Interview: Sprott CEO on 2022 Plans for Uranium Trust

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Sprott Physical Uranium Trust was launched in July 2021 by Canada's Sprott Asset Management, famed for connecting an eager investment community to physical uranium holdings with a market capitalization that has grown to $2 billion from $630 million when Sprott acquired the fund's predecessor Uranium Participation Corp. this summer. In the months since it launched, the physical holding fund has transformed the uranium market through its Canadian at-the-market (ATM) offering program. The ATM rules stipulate that the fund's share price has to exceed its net asset value to sell units. That limits the ability of the fund to raise cash to buy uranium, which has so far capped how much uranium the fund can buy at any given time. With 43.8 million pounds U3O8 in holdings, the fund's buying power has proven to be a formidable force in the spot uranium market improving both liquidity and volatility. As Sprott prepares to launch Sput on the New York Stock Exchange (NYSE), Sprott Asset Management CEO John Ciampaglia spoke with Energy Intelligence's Jessica Sondgeroth about his plans for this year.

Q: With the advancement of nuclear energy into the EU taxonomy and civil unrest in Kazakhstan last week, can you provide your take on what happened with investors and how that news cycle fueled activity at Sput?

A: It's hard to believe we're only a few days into 2022, but there's been a lot of interesting developments in the uranium market thus far. I would say really what's happening is two major events, as you mentioned, one growing expectation that nuclear is going to be included in the EU Sustainable Finance taxonomy. I think that was the first piece of news that has helped support the uranium market so far this year. And then unfortunately the troubles that we witnessed in Kazakhstan exposed an underlying issue for the uranium sector as a whole: it is more vulnerable to supply disruptions because it is so concentrated in a small number of countries and in a small number of mine locations.

I think this realization is growing among many of the people we spoke to the past week or so, acknowledging that this is a sector that is just more susceptible to disruptions and it's not just civil unrest that you have to think about it's potential mine floods or labor strikes, or Covid-19-related supply or labor disruptions, all of these things can have an impact on the uranium supply chain.

Q: Do you think investors expect that supply from Kazakhstan will become a problem this year? This week, things seemed to calm down a bit.

A: I think we're starting to finally get some news flow from that part of the world, given communications have finally been restored. We have been in touch with members of Kazatomprom that have reassured us that their operations are functioning. It will take more time, I suspect, for logistics to get back into place. The main issue right now is just shipping uranium via either truck or rail — that’s probably the largest impact near term on their operations. But as we know, the uranium market does not operate on a just-in-time inventory model, so it won't have an immediate impact. I think the longer-term implication is around how people assess or perceive potential geopolitical risk.

Q: Certainly something to keep an eye on. Looking forward, I think the big question on everybody's mind is when will Sput list on the NYSE?

A: The listing application is imminent. Imminent means in the next couple of weeks we expect the application to be made by the NYSE to the SEC [US Securities and Exchange Commission]. The trust’s draft application to the NYSE is being finalized right now. I'm hopeful that in January the application will be formally submitted by the NYSE to the SEC.

Q: What do you see as the benefits of that listing?

A: The US capital market is obviously the largest in the world. Many uranium investors are in the United States and I think there's always that preference to transact on your local home exchange. So being listed on the New York Stock Exchange I think would bring more investors and provide greater access to the trust. Now having said all of that, we're very happy with the way the trust has operated on the Toronto Stock Exchange. Institutional investors from around the world don't have any issues in terms of accessing the trust via the TSX. We're hopeful that the New York Stock Exchange listing will be granted and provide greater liquidity and access to investors in the US.

Q: What is the current status of Sput’s Canadian ATM offering?

A: The last shelf prospectus amendment that we made in 2021 increased the overall limit to $3.5 billion. That has been in response to growing interest that we've seen and interest we believe is out there in the marketplace. So far in 2022, we've issued a little over $100 million of new units via the at-the-market mechanism. That is a reflection of the interest we're seeing right now in the category, partly driven by the EU news and somewhat from people being concerned about supply disruptions coming from Kazakhstan.

Q: Of that total $3.5 billion, where are you now then? How much have you raised?

A: We are at about $1.1 billion that's been issued since the ATM commenced.

Q: Because Sput can only sell shares when its share price is higher than its net asset value, Sput has only been able to sell units on a handful of days since mid-November. Can you provide your take on why that has happened? Does it reflect more bearish sentiment from investors?

A: In November and December, we definitely saw the sector take a breather and as a result of that, we saw the uranium equities pull back, we saw the price of uranium pull back and we saw the ATM cool off. We think that's a function of people taking some profits after very sharp rises earlier in 2021. And obviously, there was broader concern in the markets with the federal reserve tightening and tapering, prompting some investors to take money off the table. We saw this across the board in a lot of different asset categories. The uranium sector was not immune and people had large gains prior. We think it was probably a healthy time to pause and let the market settle out a little bit.

We remain bullish for 2022. We think the fundamentals are very favorable. We think that the policy and regulatory support remains very supportive in a number of countries.

Q: Can you walk us through what processes go into a Sput decision to buy uranium?

A: When the trust raises new capital through its at-the-market offering, it then uses that capital to acquire more physical uranium. We go through a process in conjunction with WMC Energy, who is our technical adviser, to solicit available materials from different counterparties. We purchased uranium from about 20 different parties so far, so we're really open-minded in terms of trying to source the best deals we can for the trust.

We find each day in the uranium market to be a little different. So far in 2022, we've purchased a little over 2 million lbs. U3O8. So we've been active already.

Q: Some market sources have described Sput's buying activity to me as hot and cold, and worried that this might undermine market confidence. One asked "Why does Sput keep slamming on the brakes in terms of its market purchase activity?" How do you respond?

A: I think the reality is that we've been managing the fund close to being fully invested since its inception. The fund generally holds between 1% and 3% cash on any given day and we’ve been fairly consistent in our approach to buying additional uranium.

Our buying activity is really a direct function of how much new capital we're raising, how much cash we have to deploy and what kind of offers are available in the market for physical uranium. I think that particular person needs to understand that the trust is really an enabler for investors to express their interest in physical uranium. When we see high levels of investor interest, that tends to generate more inflows and allows us to buy more uranium. And when we hit an air pocket, when the uranium market is quiet, then the trust is less active. It's a pretty simple relationship.

Q: And when Sput decides to raise the ATM limit, I'm assuming that's also a function of growing investor interest. Did you reach a certain point in the previous ATM limit where you decided now it's time to raise the limit again?

A: Yes, exactly. We initially started off with a $300 million capacity on Aug. 17 and then we quickly realized that we'd underestimated market demand. We added an incremental $1 billion on Sep. 10. Then we subsequently added the extra $2.2 billion, which got us to the $3.5 billion. So you want to have enough capacity to meet demand that may come in the market — it's impossible to know, but you want to have that capacity to take advantage. We will review market conditions as we draw down each shelf and reassess whether to reload.

Q: Can you characterize the nature of Sput suppliers? I know you mentioned about 20 different parties so far. Can you characterize your supply base?

A: We want to be as open and flexible as possible in terms of our range of options to find uranium so it's just about everybody, every category is ticked in terms of traditional traders, some producers, I think we did one trade with a utility. We also did one trade with a junior exploration company. We bought material from non-utility holders, different investment funds. Acquiring 25 million lbs. over the last few months has forced us to turn over a lot of rocks. That's the approach we've taken, which is different than what others are doing.

Q: What are your plans for 2022?

A: Our goals for 2022 are to get the NYSE listing and to continue to promote the uranium trust as being part of the solution to achieve decarbonization and climate change goals. The market is going to do what it's going to do, so we focus on what we can control.

Q: What about your uranium price projections for the year? Can we expect much more volatility?

A: I think volatility is probably something we can expect to continue because we've taken what was otherwise a very dormant spot market, and we made it much more liquid and active and transparent.

If you look at the price chart of the uranium spot market for the two prior years before we arrived, it was pretty flat. I do think the uranium market is going through an evolution right now. The spot market has been re-energized with activity, and I think that activity was what was missing. That's created more volatility. That's one of the byproducts of having more participants, more activity, more liquidity, you tend to get more volatility. I think we did see fairly large swings in the fourth quarter that were a little atypical. My expectation is that volatility may become more muted over time.

Q: I know Sput recently sold its UF6 holdings from its days as Uranium Participation Corp. (UPC). Could and will Sput expand its role in either U3O8 or further down the fuel cycle, or is that UF6 sale a step away from that?

A: We've made the decision to stick solely to U3O8. The reason for that is really twofold. It's the most liquid part of the market and that's important. Secondly, it keeps the fund simple. One of the reasons we sold the UF6 was we thought it would make the NYSE listing easier to achieve.

Q: Can you elaborate on why? Because of the simplification of the fund?

A: Because it's not as liquid and transparent. We believe the SEC is going to be focused on market structure, liquidity, pricing sources, all of those things. Is there a futures market related to the underlying commodity? All of those market structure-type questions we would expect the SEC to dive into, and not having to deal with the UF6 was one less hurdle to get over.

Q: We've talked a little bit in the past about the potential to loan or swap material. Is this something that you are still considering or have explored further?

A: It's not something we want to entertain. We've never done it for any of our funds, so that's been our operating practice for the last 11 years with our other commodity funds.

Q: Moving on, what attracts investors to Sput? For the typical investor, how does it fit into their portfolios?

A: We have talked to dozens of institutional investors over the past few months, and I just finished a two-day mini road show where we talked to institutions from around the globe. There are a number of key themes being expressed to us. They clearly see the uranium market as having constructive fundamentals around its supply and demand. Obviously there is steady growing demand for uranium. But it's more of a supply story in terms of what is the incentive price uranium needs to get to in order to ensure that the industry has security of supply, medium and longer term.

That seems to be the fundamental crux of their thesis. We have a growing number of investors acknowledging that decarbonization, energy transition are key secular themes playing out in the markets right now and they're looking at uranium as part of that theme. We've been talking to a number of funds that are involved in energy transition, climate change, ESG [environmental, social and governance] and they're doing their research around how uranium fits in with those big future themes.

With respect to the trust, a number of investors have said to us that there aren't many ways to invest in the sector today. It's a small sector and the small relative market capitalization of all the companies involved is partially a function of a nine-year bear market that wiped out a lot of value and a lot of companies. So when you look at our physical uranium trust with a market cap of approximately $2 billion, that is attractive to a lot of investors that want to gain exposure to the more liquid and larger cap segment of the market.

Increasingly we're hearing from institutions that they like the fact that the trust has grown so much. I think this is a key message that we've been pushing on since the first day we arrived, which is we need the fund to continue to grow to incent larger and larger institutions to get involved in the sector. When we acquired UPC in 2021, the fund was only $630 million and so having a conversation with an institution about making a $50 million investment in the fund was very different than versus today when the fund is at $2 billion. As the fund has scaled more and more, institutions have realized that it's a more attractive opportunity for them to invest.

Q: At what point would Sput offload material? What would have to happen to make that decision?

A: The mandate of the Sprott Uranium Trust is to not sell its holdings. The trust will operate in perpetuity.

Q: Initially it seems like Sput might be pulling investment away from junior mining companies. Do you think over time that it will bring more interest to those projects?

A: It's a critical mineral and we think the sector needs massive investment to ensure long-term security of supply. That's going to happen over time, but it's not going to happen without a higher uranium price because it's just not economically viable to build more capacity at prices starting with three or fours or maybe even fives.

Q: Are investors interested in uranium equities?

A: Every investor is different in terms of their risk profile. But what we have found is a lot of investors are investing in both sleeves, physical uranium and the related equities and that's one of the key reasons why we announced late last year the acquisition of the North Shore Global Uranium Mining ETF: URNM, that is the ticker on the New York Stock Exchange. Our plan is to reorganize that fund in the first quarter this year to become the Sprott Uranium Miners ETF and we'll be offering investors two complementary funds to invest in the uranium sector.

Q: Can you tell us a little bit about how URNM will operate? Some of the equities it will offer?

A: No comment given we are about to start a shareholder proxy process.

Q: And you said you expect to complete that this quarter.

A: Yes. There's a shareholder vote scheduled for the end of February and we hope to have the transaction completed in March.

Q: With regard to Sprott Asset Management itself, a lot of the other funds being gold and silver tend to be a hedge against inflation for investors. How does uranium fit into Sprott's portfolio?

A: Our specialty is really metals and mining. We're based in Toronto and we view that as the mine finance capital of the world. So our business is very focused on metals and mining, and we've been historically very focused on precious metals given the size of those markets. We are very interested in looking at adjacent metals, uranium obviously being the latest addition to our suite. We do think that we're finally coming out of 10-year bear markets for many of these metals. I never would've guessed that Covid-19 would've been the catalyst, but I do think it was a key catalyst along with growing realization that we need to transition away from fossil fuels, which will require massive infrastructure build-out, whether that's for renewables, pipelines, electrification, electric cars. We're very interested in all of these metal-related themes and we're actively exploring different ideas in those areas.

Q: It sounds like Sput might be attracting a different set of investors to Sprott.

A: Yes, I think that's a really good point to highlight: the investors we've engaged with over the last six months are very different than the traditional investor base we've interacted with in the precious metals sector. I would say we've also noticed that the investor base is more institutional in nature, more global, and I would say younger relative to most precious metals investors.

Q: I'd like to ask about some of the fluctuations in Sput's share price and its notable impact on the uranium spot price itself. In September, for example, there was a Bloomberg article that quoted a Kazatompom executive as saying that utilities have sufficient uranium stocks for the next three years. That prompted a bit of a response from investors that to traditional market participants indicated an information gap. Is there an information gap when it comes to investing in the nuclear fuel market?

A: I totally agree with that position. Something we've been really focused on the last six months is education. I think the reason why there's an information gap or knowledge gap is because the sector was so neglected for so many years, investors just were not following it. You have investors who may have participated in the last cycle and are just coming back to uranium now for the first time. We also have a lot of new investors to the sector who are interested in the theme of energy transition and decarbonization.

We've been trying very hard to put out a lot of educational content to help the market understand how it operates. As you mentioned, the uranium market is very different than other markets. It's something that people need to do their homework with to understand that it's not a just-in-time inventory model for example. It also operates very slowly, mining is a very slow-moving endeavor. One of the things that we've been trying to educate the market about is the fact that supply responses are very slow given how long it takes to develop a new uranium mine, as well as even just resuming operations at one that's on care and maintenance.

Q: Going forward, what fundamentals are you most keeping an eye on for 2022?

A: For 2022, I guess I'm focused on the EU taxonomy, because I do think that will give the sector a boost. I do think it will open a new group of investors to the category who right now are on the sidelines. And we're obviously watching very, very closely with respect to: What's the potential supply response, with prices growing higher? Will we see additional capacity come on line in the next few years or not? That seems to be the issue most people are focused on, in terms of what that supply pipeline looks like.

Q: So not too heavy on the demand side. I think you've mentioned most of the focus seems to be on supply at this point.

A: Yes, I think people have a pretty good line of sight on what the demand looks like. A lot of countries have clearly signaled what their intentions are around adding additional capacity. That part evolves very slow given how involved a newbuild is. The supply situation can change overnight, as I said, whether you have some kind of a supply disruption because of a flood or a strike or whatever, I mean, those kinds of things have an immediate effect.

Q: One final question for you: where do you see the uranium spot price floor for 2022?

A: Do I see the floor? Well it's impossible to predict as you know, but the $40 mark seems to be a level that could be a floor. I'm using that number because we had a bit of a lull and a pullback late in the fourth quarter and we didn't seem to hit that number. We got close to it. So in my mind, that might be a level of support.

Q: John, this has been very informative. Is there anything else you'd like to add?

A: I would just say that we remain very constructive on the sector. We still think we're in the early innings of this recovery after essentially a nine-year bear market. It's a very small market and so it doesn't take a lot of capital to come into the sector to continue to give it interest and support. I think that's really interesting from an investment perspective.

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