The recent sell-off in uranium equities has unnerved investors and generated doubts about the thesis. Based on my analysis of recent events however I feel the bearish price action has been more a function of positioning / technical factors vs. any fundamental changes.
What’s clear is that a number of retail traders / speculators with low conviction in the long-term thesis had been piling into the sector given the strong uptrend since December last year. You should always be wary when ‘momentum chasers’ start becoming involved in your favorite investments as they inevitably panic sell at the slightest hint of trouble.
The ‘trouble’ began on June 14 when CNN put out a story regarding a nuclear reactor located in Southern China.
To be fair, as a uranium investor this is last thing you want to see in the headlines. For more than a decade uranium investors have been scarred by the repercussions of the accident at Japan’s Fukushima reactors and any news that puts into doubt the safety aspects of nuclear energy rightly generates a ‘sell first, ask questions later’ mentality.
When I read this headline I instinctively sold out of 50% of my position as a risk management measure until I could understand the situation better. However it quickly became clear to me that this was not a significant incident and certainly not a threat to the long-term bull thesis. The International Atomic Energy Agency (“IAEA”) explained it best in their article three days later.
I would strongly encourage you to read the article in full and understand it for yourself. But the summary is that the CNN headline was very misleading. The reported ‘leak’ was simply an increase in radioactivity in the primary reactor at the facility (which sits inside a containment with several further barriers to prevent release into the environment) caused by a failure of fuel cladding, which is a known and not uncommon occurrence. The proportion of damaged fuel rods at the Taishan reactor was less than 0.01% of the total, much lower than the 0.25%threshold / margin of safety to account for uncontrollable factors. This what China’s National Nuclear Safety Administration had to say: “Due to the influence of uncontrollable factors such as fuel manufacturing, transportation, loading, etc., a small amount of fuel rod damage during the operation of nuclear power plants is unavoidable, which is a common phenomenon.”
Despite this relatively clear explanation uranium stocks have continued to sell-off, clearly demonstrating that a number of the investors / traders who have recently become involved in the sector have no interest in any fundamental analysis and are simply chasing price / momentum.
Now that we’ve gotten that out of the way – on to the more interesting stuff!
By far the most exciting development in the sector recently is the ‘financialization’ of uranium purchases. Two of the physical uranium trusts, Yellow Cake plc and Uranium Participation Corp. (UPC), have been joined by a number of pre-production companies in buying physical uranium from the spot market. It started in March of this year when Yellow Cake announced it had exercised its 2021 option to purchase 3.5mm pounds of U3O8 from Kazatomprom. To fund this purchase Yellow Cake went out to raise US$110mm in equity and ended up upsizing the deal to US$140mm given the strong demand / oversubscription. This was a very important signal to the community that investor sentiment had started to shift. It wasn’t just retail mom-pop investors anymore but institutional money coming in to bet on the revival of the sector in a big way.
This announcement triggered a number of other transactions from pre-production mining companies including Denison Mines, Boss Resources, Uranium Energy Corp. (UEC), Uranium Royalty Corp all purchasing pounds in the spot market. The buying of physical uranium by miners is quite unprecedented and reflects a high conviction bullish bet on future uranium prices. In addition to these purchases, Cameco and Kazatomprom have also been buying on the spot market to meet their contractual delivery agreements (due to mine closures / production curtailments). In total more than 21mm lbs of uranium have been taken off the spot market as a result of these purchases this year which is a significant percentage of the total demand estimated to be around ~180mm lbs.
On April 28th the market was rocked by another bombshell announcement: Uranium Participation Corp announced their decision to be acquired and managed by Sprott Asset Management. UPC would become the “Sprott Physical Uranium Trust” and join the family of Sprott physical commodity trusts like PSLV (Silver) and PHYS (Gold) that are extremely popular with commodity investors. The transaction was completed recently and the trust started trading under the ticker U.UN on July 19.
This is significant for a couple of reasons:
1/ Sprott is a marketing powerhouse for commodity ETFs (as evidenced by the size / AUM of their gold and silver ETFs)
2/ Sprott intends to obtain a U.S. listing for the trust which will materially broaden the investor base and
3/ the new trust will be able to raise capital through an At-The-Money (ATM) equity issuance structure which means capital inflows into the trust will lead to consistent / frequent purchases of physical uranium. In fact SPUT has already started buying on the spot market with 900K lbs purchase on August 20:
All these developments can significantly accelerate the balancing of the uranium market as they increase the financial demand for uranium (in addition to the step change in physical demand that’s about to occur over the next few years as I elaborated on in my first article). We could potentially see a positive feedback loop where buying from the Sprott uranium trust leads to an increase in spot price, which in turns leads to more inflows for the trust from momentum chasing hedge funds / investors, which then leads to even more buying.
The increases in spot price could also be the catalyst to wake up the utilities and encourage them to start re-contracting with the uranium miners to lock in prices for the next few years.
The combination of all the above could lead to a parabolic move in uranium prices similar to the 2005-07 period.
As another example of the increased institutional interest in the sector, the Wall Street Journal ran the following story in June:
To summarize, the world is currently in a uranium supply-deficit which is about to get a lot worse for a few reasons:
1/ A number of countries are being forced to re-think their nuclear strategy given the urgency to address climate change, and as a result are extending the planned retirement dates of currently operating nuclear reactors across the globe
2/ There are also currently 50+ reactors in development (mostly in China and India) that will lead to a step change in demand in the coming 5-10 years
3/ The recent financialization of the uranium sector will exert additional pressure on balances given the increased demand to hold uranium as a financial / speculative asset
4/ With spot prices still languishing in the $30s and the largest suppliers (Cameco and Kazatomprom) continuing to maintain production discipline, supply will remain inelastic in the short run
To me all of this means that we are on the cusp of a big move in uranium prices which will encourage utilities to finally start re-contracting with the miners to lock in supply over the next 18-24 months.
With miners having the pricing power in the current situation, these contracts will likely be transacted at much higher prices relative to today’s spot price to ensure 1/ miner profitability for current production and 2/ provide the appropriate economic incentive to develop new mines / production (which is a capital intensive, multi-year undertaking).
In the last article I estimated that spot price would need to more than double from here for all of this to work, which would be extremely bullish for the sector and uranium mining equities. I think the current dip is a buying opportunity.
The Pale Blue Dot 