Prices of uranium and companies that mine the radioactive element are surging as Reddit investors place bets that nuclear power could be the next big clean energy source.
Uranium, which does not trade on public markets, reached a nine-year high on 15 September at $48 per pound, up $5 or 11.6%, in just two days, according to S&P.
The price increase in the commodity itself was driven by Sprott Physical Uranium Trust, a Toronto-listed exchange-traded fund (ETF) that gives investors direct exposure to the metal. The fund bought 850,000 pounds of nuclear fuel last week, 1.4 million pounds the week before that and holds more than 26 million pounds since launching in July, reported Fortune.
All that buying added around 3% to global demand, according to analysts at Bank of America.
Reddit users that backed shares of GameStop and AMC Entertainment have set their sights on uranium, causing much of the volatility in the sector.
A subreddit called r/UraniumSqueeze was formed in February as a place for people “who believe in nuclear energy / nuclear power generation to fight climate change,” according to the subreddit.
The page has drawn over 15,000 members but is still much smaller than the hyper-popular r/wallstreetbets, which has more than 10 million followers.
These Reddit users are not only putting money in the Sprott ETF – which has a total net asset value of $1.35bn – but are also investing in companies connected to the uranium sector.
Companies on the rise
Canada-based Cameco is the largest uranium company trading in the US market and its stock is up over 47% in the last month coinciding with a 40% jump in uranium prices over that time.
Bank of America (BofA) analysts reiterated Tuesday a neutral rating on Cameco and raised the price target from $20 to $29 per share. The shares are currently trading around $24, Yahoo reported.
“We however believe that any potential short-term spike in prices would prove temporary,” BofA noted in the report obtained by Capital.com. The analysts noted shares will trade with a lot of volatility in the short term. “We see our current outlook as largely reflected in the shares.”
In addition to Cameco, several uranium penny stocks are experiencing volatility this week. Over the past five trading days shares from uranium companies Peninsula Energy and Energy Resources of Australia are up over 40% while Yellow Cake shares are up more than 20%.
Analysts are sceptical the recent gains are sustainable beyond the short-term. The political realities of nuclear energy have not changed drastically this year.
Although nuclear energy does not emit carbon, proponents of the energy source have faced criticism over its impact on areas surrounding a power plant. Not to mention, the 2011 Fukushima nuclear disaster in Japan still remains fresh even a decade after the incident, which was commemorated at this past summer’s Olympic games in Tokyo.
For example, California’s last nuclear plant called Diablo Canyon is set to expire in 2024 despite accounting for 10% of the state’s energy portfolio. Germany is even pursing a shutdown of all nuclear plants in the country by next year.
The US Department of Energy put out a request for information Monday regarding the establishment of a national uranium reserve program that would further boost production. The measure was initially proposed by former US President Donald Trump and taken up again by President Joe Biden, but this week a group of six Democrats criticised the measure in a letter on Wednesday.
Trend or fad?
Those underlying fundamentals make it highly unlikely uranium could rally back to $140 per pound like it traded from 2004-2007 when there was a bull run on a “nuclear renaissance,” Morgan Stanley analysts noted in a report this week obtained by Capital.com..
“While coal and natural gas prices are driven up by actual market tightness, uranium’s underlying supply-demand fundamentals haven’t meaningfully changed over the last few months to warrant this price surge,” Morgan Stanley said.
“Although the current rally is likely to have further to run, we are not yet convinced that it can be sustained into next year, as investor demand could struggle to maintain the current momentum.”
Regardless of the length or longevity of this rally, it could force some uranium operators to restart idled plants to increase the supply and meet current demand.
Cameco controls 58% of the idled uranium capacity and has previously stated that it would need to see higher uranium prices in order to restart those mines, according to BofA. The company said it would need prices to rise to around $40 or more in order to restart its McArthur/ Key Lake mine in Canada – a benchmark already met. And even higher prices would be required to restart its Rabbit Lake mine in Canada that was suspended in 2016.
The Australian uranium company Paladin Energy is similarly situated. Its Langer Heinrich mine accounts for another 11% of idled capacity.
“Of the remaining 31% of potentially undisciplined producers only 17% (8.9Mlbs) is profitable at the current spot price on a full cost basis,” BofA analysts said. “However, much of this potentially undisciplined production will soon be profitable as prices rise.”