URA: The Uranium Trade Isn't Too Crowded Yet

seekingalpha11-22 12:52

The Global X Uranium ETF offers access to the uranium trade, benefiting from rising nuclear energy demand and supply constraints.Big tech companies are investing in nuclear energy to meet carbon-...

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Lauded as a solution to coal and oil-powered plants polluting the air, nuclear has been on the rise across the world, and has hit major news headlines recently. The Global X Uranium ETF (NYSEARCA:URA) is a fund that allows investors access to the broad uranium trade. It has had a great last five years, with the recovery from this most recent slump taking it to recent highs. Data by YChartsI am very bullish on the long-term prospects of nuclear energy, from the emergence of small modular reactors to old-school plants needing more fuel as we spin up more of them across the country. This is a trend that is not isolated to the US, and bar Germany, most major world powers are upping their nuclear power generation capabilities. This is due to many factors, but mostly that it burns clean. Besides the waste, which must be stored in barrels and are usually buried, it's significantly better for the environment than coal, oil, or even natural gas. It doesn't require the wind to be blowing or the sun to be shining, you can get power from these babies 24/7, no batteries required. There are a slew of catalysts still in play, and ongoing, that give us more potential upside in the uranium mining and storage industry. Big Tech Goes Nuclear I'm starting here, since this is the most recent catalyst. There was a big push in the late 20-teens to make climate pledges, like the Paris Climate Accords in geopolitics, and many big tech companies made promises to be carbon-neutral by certain dates, mostly in the late 2020s and 2030s. Microsoft (MSFT) even pledged to be carbon negative by 2050. The issue is that they didn't expect the breakthroughs in generative AI that have led to the need for immense amounts of energy. They are using so much power to run their large language models, that they are starting to build or buy their own power infrastructure to compensate.  Google is working with small modular reactors with Kairos Power. Amazon invested in SMRs, and made a deal with one to build four reactors. Microsoft purchased and is refurbishing the Three Mile Island plant. Oracle is planning to use SMRs to power data centers.  Supply & Demand The major catalyst for the uranium mining industry is the world's turn toward nuclear energy as a means of replacing fossil fuel power plants, even beyond big tech in the US. 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, but is still below the required amount today.   OECD-NEAIf demand outpaces supply, you face shortages. Shortages are made up for by rising prices; that's just supply and demand. Both the supply and demand span the globe, too. Today, there are 436 nuclear power plants, operating in 32 countries. Total number of operational nuclear power plants by country in 2023.   StatistaCountries in the EU (bar Germany), have 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.   StatistaThe 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.   StatistaNumber of planned nuclear power reactors as of May 2023.   StatistaProduction 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.   Visual CapitalistCompetition isn't as fierce as one might expect, with the next two decades of projected mining operations showing an uptick and then slowdown of mining productions. A large drop-off in existing mines is expected to happen in about 10 years. Whether this model will hold up or not is unknown, but this would favor producers with diversified portfolios that span the globe rather than concentrated or isolated mining operations in one country, or an investor who diversified across companies with an ETF like URA.   World Nuclear AssociationAs 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 been broken out of the general commodities trend since mid-2023. The miners, subsequently, have also benefitted. Data by YChartsHoldings What does URA actually hold? Let's take a look. Here is their full holdings, and here is their top 10:   Global XIt should be to note that just like competitor ETFs URNM and URNJ, URA holds physical uranium on its books through the Sprott Physical Uranium Trust (OTCPK:SRUUF), which they weight as high as 8.5% of NAV. The only holding larger than it, and it's much larger, is Canadian uranium giant Cameco, being held at 25% of NAV. That is a massive concentration risk to consider. You have to be bullish on Cameco to be bullish on URA. Risks There are a few major risks to consider:  Uranium could fizzle out due to new technology making nuclear energy unnecessary.This is how oil felt when nuclear power went online in the 50s.  Cameco is a massive part of URA, and could tank for idiosyncratic reasons and pull down the fund. The Uranium trade could take far longer to play out than you have patience to wait.Most of the catalysts are measured in years and decades, not weeks and months.  The expense ratio is rather high for an indexed ETF, at 0.69%.  Conclusion Ultimately, the uranium trade still has room to run and more catalysts abound despite its recent run-up. I believe there is still more to go and I am giving URA a \"buy\" rating because of that. I would suggest that aggressive equity investors limit their URA exposure to no more than 10% of an equity portfolio. Moderate equity investors should consider up to 5%, and conservative equity investors should consider up to 2% of their portfolios in URA. These figures would be cut in half if the investor also owns their own exposure to uranium through individual miners or a spot ETF. Thanks for reading.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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