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Markit Securities Finance Commentary
Nuclear glows

09 September 2013 | Posted by Alex Brog
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Nuclear power is never far from the headlines as the UK seeks support from China and Russia to replace its aging plants. We highlight positive investor sentiment towards nuclear ETPs and falling short interest.


  • Investor flows in the main uranium ETPs have held up despite poor performance this year
  • Shorts are being covered across the 24 stocks in the S&P Global Nuclear index
  • Uranium Energy Corp (UEC) and Paladin Energy (PDN) remain the most shorted
  • Diversified energy giants like EDF see low short interest

The decision to award Tokyo the 2020 Olympics puts the radiation concerns following the Fukushima nuclear accident far behind it. Yet South Korea has just banned Japanese fish imports amid concern over radioactive contamination.

Meanwhile, the UK government continues to court favour from both Russia and China as it seeks partners to assist the financing of its next generation nuclear plants.

Rosatom, the Russian state nuclear group, is joining forces with Rolls-Royce and Finnish nuclear utility, Fortum, to assess whether Russian nuclear reactor technology could be introduced into the UK market in a process that could take years. Overcoming the Chernobyl fallout will not be quick or easy according to The Financial Times.

Among those with plans to build in the UK are EDF of France and Japan’s Hitachi.

Positive ETP flow

Investor flows in the main exchange traded products (ETPs) that track uranium have held up despite poor performance this year.

Investors appear to be playing a long term game. In the short term, governments are selling their uranium supplies thanks to nuclear weapon disarmament leading to a flood of supply acting as a drag on the price. But, when this has passed through the system and more countries embrace nuclear power the price should better reflect that actual scarcity of this commodity.

The net asset value (NAV) performance of the largest ETP, the Global X Uranium ETF (URA) has declined almost a fifth. Despite this, it has posted fund inflows of $11.9m, increasing total assets under management (AUM) to $122.5m.

Perhaps in recognition of this, short sellers have covered their positions, from the annual high of 1.7% of the total shares on loan in May to just 0.25%, while the share price tracks multi-year lows.


 
 

The next largest ETP by AUM, the Market Vectors Uranium + Nuclear Energy ETF has fared better. NAV performance this year is up 5.9% and inflows have amounted to $28.9m, raising AUM to $73.7m. Short interest is negligible.

Most borrowed

Positive investor sentiment towards the industry is evidenced by a trend towards short covering across the 24 stocks in the S&P Global Nuclear index.

Average short interest is 1.8% of the total shares on loan, down from 2.7% a year ago.

While diversified energy giants like France’s EDF see low short interest, uranium miner Paladin Energy (PDN) remains the most heavily shorted of all the companies in the nuclear index by a longshot, with 8.8% of its total shares on loan.

 
 

However, demand to borrow has fallen to its lowest level in over a year and is considerably below the peak in short interest of 18.3% recorded in mid-August.

The Australian listed company plans to boost production and push ahead with the partial sale of its Namibia mine. Yet its recently reported full year loss more than doubled to $420.9m.

 
 

US listed Uranium Energy Corp (UEC) does not feature in the S&P nuclear index, but is heavily borrowed with 13.3% of shares on loan. It has also witnessed short covering, with short interest having fallen from the annual high of over 16% seen in July.

That said, demand to borrow remains heavy with almost four-fifths of the stock that can be borrowed from lending programmes being on loan. This means it would be hard to short any more of the company.

Also of note is the sharp increased in demand to borrow Canadian list Cameco (CCO), which has seen short interest rise over 200% to 3.8% in the last month.

Short interest in TEPCO (9501), the company at the centre of the Japanese nuclear disaster, remains noteworthy at 3.8%, but this is also down from the annual high of 5% recorded at the beginning of June.

However, the share price has also fallen from its annual high recorded at that time, amid recent reports of new radiation hotspots at four locations near tanks holding contaminated water at its stricken plant. This adds fuel to concerns that Tepco will not be able to safely decommission the tsunami-hit site.