Horizon's Global Uranium Index ETF (HURA) aims to provide diversified exposure to the uranium sector
One of Horizons ETFs’ best-performing funds over the one-year period ending December 31, 2020, was their Global Uranium Index ETF (HURA), an index fund that offers exposure to companies involved in uranium mining and exploration, as well as the physical price of uranium. To understand its performance last year, you need to look back at the history of the commodity that could impact its underlying index, The Solactive Global Uranium PurePlay Index.
“Uranium goes through relatively long bear and bull cycles. It has been in a bear cycle for the last seven or eight years, and the last high was in 2007,” says Nick Piquard, portfolio manager and options strategist, Horizons ETFs.
Piquard noted a few factors that created this prolonged bear run. The first was the Fukushima nuclear disaster in 2011. That put many activities related to nuclear energy on hold, globally. The second was countries shifting to other renewable sources of energy, like solar and wind, leading to an increased energy supply. However, countries soon realized that they couldn’t just flip the switch on energy; traditional sources were still necessary. That is when things started to swing for the industry.
“One significant change was the shutdown of the McArthur River uranium mine in Northern Saskatchewan. It was the largest mine in the world at the time, so that started to limit supply,” says Piquard. In 2018, Kazatomprom, the national uranium company of Kazakhstan, went public, curtailing supply as the company sought growth over profits; in 2019, it announced production cuts through 2021 as the uranium market recovered from oversupply and prices remained low. “That also curtailed supply.”
Meanwhile, countries such as China began building and exporting more nuclear reactors at a faster pace. Suddenly, there was a demand for the reduced supply of uranium. That ushered in a renaissance for the industry as now it is seeing advances in technology and safety.
That is why Horizons saw an opportunity to offer exposure to the space. “When we launched HURA, we set out to offer an ETF which provides diversified exposure to uranium. We recognized that it was a pretty niche industry, so we sought an index which offered exposure to all areas of the sector,” says Piquard. Through its underlying index, the Solactive Global Uranium Pure-Play Index, “We have large-cap exposure, through the holdings of Cameco and Kazatomprom, the two largest uranium companies. Then, we have the junior miners and up to 20% of the portfolio can be allocated to companies that hold uranium as a commodity.”
Piquard adds that investing in physical uranium is different than other commodities. It is difficult because there is no liquid futures market. To get the exposure, the fund’s mandate includes uranium holding companies: Uranium Participation Unit and Yellowcake. “Because the index methodology caps the weight of each company at 20%, you have the two large-cap companies at 40% of the fund, then 40% is exposure to junior miners, and 20% to the physical commodity, so it is a nice balance.”
Creating a fund with diversified exposure made sense to Horizons ETFs. Unlike other commodities, such as gold, which has dedicated funds to each of the sub-sectors (gold bullion, gold mining and exploration companies and gold futures), the uranium market is smaller. Providing exposure to all three areas makes it easier for investors to access them. “It adds diversification and if the sector does well, they should all do well,” says Piquard, though if there is a decline, these sectors would move in tandem.
The positive performance of the uranium sector and subsequently, HURA, can potentially be attributed to a few key factors. First, the reduction in supply had a tremendous impact. Then, as the COVID-19 pandemic hit, it forced the second-largest mine, Cigar Lake, to also shut down, reducing supply further. While that mine did reopen, it was forced to shut down in December 2020 during COVID-19’s second wave.
“That precipitated the perception that we were heading towards a deficit in uranium, unless the big mines could come back online,” says Piquard. “So, the decline in supply has been a big factor. At the same time, there hasn’t been a change in demand; it didn’t come down much during the pandemic because people still needed electricity.”
While recent demand has laid way to strong performance, Piquard feels uranium may have some more room to grow. “I think the future for uranium is pretty bright. There is quite a bit of uranium in the world, it is just expensive to extract. Australia, for example, doesn’t produce much or nearly as much as Canada and Kazakhstan, but they have the biggest reserves in the world, it is just expensive to get to. On the other hand, uranium is a pretty small part of the cost of generating electricity. If we can improve on nuclear technology, safety, and get people more comfortable with it as a resource, there is plenty of it to be used. Some of the newer technologies look bright in terms of lower fixed cost and better safety profiles.”
As the technology continues to improve in the industry, and if the resource can be less expensive to mine, that supply could keep nuclear power in the conversation, even as the shift to renewables occurs.
“Energy demand is only going to be greater. You see all these targets of getting rid of fossil fuel generation in electricity, but coal, natural gas and oil still contribute about 50% of electricity generation. It will be hard for renewables to meet that demand. The technology may get there down the road, but we have technology today in nuclear to meet that need. You are starting to see it from various governments, they want to invest in that space and want to protect existing infrastructure.”
One example of that is in the U.S. with the American Nuclear Infrastructure Act (AINA) approved in December 2020, which promotes the development of nuclear technologies, new reactors and creating a uranium reserve. It also currently has support from both political parties, which is another good sign for the industry. In Canada, C$26 billion is being invested in Ontario to refurbish 10 reactors until 2031, ensuring their operation for another 25 to 30 years.
Piquard notes that it is a high-risk sector because of the long bull and bear markets and volatility, so the fund should only appeal to investors who have a high-risk tolerance. He adds there can also be risks around the mines themselves that can affect the industry; if there is a decline in the industry, it is reflected in these funds. However, he adds that because the fund provides exposure to multiple areas of the industry, it aims to give investors exposure without putting all their eggs in one basket.
“I think if you believe nuclear energy is here to stay, it is currently providing 11% of global energy supply, 20% in the U.S., I think it could be an attractive market because we aren’t producing enough uranium today to supply the existing power plants. The market is still imbalanced because there is inventory overhang from when Japan shut down their plants and some additional inventory available, but that inventory won’t last forever. If you take a long-term view, then I think it provides an attractive entry point.”
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