Down for the count

What I heard from the Cameco earnings call today was as positive we could hope for. However uranium, together with most other commodities, went down hard today. There can be many reasons for this, but one thing is for sure. Volatility is the rule, not the exception in commodities.

SPUT taking a real beating

It is important to remember one thing: the stock market moves however it wants. What you think it will (or want it to) do has no effect on this. (At least short term). We could have had news about something like «Silicon Valley Company close to breakthrough on micro reactors. Company expect 25% of all homes having their own (100% meltdown secure rector) by the end of the decade» and the market still could have gone down afterwards. The market is like the weather: hard to predict in the short term, but we can be more confident that it will be cold during winter, and warm during summer.

Spot has traded down quickly, helped by the quick and harsh sell off in the Sprott Physical Uranium Trust (SPUT) the last couple of days. Some participants in the market have spot-priced deliveries that are dependent on the month end price of uranium. If they are able to push this price down towards the end of the month they can save millions in lower costs. Another hypothesis can be that SPUT might have been fuelled by «too the moon» opportunists. (Not meant in a negative way, just traders making use of momentum. The market has many different playes that make up the total). They saw that the vehicle got off to a great start moving spot from $30 to $50 in a short amount of time. In the beginning it looked like SPUT came in hard like a cavalry charge. The ask price they got increased very quickly until they hit $50, and it looked like they were going to blow right past it. 

After that we had a correction down and when they resumed it seemed like the strategy changed a bit. (If this is the reality or not I do not know). Instead of buying everything in sight SPUT were looking at accumulating in volume at reasonable prices, instead of bidding up the price. This is great for the market long term, but there might have been received less enthusiastically by momentum players. They entered the trade with a goal of a move of over 100-200% in a short period of time. When the momentum disappeared they might have sold down, and gone to greener pastures in cryptos and tech companies that are flying high at the moment.

This might reduce the possibility of a shorter blow off top, and a compressed timeline. We want this sector to grow and contribute to lower emissions. A more steady rise over a longer timeframe is more preferable than a market that goes straight up and down again. (Something that can scare off more conservative investors, banks and other debt investors). The the longer the price continues stay under $50 with this volatility, the longer a developer/past producer will postpone bringing new supply online and get financing. The higher the price will have to go to make sure everyone gets covered in the future.

I do not run out and say buying opportunity, or that the stocks are cheap now. However, the action we see today will continue as we go forward. Either you learn to live with it, or you have to look for another strategy or sector entirely. The best advice for you this weekend is to get some quality time outside, or read a book. I am still as optimistic as ever for the market long term.

3 thoughts on “Down for the count

  1. Nice article as always, keep them coming. Just one thought: you say “ the longer the price continues stay under $50 with this volatility, the longer a developer/past producer will postpone bringing new supply online and get financing”, yes but as time goes by new developers will become producers: boss nexgen Denison, bannerman What will happen in 3-4 years when cameco restarts, KAP increases production and lots of new mines get into production? Are we sure time is on our side? Besides, mines postponed means just that postponed and ready to produce when the time is right. bullish uranium but I like to listen to the bearish thesis too. Too many U super mega bulls on twitter and very few bears. Just like u I follow a guy “savvy investor…” and he usually makes good reasoned statements.

    1. Thanks for reading

      If we have developers signing contracts under $50 dollars now to cover the market now, I will agree it is not very positive for the sector. (Kazatomprom is almost the only company that is investable at that price). For the most part $50 is not what investors have placed money with the companies. The developers you mention (Boss, Nexgen, Denison and Bannerman) all have challenges with getting into production. For the two Canadian it is permitting time that takes years, and for Bannerman it is costs. Bannerman should not sign a single contract under $50 based on their high costs project. The mine Honeymoon mine Boss has taken over was in production less than two years and closed down because of “continuing difficulties in the production process and issues in attaining design capacity, combined with high mine operation costs.” In addition we have cost inflation that make all the different feasibility study numbers outdated. Getting hold of workers that with experience in the sector is also a big challenge.

      On twitter you will find an echo chamber for uranium, and most of us should maybe spend less time there. (Me included). Outside Twitter I talk to people people with differing views, and they ask questions about why I invest in the sector and give me objections. I can see several bearish scenarios that are more or less likely. I am therefore not going to sit with “diamond hands”until spot $200 as some of the mega bulls are calling for. A 2008 situation will for example most likely bring down all equities, no matter how fantastic prospects are. I do also not want to mention a Japan 2011 situation, but a chance of that is always possible. The biggest worry is maybe if there is something I, and others, have overlooked that invalidates the thesis.

      I am aggressive as long as we are under the marginal cost producer, but will be more cautious the higher we get.

  2. Really like your articles, thanks. Another possible bear case down the road…another Megatons for Megawatts program announcement where enriched uranium from the U.S. or elsewhere is directed towards energy. I’m not sure how many lbs. were generated during the last program involving Russia. A new program cannot happen overnight but even the announced intent could put a damper on the market. I think there are very few companies (one? LEU) that are able to take on this project. In the shorter term (1-2 years) there is still the bull case with deficits projected regardless of this possibility.

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