Market Insights: Uranium Price Hits Fresh Decade High
Milestone Wealth Management Ltd. - Sep 22, 2023
Macroeconomic and Market Developments:
- North American markets were down this week. In Canada, the S&P/TSX Composite Index fell 4.01%. In the U.S., the Dow Jones Industrial Average dropped 1.89% and the S&P 500 Index was down 2.93%.
- The Canadian dollar increased this week, closing at 74.21 cents vs 73.92 cents last Friday.
- Oil prices were down slightly this week. U.S. West Texas crude closed at US$90.36 vs US$91.12, and the Western Canadian Select price closed at US$71.84 vs US$72.25 last Friday.
- The price of gold was up very slightly this week, closing at US$1,925 vs US$1,923 last Friday.
- The U.S. Federal Open Market Committee (FOMC) met this week and elected to hold interest rates at the target range of 5.25 – 5.50%. The central bank’s accompanying statement read, “Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.”
- Also this week, the Bank of England chose to hold interest rates at 5.25% after 14 straight interest rate hikes. The Monetary Policy Committee voted 5 - 4 in favour of maintaining this rate at its September meeting, with the four members preferring another 0.25% increase.
- BMO Financial Group is set to close its retail auto finance business due to financial strain faced by consumers amid rising interest rates. The bank's bad debt provisions more than tripled to $492 million in the quarter ended July 31 compared to the previous year.
- Canada’s rate of inflation accelerated by more than expected for the second straight month, driven by higher gasoline prices. The consumer price index (CPI) rose 4.0% from a year ago, the quickest pace since April, up from a 3.3% annual pace in the July reading. On a monthly basis, the index rose 0.4%, double the expectations.
- Online grocery delivery business Instacart completed its IPO on Tuesday under the symbol CART. The company raised $660 million at US$30 and finished the day at $33.77, giving a market cap of roughly US$11 billion, a steep plunge from its $39 billion valuation in a 2021 private financing round.
- Cisco Systems (CSCO) is acquiring cybersecurity software company Splunk for $157/share in a cash deal worth approximately $28 billion, a ~31% premium to the previous day’s closing price. Splunk is a cybersecurity company that helps enterprises monitor and analyze their data to minimize the risk of hacks and resolve technical issues faster.
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Charts of the Week:
While stock markets have been in correction mode the last few weeks, the lesser-known commodity uranium is hitting fresh decade highs. It is officially in a bull market with a 30% rise so far this year, vastly outperforming other metals markets. As the following 1-year chart illustrates, the price of Uranium scaled over $65 USD per pound last Friday for the first time since 2011.
Source: Trading Economics
If we back that same chart out, you will see that the price of uranium spent the better part of the last decade in the doldrums, finally coming to life with a big price jump in August - September 2021. Earlier that year, we looked at alternative commodities to form part of the Real Assets sleeve of our asset allocation for many of our investment mandates, and first pulled the trigger on investing in physical uranium in July of 2021. In fact, we wrote about this on our blog back on June 4, 2021 with the published entry titled Uranium Rally to Power Ahead, summarizing those comments with “our view is that higher uranium prices seem to be the likely path to rebalance the market and incentivize more production”. At the time, the price of uranium was around $30 USD/Lbs.
In hindsight, there was definitely luck in the perfect timing of our initial investment, but the thought process behind it we believed to be sound. At the time, we felt the supply-demand metrics for uranium were very strong, and believed the price was starting to turn around and likely forming the start of a long-term uptrend. In addition, at the time there was only one investment available in North America whereby you could participate in owning physical uranium, which provided an additional source of confidence that there was a large amount of upside potential.
Source: Trading Economics
The supply/demand metric that we just referred to was based on many research reports we looked at, like the World Nuclear Association’s (WNA) biennial report, showing the world reactor requirement for uranium was set to surge. The WNA report provides medium and long projections and insights into the more obscure corners of the global supply chain, and the role that nuclear energy could play as the green energy transition becomes more obvious even to long term critics of the renewable source. Uranium is now more seriously viewed as a safe powerful source of energy that doesn’t take up a large amount of space, has very little waste, and has an overall small carbon footprint.
One major change in the uranium space that has played a big role in stoking demand is the development of small modular reactors (SMRs). These technologies deemed to be extremely safe are finally set to have a meaningful impact, and a significant portion of WNA’s upward growth adjustments can be rooted in the accelerated adoption of SMRs. Overall, the WNA report projects world reactor requirements for uranium to surge to almost 130,000 tonnes (~285 million pounds) by 2040, which is up drastically from an estimated 65,650 tonnes this year. That is an estimated increase of almost 200%, and that is just the mid-level forecast, with their upper range set at 184,000 tonnes of demand. Even the most pessimistic forecast of 87,000 tonnes is a healthy rise in demand for the commodity.
Sources: CNBC.com, Globe and Mail, Financial Post, Bloomberg, Thomson Reuters, Refinitiv, Trading Economics, World Nuclear Association
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