URNM And URNJ: Access Pure-Play Uranium With Sprott ETFs (NASDAQ:URNJ)

Introduction

For investors looking to invest in “the trends of the future,” no commodity stands out more than uranium. Lauded as a solution to carbon-emitting fossil fuel power plants, nuclear has been on the rise across the world both on the energy production front, but also on Wall St.

The Sprott Uranium Miners ETF (NYSEARCA:URNM) and the Sprott Junior Uranium Miners ETF (NASDAQ:URNJ) are two funds that have given investors access to this industry and its major global players, as well as access to direct uranium as a commodity (more on that in the holdings section).

This column is going to explore the possibility of adding uranium exposure to an equity portfolio and how it could outperform in the long term, especially compared to other commodities miners like gold and silver mining operations.

In the last five years, the world uranium index has performed admirably against the SPX.

Nuclear Power

In June 1954, the Soviet Union celebrated a world first: the Obninsk nuclear power station was connected to the Moscow power grid. Soviet citizens in Moscow were the first in the world to have nuclear power running through their homes. The plant operated until 2002, when it was decommissioned.

The US finished their first nuclear power station a month later. Since 1957, both the US and Russia have been running partially on nuclear power. In the ensuing years, more and more plants would come online and demand for low-enriched uranium (“LEU”), the kind used for power and not for weapons, has not slowed down as more and more is needed to keep up with the abundance of reactors found across the world.

This trend spread across the developed world, and today there are 436 power plants, operating in 32 countries.

Total number of operational nuclear power plants by country in 2023.

Supply & Demand

One of the major catalysts for the uranium mining industry is the world’s turn toward nuclear energy as a means of replacing fossil fuel power plants.

Since the dissolution of the Soviet Union in 1991, the world’s demand for LEU has outpaced its supply. Supply met demand again following an explosion of Kazakhstani production in the mid-2000s.

If demand outpaces supply, you face shortages. Shortages are made up for by rising prices, as what’s left is bid up by the excess demand. This is a very straightforward and simplified look at the issue but is the basis for the macro outlook on uranium.

Countries in the EU (bar Germany) has been moving their power grids over to nuclear at an increasing rate. By the end of 2022, both France and Slovakia had transitioned to more than half of their total power generation being nuclear. Hungary, Belgium, and Slovenia are already at over 40% of their power, with many others at over a third.

Share of nuclear power in total domestic electricity generation in 2022.

The World Nuclear Association predicts another large increase in demand this decade, calling for a near 30% rise in demand globally.

This increase in demand will be fueled by new reactors coming online in developing economies like China, Russia, and India, where dozens of reactors are being planned and constructed.

Number of nuclear power reactors under construction as of June 2023.

Number of planned nuclear power reactors as of May 2023.

Production has been on the decline as it has become harder for companies to secure new mines, and new mines take 10–15 years to become fully operational.

Add to this that finding new locations to build mines is difficult, because all the surface-level uranium has already been extracted.

As the supply gap widens, and new mines are not able to spring up quickly, this shortage should act as a price catalyst for LEU. It has already broken out of the general commodities trend.

Taking Advantage of a Pullback

Recently, uranium hit a new high. February led to a pullback in miners, but spot remained sturdy.

Part of this movement is technical, with the February high now acting as a level of resistance for future movements, and the return to December-January lows acting as new levels of support.

Coming off of that new support level, now might be a time to take advantage of the pullback since the price has shown some resiliency.

The other catalyst was macroeconomic, with the broader mining markets falling in sympathy with changes in Fed interest rate expectations.

This highlights the additional risk taken on with uranium miners, which are more volatile than their gold and silver mining peers.

Holdings

So, what’s actually in these ETFs?

Sprott Uranium Miners ETF (URNM)

The “senior” uranium miners ETF holds two assets: equities and spot uranium.

While nearly 82% of the fund is made up of equities, the remaining 18% is dedicated to holding commodities via the Sprott Physical Uranium Trust (SRUUF / U.UN:CA). This provides direct exposure to the commodity itself, on top of exposure to the companies that handle it. This is the primary reason I am choosing to cover this fund over its direct competitor, the Global X Uranium ETF (URA).

Adding in that allocation to spot uranium has given URNM a massive boost to the upside over URA in its history.

URNM primarily holds ex-US companies, with an only 10% allocation to the US. Its largest allocation is to Canada, followed by Australia.

Its largest singular holding is Kazatomprom (OTC:NATKY), the largest uranium producer in the world, located in Kazakhstan.

Sprott Junior Uranium Miners ETF (URNJ)

I pair my exposure to URNM with a very similar fund, URNJ. This ETF focuses only on mid and small-cap mining operations, excluding URNM’s holdings in major large-cap players like Kazatomprom, Cameco (CCJ), and Yellow Cake (OTCQX:YLLXF).

It also doesn’t hold spot uranium, with no allocation to SRUUF.

Its holdings are all found in URNM, bar just a few, and the two funds have a 96% overlap by holdings alone.

Their weights vary, and the two only have a 50% overlap by weight.

URNJ’s list of holdings should look familiar to anyone following the uranium market.

Dividends

One of the important factors to consider with these ETFs is the nature of dividend payouts in the mining industry. Because it is difficult to anticipate capital expenditures for mining operations, dividends are paid out sparsely or sometimes not at all.

When they are paid out, they can exceed a 3% yield. These payments shouldn’t be banked on and are a downside for investors who prefer more stable dividend flows in their portfolios.

Pairing

I pair the two of these ETFs together in my own portfolio, holding them at equal weights. There is an argument to be made for weighting them closer to 6:4, or even 8:2, depending on your risk tolerance.

Note the Stdev (or standard deviation) column, as well as the maximum drawdowns. That backtest is only over a year, due to URNJ’s launch being March ’23.

The higher ratio of URNM to URNJ, the less volatile the pairing will be, as you will hold fewer and fewer small cap companies.

At 50/50, you would hold 52% small-caps.

At 80/20, you end up with a 44% allocation, as large cap coverage expands.

This is important to note for potential investors, as most “broad-market” funds have massive allocations to large cap stocks.

Risks

• Commodities cycles can be fickle. If the price of uranium falls for an unforeseen reason, all the miners will suffer.
  • These losses may be compounded by the spot uranium holdings in URNM via SRUUF.
• Kazakhstan is formally part of the CSTO, Russia’s defensive pact. If Kazakhstan is drawn into the Russo-Ukrainian War, sanctions placed on the country would tank its stock market and subsequently the crush the near 15% allocation to Kazakhstan that URNM has.
  • Take a look at what happened to the Russian market when they entered the war in February ’22. A full halt to trading, followed by a drop to effectively zero, followed by delisting.

• A political push to decelerate nuclearization and denuclearize altogether, led by countries like Germany, which closed their last nuclear reactors last year; could alter the expected demand for uranium moving forward.
  • This would take away uranium’s major catalyst, which is that we need more of it than we can dig up and process.

Conclusion

I am issuing buy ratings to both URNM and URNJ. Both of them have earned a place in my equities portfolio for the foreseeable future, based on continuing trends in supply and demand of LEU. It shows no signs of slowing down and will act as a generally positive catalyst for potentially 5–10 years, if not more.

I am overweight this industry and believe in its ability to outperform in the next decade.

Thanks for reading.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.