David Lin of Kitco News interviews John Ciampaglia, CEO of Sprott Asset Management. They explore the recent surge in uranium prices, supported by a growing understanding that nuclear power is perhaps one of the more reliable and safe sources of baseload power and uranium supply is limited.
[Please note: In the video David Lin refers to Sprott Physical Uranium Trust Fund, which is not the correct name of the Trust. The correct name is Sprott Physical Uranium Trust.]
David Lin/Kitco News: Joining us today is John Ciampaglia. He is the CEO of Sprott Asset Management, and we'll be discussing the uranium market in great detail. Sprott is launching a new uranium trust fund, and it's a very exciting time for investors. Welcome to the show, John.
John Ciampaglia/Sprott Asset Management: Thanks for having me.
David Lin: As I said, it is a very exciting time for investors in the uranium market, especially for those who have bought uranium stocks. I'm looking at the URNM, which is the North Shore Global Uranium Mining ETF. It's appreciated 100% since last year. The uranium metal itself has not appreciated 100%, as you know. Why the divergence? Let's start with that.
John Ciampaglia: I think uranium stocks are clearly building in a future price expectation for uranium that is much higher than current spot prices. And we've seen the price of uranium move from recent lows a few weeks back. Just yesterday, we pierced the $38 per pound mark, which is the highest level uranium has been in about six years. That level has got the market very excited, and it appears that we have finally turned the corner in terms of coming out of a very long protracted bear market.
David Lin: It's interesting how the uranium market could, I wouldn't say front-run, but basically forward project the price of uranium. We've seen some of that happen in the gold and silver markets, where sometimes the gold miners move ahead of the metals, but not to the extent where rallies are 100% and the metal stays relatively flat.
I wonder what you think about the valuations of these uranium miners today. Some people might say that because the underlying metal hasn't really moved that these stocks are overvalued, especially when you consider that many of these companies, like Cameco, haven't really even been mining over the last year. What do you think?
John Ciampaglia: I think the stocks are reflecting the situation right now where the market is in a deficit position. And what I mean by that is if you look at the global fleet of nuclear reactors, most estimates will say they need about 175 million pounds of uranium a year to function. That's because they're using the fuel and it needs to be reloaded.
If you look at the primary supply coming out of the ground and the secondary supply available, estimates show that to be about 140 million pounds. There is a supply deficit and that's why the market is getting excited. How long can this deficit stay in place before the price needs to reset? And there are many idle mines right now that are not in production because the price is just too low. Many market participants believe we need a new incentive price to bring those big mines back into production. Some think it's $50; some believe it's $60. I don't know the exact number, but it's obviously higher than where the spot market is currently trading, which is about $38. I think that's why equity investors are excited. They want to see this recalibration in the marketplace where this incentive price helps to rebalance the market.
David Lin: Why can't the miners just make a forward contract right now with some of the utility companies and come to an agreement where they're producing at a higher price and spot price? Participants in the uranium market very rarely use just a spot price. Most of it is through contracts, anyway.
John Ciampaglia: Right, exactly. Obviously, the primary users of uranium are the utilities, and they tend to contract in the term market. I think the issue is that these mines are closed; it's idle production that won't come back online unless the price is there to contract for those future deliveries. The market is grinding its way to that level, we believe. How long it will take is to be determined, but right now, I think the market is excited about the future for uranium after a very long protracted bear market.
David Lin: John, where are the utility companies getting their fuel from right now if North American miners are not producing anything?
John Ciampaglia: Many utilities are still receiving material from contracts they entered into two years ago, which is what's supplying them. There are a number of mines that are producing about 140 million pounds a year combined; that supply that's coming to the marketplace. The issue is going to be when the contracting cycle resumes. And many participants believe that over the next one or two years, we will enter a new cycle of utility contracting. And that cycle will help reset the price of uranium to higher levels.
David Lin: You said that the uranium stocks are projecting higher uranium prices. You said that these prices could be $50 to $60. Again, the uranium stocks have already run up substantially. Do you think that these stocks have already priced in $50 or $60 for uranium?
John Ciampaglia: I think some of them have, and reflect pretty lofty uranium prices and the expectation that some of these development projects will get built out in the years to come. Yes, the stocks have clearly gotten a little bit ahead of themselves. My partner, Rick Rule, will tell you that they are reflecting lofty expectations right now. But again, it's a small market. And as we've seen with other sectors, when you get a spike in interest from investors, these valuations can sometimes get a little stretched.
David Lin: I'm just wondering if I put myself in the shoes of a uranium investor who was looking at the market way back last year, last September, or even started rallying in November, and I'm thinking to myself, "Okay, the uranium price hasn't moved much. And for all these factors that we've discussed, companies aren't even producing. What are the variables I'm looking at to decide as to whether or not to buy?"
You must have had tremendous foresight to realize that these contracts at current prices are not sustainable. They have to roll over, and eventually, prices will have to be reflected upwards. Put yourself in the shoes of an investor a year ago, what would you be looking at?
John Ciampaglia: A number of things are driving the uranium market. The biggest thing is the narrative around the role of nuclear power and decarbonization. I think why the market participants are so excited, why people are buying up these stocks at these levels is that the narrative around uranium has really shifted. If you think about the views of many people around uranium and nuclear energy, there's this negative stigma related to large-scale disasters in the past.
The reality is that nuclear energy is one of the safest forms of energy production, it's one of the most reliable, and it's one of the cheapest. In a world where governments are moving to decarbonize economies, there's a growing realization that nuclear has to be part of the low-carbon energy mix. And you're seeing that from the Biden administration, you're seeing that from the European Union. You just can't keep the lights on with just solar and wind because they're just intermittent as we know. Nuclear provides the most predictable base load of energy in a world that's becoming increasingly electrified.
David Lin: As we're speaking, actually, the price of uranium is shooting up from about $25 to $37, I'm looking at, the spot price over just the last week. There's a big move, but it seems to just move and then stay and then drop. If you zoom out of it, we're still nowhere near its highs of around $100 and $140 a pound way back in 2007. What happened in 2007? Can you shed some light as to why it reached triple digits, albeit for a very short amount of time before it came back down?
John Ciampaglia: Back then, there was obviously a huge excitement about the build-out in places like China with their nuclear fleets, and the market clearly did not have the pounds to meet that future growth. Now, eventually, new mines came on board and brought relief to that. But I think if you go back a little earlier in time, say the last 10 years, the price of uranium, even at today's level, is still about 50% lower than where it was in 2011. I think a lot of value-oriented investors are looking at that and saying, "Where else in the world can we find a commodity that's still 50 percent where it was 10 years ago?" Given the valuations we're seeing in just about every asset class in the world, this one still represents value to many investors. I think that's what the early investors in uranium in the last two to three years identified accurately, and they remain very bullish even though the price has gone from $20 a pound to approaching $38 a pound.
David Lin: John, you are correct. The decline in the uranium price over the last 10 years has been partly due to the public being disenchanted with uranium power and nuclear energy after the Fukushima accident in Japan. What needs to happen now to turn public perception around? Is it more public awareness of nuclear power, that it could be a safe and reliable baseload for power? Is it more government subsidies and sponsorship? Is it more investor interest from the generalist investor space? What needs to happen, John?
John Ciampaglia: I think it's a number of things and we see them happening right now. I think there is a growing acknowledgment by the governments around the world that they will not be able to meet their decarbonization goals without nuclear in the mix. Yes, wind and solar will continue to receive support and subsidization, but nuclear has to be part of that energy mix. Every government is acknowledging that, and I think that's very supportive.
The recent Biden administration has announced the number of support mechanisms for their nuclear energy in the United States, which we hope will protract the lives of the operating licenses for a number of plants and give them a better ability to compete with other forms of energy.
I think education is a key part of the mix. People need to understand that relative to other forms of power generation, nuclear is actually very safe. I don't want to belittle the catastrophes that we had in the past, but nuclear energy has a safety track record, nuclear energy has improved dramatically since those events. If you compare it to the production of things like coal, oil, and gas, and other things that we use for power generation, nuclear is incredibly safe, and we actually believe it's one of the safest. I think there's a growing understanding of that, and that's what's giving the narrative a really big shift. And it's also drawing the investment community into the sector. We also think that's a key driver for price discovery and price formation over time that investors, along with utilities, are going to help the market rebalance.
David Lin: The other issue around nuclear power plants is what to do with the waste. And I was just reading this Bloomberg article about what is happening in Sweden right now. The parliament is deciding what to do with their nuclear waste. The headline is "Sweden Risks Blackouts as It Runs Out of Space to Store Nuclear Waste". I'm just going to read the first two paragraphs here. This is a week before.
"Sweden has less than a week to decide where to store its nuclear waste or risk having the lights go out. The Scandinavian country is running out of space to store the waste produced by its six reactors, which supply about a third of the nation's power. Without a decision before the end of the month, nuclear operators including Vattenfall say they will have to start halting plans in just three years."
Clearly, there's some regulation around storing the waste, and they haven't come to an agreement. This, again, was news from a week ago. As demand grows, as nuclear power plants, I guess, proliferate, as more utility companies start demanding more fuel, what can we do about this waste problem? Is this something that investors have considered?
John Ciampaglia: Yes, it's a key issue. I think the end-use for these spent fuel rods, they need to find a safe resting place in the end. At the end of the day, nobody really wants them in their backyard. I think that's part of the issue. It's really up to the industry to figure out ways to safely store the material, whether that's underground or other means to make sure it's not any risk to anybody. it is important to make sure that, just like with mining, when you finish developing a mind, there has to be reclamation. It's similar to that. You need to deal with a complete cycle.
David Lin: John, let's talk about Sprott now. Sprott has made some new developments for investors in the uranium space. Let's put it that way. I'll leave it vague and broad, and I'll let you fill in the blanks here.
John Ciampaglia: A few months back in late April, we announced that Sprott was acquiring Uranium Participation Corp, which is the first uranium fund that's ever been listed on an exchange way back in 2005. We had a very shareholder-friendly proposal that we put forward to modernize the vehicle to relaunch it as an investment trust. And that new trust started trading on the Toronto Stock Exchange on July 19. We're very excited about it, and the market has really shown their support for the new vehicles. It's trading very well, and it's attracting a lot of interest around the world.
What we really wanted to do with UPC was modernize its structure. We turned it into an investment fund, which is really the go-to fund structure these days for most investors around the world. It trades on the Toronto Stock Exchange. It is growing in this liquidity. We're seeing, as I said, great responses from investors around the world. We're providing enhanced disclosure with the fund by providing a daily net asset value. We're disclosing the amount of pounds that we're buying each day.
The market is really applauding all of this disclosure because one of the things about the uranium market is it's very opaque. It's still very OTC-driven. And our involvement is really shining a light on it and bringing more information to the investment community. We think that's very important if the market is going to evolve and grow, that investors need to have better transparency about how the market operates and what we're doing in the marketplace each day.
We're seeing lots of interest. We're seeing lots of institutional interest. We're seeing individual investor interest, and we're seeing it from around the globe, which really speaks to this idea we just spoke about, which is the narrative around nuclear and uranium has really changed.
David Lin: The name is Sprott Physical Uranium Trust is the new organized fund. It trades like an ETF, right?
John Ciampaglia: Correct. It's a closed-end fund on the Toronto Stock Exchange, and it's available in two currencies, Canadian and US Dollars.
David Lin: Is it backed by physical uranium?
John Ciampaglia: Correct. It's 100% backed by physical uranium. Right now, we have the fund about 98 percent invested, and we've been raising new capital for about the last three weeks. New capital has been coming into the fund, and we've been buying more pounds. We've probably bought about three million pounds in the last three weeks. So we've been very active in the marketplace.
David Lin: Without going into too much detail, where are you buying the pounds from? Because, like we discussed, miners aren't producing anymore.
John Ciampaglia: There's always availability of material. We call that secondary supply. So we've been buying material mostly from traders, some producers, and we've been sourcing that material.
The reality is you're right. There isn't a ton of material out there. It is a tight market on the physical side. And as I said, the three million pounds, it was a lot of work to source and to buy. It's proving to be a very interesting market to work in relative to the markets we've traditionally worked in, which are mostly in the precious metals.
David Lin: I spoke to an analyst of uranium, and he said that this fund from Sprott might be a game-changer for the uranium market because he said that, as you said, the supply and inventory around is limited. What you're effectively doing is you're buying up a residual supply, but I don't know if you would agree or disagree with that analysis there.
John Ciampaglia: What I would describe it as is we're giving investors that are interested in this category a really great investment vehicle to express their view with. I'm going to quote some people that I've spoken to. And they just said, "You guys have engineered a really great product for us to invest in." That makes me really happy because we spent a lot of time and effort thinking about it, we have a lot of experience with these commodity holding funds, and we have a quarter million investors that have given us their money to invest in these kinds of vehicles.
We have great experience. We know what's important to shareholders in trying to manage the vehicle to meet the needs in the marketplace.
David Lin: You're at $850 million in assets under management?
John Ciampaglia: When we took over the fund and we started the trust on July 19, there were about $630 million of assets. As of last night, we had about $850 million. That growth took about six weeks, just to give you a sense of what kind of interest we're seeing and the price reaction in the spot market.
David Lin: Okay. Best of luck, and we'll follow up more as the uranium market moves, no doubt, down the line. Thank you, John, for coming to the show today.
†The Trusts are closed-end funds established under the laws of the Province of Ontario in Canada. PHYS, PSLV, CEF and SPPP are available to U.S. investors by way of listings on the NYSE Arca pursuant to the U.S. Securities Exchange Act of 1934. The Trusts are not registered as investment companies under the U.S. Investment Company Act of 1940.
††SESG is a U.S. registered exchange traded fund established pursuant to the U.S. Securities Act of 1933 and is listed on the NYSE Arca.
The Sprott Physical Uranium Trust is generally exposed to the multiple risks that have been identified and described in the Management Information Circular and the Prospectus. Please refer to the Management Information Circular or the Prospectus for a description of these risks.
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