7 Reasons The Generalist Investor Can't Ignore Uranium Stocks from an Anonymous Adviser ... on Twitter.
Recently, an article on uranium in the WSJ made the rounds. New York hedge fund Anchorage Capital Group LLC, was rumored to have purchased~3mm lbs of U308. Anchorage was recently in the spotlight after scoring about $2 billion in paper profits from Amazon's deal to buy MGM in May. It was a big deal
Below is a list of uranium industry observations for the generalist investor. In preview, I'm beyond bullish. It is meant to be a discussion starter, as I think this could be your biggest trade of the next 12 months. Nuclear is not only net-zero (CO2 free power generation), but also its generation output is base load, not influenced by weather conditions and seasonality (like wind or solar). Remember, uranium is the rock star of commodities. Bull and Bear markets, are of epic proportions. Don't let that scare you. It's been 10 years of the latter. H2 2021/22 is shaping up to be the lighting rod that ignites this sector. Is $200/lb uranium possible in the next 10 years? Yes, I think so. But is a doubling highly likely in the shorter tern? I don't see how that doesn't happen.
Here are my 7 reasons generalists should care:
(1) The market is very different today, versus how it exited last cycle.
The market was oversupplied at the 2011 peak. Cameco was bringing on a new mine. Kazatomprom was ramping up production in a way that would flood the market. During the last bull market, there was no structural deficit. This is critical. What drove the parabolic price action between 2001 and 2011, was a "nuclear renaissance", driven by positive sentiment about the revival of nuclear energy caused by rising fossil fuel prices and global public concern about greenhouse gas emissions. Utilities were gobbling up supply in anticipation of a green future.
Then Fukushima hits and overnight, 14% of global demand shuts off. All 54 reactors were stopped in Japan. The ripple effects of other assets closing caused a huge glut in global inventory. Germany announced the decommissioning of the entire fleet of its nuclear reactors by 2022. U.S. and Euro utilities were full up, and the rest is history.
Fast forward to today. This time we are in a ~20mm lb per year deficit. Mine lives are depleting by the day. Instead of being full up, U.S. and Euro utilities are at levels they don't want to go any lower. Now that they've drained their inventories, we're on the cusp of a new contracting cycle. How much inventory is there in Japan? China? India? Not enough. The worrying part, is if exciting new projects don't come on line before Cigar like runs out of ore, which is scheduled for the end of the decade, then the market would go totally bonkers. The CEO of Kazataprom said himself the world needs 3 new Kazataprom's. If 40 million Californians want to all reload their car batteries at the same time given that there are already constant power outages, we need nuclear.
(2) Timing is everything.
After a decade, the world is finally ready. Let's review what's happened in 2021 so far:
- On Biden's first day in office, he rejoins the Paris accord.
- Then the American Jobs Plan promises incentives for clean energy, explicitly calling out the need for funding new and existing nuclear reactors.
- Then U.S. Secretary of Energy Jenifer Granhold says "we're not going to be able to achieve our climate goals if our nuclear power plants are shut down", while flat out saying she's open to subsidies for nuclear power plants.
- Then, China's 14th Five Year Plan lays out a plan to build HUGE nuclear energy infrastructure; calling for 40% Growth by 2025 {@S0GWe) & by 2030, 120 GWe, 2x current capacity. By 2040, it's closer to 200GWe ... by 2040, China will consume more than all the U308 from existing mines ... they are going to aggressively build their inventories this cycle as they build new reactors.
- Even the E.U., who remember has spent the better part of the last decade reversing nuclear progress, has flipped from bearish, to consistent with America and China .. which could spur France and Germany to rethink their nuclear retirement plans, or risk falling behind on climate goals.
(3) Sentiment has shifted. This is key.
Just ONE of the above catalysts in isolation under normal circumstances would be viewed as a game-changer positive catalyst for the space. But the point is, positive shoes are dropping daily. Take the Democrats, who historically have not been supportive of nuclear power, flipping to pro nuclear.
The wokest of the woke, from U2 guitarist The Edge {link), to Bill Gates {link), to A.O.C. {link) are now advocating for countries need to consider adopting next generation nuclear power to meet their climate change targets. Even Greta Thunberg {link), who keep in mind is against LITERALLY EVERYTHING {emphasis added), conceded nuclear can play a role in a greener future;
The stories we tell ourselves can have self-fulfilling consequences. The other day, the FT reported that Global investors pressure Asian utilities to cut emissions; This is critical. A group of investors with a combined $8.8 trillion of AUM, including the likes of JPMorgan & Fidelity, is ratcheting up pressure on Asian Utilities that operate large coal-fired operations, to clean up their environmental-act. According to Rebecca Mikula-Wright of the Asian Investor Group on Climate Change;
"Asian utilities are responsible for 23 per cent of the world's total carbon emissions. The transition of Asian utilities to net-zero emissions will be critical for the world to meet its Paris Agreement goals to limit global warming to 1.SC." Uranium has to play a role in that happening.
(4) When sentiment shifts, money flow will too. The show is starting, get your popcorn.
Like always, it's all based on$ flows. Money has been pouring into the ETF's, in aggregate north of $1bn. Here is the Global X Uranium ETF (URA US), 2011 to today: The uranium spot commodity price could breach last cycle's highs north of $150/lb -the market is very thin - this could literally get to $200/lb. What happens to the chart above if that happens? I don't need to tell you. We sit at $32/lb today. The contract market is still closer to $40/lb too. All that you need to read into that price, is it's still WAY below the incentive to price to reopen shuttered mine assets, let alone break new ground. Case in point is Cameco, who remains short production. This movie starts, with Utilities enter the market and start slowly squeezing prices higher. The bid behind that, will be Sprott (link).
Just over a month ago, Uranium Participation Corp. announced they would enter into a partnership with Sprott Asset Management to form the Sprott Physical Uranium Trust. A big board NYSE US listing, meaning a vehicle that is transparent and trades at NAV- marked daily. Which REAL players can actually buy. There are no issues with the NAV oscillating around; NYSE shows daily NAV versus monthly updates previously. As I understand it, in the past UPC would buy and hold physical uranium. Now they become a US listed vehicle with a physical redemption, similar to a GLD for gold, so in other words, instead of being pink sheets OTC, the Robinhood crowd can go out and buy this on the NYSE. Then Sprott takes that money and goes out and buys physical uranium.
The trust is expected to do a big offering, to buy up new pounds for the fund. So long to any loose inventory if there was any. This could be the inflection point moment, that sparks a long awaited Uranium price breakout. Right now, the spot market is extremely tight. If you tried to buy 1mm lbs as the WSJ article on Anchorage told us, you can't. Not quickly at least. So what happens when Sprott does it this month. And the month after that.
P.S. What about the money flows leaving uranium? Surely some folks must be selling given many names have more than doubled off March 2020 lows. As I will explain below, there simply aren't any sellers left.
(5) The uranium party hasn't even started.
It might be hard to believe, but the total market cap of all the listed Uranium companies is - $29 billion which is up from $20 billion.
$29 billion is about the market cap of Franco Nevada {FNV CN).
$29 billion is the market cap of Kroger {KR US).
$29 billion is the market cap of Best Buy {BBY US) ... BEST BUY folks!!! BEST BUY.
Same as the ENTIRE uranium sector. At the peak of the last cycle, it was closer to +$150 billion. A Sx from here. Not to mention capital markets today are a different animal versus 2011 pre-Fukushima, in a good way for our purposes. I would argue there is a very good chance the overall market cap of Uranium stocks breaches $150 billion, as investors price in the reality of Uranium entering a multi-year sustained supply deficit.
Further contributing to the problem, there's just not a lot of names. After your first 5 or 6 players, who do you buy as a large institutional player? Oh wait, the large institutional players aren't here yet either. But the answer is, there aren't a lot of options.
(6) The risk-reward setup is off-the-charts.
If you agree the upside in uranium equities could be fat multi-bagger's; What's the downside? There are two bear cases for uranium stocks. The first, is mines coming back online. And the second, to borrow from Nassim Taleb, is a black swan (extreme rarity, severe impact, and the widespread insistence it was obvious in hindsight) aka a tail-risk scenario.
Risk #1: The biggest risk to a bull-thesis I hear is the restart of the ~40% of producing uranium mines that are offline. This "risk" is really a misconception. The ~40% only comes back on at +$SO/lb U308. In other words, when the commodity goes up 50% from current spot ... is that really a risk? I think the reason this aspect isn't clear, is because most just don't know all the facts. So they confuse a lack of guidance, for uncertainty. And because markets hate uncertainty, more than they like certainty, it becomes this boogey-man risk it need not be. Because even with it, the market is still significantly undersupplied.
It works like this ... The two big miners to watch are Kazakhstan and Cameco. Logically, it's probably be Kazakhstan that strikes first, because Cameco has a higher breakeven price because of higher care & maintenance costs and more contracts based on fixed price terms. That said, it could be argued Cameco is more market savvy and very plugged in with utilities so we could actually see them striking first too. Let's call it a coin flip for arguments sake.
A McArthur River{Cameco) restart is 22Mln lbs/year+ Kazakhstan (which currently operates at 20% below its subsoil use agreements) is another 15Mln lbs/year of supply. This compares to the current market in a l0Mln lbs/year deficit. For both of these producers to come back, we would need to see sustainably above at least $40/lb for Cameco and more like $SO/lb for Kazakhstan. Each of these two will let the price run before restarting, but, they are competitors so it's a bit of a race to see which has the cojones to do it first.
In simple rough terms for illustrative purposes, Kazakh's produce cheap ISR at a cost of $35/lb and need +$45/lb to make money, whereas your garden variety North American producer has a rough avg. cost of $45/lb and need $55 to make money. The uranium price is ~$32/lb U3O8.
Based on this rudimentary comparison, the Kazakh's could quite profitably ramp up at $45/lb, but would be shooting themselves in the foot by flooding market/pushing prices lower .... as they have signaled they will not do. However, I can't see the Kazakh's letting prices get much higher than $55/lb without ramping up (at which point their NA peers start to make money).
So, what is the downside if/when Risk #1 happens? None. A restart means U308 is ~50-70% higher than it is today. If U308 is +50%, I'm willing to wager the equities will be up more. Not to mention we're at the precipice of a Uranium buying cycle. So U308 might just keep marching higher. No matter who restarts first the market will remain in a meaningful deficit for the next few years. The supply side remains structurally constrained.
Risk #2: The biggest pushback, especially from generalists, is a little more biblical; another black-swan- Fukushima type event. This is the definition of tail risk. For as long as 1 can remember, popular culture has conjured up images of the significant potential impacts of a nuclear accident.1 like many of you grew up watching a loveable but dangerous idiot, named Homer Simpson,. fall asleep at his post at Springfield's nuclear power plant. You grow up, and Homer gives way to HBO's 2019 dramatic mini-series Chernobyl... it's not hard to see why people are scared of this stuff.
Here are the facts.
Uranium is not only more reliable & less wasteful than alternatives, it's also actually safer. According to Barclay's research; "There hove been several high profile nuclear accidents., all of which were at earlier generation nuclear plants. No nuclear accidents for commercial power plants have roused more than four deaths, of which only one was directly caused by radiation." While the long-term impact from radioactive release from Fukushima will not be known for years, and even with the spectre of significant event risk from accidents, nuclear remains the safest generation technology based on deaths/year/Twh.
So, what is the downside of our Risk #2? Pricing tail risk is hard. What would it be like living through another "tail risk" event? Well, the sector just lived it for a decade. And is in the first inning of breaking out of long term digestion/consolidation. I'll price it at 40-50% downside moves, god forbid tail risk hits. Highly unlikely, as you can see above. [Industry perspectives are presented (here) and (here) and (here) and (here).]
So, tell me this ...
Does the uranium risk-reward set-up seem exceptionally asymmetrical? Yes or No
Are you underweight or market weight Uranium equities in your portfolio? Yes or No
If you answered Yes in each instance, I would argue it's time to drill deeper. I'm highly confident you will find the risk-reward from a long perspective is at the very least, a multi-bagger opportunity. Perhaps once in a career.
The commodity is becoming scarcer at the exact same time demand for nuclear energy is about to soar to new highs, as it is the only reliable carbon-free 24/7 clean energy source which can meet carbon emissions goals. Uranium prices must more than double soon to meet demand.
(7) In conclusion, lets talk China.
If America runs on Dunkin, China runs on coal. China and India are in flat out climate crisis's. Operational coal plants in China+ India= 1320 vs. US+ Germany = 32S in a climate. The only(realistic) way for China to dig themselves out of this hole, is to embrace nuclear. And aggressively.
Here's Barclay's; "Coal accounted for 57% of primary energy consumption in China in 2020, but needs to be limited to 25-30% of total energy and about 20% of electricity generation by 2050, according to BCG.
What does this mean for nuclear power growth in China? Conservatively assuming that over the next 30 years China sees a 3% GDP CAGR, a 20% improvement in energy efficiency, and no replacement needs for existing power sources, we estimate it will still need twice the installed capacity as it does now. In order for nuclear power generation capacity to reach 10% of the total power generation installed capacity then, it would require a more than eight-fold increase of the current nuclear power installed capacity, to 438 GW.
That would also require much faster nuclear growth rates than what is expected between 2020 and 2030, when nuclear power capacity is targeted to rise to l0 GW in 2025, and could potentially reach 100-120 GW in 2030 (based on 6-10 units approved per year in 2020-25)."
Now ... what people in the West don't understand is; (1) how bad the air is in China and (2) how quickly their government can get things done.
As most of you know, I used to travel to the Asian Pacific region ~4-6 times a year, for the last several years. I'll never forget having breakfast in a Hong Kong hotel, with a corporate issuer (who happened to be an EV metal producer) and a buyside client. My client talked about these strategic metals unlike anyone in the west I'd heard. He argued China's economic growth engine has always been its people, as he ominously pointed out the window at Hong Kong's mostly grey skyline. Cities in China are MUCH worse than HK. A quick trip across the border to Shenzen, a factory town, is a stark contrast to our blue sky's of Toronto or NYC or London.
My client argued if they didn't clean up their act-and fast-the economic consequences would be dire. Xi Jinping knows this. Hence his ambitious 14th S year plan mentioned earlier. When the Chinese Communist Party wants things done - they get done. When Xi says jump, constituents say how high. In Toronto, it's taken us over 5 years to build a street car on Eglinton Avenue. In China, they built the world's largest arch dam in just four years. Upon completion, the Baihetan hydropower project will be the world's largest second biggest power station after the Three Gorges Dam. 4 years. That is insane. Doubt the speed they ramp nuclear at your own peril.
How I'm Playing This Trade (in no particular order): NXE, FCU, EFR, U/Sprott Physical Trust, AZZ, ISO, UEC US, URE, PTU, EU, GLO, STND.
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