This week we have seen SPUT is continuing to drain the spot market. Kazatomprom is in talks to supply both SPUT outside the spot market, and Chinese stockpiles. Today I will have a shorter update, and my focus will mainly be on the action in the market on Friday. I also share some of my thoughts for new investments going forward.
Friday was a very interesting day. I hope that everyone that has entered into the uranium sector has been aware that these daily moves are both possible and normal. Volatility is the name of the game, and it cuts both ways. There can be several reasons why the companies, on average, lost 10% on Friday:
- The situation in China with Evergrande Group and their creditworthiness we are seeing going down. This is scaring the general market who is afraid of contagion. A lot of people remember the housing market in the US was the first domino to fall in the 2007-2008 financial crisis. If not a full blown crisis, people might just be afraid of a correction. That however usually means a run to the dollar. With the uranium sector having a high beta, the moves down in the general market is amplified among the uranium companies.
- We can also have traders who look at $50 as a resistance level that could give a pullback and have traded this level. The market is made up of several different players who play a different game than you and me.
- Friday was also the date for option expiry for a lot of the companies. Before Friday a lot of these options were in the money, but with a 10% correction a lot of these expired worthless. I have not seen any numbers to see how big of an impact this correction had, but I would not find it surprising to see these kinds of moves.
- Some investors in the uranium sector can have $50 dollars as their first sell target for their first tranche of selling. If enough big players sold down a portion of their holdings, this could affect the market. (I think the marginal cost of producers is more around $60-70, and is where a functioning market could find its equilibrium).
- We’ve had several tweets shared about utilities that have three years worth of uranium. This can make the utilities wait longer for contracts than we think, and ride this price spike out. I do not think that three years sounds that long. We have the ramp up times for existing (and new) mines that can take years, and the time for the fuel cycle is not that quick too. John Borshoff of Deep Yellow, says that there are many teams that lack the skills to start up and run a uranium mine. He thinks the ramp up speed is way too optimistic for most of the aspiring producers in the sector.
- We have the existing producers (Kazatomprom and Cameco) who do not want a spike in price. This could lead to overproduction, followed by a sharp decline in price, with the price settling down in the 20-30s again. I believe we can have a spike and a drop, but going back to the 20s again would mean all the utilities have topped up inventories again as they had before Fukushima. They had been contracting over 100% of their yearly consumption for years by that time. I do not think that Kazatomprom and Cameco will be able to cap the price at around $60 now. In 2019, before the supply disruptions by Covid-19, and before SPUT was launched in 2021, I think they could have been successful. Now that the financial players on Wall Street are smelling blood, it’s a whole other game. Wall Street now has a vehicle where they can move the spot market.
When I take the numbers from UxC (that Kazatomprom has been using) for utility term volume (over a simplified assumption of 180 million pounds consumption/demand per year), I get a graph very close to the one Sachem Cove Partners have been using in their presentations. The years with 40% contracting led to several years with over 100% contracting. Several years of contracting at this higher level had to pass before the price could drop from oversupply of the market.
Barring a bigger correction or financial crisis, I do not see much stopping the Sprott Physical Uranium Trust from continuing to push the uranium spot price past $60 the next couple of weeks. The uranium equities can however correct 50% at any time, and still be in a bull market. This volatility is something you have to live with if you want to hold them.
I have to admit that I am looking a lot at other commodities than uranium at the moment. My allocation, and the appreciation, of the sector has made my uranium holdings very large. (The picture was totally different during the Summer of 2020. My uranium holdings were a fraction of what they are now, and their performance made me pinch my nose when I bought more). I do not have that feeling anymore and I am looking to precious metals that have had a horrible year. Copper and tin are also sectors I want to get a better exposure.
Commodity companies are not buy and hold investments, and the different sectors will have different peaks. I know some think they can surf one wave perfectly and then hit the next one. I doubt that I will be able to do that. I therefore want to average into some other commodities going forward. I have to preface this with the fact that I have tried to do this before, and I have most of the time ended up just increasing my positions in uranium.