Are people suddenly bearish on uranium?

At the moment we are seeing a lot of short term noise on Twitter about the spot market. I do not see it being too useful to comment too much on it on that platform. I do however want to start out this post by giving my two cents on the subject. In addition I will try to take a more long term view on the market.

This week I have seen some people worried about the prospects of uranium on Twitter. I have also had some friends asking me about what is happening in the market. I have done enough to prepare myself for the ups and downs, but that does not mean that everyone else has done the same.

After a couple of weeks of spot buying, with Yellow Cake and Denison Mines in the lead, about 10.5M lbs have been removed from the market. The split is as follows:

  • Yellow cake 3.94M lbs
  • Denison 2.50M lbs 
  • UEC 2.10M lbs
  • Boss 1.25M lbs
  • Peninsula 0.45M lbs (for delivery on contracts in 2022)
  • Encore 0.2M lbs

We need to mention that Denison needed 17 separate transactions from 12 separate counterparties to fulfill their 2.5 million order. (Some of it will be from production later this year) After these transactions were done, the activity in the spot market has gone down a lot. There are few buyers left. Now we are seeing some tiny drops of supply offered again without any buyers, resulting in that the spot price has done down under $30/lb again. We have been waiting for Uranium Participation Corp to do a raise and buy pounds. Uranium Participation Corp is a physical holder of uranium and has been trading at a premium to spot for weeks. I believe they would have seen a lot of interest in a raise to get pounds away from the spot market the last couple of weeks. They have however put on the brakes and said that they need a premium to NAV of at least 20% to raise money to buy pounds. This clarification has put a lid on the expectations for Uranium Participations involvement at the moment.

People who are taking a bearish view on these developments are commenting that they were able to get a hold of over 10M lbs, almost everything sourced from the spot market, easily.   

I try not to put too much stock in any of the views. In a market with 180M lbs of demand per year from utilities, we have now removed supply which amounts to 5,5 % of this demand in 2021. I look at it like Denison and the rest of the companies have carried away 105 buckets of water (10.5M lbs supply), and most of the buyers have now left the market. We now have two to five more buckets back for sale (0.2 – 0.5M lbs for sale) and no one is buying. It is not enough to cover the needs of Cameco, Kazatomprom or utilities by any means, but enough for entertaining the market with more questions.

Long term view on the market

With all this focus on what is right in front of us, I have tried to look more long term and see what is in front of us the next couple of years. We have seen prices increase further up the nuclear fuel cycle. This will reach the U308 price in the end. I am reaching a conclusion of that slow rise in the spot and term price to an equilibrium of $60-70/lbs seems less and less likely. If contracting had started in 2019, instead of being delayed by Section 232, then the Russian Suspension Agreement and then Covid-19, I think we would have had this as a reasonable result. What I now expect with higher and higher probability is that we will have a game of musical chairs where not every participant will get a seat.

Contracting among utilities and miners has been a game of chicken. After Fukushima in 2011 the power was at the utility side, but gradually this power balance has changed. With inventory from utilities and miners, the advantage has turned more and more in favor of miners. As Trader Ferg has said, utilities are like racing cars that have to go to refuel to continue the race. No one wants to be the first car that has to buy fuel at a price over $50/lbs. By leaving it this late, there will not be enough pounds available for everyone, which in turn will lead to an overshoot in price.

Is Paladin overpriced?

Yesterday I read a post by Mikko Leivo that found companies like Paladin, Denison and Goviex overvalued at today’s spot price, and will continue to be overpriced until we get a price above $60-70. I recommend everyone to read the post and have linked it here. I agree with Mikko’s view, and think there are some speculative tendencies in the market. The market is also forward looking and expects a higher price in the future. Some of the investors think that long term contracts price will shoot over $70 with the reasons given above. 

I will take some extra time on Paladin because it is one of the companies mentioned in the post, and Paladin is also one of the most popular companies in the community. Some of the best heads in the business have also taken big positions in the company with Sachem Cove Partners and Segra Capital Management among others. I do not think that these two Specialist funds will be happy with just a 100% from today’s levels. I think they are expecting contracts to be a lot higher than $50-60/lbs for them to be happy.

I have done some of my investments outside the public stock market. Investing in the private market you expect more than the average return for the increased risk from illiquidity. Management in the uranium companies have a similar set up where they can’t get in or out of their positions as easily as retail. A lot of the management teams in uranium have been in the sector for decades, and have made uranium their lives work. After a 10 year bear market they are not just going to accept the first and best offers that come their way. (I would say that investors that have been through a restructuring like the one we saw in Paladin in 2017/2017 also would demand higher than just 100% returns. The restructuring saw 98% of Paladin’s issued shares transferred to creditors with existing shareholders retaining 2%). I have shown the graph for Paladins meteoric rise in an earlier post, but the graph is just as impressive on the way down. People have lost a lot of money in Paladin, and other uranium companies. If they are still investors in the sector, they want management to maximize their returns. You will not see that with $50-60 contracts. You could say that asking for more than this is unreasonable, but a lot of miners would have accepted this selling price in 2016/2017. At the time utilities did not want to pay this price and would rather postpone long term contracting. Utilities outplayed their hand and now they have to accept higher prices. Miners that had to dilute and restructure their companies will not be as happy with $50-60 contracts anymore.

A surprising bear case in Global Atomic

Global Atomic has long been one of my absolute favorites in the sector. The company is very popular with a low all in sustaining cost for the asset and a short time to production. This is not necessarily a good thing for investors if they contract at $50 dollar for a big part of their asset. If they contract out too much at $50/lbs they put a cap on the upside. The risk I see here is not a company who has had 10 horrible years, but companies that have had a steady rise the last couple of years.

You can defend contracting early with that the cash flow can be used to buy up competitors, but I believe the competitors will become more expensive as the time goes by and the price of uranium goes up. You will then have sold most of your assets at $50 dollars and competitors will be able to contract out the rest of the demand at higher prices. I do not find the current conditions, with demand higher than supply, to favor first movers. If we were expecting the market to be covered by supply the case would be different, but at the current standing I would call it a first mover disadvantage.

I do not think Global Atomic will put a cap on their upside potential, but the probability is higher with a low cost supplier that can get into production quickly. Another thing that I will hold against Global Atomic is that it has had a very strong run already. Global Atomic is 400% from when I bought into the company a couple of years ago, and many have gotten in a lot earlier than me. A lot of potential gains have already been taken out of the company. Rick Rule says that a company that has gone 2x, all else being equal, is half as attractive as it used to be. I am still holding my shares in the company, and I think the market can get more crazy than it did in 2007. However, the best time to buy is always yesterday when the company has had a good run.

Second mover advantage – Bannerman

We have heard a lot about first mover advantage, but very often there is an advantage to going after the first ones after the waters have been tested. Bannerman is a company I would say has a second mover advantage. They have a higher cost profile and have to enter into negotiations later than the lower cost producers. They will enter negotiations in a rising price-environment. The more time that goes by without any long term contracts, I think this is becoming a bigger and bigger advantage for the high cost producers.

In 2020 Bannerman came out with their Etango-8 study which made the company more investable. Before this the company had relied on a study from 2015. In the 2015 study they had an almost $800 million upfront CAPEX investment with a company valuation under $100 million dollars. It was very hard to see being made a reality for investors and had been a damper on interest in the company. Then, in August 2020 the Etango-8 study came out. It had only $250 million in initial CAPEX investment. This lower capital requirement was what made me pull the trigger and invest in the company. (Now, in a rising share price environment, I hope with patience, Bannerman will be able to go back to more from the original plan).

With the original 2015 plan they are worthless at $55 price of uranium, worth US$86 million at price $65 and US$419 million at price $75. ($65 and $75 gives a 4,9X difference in value of the project). Comparing this to the US OTC listing value of $0.1138 (from Friday 16. April 2021) and outstanding shares of 1.19 billion, the difference between US$86 million and US$419 million amounts to $0.072 and to $0,352 per share. If you try to make a similar calculation between prices with other companies you will not see this dramatic change in value. When Brandon Munro talks about Bannerman as an out of the money call option on the uranium market, he is not joking. 

I believe that the longer we wait, the quicker and higher the price will shoot through the $50-60 dollar area. When looking at numbers like this I just wish that I had invested more in Bannerman. (If you do not believe in that the price will overshoot, you will off course not invest in this company. You should stick to Kazatomprom, Cameco, CGN and some near term producers like Global Atomic).

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