Uranium Energy: Natgas Is Okay, But This Is Nuclear

PashaIgnatov

Investment Thesis

Uranium Energy (NYSE:UEC) is very well positioned to participate in the energy crisis. As Europe looks to enter winter with bated breath, it will not be only one source of energy that will be enough to get over this period, but ”all of the above” energy policy.

As governments around the world reconsider their stance on uranium, unlike other energy stocks, such as natural gas, uranium has not caught a significant bid yet.

Accordingly, I make the argument that UEC is perhaps the best way to play this sector right now.

Top 3 Reasons For Why Uranium

Everyone has been focused and even obsessed over the natural gas market. Meanwhile, the uranium market has been mostly cast aside.

And that makes sense, there’s been a lot happening with natural gas. The problem though is that because it’s in the headlines, it’s also in the share prices of many natural gas stocks (natgas).

So let’s describe the underlying dynamics for those that are new to the story because despite falling to make many headlines, uranium fundamentals have never been stronger.

Here are the top 3 drivers of this story.

Firstly, there are strong geopolitical tailwinds providing support for this sector.

Supply from Russia has become restricted through several measures. Not only has the US started to feel uneasy about asking the West to curb oil and gas from Russia, while the US still imports uranium from Russia, but in practical terms, getting uranium from Russia is slowly becoming more cumbersome.

Further, London-listed partially state-owned Kazatomprom, the world’s largest uranium producer, has up until recently, routed uranium overland through Russia and transported it via container ships out of St. Petersburg.

However, geopolitical tensions have made insuring nuclear materials out of Russian seaports a serious challenge. As you can imagine insurers are not willing to provide a cheap fee for ships full of uranium to exit St. Petersberg.

Secondly, as the world clamors for clean energy, uranium is by far the best alternative, as you can see below.

UEC August presentation

Uranium not only has the lowest CO2 emissions of all energy sources but it also has more than 90% energy reliability. Simply put, as we continue to move further along the green energy transition, you get the most reliable and cleanest energy from uranium.

Thirdly, there’s an imbalance between supply and demand. We have just come away from a nearly decade-long winter market for uranium energy. This has caused massive shortages in supply, while demand continues to steadily rise.

TradingEconomics.com

What you see above is that as soon as Ukraine’s war started, the market recognized the importance that securing uranium would have. But then as the markets wobbled, interest in this space rapidly fizzled out, as investors instead turned their focus to natgas.

However, in recent weeks, there’s been a change in the market, that has led to uranium prices trickling back up. Why?

I contend that two different factors have been underway here. Japan’s about-turn on uranium is one critical piece of the puzzle, as it looks to reinitiate its dependency on uranium after the Fukushima disaster.

Secondly, Sprott Physical Uranium Trust (OTCPK:SRUUF) the long-only fund that sequesters physical uranium has started to see its share price increase in the past few weeks, given the culmination of the above factors.

SRUUF data by YCharts

This fund’s job is to buy and store physical uranium any time its shares move higher. Sprott will now look to buy uranium in the spot market, further igniting uranium prices higher.

Why UEC? Why Now?

Moving on, together with its recent acquisition of UEX, UEC is set to become the largest diversified North American-focused uranium company. There are many uranium companies in North America, most notably Cameco (CCJ) in Canada or Energy Fuels (UUUU) in the US, which is also focused on vanadium.

But UEC is solely focused on uranium and doesn’t have rare earth minerals in its portfolio or other minerals. Simply put, UEC is an unhedged US-based uranium pure play company.

The business is well capitalized with approximately $180 million of cash and no debt.

Looking ahead, UEC declares that it’s about to start production in the coming year (14:13).

The Bottom Line

The move towards greener, cleaner energy is important. But investors have up until recently been too caught up in ideology and have now fully swung the other way towards coal and natgas. But there’s another energy source, that delivers +90% reliability, and that’s uranium.

As governments look to act on this energy crisis, many countries from Japan to Germany, the UK to the US, are now rapidly reconsidering their stance on uranium.

The problem though is that there’s been such a prolonged period of underinvestment, that this has led to a crucial under-supply in the market. When there’s too little supply and high demand, you get high prices. Perfect for a uranium miner that’s going to start production in 2023.

In conclusion, you have a very tight uranium market together with rapidly increasing demand. And then, to further confound issues, there are geopolitical tensions that make the world’s large uranium supplier, Kazatomprom, have no practical means to ship out uranium on anything but the most onerous terms.

This is the perfect storm. And it’s only getting started. Buy rating.

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