THE MONTHY MONITOR | 1 THE MONTHLY MONITOR MAY 2018 MONTH IN REVIEW THE GLOBAL X URANIUM ETF RESETS THEIR EXPECTATIONS Although we witnessed sporadic surges of acvity in the spot market during April, the overall result was viewed as calm. The long-term market was even calmer with only two small deals reported over the course of the month. Both spot and long- term prices closed with next to no change. Some ulies are expected to move back into the market in May, which we hope will bring this drought to an end. No contracts of a reportable size have been awarded yet during 2018. Equies are another story, however, and finally seem to be moving in ancipaon of beer U prices. The SLU3O8 Equity index rose for the first me this year by over 10% to 546.24. Topping supply news in April were the threatened Russian sancons against the USA to stem uranium supply. In addion, Paladin announced its intenon to close the Langer Heinrich mine in Namibia. We look forward to any comments or quesons you may have. Ask us on Twier (@Sightlineu3o8) or email us at editor@ sightlineu3o8.com. EQUITY INDEX January 31, 2018 521.11 February 28, 2018 500.61 March 31, 2018 491.48 April 30, 2018 546.24 Global Reactor Count # GWe Operable 449 394 Under construcon 58 63 Planned 154 158 Proposed 333 382 CONTINUED ON PG 2 EXCLUSIVE TO SIGHTLINE U3O8 – For the uranium investor that was long in February and March of this year, the sudden uranium equity price drops and general volality may have been surprising. With price drops of almost 30% in some equies, uranium investors were undoubt- edly taken by surprise. The February/March drop was largely caused by changes announced by the Global X Uranium ETF (NYSE:URA). URA is the only large ETF available directly targeng the uranium space with a mandate to offer diversified exposure to a broad range of uranium mining companies. With a recent adjustment in philosophy resulng in a rebalancing of the ETF’s ~USD$375 mil- lion in net assets, there may be more volality on the horizon. What is an ETF? Think of an ETF as a slice of a pool of securies or a more liquid mutual fund. While both finan- cial instruments are comprised of mulple underlying securies, a mutual fund seles at market close whereas an ETF is transactable at any point during market operaon. As such, the value of an ETF is derived from the individual values of its underlying securies. URANIUM PRICES LONG TERM PRICE US$/lb U 3 O 8 SPOT PRICE US$/lb U 3 O 8 UC x PRICES March 31, 2018 $30.00 $20.88 April 30, 2018 $30.00 $20.93 PRICE OUTLOOK June 30, 2018 $32.50 $23.25 September 30, 2018 $38.00 $30.00 December 31, 2018 $44.50 $37.50 December 31, 2019 $56.00 $45.00 December 31, 2020 $59.00 $48.25 UXC: UX Consulng Company Updated on May 1, 2018
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THE MONTHY MONITOR MAY 2018...2018/05/02 · tsxv:plu Plateau Uranium Inc Argentina $0.58 $0.56 $0.78 38.4 tsxv:ptu Purepoint Uranium Group Inc. Canada $0.07 $0.05 $0.10 14.2 tsxv:syh
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THE MONTHY MONITOR | 1
THE MONTHLY MONITOR MAY 2018
MONTH IN REVIEW THE GLOBAL X URANIUM ETF RESETS THEIR EXPECTATIONSAlthough we witnessed sporadic surges of activity in the spot market during April, the overall result was viewed as calm. The long-term market was even calmer with only two small deals reported over the course of the month. Both spot and long-term prices closed with next to no change.
Some utilities are expected to move back into the market in May, which we hope will bring this drought to an end. No contracts of a reportable size have been awarded yet during 2018.
Equities are another story, however, and finally seem to be moving in anticipation of better U prices. The SLU3O8 Equity index rose for the first time this year by over 10% to 546.24.
Topping supply news in April were the threatened Russian sanctions against the USA to stem uranium supply. In addition, Paladin announced its intention to close the Langer Heinrich mine in Namibia.
We look forward to any comments or questions you may have. Ask us on Twitter (@Sightlineu3o8) or email us at [email protected].
EQUITY INDEX
January 31, 2018 521.11
February 28, 2018 500.61
March 31, 2018 491.48
April 30, 2018 546.24
Global Reactor Count # GWe
Operable 449 394
Under construction 58 63
Planned 154 158
Proposed 333 382
CONTINUED ON PG 2
EXCLUSIVE TO SIGHTLINE U3O8 – For the uranium investor that was long in February and March of this year, the sudden uranium equity price drops and general volatility may have been surprising. With price drops of almost 30% in some equities, uranium investors were undoubt-edly taken by surprise.
The February/March drop was largely caused by changes announced by the Global X Uranium ETF (NYSE:URA). URA is the only large ETF available directly targeting the uranium space with a mandate to offer diversified exposure to a broad range of uranium mining companies.
With a recent adjustment in philosophy resulting in a rebalancing of the ETF’s ~USD$375 mil-lion in net assets, there may be more volatility on the horizon.
What is an ETF?
Think of an ETF as a slice of a pool of securities or a more liquid mutual fund. While both finan-cial instruments are comprised of multiple underlying securities, a mutual fund settles at market close whereas an ETF is transactable at any point during market operation.
As such, the value of an ETF is derived from the individual values of its underlying securities.
URANIUM PRICES LONG TERM PRICEUS$/lb U3O8
SPOT PRICE US$/lb U3O8
UCx PRICES
March 31, 2018 $30.00 $20.88
April 30, 2018 $30.00 $20.93
PRICE OUTLOOK
June 30, 2018 $32.50 $23.25
September 30, 2018 $38.00 $30.00
December 31, 2018 $44.50 $37.50
December 31, 2019 $56.00 $45.00
December 31, 2020 $59.00 $48.25 UXC: UX Consulting CompanyUpdated on May 1, 2018
THE GLOBAL X URANIUM ETF RESETS THEIR EXPECTATIONS (Cont’d)
CONTINUED ON PG 3
URANIUM PRICES LONG TERM PRICEUS$/lb U3O8
SPOT PRICE US$/lb U3O8
PRICES
April 30, 2018 $30.00 $20.93
PRICE OUTLOOK
June 30, 2018 $32.50 $23.25
UCxEvery ETF has a mandate, describing the cri-teria used to select its underlying securities and the fixed percentage of total net assets that each security is allocated. The simplest ETFs mirror a popular market index, like the S&P500 or the FTSE however, ETFs can also get quite complex employing leverage, futures trading, and derivates to achieve a very specific result.
Regardless of the tactics and complexities employed to structure an ETF, the benefit to the long investor is exposure to underlying assets in a specific sector, geography, com-modity, index, etc.
How is Liquidity and Fair Pricing Accom-plished?
Intraday liquidity is possible because of the role played by market makers (also called authorized participants or APs for short). These APs are large institutional investors that facilitate the creation and redemption mechanism essential to ETF liquidity and fair ETF pricing; fair meaning ETF prices reflec-tive of underlying exposure / assets.
Think of APs as intermediaries between the secondary market and in this case, the issuer, Global X. Only APs can transact with the fund due to the sheer size of these transactions. An AP can give the fund a bucket of securities in exchange for ETF units or, vice-versa, give the fund ETF units in exchange for securities.
When investors buy an ETF, demand increases moving the ETF price higher than its underlying assets and thus creating an arbitrage opportunity. To take advantage of the opportunity APs will:
1. buy more underlying assets from the secondary market
2. exchange the bought underlying assets with the fund for more expensive ETF units
3. sell more ETF units on the secondary market
4. pocket the difference between underly-ing assets bought and ETF units sold
THE GLOBAL X URANIUM ETF RESETS THEIR EXPECTATIONS (Cont’d)
Execution of this process has the following effects:
1. demand for underlying units is in-creased driving individual securities prices up
2. supply of ETF units is also increase driving ETF prices down
Full equilibrium is never reached but execu-tion of the arbitrage ensures ETF prices trade very close to the values of their under-lying assets.
When an ETF trades at a discount to its un-derlying assets due to investors selling ETF units, the process occurs in reverse. APs will buy ETFs from the secondary market to trade for underlying assets with the fund. These assets are subsequently sold on the secondary market.
More simply put, ETF purchases result in underlying asset purchases while increased ETF sales result in underlying asset sales.
Why is the URA Being Changed
The URA tracks the Solactive Global Ura-nium Total Return Index (SOLURA for short) which is comprised of companies active in the uranium mining and exploration in-dustry. As of July 2018, the SOLURA index will be replaced with the “Solactive Global Uranium & Nuclear Components Index.”
The new index broadens exposure to the nuclear industry as a whole as opposed to reliance on only uranium mining and explo-ration companies. As a result, companies with operations related to the production of nuclear components and technologies will be scoped in.
A summary of target weightings for both indices is included on table 1 and 2.
With supply cuts in place, some EPS volatility in miners’ results are to be expected. To smooth this out, the new In-dex increases diversification, emphasizing large-cap Asian manufacturing companies to take advantage of the growing nuclear fleets in those regions.
What do URA Changes mean for Under-lying Security Prices and Volatility
There are two ways an ETF can affect the prices of individual securities:
1. Demand and Supply of ETF – mean-ing purchases and sales in the ETF ultimately result in purchases and sales in its underlying securities. This creates an additional layer of buy-ing and selling alongside the direct transactions between investor and individual securities on the second-ary market. Thus, securities that are part of an ETF generally enjoy greater liquidity and transaction vol-umes due to the role played by APs.
2. Rebalancing – when an ETF invest-ment mandate/ asset allocation changes, so does its underlying asset allocations. This results in additional buying and selling on the secondary market to facilitate the rebalancing.
Rebalancing usually takes place in phases to ensure lower volatility in the ETF’s price. Unfortunately, it always has the ef-fect of artificially displacing the prices of the underlying securities being changed. Phase 1 of the URA rebalancing resulted in the equity price volatility during Febru-ary/ March.
There are more phases required to transition the old SOLURA Index to the new one. Asset allocations as of Phase 1 completion are summarized on Table 3.
As can be seen, the stake in Uranium mining companies has dropped and will continue to do so. Further rebalancing is needed and will result in additional volatility for the mining companies whose fund percentage allocation is being changed.
Table 3 - ASSET ALLOCATIONS AS OF PHASE 1 COMPLETION
What Does this all Mean for Uranium Investors
Over the past 4 months, there have been a number of significant events that should directly affect the price of uranium, rang-ing from mine shutdowns to soviet sanc-tions and Japanese reactor re-starts. For investors looking to take advantage of a pending rise in uranium prices, they must take into account the impact of the URA:
1. The Phase 1, URA rebalancing sig-nificantly contributed to the uranium equity volatility observed in February and March as it announced and then executed the sell-off of certain of its uranium equities.
2. Since the URA’s future intended as-set allocation is yet to be achieved, there will be additional phases of rebalancing causing further volatility in the equities being transitioned. For the volatility adverse investor, it may be prudent to stay away from the companies being transitioned, at least in the short term.
3. For those using the URA as a meth-od of investing in uranium, there is some downside to the proposed as-set allocations in the Solactive Global Uranium & Nuclear Components Index caused by potential over-di-versification cutting into the returns of a uranium price resurgence. Some of the new companies being added have highly diversified operations that are not solely concentrated on uranium thus, they would capture a lower percentage of a uranium rally.
4. The miners and explorers that stand to benefit the most from increas-ing long-term prices are potentially under-represented under the new Solactive index due to the focus on lower volatility and the entire nuclear industry.
Investors should continue to maintain a broad balance within their uranium portfolios if they expect to maximize their exposure to the metal while keeping a re-sponsible handle on their investment risk.
The SLU3O8 Outlook; is an in-depth forecast model, optimized to anticipate the timing and extent of pending changes in uranium prices. Projections are maintained quarterly and based on the analysis of uranium price movement relative to detailed supply and demand changes over the past 15 years.
ABOUT THE SLU3O8 EQUITY INDEX
The SLU3O8 Equity Index tracks the relative share price of a select basket of uranium-based equities, checking the market’s reaction to industry activities. The Index is based on share price movement since January 1, 2012 (1,000.00) of the following companies*:
* As the significant stock price movement of Fission Uranium Corp and NexGen Energy Ltd. is a function of major uranium discoveries, we have not included their stock performance in the Index to better reflect the uranium equities market in general.
ABOUT SIGHTLINE SLU3O8
Sightline U3O8 is a monthly newsletter and supporting website created and maintained to provide uranium investors and industry stakeholders with a single source of insight into the ongoing factors that directly affect uranium prices.
We welcome your comments, questions and ideas. Please contact us at [email protected]
www. sightlineu3o8.com
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UComparables will provide metrics and data that measure the performance of management, the value of their projects and the financial health of the companies, gathered across the entire spectrum of uranium exploration companies and uranium development companies.
We will look at metrics and data points, common across the companies that investors can use as input to their decision making process.
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