It seems to be all about the spot price

In this post I will bring up a couple of subjects that seem to be relevant at the moment. The main subject will be about the uranium spot price, and some of the concerns I see people in the uranium space have.

During the last couple of weeks I have seen more participants, some new and some old, focus on the uranium spot price. Many of the people I follow are selling down 10 % or 1/3 of their position because there is a lack of upward movement. The veterans do not necessarily sell down because they believe the spot price matters by itself. Many say they sell down because the generalists in the market believe it matters. When the generalists get tired of no action, many will sell and drag the market down with them. I believe that this is a valid reasoning because many come into uranium with an expectation of a GME or AMC situation. Veterans know uranium is mostly a quiet market until it’s not, with little warning before the big jumps in price. With the more veteran uranium investors selling down parts of their portfolio they are also contributing to the sentiment in the market. It almost becomes a self fulfilling prophecy.

I will repeat this every time I comment on other people’s tactics: people buy and sell for different reasons. I am not doing anything that is better than them as long as they are following their strategy. From what I see the strategy and allocation differ a lot among the uranium investors. Some are traders, some hold a big basket of companies, some own a few, some have invested a small part in uranium, some are all in. The only thing I hope is that everyone has come up with the best strategy for themselves. I know for myself, that at least in the beginning of this bull market, I will be applying the “Odysseus and the Sirens” strategy. I will tie myself to the mast and not sell out of fear or the pursuit of more tempting short term trades. 30 – 50 % drawdowns are expected on the way. Some might call the tactic “putting your head in the sand”. We will know in a couple of years if it was foolish.

The fact that spot price has not gone up is used as evidence by some that there is more than enough supply out there. Mike Alkin from Sachem Cove Partners says that this is mainly pounds traded back and forth without delivery, and it is nothing to look at. “Spot price moved a nickel today, who gives a sh#t.” On the other side we have Twitter accounts that say that nuclear plants topped off their fuel needs in 2020. Again, topped off inventories for how long? One year forward, two? It does not matter. Short term I see the spot price as the main concern for most people. This is very understandable when there is not much else to look at. Short term is not the problem. It is the period after 2025 that matters.

I do however believe that we should always check what we can be wrong about and if there are flaws in our thesis. I have come to the conclusion that maybe the biggest risk now is our faith in people like Mike Alkin as an “Uranium Savior”. Many people in the space are disciples of him similar as we have seen with Elon Musk and Tesla. Mike Alkin says that the work he has done in uranium is done with information available for everyone. However, if this is not a part of your full time job it is not very likely you will model out all the demand and possible supply by yourself. We have taken their word for it based on Sachem Cove Partners have staked their reputation on being right about this. They have gone out on a limb when few others have gone and spoken up against the recency bias in the sector. Others have followed after them. When I listen to other people, and myself talking,  I see we are almost parroting a lot of their talking points. If there is a massive hidden stockpile suddenly available, our investment does not look as attractive anymore. What makes me think this is very unlikely is I see similar communication from producers like Cameco, and Kazatomprom. We also see hints further up the fuel cycle of higher prices there on SWU and UF6.

Another valid concern I hear is that Nexgen will contract out their whole mine for $50 dollar and kill supply needs the next couple of years. (The same argument can be used about Kazatomprom). Answer number one is they do not have enough supply for the gap in US, European and Chinese markets the next couple of years. Answer number two, I believe they are rational actors. If they contract their whole mine production out for $50 dollars per pound they are not acting in their own shareholders best interest. If the shareholders of the company see that management starting to contract out the whole mine at this level they would have a riot. A mine gets depleted. If you sell all of it out at low prices, while the higher cost ones contract for higher prices, I would question your sanity.

Art Hyde from Segra Capital Management (@JekyllCapital on Twitter) has a great thread on Nexgen from January 22. Here he goes over a possible timeline for when they can get into production. You can find the thread here. Fun fact: Art Hyde torpedoed my best performing company to date with his comparison to Nexgen, Denison Mines and Global Atomic (shares I also have in my portfolio). I followed him right after and have a notification on every time he makes a tweet. To go against Art Hyde would be like trying to beat a NBA professional as a part time player. We are not even in the same league. However, I do not expect the market to be rational at all the time when it comes to pricing. 

Brandon Munro from Bannerman Resources is one of my favourite experts on the uranium market. He just had an interview where he explained the number of virtuous cycles that happen as a market, particularly uranium, starts to pick up:

«The first virtuous cycle is that when a price starts to rise utilities and other market players hold tighter onto the inventory that they’ve got. When a market is flat for some period of time as we’ve seen with uranium, you see for example the finance department says to the fuel buyer you know you’ve maintained two and a half years of inventory for the last five years that’s just sitting on the balance sheet doing nothing. We could have sold two years of that (or one year of that) a few years ago and used that money, and you could have bought it back cheaper because the price has been going down. How do we justify carrying this much capital in the form of inventory.»

This is the «Just in Time’» attitude that has been used by many sectors the last couple of years. This can at times leave you very exposed for supply shocks. We all saw what happened with toilet paper in March 2020. Uranium is just as important to keep the power in several places in the world. Texas being one of them.

«Now what we are seeing is increasing prices, and increased understanding that prices need to rise further. Not only will they hold on to the inventory and resist any attempts to optimize balance sheets. The view will become that we’d better top up and make sure that as this cycle kicks off, we are perhaps on the higher side of historical inventory, rather than being on the lower side.»

To end this post I do not sit with any great answers for people. If we are able to get a raise from Uranium Participation Corp the next couple of weeks to buy 3 to 4 million pounds of uranium we might find out how deep the spot market is. If they can fill their order without any problems we might have some more waiting ahead of us and a sell off in equities. If they can’t, this might act as a trigger for the spot price moving upwards.