Commodities, uranium provides opportunities for portfolios

Wars and energy programmes boosted the commodity at the beginning of the year. Now new challenges could revive the rally. What to expect and how to invest, according to the experts at VanEck

by Giulio Zangrandi

Nuclear power is back in the spotlight. According to the International Energy Agency's report entitled, within two years atomic energy production is expected to reach an all-time high globally. This record is the result of many different dynamics: from the increase in production in France, where the world's largest company is based, to the restart of several plants in Japan. This is why more and more investors are wondering whether it is time to consider uranium allocations again, after the end of the long rally that brought the commodity to a 17-year high in February. FocusRisparmio interviewed Kamil Sudiyarov and Salvatore Catalano, respectively product manager and head of sales of Italy at VanEck, to find out what the best strategies are.

Sudiyarov - According to the IEA, nuclear power generation is expected to reach an all-time high globally in 2024. What are the drivers of this growth and what should we expect in the medium to long term?

There are 2 main direct drivers to this trend: new plants being brought into operation and, more importantly, lifecycle extension of nuclear plants in the developed world. The nuclear energy revival trend started in the wake of the Ukraine war, when the European gas prices shot up and carried the electricity prices to historical maximums. This motivated governments to reopen reactors to ease the pressure on consumers and extend lifecycle of the existing reactors with 75 out of 109 European reactors receiving such approval. On the demand side, the spike in data center-driven electricity consumption has spurred search for sources of stable and clean energy, benefitting nuclear energy, known for its reliability and low carbon footprint. For example, Microsoft and US utility Constellation Energy recently signed a deal to resurrect a unit of the Three Mile Island nuclear plant, retired in 2019 due to economic reasons, with Microsoft committing to purchase energy for 20 years. Medium-to-long term there are several trends that could be worth following. Low carbon footprint and reliability make nuclear energy very desirable for countries seeking stable electricity supply. China is the obvious hotspot, with 26 reactors being constructed? and further 41 planned. India is another significant player looking to add nuclear to its energy mix. Another important development is emergence of small modular reactors (SMR) -? their compact size and modular nature allows them to be installed in sites unsuitable for larger reactors and offers superior scalability, shorter constructions times and potentially lower investments outlays

Sudiyarov - What is the impact on uranium? After a rally lasting more than two years that brought the price to over $100 per pound, the market for this commodity seems to have stabilized. How do you see the future? An opportunity but also several risks. Is geopolitics among them, given the commodity's use?

Major uranium players usually sign delivery contracts 2-3 years in advance. In the light of geopolitical turbulence, European utilities with Soviet-era reactors scrambled to find replacement for Russian fuel and paid premium to secure uranium supply. Since then, the spot uranium prices have dropped, however the long-term contractual uranium price has steadily climbed from $72 in the beginning of 2023 to $81 as of August 2024. Despite short-term supply problems having resolved, geopolitics remain an issue for the sectors. Delivery problems with Kazakhstan (~40% of global production) still persist, as most of the Kazakh Uranium passes through Russia, and the political situation in Niger (~20% of French uranium supply) remains complicated.

Catalano - What products and strategies should be used to invest in uranium? Better ETFs or active products? Does it make sense to target the commodity directly or is it better to invest in shares of companies active in the sector? Are there geographies to be favoured, perhaps in relation to supply dynamics?

When approaching any sector, various strategies can be applied, depending on the investment objective. In the case of active management, a skilled portfolio manager with robust research capabilities is essential. A critical question in this context is whether you can achieve pure exposure to the uranium sector, as it is often classified under the broader umbrella of sustainable resources. One option to gain direct exposure to Uranium itself is through ETPs (Exchange Traded Products). However, considering the potential growth in uranium supply, it is possible that prices will fall over time, which would be less advantageous. Alternatively, looking at uranium mining companies, there is potential for leverage to the underlying commodity price, a dynamic common across the mining sector. Rising demand for uranium could lead to improved revenues and cash flows for these companies, with operational efficiency becoming a key factor in sustaining high levels of free cash flow. Recent developments, especially advancements in technology that enhance the efficiency and reduce the costs of nuclear power plants, indicate that investing in the infrastructure side of the sector could also be considered as an opportunity. While some investors might consider utility companies to gain exposure to the nuclear sector, others believe that utilities have not effectively reflected the long-term developments in uranium and the broader nuclear industry. So, how can you combine these factors into a cohesive investment strategy? One option is to engage an active manager with specialized knowledge in the sector, albeit at a relatively higher cost. Alternatively, you can opt for broader beta exposure via an ETF.

Catalano - Since you have a dedicated ETF, the VanEck Uranium and Nuclear Technologies ETF, can you explain how it has been structured?

Our VanEck Uranium and Nuclear Technologies ETF provides pure exposure to the uranium sector, encompassing mining companies, infrastructure, and a portion of physical uranium through the Sprott Uranium Trust. We exclude utilities from the ETF for the reasons mentioned earlier. The ETF offers a TER of 0.55%. Naturally, the sector presents both opportunities and risks. A significant event, such as another incident similar to Fukushima, could have a pronounced negative impact. However, public research indicates that the nuclear sector has the second-lowest death rate per unit of electricity produced, ranking just behind solar power. With nuclear energy included in the EU Taxonomy, there is a strong likelyhood for its continued adoption and growing importance as part of the energy transition. A detailed explanations of the risks related to the investment on this ETF, can be found in the Prospectus and in the KID, to be read before investing.