Market Thinking

making sense of the narrative

A NICE future for Uranium

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With the G7 meeting in the UK coming up next week with a focus entirely on ‘Carbon’ and politicians everywhere seeking to out-compete one another to be ‘greener than thou’ it is probably no coincidence that this week, Bill Gates and Warren Buffet announced they were going to build a ‘new’ type of Nuclear Reactor in Wyoming. To date, Clean Energy in the form of wind and solar has attracted billions if not trillions in investment yet barely moves the needle on required energy output. When two of the richest men in America are clearly backing the real world practical solution of nuclear power and when the two other richest men in America, Jeff Bezos and Elon Musk, are indulging in a space race that will also rely on nuclear energy, it’s probably time to pay attention to Uranium again. There is a growing commitment to ensure than Nuclear Innovation Clean Energy is part of future planning. A NICE future indeed and one that investors need to start thinking about.

While equities and bonds are largely trading sideways, commodity markets continue to contain most of the action, most notably with Oil, which broke convincingly upward through $70 a barrel this week. This of course helped with the picks and shovels plays we discussed last week in the Oil services space, with PXJ, the Oil Services ETF we discussed  a little over a week ago jumping over 12% since then and seemingly taking over some of the narrative from the other commodity related stock ETFs, like PICK and WOOD, which have enjoyed a tremendous run since last Autumn. As the chart shows, being long old energy and short ‘clean energy’ (here proxied by the I-Shares clean energy ETF INRG ) has been a very profitable trade this year, either via the broad Energy sector ETF or the picks and shovels of the Oil Service companies.

Chart 1: Clean versus Dirty

Source Bloomberg, Market Thinking

(Note that as we said before, these are not stock recommendations and the reason for highlighting PXJ over other Oil Service ETFs is primarily because it has less of a market cap weighted bias than the Oil service index, which has over 20% in a single stock, Schlumberger.)

The reality is that the most popular Clean energy solutions, Wind and Solar, are simply not capable of replacing fossil fuels until there is a long term storage solution and no amount of pointing to the ability to meet demand on any given day under favourable circumstances is going to change that. As such, the old notion that the best cure for $100 oil is, $100 oil, and that the increased price will bring forth increased supply remains true. As with any commodity, the money is arguably more easily made in selling the picks and shovels.

However, there is another solution, which we suspect is creeping up upon us and that is Nuclear and Uranium. The second chart shows the three main Uranium ETFs available for investors; URA, URNM and NLR.  The VanEck Vectors Uranium+Nuclear Energy ETF (NLR), is the oldest and broadest and has been going since 2007. It is dominated by U.S. large and mid-cap energy producers and infrastructure companies. Meanwhile, the Global X Uranium ETF (URA) is the biggest of the three funds, is more focused on uranium, with greater small-cap and international exposure. It also holds the dubious record of being one of the worst performing long term ETFs, having fallen almost 90% from its peak at one point. The NorthShore Global Uranium Mining ETF (URNM), is the newest and was only introduced in December, offering an even more concentrated exposure to uranium mining, with 52% of the fund in Canadian companies.  It holds fewer broad miners than URA and moves most closely with uranium prices. Here we can see that Clean Energy is down 25% year to date, while nuclear clean is up anything from 11% to 61%.

Chart 2, Clean versus pragmatic Clean

Source Bloomberg, Market Thinking

Thus the announcement this week by Bill Gates and Warren Buffet that they are going to build a Natrium Nuclear reactor in Wyoming is incredibly important for the longer term demand story for Uranium. The fact that it is being located on the site of a former coal plant signals the new narrative – coal is no longer being supplanted by gas, but also by nuclear. The idea behind this small scale reactor is that it can provide the baseload for the renewables (see video demonstration here), although we suspect that this is primarily to ensure the approval of the powerful renewable advocates in the overall ‘green’ movement. If they succeed in overcoming the paranoia on nuclear then they could provide significantly greater amounts of total electricity demand. The basic technology may be familiar to those who sat all the way through the hagiography on NetFlix (Inside Bill’s brain) since the idea of a travelling wave reactor using relatively low grade uranium was originally planned as a joint venture with China. That is clearly off the table now of course, but with the US government already quietly advancing a variety of ‘new’ reactors, it looks like the switch from Coal to Nuclear is on track on both sides of the new Cold War divide. Uranium sits in the middle.

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