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By Kyle Anthony, Benzinga
Political risk is an ever-present but often understated risk that investors face, as its occurrence can reshape the entire investment landscape. One asset class that is among the most susceptible to political risk is commodities. As Bloomberg reported recently, Russian President Vladimir Putin asked his government to consider limiting exports of some commodities like nickel, titanium and uranium in retaliation for Western sanctions. Against the backdrop of the ongoing Russia-Ukraine War, the U.S. and other developed economies have placed numerous sanctions on Russia, intending to weaken the nation’s economy.
The Importance Of Russian Uranium
Earlier this year, U.S. President Joe Biden signed the Prohibiting Russian Uranium Imports Act into law, effectively starting the process of ending the country's dependence on imported uranium supplies. The U.S. reliance on Russian uranium began in 1993 with the Megatons to Megawatts program, initiated soon after the Cold War. This initiative involved purchasing 500 metric tons of uranium from dismantled Russian nuclear warheads, which were then converted into fuel for nuclear reactors. Though this agreement ended in 2013, arrangements were made to facilitate further Russian uranium moving to the U.S. and other developed nations. As reported by the U.S. Energy Information Administration, as of June 2023, 12% of the country's yearly uranium imports originated in Russia.
Data from the World Nuclear Association indicates Russia has the sixth-largest global mining production as of 2022. However, from a uranium enrichment perspective, the Kremlin-controlled nuclear giant Rosatom Corp. controls almost half the global enrichment capacity needed to convert the ore into energy.
Implications Of Russia Restricting Critical Material Supply
Uranium fuels nuclear reactors, playing a vital role in electricity generation. Though the U.S. and other developed economies are looking to build their uranium capacity, such long-tenured projects would not counteract the disruptive nature of Russia reducing its supply to the market in the near future and driving up prices. As noted in a recent Reuters report, President Putin’s remarks prompted an increase in the shares of uranium mining companies. The price of nickel also increased after his comments, as it is another critical material essential in producing batteries and alloys. Russia is home to Norilsk Nickel, which is the world's biggest producer of Class 1 nickel, as well as the top miner of palladium and a producer of other metals.
Gaining Exposure To Uranium And Nickel
Given its status as a major global metal producer, the impact on commodity markets would be material if Russia were to restrict supply, as lack of supply could potentially lead to price increases for uranium, nickel and other critical minerals. Such a market action could benefit companies capable of supplying these vital resources to the market, as they would reflect some of the fundamental economic value derived from the minerals.
The Sprott Uranium Miners ETF (ARCA: URNM) provides investors with exposure to companies that devote at least 50% of their assets to the uranium mining industry – which may include mining, exploration, development and production of uranium, or holding physical uranium, owning uranium royalties or engaging in other, non-mining activities that support the uranium mining industry – by tracking the North Shore Global Uranium Mining Index.
Similar to URNM but different in scope, the Sprott Junior Uranium Miners ETF (NASDAQ: URNJ) is designed to track the performance of mid-, small- and micro-cap companies in uranium-mining-related businesses. These funds seek to capitalize on the growing global demand for energy and the need to move away from fossil fuels, which could be setting the stage for nuclear power and the companies that can help provide it.
While energy generation is a first-order consideration when discussing energy security, the second-order consideration is typically energy storage. As the world moves closer to net-zero emissions, the importance of nickel in electrification and energy storage is becoming increasingly apparent. For example, lithium-ion batteries are increasingly using more nickel to increase the drivable range. Adding nickel increases the energy density of these batteries, leading to a more extended drivable range. As such, nickel seems to be becoming an important part of the transition from gas-powered cars to electric vehicles in the coming decades for highly car-dependent geographies such as North America, based on currently popular battery chemistries. The Sprott Nickel Miners ETF (NASDAQ: NIKL) aims to capitalize on the growing demand for nickel and the integral part it is expected to play in the transition to a carbon-neutral society. The ETF will track the Nasdaq Sprott Nickel Miners™ Index, which is designed to track the performance of a selection of global securities in the nickel industry, including nickel producers, developers and explorers.
The value proposition of the Sprott Nickel Miners ETF Fund is three-fold. Firstly, it seeks to offer value in the form of commodity exposure. Many commodity indexes tend to be underweight nickel or exclude it altogether. Investors may utilize this ETF to add more weight to nickel in their portfolio.
Secondly, nickel may fit in as a thematic allocation or in a growth bucket. Thematic and growth can often go hand in hand. Since nickel is an area of the commodity sector that could grow in the coming decades, future-focused investors interested in the metals that could potentially power the future may be interested in what the ETF offers. Finally, it also offers global equity energy allocation. Given that non-U.S. countries hold the largest nickel reserves, investors looking to diversify their energy exposure may want to consider this fund.
A Crucial Time For Critical Materials
Geopolitics is high among the market dynamics that influence the investment landscape for commodities. If trends continue, and demand for critical materials such as uranium and nickel continues to increase, investors who have exposure to the right investment solutions could benefit from the demand for these rare and economically important resources.
Featured photo by Dominik Vanyi on Unsplash.
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Important Disclosures
Before investing, you should consider each Fund’s investment objectives, risks, charges and expenses. Each Fund’s prospectus contains this and other information about the Fund and should be read carefully before investing.
A prospectus can be obtained by calling 888.622.1813 or by clicking these links: Sprott Uranium Miners ETF Prospectus, Sprott Junior Uranium Miners ETF Prospectus, and Sprott Nickel Miners ETF Prospectus.
The Funds are not suitable for all investors. There are risks involved with investing in ETFs, including the loss of money. The Funds are non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund. As a result, changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a diversified fund.
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Funds that emphasize investments in small/mid-cap companies will generally experience greater price volatility. Diversification does not eliminate the risk of experiencing investment losses. ETFs are considered to have continuous liquidity because they allow for an individual to trade throughout the day. A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses, affect the Funds’ performance.
The North Shore Global Uranium Mining Index is designed to track the performance of companies that devote at least 50% of their assets to the uranium mining industry, which may include mining, exploration, development and production of uranium, or holding physical uranium, owning uranium royalties or engaging in other non-mining activities that support the uranium mining industry.
The Nasdaq Sprott Junior Uranium Miners™ Index (NSURNJ™) is designed to track the performance of mid-, small- and micro-cap companies in uranium-mining related businesses.
Nasdaq®, Nasdaq Junior Uranium Miners™ Index, Nasdaq Nickel Miners™ Index, NSURNJ™, and NSNIKL™ are registered trademarks of Nasdaq, Inc. (which with its affiliates is referred to as the “Corporations”) and are licensed for use by Sprott Asset Management LP. The Product(s) have not been passed on by the Corporations as to their legality or suitability. The Product(s) are not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT(S).
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Sprott Asset Management USA, Inc. is the Investment Adviser to the Sprott ETFs. Sprott Asset Management LP is the Sponsor of the Funds. ALPS Distributors, Inc. is the Distributor for the Sprott ETFs and is a registered broker-dealer and FINRA Member.
ALPS Distributors, Inc. is not affiliated with Sprott Asset Management LP.
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