Sprott Physical Uranium Trust: Uranium Trade Too Risky For Now

Thesis

Several days ago, I published an article entitled Go Long the Nuclear Revival which concluded by recommending investing in uranium through the Sprott Physical Uranium Trust (OTCPK:SRUUF). While the reasoning and arguments made in the piece still stand and I believe will be valid over the longer-term, the immediate risks posed to the sector by the ongoing war in Ukraine make investing in uranium too risky in the short-term. For that reason, I have liquidated my holdings in the trust and plan to avoid the sector until the situation in Ukraine stabilizes and fighting has stopped.

Geopolitical Risk

It’s often advisable to ignore the noise and low-level everyday political rumblings when investing. Better to focus instead on company fundamentals and industry trends. Some events however, such as major geopolitical shifts like the one going on in Europe need to be incorporated into every investor’s analysis.

My original article did this by taking into account the increasing stranglehold Vladimir Putin was gaining over Europe’s energy supply. It also took into account the growing desire by some EU members such as France, Poland and Romania to diversify away from natural gas by building out nuclear generating capacity. These trends are, of course, bullish for uranium’s medium and long-term prospects.

However, central to the article was the underlying assumption that the war would not affect Ukraine’s nuclear power plants. The risks were recognized and discussed but I believed the probability of the plants coming under direct attack was quite small and even added to my uranium position over recent weeks.

Asymmetric Risk

Most people who invest in uranium are well aware that it is one of the safest fuels for the production of energy currently available. Its mortality rate pales in comparison to not only coal and oil but natural gas as well.

It’s also the cleanest fuel in terms of CO₂ emissions, even beating wind and solar. This makes nuclear the ideal generating capacity into which baseload capacity should be migrated as carbon reduction efforts continue.

However, the problem is that if ever there’s another accident on par with Chernobyl, none of that will matter. Another accident would probably have the same impact on the global nuclear and uranium sectors as what occurred after the Fukushima accident in 2011. Public perception would turn extremely negative and power plant projects would be cancelled; some existing installations would also be closed. The discount between spot uranium and term prices, which has recently turned into a premium, would widen and incentivize utilities to buy in the spot market which would eventually lead to mine closures.

The very nature of nuclear accidents makes them high-impact events. The duration and difficulty in controlling an accident when it occurs causes any incident to instantly become high-profile news. For investors, this translates into a high degree of negative asymmetric risk as prices can trend upward for extended periods of time but a single serious accident can send prices plunging overnight, for uranium a price collapse is compounded by the fact that spot markets are very thinly traded. Spot markets are what the Sprott fund invests in.

Changing Assumptions

Most investors are well-aware of these risks and readily accept them given the industry’s previously mentioned excellent safety record. However, risk increased exponentially with the news that Russia had attacked the Zaporizhzhia nuclear plant in Ukraine. Whether this was done intentionally or was the result of negligence is not clear. But what is clear is that one can’t assume that Ukraine’s nuclear installations will not be targeted.

That’s a huge risk given that Ukraine is the second biggest user of nuclear energy in Europe after France. And even if the Zaporizhzhia installations are now secure, the country still has many other sites in harm’s way.

Conclusion

If the war eventually concludes without any other nuclear incidents occurring, I will repurchase this fund. I may miss the jump in uranium spot prices that’ll occur once risk starts to subside but the outlook for nuclear and uranium was already bright before this conflict began. The industry’s prospects will only improve given current energy prices and the changing geopolitical situation. That means that when this conflict ends, we’ll still be in the early rounds of the next uranium cycle.