7th March
As of Tuesday, the S&P had erased all of its post-election gains, the equivalent of $3.4 trillion in value. Much of this came after DeepSeek announced its LLM, wiping out a staggering $2 trillion worth of US market cap. Add to the equation geopolitical instability, tariffs and US recession fears, and you have a market condition that make the most seasoned investors wince.
Uranium equities ($URNM) have also suffered, falling 27% from its highs this year. This is despite largely positive news flow across uranium and nuclear in the past months including the new administrations support for nuclear, AI capex spend surpassing $300 billion, new builds, extensions and restarts, nuclear policy shifting in Europe, and India advancing its ambitious plans for nuclear energy.
While the DeepSeek news played some part, equities had been recovering from a weakened spot price, driven by some excess lbs from the likes of ANU Energy, as well as limited liquidity in the spot market. Uranium equities have historically traded relative to the spot price. The graphic below shows the relationship (URNM vs Spot).
Sequesters such as SPUT are trading at a 9% discount to NAV, giving investors access to uranium priced below $60/lb. Inactivity and churn in the spot market has dragged the spot price. Utilities have focused further down the fuel chain towards services like conversion and enrichment, which have seen significant price movements. According to the producers there are also utilities that are wagering that uranium greenfield projects will alleviate the supply deficit. Developers and producers alike are demanding greater incentive pricing, particularly in the West and some mines in Africa where the marginal cost of supply is greater. Producers we have spoken to have suggested that the spot price is approaching a level below this marginal cost. Of the 11 known restarts between now and 2030, 7 have marginal costs higher than $60 / lb. Marginal cost differs from incentive prices which will require significantly higher spot prices in order to truly incentivise new production.
“Key producers remain steadfast in their supply discipline strategy, and there appears to be a market standoff. Utilities are balking at the significant move in uranium prices, which will impact their future operating budgets, while producers are capitalising on their long-awaited market leverage over utilities. As Cameco often repeats, utilities can delay and defer, but they will eventually be forced to buy.” - Sprott Uranium
The unhedged sales strategy of companies such as UEC and Nexgen, reflects this sentiment. The US is the largest consumer of uranium at 47 M lbs/yr with increasing demand from utilities and US government for domestic supply. Currently it produces less than 1 M lbs/ yr. UEC has 12.1 M Lbs. /yr licensed capacity. This is the largest production profile in the US, and gives the company significant leverage, particularly as the provenance of material becomes an increasingly critical.
URNM as the sector benchmark ETF has seen 11 drawdowns since 2020 of more than 20%. Similarly, CCJ has had 7 drawdowns of more than 20% since 2020. However, both have outperformed the market during the same period, increasing +194% and +388% respectively.
Click here to see the graphs in more detail.