Uranium stocks are surging – But can the good times last?

The uranium sector is one of the most choppy sectors I've ever seen – It loves to gap up, pull back sharply and then chop sideways like no tomorrow.

Uranium names like Paladin Energy and Boss Energy more than halved between May and September this year. The weakness was largely driven by softer uranium prices and, to a lesser extent, factors such as project execution risks, profit taking and rising short interest.

The sector is back in the headlines after three of the world's largest tech companies outlined plans to see more nuclear energy feeding their power-hungry data centres. This included:

• Alphabet: Announced a partnership with Kairos Power to develop small modular reactors (SMRs). The agreement is described as "the world's first corporate agreement to acquire nuclear energy" from SMRs. The first SMR is expected to be operational by the end of the decade.

• Amazon: Anchored a $500 million investment round for X-Energy to develop small advanced modular nuclear reactors. The company aims to develop more than 5GW of new power projects across the US by 2039

• Microsoft: Signed a 20-year power purchase agreement with Constellation Energy to restart Unit 1 reactor at Three Mile Island. This agreement is part of the launch of Crane Clean Energy Centre (CCEC), which seeks to add over 800MW of carbon-free energy to the grid.

The Alphabet news on Thursday, 17 October, sent a bellwether name like Paladin Energy 10.9% higher to a fresh three-month high of $13.04. While the Microsoft announcement on 19 September also pushed the stock 8.1% higher, to $9.86.

Paladin Energy year-to-date price chart (Source: TradingView)

This adds to the myriad of factors supporting a bullish thesis for uranium, including:

• The recent US ban on Russian uranium imports (approximately 15% of global supply) constrains available supply

• Major producers like Kazatomprom (45% of global supply) have faced production challenges and announced they will not scale up production as originally planned

• Countries like Japan are restarting idle reactors, while others like China and India have ambitious new build programs

• Years of low uranium prices led to significant underinvestment in exploration and new projects

Given all the above, why haven't uranium stocks returned to recent highs? Below, we explore why they're still struggling for upside.

Lack of spot price upside

Uranium prices ticked only 4.6% higher over the past month, from US$79 to US$83 a pound. Despite all the bullish drivers, prices are down around 9% year-to-date.

Uranium price chart (Source: TradingEconomics)

Prices aren't high enough

Bannerman Energy (ASX: BMN) is seeking to develop the Etango Uranium Project in Namibia. It's one of the world's largest undeveloped uranium assets, with a mineral resource of 225 million pounds of uranium.

The company's latest quarterly (16 October 2024) was a mouthful. Here are the three key lines from the report.

• "Bannerman’s well-established position with respect to offtake marketing is that it will preserve the long-term underlying value of Etango by only committing to contracting its planned uranium output on price (and other terms) that are considered representative of long-term market fundamentals and producer opportunity."

• "Although the market is developing positively, current term contract conditions have not yet fully aligned with these criteria."

• "The exercising of this patience means that Bannerman has elected to expand its projected window for a targeted positive Final Investment Decision (FID) on Etango into 2025."

In summary – Prices aren't high enough and the company is pushing back its final investment decision into 2025.

Short sellers are on the rise

Boss Energy (ASX: BOE) is now the second most shorted stock on the ASX, with short interest soaring from 2.5% at the beginning of the year to a record 14.2% as at 15 October.

Boss Energy 12-month short interest chart (Source: Shortman)

Short interest in Paladin Energy, Deep Yellow and Lotus Resources are also the 4th, 8th and 10th most shorted stocks on the market.

Morgan Stanley reiterated an OVERWEIGHT rating on Paladin Energy, with a $12.00 target price in early September. But their financial models (ex-Fission merger) showcase a rather expensive miner.

Source: Morgan Stanley September 2024

Earlier this year, Paladin entered into an agreement to acquire Canada's Fission Uranium for C$1.14 billion (A$850m).

Fission is a uranium development company focused on advancing its Patterson Lake South (PLS) project in Saskatchewan's Athabasca Basin. The below Citi sensitivity analysis shows just how much leverage is built into these projects.

Source: Citi June 2024

Source: Citi June 2024

Uranium prices have remained relatively unmoved by the recent headlines from Alphabet, Amazon, and Microsoft. This muted reaction is understandable, given that these tech giants' commitments are long-term and unlikely to impact immediate supply and demand dynamics. However, these investments signal a significant shift in attitude towards nuclear energy and its role in meeting escalating power needs.

For uranium stocks, the situation remains unchanged: They continue to act as leveraged plays on the uranium price and as long as uranium prices remain subdued, so will the associated stocks. The high level of short interest in these stocks acts as a double-edged sword. While it generally suppresses gains, it can also lead to sharp upswings during short-covering rallies, as witnessed following the Microsoft and Amazon announcements.