Going over the thesis: the tin market

I have dipped my toe into the tin market as an investor, but I have not written that much about it yet. Information about the sector is not as readily available as some of the other commodities. I do not know much of metallurgy, and even had to google what alluvial mining is. I am a generalist investor, and this post is aimed towards other generalists.

I first got a sniff of the tin market sometime after New Years Eve 2020/2021, when my twitter feed got filled with people using the #tinbaron hashtag. Later in March I got to listen to the excellent episode with Trevor Hall’s Mining Stock Daily: A Very Tin Special with guests Mark Thompson and Emil Bagge that made me more interested in the sector. After that I have looked for more readily available information on the sector, and placed some funds into the sector. Much of what I write today however, will have been covered in that interview.

Why is there an investment opportunity in tin?

I will not go over the full history of tin, but tin has had a very important strategic purpose for decades after WW2. The military for example needed copper-tin alloys to make bronze that is used in cannons in addition to a lot of other essential equipment. (If you have any interest in the two world wars, you will know how essential getting hold of the right materials to supply the war effort has been). During the Cold War the US amassed a big strategic stockpile of tin to squeeze the Soviet economy. (The Soviet Union did not have a big supply of tin at the time). This however failed when the Soviet Union found their own deposits in Russia some years later.

Like many other commodities, tin has turned out to be a very cyclical one. There has not really been a global exploration plan for tin since 1985, the year of the collapse of The International Tin Council, and the tin price crash. By 1991 the price of tin had fallen by about 90%. The tin market was in the following years kept amply supplied throughout the 1990’s and early 2000’s due to a massive ramp up in supply from Indonesia, China and Peru. You had a big marked surplus that was keeping prices depressed.

This 20 year bear market had a profound effect on tin exploration. Most mining companies exited the tin sector, and today we see there is a severe shortage of projects. In addition to this, the US had their strategic tin stockpile from the Cold War for years. This stockpile was not worked off before 2005. After the 2005 bottom at a price of about $3,875, the price has been volatile with spikes up to over $30,000 and followed by hard drops.

With 35 years of below trend exploration on the hardrock side, we are facing shortages in the future. What has postponed this development have been massive alluvial discoveries in Myanmar in 2015 that have come into production, and continued mining in Indonesia of their marine assets. (Alluvial mining is the mining of stream bed deposits (also known as alluvial deposits) for minerals. These alluvial deposits are formed when minerals are eroded from their source, and then transported by water to a new locale). Myanmar’s best deposits have now been mined and production is decreasing. When these alluvial deposits run out, you have to replace them with new discoveries, and the future of tin supply will be from hard rock mining. We need a price over $30,000 for several years to tempt bank financing for new production.

What is tin used for?

Most people have heard of tin cans, but tin’s main use area is in solder. Solder is the glue that makes items join together, typically in circuit boards. You do this by melting the solder to create a permanent bond between the components. Tin is an excellent metal for solder because it melts at temperatures considerably below other metals melting points. 

Electronics is 50% of tin demand. Tin demand has gone up a lot during the lock-downs because people are buying more electronics. In almost all cases, you cannot replace tin with another metal or material. There is a worldwide dearth for chips in cars and we see shortages in several other sectors. Tin is widely used in many products, but only as a very small component. If the price of tin goes up by a lot it will not have a big effect on overall price because it is used in such low quantities. We therefore do not see very price elastic demand.

Future demand

The supply and demand picture going forward looks similar to what we expect in a lot of other commodities. Low demand has led to low prices that have not incentivized new production. This has led to a gap between demand and production with tin inventories scraping the bottom of the barrel.

In addition to primary uses (in solder, tin plating, chemicals, and copper alloys), tin is also becoming important for the “green” economy. With the electrification planned over the next decade tin is likely to be found in lithium-ion and other batteries, solar PV, thermoelectric materials among others. In solar panels alone, we can expect between 2-3x increased demand for tin from what we have today.

Sentiment

If we go by investment banks’ interests in different commodities, I will say that tin is still a very contrarian play. What is the reason for this? Because tin is nowhere to be found on their radar, even with the supply situation in the sector. The tin sector is also too small to be investable for most funds and is therefore ignored by most.

However, looking at the performance of the Tin companies last year we see a great move already. One would expect this when the price of tin has more than doubled. I sometimes wish the #tinbarons on Twitter had been a bit louder earlier. With the run up the companies have seen already in the industry, the smartest contrarians have already entered their positions. Looking at the charts of the companies it can make you feel like you have missed the boat. Many investors in the space have seen 5X returns already.

In the last two years the tin price has gone from a low $14,000 to over $34,000 in July 2021. We are currently at an all time high. However, if we are going to get meaningful production online, the price has to stay above this level of $30,000 for years to incentivize the existing known projects. They will not be able to get bank financing without the price staying above this level.

The effects from the lock downs will probably go away, but the demand from the electrification and green economy will most likely not.

How do one participate in this market?

If you have no experience in the market, do not know about metallurgy, or if the team is able to take the project into production, you should keep things simple. This means investing in one of the two producing companies: Alphamin Resources and Metals X. That is basically what I have done. 

Alphamin Resources is the owner and operator of the Bisie tin mine located in the Democratic Republic of Congo (DRC). At a tin grade of roughly 4.5%, Alphamin has the world’s highest-grade tin resource, about four times higher than most other operating tin mines. In addition they belong to the lowest quartile cost producer. The biggest concern most investors have to the company is the jurisdiction. If you think the company specific pros outweigh jurisdictional cons, the company is a buy. Alphamin has a drill program to increase their resource,and they are also increasing their production from 11,00 tonnes to 13,000 tonnes. This is great timing in a rising price environment.

Metals X Limited is the other alternative who has a producing asset. They are the largest tin producer in Australia, and they hold 50% stake in the Renison Mine in Tasmania. They are working on increasing the output from the mine to 10,000 tpa from 8,500 tpa by full year 2025. With jurisdiction it is not as challenging, and at a higher tin price they are a good option for people who want exposure to the sector.

The producer with the lower margins will often have the more transformational change in profitability with a higher commodity price. Alphamin, to their advantage, has a bigger potential upside in their exploration program. A 50/50 allocation to both companies might therefore not be too bad.

There are other companies like Afritin Mining, Elementos Limited, Stellar Resources and Cornish Metals. Many of these probably have higher potential than the two producing ones, but you have to have some more in depth knowledge to assess them.

If you want to look for more information on the sector you should start by looking at Twitter and Mark Thompson‘s page in addition to search for the #tin hashtag. You can also use Google to search for articles, and there is also a handful of podcasts you can listen to. Lastly, the webpages of the different tin companies usually have information on the tin sector.

Our first test of conviction

cold glacier snow landscape

I see that it is close to one month since my last post. The reason for the long wait is that I was in the most hectic part of the year at my job. In addition, I also got married with all the preparations needed for making it a special day. With all of this behind me I have some time to write another post.

Recent developments

The uranium market had already started being choppy by mid June. By the time of my last post, we already had the news of 14. June about the Taishan nuclear plant in Southern China from the CNN article: «US assessing reported leak at Chinese nuclear power facility». This started the correction in a market that was looking for a reason to go down. The people who have not built conviction in the thesis have struggled. From watching Twitter one will also have noticed how short term focused a lot of people have become. We have corrected down in some of the companies. However, we have to remember we had 50% pullbacks several times in the last bull market between 2000-2007.

We also had a forest fire in Saskatchewan, Canada, that led to the evacuation of 230 workers at the Cigar Lake mine on 1. July. This led to a temporary suspension of production, but luckily the workers could get back to work a couple of days later without any damage on the installation. I for one am happy to see that the measures Cameco had against forest fires worked as intended. I am sure when they planned the mine, precautions against forest fires were one of the priorities.

On 6 July Kazatomprom announced that they have extended their 20% production cut until the end of 2023. They say the reason for this is that the uranium market is still recovering from a period of oversupply. I for one believe the 20 % production cut will be more than compensated by a higher price in the market by that time. They also want higher uranium prices for putting future production online and the new CAPEX investments they will need to make.

Keeping calm

Have you passed your baseline test?

Keeping your emotions in check is a must to weather the ups and downs you experience in a commodities bull market.

In 2019 and 2020 we had two big drawdowns. One in July 2019 and the one in March 2020. I used the two of these as practice to prepare mentally. The correction we have been going through the last month has been the first real correction since the bull market started. (Even the notion that we are in a bull market is still contested by some. The spot is not above $35 yet, and one can say that we still do not have confirmation. I think that by waiting for confirmation, you risk the market getting away from you. If you only place chips on the table when you know the outcome in advance, you will have to settle for a lower return).

Because I was not buying much during this period, I stopped checking the value of my portfolio. (I still kept up with all the news and developments). The only time I logged into my account was to add to some of my positions. Other than that I made an extra effort to get out in the sun, and focus on other things than the markets. Living in Norway, we risk the Summer only lasting with a couple of days of sun, and the rest of them being gray and rainy. Spending time outside has therefore been a priority. Other priorities have been time with family and friends, or reading a good book. Thinking back on the two other corrections I have been through already has also given me some perspective. It could be a lot worse, and nothing says it cant go further down than what we are now. 

One part of my tactic that did not work as planned was focusing on my other commodities positions. Uranium is generally not that correlated with the other commodities. The last month however, my other commodities positions also corrected down at the same time as uranium. With exception for my oil position, my gold, silver, copper and tin positions went down in June. (Statements by the FED and China had some of the explanation for this). The safe harbors for speculators and investors in the later part of June were big tech and coal. I do not believe that big tech will be a winner going forward, but coal is a commodity we will not be able to cut our dependency off for a while.

I have also tried to find some new possibilities for a real bear case. I have written about some of them already here, but generally most people in the sector are very optimistic. Outside a general stock market crash, or a new nuclear accident there are few real threats. One bear case I have been toying with is that we could see government intervention in the market if prices get too high. (Similar to what we had with the Hunt Brothers in the silver market in 1980. The Hunt Brothers were forced to sell out of their position). This might seem a bit far-fetched, but we have thought of the most plausible and obvious bear scenarios already.

Going forward

Over the coming months I will go over my portfolio with a critical eye. I am still happy with having mainly developers or near term producers in the portfolio, but I might cut a position or two. A more focused portfolio with less names with higher conviction is what I aim for. The last two and a half years have been an exciting ride and I look forward to the road going forward.

“Don’t count your chickens before they’re hatched” applies to all of us, even though I like the Norwegian version better: “Do not sell the skin (of the bear) until the bear has been shot”. Load your weapon and happy hunting!

brown bear in body of water during daytime
Photo by Pixabay on Pexels.com

Choppy Waters in Uranium

crashing waves

I think I have less value to add when things are going great. Lately things have been busy and I have focused more on other things. Also, when things are doing great, I do not see a need for me to be a cheerleader for uranium. After this week, I think it is timely for me to write another post.

When things are not great, I find it more helpful to focus on strategy and conviction rather than the everyday movement in the underlying companies. That is why I myself have used articles like “Would You Have Made a Fortune in Uranium?” to prepare already.

The Ghost of Fukushima

This week we have seen an article with the sensational title «US assessing reported leak at Chinese nuclear power facility» from CNN on 14. June. This was shared around a lot on Twitter, and for some uranium investors the ghost of Fukushima made them sell down some of their positions. (This article was not in a vacuum. Other commodities also sold down with other news. I am just following uranium the closest. Afterwards this article has been debunked as a non-story). I think Nick Jones @Grainjones made a great call on 13. June. He said that the sentiment in the uranium sector was very positive. With everything so positive, we were almost looking for a reason for a correction. 

I have not checked the value of my portfolio once this week. I have been very busy at work, and a glance at my Twitter news feed has told me all I need to know. I do not need to check my portfolio going to red for more confirmation. I know it is down by a lot. Bigger drawdowns are scenarios I have been prepared for. The companies in my portfolio are not for sale for a long time, so why would I want to know what people are offering for them at the moment? If I am not seeing my positions being a good value in a year’s time, I would look for new prospects. These are not “set it and forget it” positions (something I do not believe in anyway), but the exit triggers are not showing themselves on the horizon yet.

I still believe in a coming bull market for commodities and uranium. The uranium bull market does not have to go as far, or as high, as the last one. I think my heavy weighting to the sector will see me well rewarded by the time we hit $60. 

If this is a short correction, or a longer consolidation period like we have seen the last year in gold, remains to be seen. We also have “Murphy’s law” that says: “Anything that can possibly go wrong, does.” Even though I like the Interstellar explanation better: “Murphy’s law doesn’t mean that something bad will happen. It means that whatever can happen, will happen.” 

This is very close to something one of my track coaches always told his athletes. “Anything can happen, anytime.” (Maybe it does not work as well as a translation). He told us this so that we would not be afraid to try to break boundaries. There are still possibilities for bad news that kills our investment thesis entirely. There are also possibilities for more positive news than we dare to imagine. This can make the upside bigger than many of us are expecting. I still have my chips at the table. I am not yelling “buying opportunity”, but I am not close to selling.

Conclusion

For my part I do not see us close to any target price for uranium. Some of the mines on care and maintenance will come back online around $45. However, we will need more than the care and maintenance mines back online to supply the market. I am also excited to see what Sprott (and YCA) will be able to do with the spot price when they start their buying later this summer.

We see a lot of positive news flow for the sector that implies higher demand for uranium in the future. Almost every week we see announcements for reactor restarts or for new plants proposed. Black Swan events are the only scenarios I see stopping this development.

Yes, there is an abundance of supply of uranium in the world. It is however not readily available for everyone at a price under $40. Some commodity investors think uranium mines can come online quickly to meet this demand. We will see, most of us know that getting any mine online is not done by a flip of the switch. In addition, the fuel cycle takes about two years from the ground until it gets in the reactor.

Our more technically inclined investors have said that some of the charts have been stretched lately. This correction therefore will get the price of the shares closer to the 50 and 200 day averages. (In many instances we are under the 50 day average). Nothing goes up in a straight line.

Again, nothing says the correction has to stop here, and we can’t go further down, but we are at least digesting gains from the last couple of months.

Conspiracy Theories

Flat Earth

Conspiracy theories have a long and exciting history. Throughout history we have seen conspiracies to take over land, acquire power, wealth and influence by many. We also have theories about whether many of the events back in time are in fact as history says. We often call this conspiracy theories. 

There is actually an anecdote about the term “conspiracy theory”. It is only in recent decades that the term has been given the somewhat derogatory term it has today. It is therefore only fitting that there is even a conspiracy theory about the origin of the term “conspiracy theory”. The conspiracy theory claims that the CIA invented this term in 1967. They did this to disqualify anyone who questioned the official version of the assassination of John F. Kennedy, and anyone who doubted that Lee Harvey Oswald had acted alone. The extreme version of the theory is that they invented the whole concept of “conspiracy theory”, while the more moderate version is that the CIA made propaganda that gave negative associations to the term. 

My favorite conspiracy theory is about director Stanley Kubrick and Moon Landing. The theory is that the film “The Shining” is the director’s admission that he actually directed the moon landing in 1969, and that the United States never went to the moon. (Or at least did not go to the moon in 1969). Since Kubrick had made “2001 a Space Odyssey” in 1968, he was the perfect candidate for the job. The United States could not see itself beaten by the Soviet Union in the space race under any circumstances. The Shining is therefore according to conspiracy theorists, full of hints that Kubrick was the director behind the moon landing. A documentary has even been made about this. «Room 237», which addresses this and several conspiracy theories about the film.

The crown proof most people use is that the character Danny is wearing a sweater with the motif “Apollo 11” on it.

If this conspiracy theory had been true, I would have found it very amusing. I am therefore sad to say that I have seen several documentaries, analyses, and behind-the-scenes footage that unfortunately disprove this theory. Kubrick always used strong symbolism in his films and they can be interpreted in several ways according to what you are looking for. In The Shining it was the costume designer for the film who found the sweater with Apollo 11 as the motif for the character Danny. The costume designer said that she chose the sweater because it looked like it was homemade, and that the family in the film did not have a lot of money. Kubrick had no influence on this other than approving the choice she made. 

There are also conspiracy theories that are supported by traditional media. Everything that had to do with suspecting the Wuhan lab was behind the virus was off limits for over a year. The media said it was a conspiracy theory. You would get suspended off Youtube if you got to close with your accusations. Now, the media have suddenly turned and say the lab could have been behind the leaked virus. The bat (and the other explanations) the media gave instead can be seen as a conspiracy theory from them. The media tried to lump everyone who saw the lab leak as a probable explanation together with the flat earthers. 

The reason I am giving all these examples is just to encourage you to be more open. Conspiracy theories do not have to be invented by people in their basement with a tin foil hat over their heads. As an investor you will have to look past the headlines, or go beyond what the crowd is doing if you want outsized returns. It is important to be critical of everything you see and read.

Precious Metals

All this preamble for saying that I am open to the possibility that the gold and silver paper markets are manipulated. (What I do not want to speculate on is how far up this conspiracy goes).

What I am comfortable in saying is that paper short sellers are able to manipulate the paper price. They usually sell down hard during the low activity hours of the day when there are few buyers are around. The amount of paper contracts they are selling are several times the real volume exchanged in a year of the physical metal. One would expect higher volumes in a futures market, but I wonder if this was the intention when they started selling the futures contracts.

We experienced a massive demand for silver this Winter/Spring with the Silversqueeze. We saw massive amounts of people who took physical delivery. There were shortages at dealers, premiums were high, but the paper price was “tamped down” because of massive paper selling.

It has been very interesting to observe this. I have never been exposed to a market where the product is sold out, and the price is going down. This is not what I have learned about supply and demand in Economics class. For me this smells like bad fish.

I am following a lot of people for more information on the subject:

Sprott Money with Eric Sprott and Craig @TFMetals Hemke

GoldSilver with Michael Maloney @mike_maloney and Jeff Clark @TheGoldAdvisor

Arcadia Economics and Chris Marcus @ArcadiaEconomic

David Morgan

Wall Street Silver

@natefishpa behind renaissancemen.org

These are just at the top of my head, and there are several others to check out. Most of these have been called tin foil hat conspiracy theorists. In this case, I think it is more a badge of honour than an insult. I can be wrong about this, but it does not hurt to seek out independent information. Both that support, and undermines your hypothesis.

Zero to one

faceless man with decorative shoe playing table game

I made my first substantial money investing in tech. Books like «Zero to One» is a book that was referenced a lot for investing in the tech sector and I really respect Peter Thiel as a thinker. I have found this book can also be applied to commodity investing. One can take knowledge from one place and try it in other sectors.

From my experience the biggest change in valuation a company can have is going from the impossible to the possible. A company that is able to get into production, come successfully out of a restructuring, or strikes gold are events I would put in this category. Things that are already seen as possible for a company will already have a lot of this priced in. Unanswered questions, or impossible situations are not priced in, and people do not know what it is worth.

In Zero to One there are three ways of approaching this:

1. Bet on a contrarian truth

What important truth do very few people agree with you on? Here you have to take a step outside the mainstream consensus. Some examples I have for this in the commodity sector are:

  • Renewables like solar and wind can’t save the environment alone. We need reliable baseload power. The solution for this is in many cases nuclear.
  • The electronics industry is experiencing a chip shortage because of increased electronics demand. The tin shortage is the bigger factor, and not production capabilities in the factories that the mainstream media portrays it as.

By betting contrarian here in smaller sectors, one avoids competing one will experience in bigger, more popular sectors.

An important factor to make sure you are correct here is: Is it the right time? If you have seen “2001 a Space Odyssey” they have a version of an iPad in the movie. The movie is from 1968, more than 40 years before the technology and the market was ready for such a thing. You would not want to wait that long for something to materialize.

2. Start by dominating a small market

The book here gives an example of Amazon that started in a small niche market, selling books. They used this as their launching pad for getting into other sectors later.

Also here you can apply this to the commodities market. You will have a better chance with over performing in a niche market like tin, tungsten or uranium than iron ore or coal. But as for every rule there are exceptions. For example, after the big fall in the oil price after 2014, a lot of the workforce had to leave the sector. After investment interest went down in the sector, competition among investors to find the best investments also went down.

3. Strive to be a monopoly

This point is about how you should not compete against other companies. You should be without competition as much as possible. By doing this you prevent the competition from eating away your profits. By doing this companies like Google can focus on improving, and creating new features which the customers will get advantage from.  

I do not apply this to the companies by themselves, but more the sector by itself when it comes to commodities investing. The sector has to be the only solution for their customers. There should not be an easy substitute for them.

The uranium sector is the only source of fuel for the nuclear plants. There is no substitute for uranium to keeping them running. That is why, when the circumstances are right, the price utilities have to pay does not matter.

If you want to solder circuit boards you need tin. Tin is the glue metal. Before you could use lead for soldering, but due to regulatory requirements, plus the health and environmental benefits, tin is the only real alternative now. 

Conclusion

This is something one must try to do with more than this example. From every aspect of your life you might have something you can transfer to another situation. From football you might have to learn to keep cool under pressure, from long distance running you might learn patience and perseverance. All things you can transfer to the rest of your life and maybe to investing. A lot of great things can happen if you go from zero to one.

Why I do not invest in Cameco at the moment

I think a lot of people should be investing in Cameco. Outside just holding the physical commodity through companies like Yellow Cake Advocate or Uranium Participation Corp, Cameco must be seen as one of the least risky uranium companies. Cameco is therefore perfect for generalist funds that want to get exposure to the sector, or the more risk averse uranium investors. I want to go over why I do not have a direct investment in them.

I have already explained in earlier posts that I believe that this uranium bull market will do very well. The returns can be life changing for many of us. I have explained my strategy of investing mainly in near term producers because I see them to have the higher potential returns given my risk tolerance. I am comfortable with this and think that this market will be as good, if not better than the last bull market.

I have wondered a bit about why Cameco did not do better than they did in the last market. I know that by posting the graph of Cameco during the last bull, you would be crazy to find any of that disappointing. It is just that they had the two biggest high grade mines in the world, and should have been able to use this in their favour to get better terms than their competitors. Cameco has fared a lot better than most of their competitors in the following bear market, but on the cusp of a new bull market I wanted to know a bit more about their strategy. I am therefore very happy that people who were participating in the last bull market have shared their experiences to explain this to us.

Kevin Bambrough, ex Sprott, now a private investor, is the person who has been writing the most about this. (You can find him on Twitter under @BambroughKevin). He therefore gets a lot of credit, and thanks, for sharing from us newer uranium investors. His insights on the last bull market with the genesis of Uranium Participation Corp and how the market behaved last time have been invaluable. He says that the reason why Cameco did not go higher than what they did was that a high percentage of their contracts were at very low fixed prices.

Now, at their most recent quarterly presentation, Cameco said they were very optimistic of the future. When asked in the Q&A part of the presentation they said they were aiming at 60/40 contracts. This is also corroborated from their web page:

We target a ratio of 40% fixed-pricing and 60% market-related pricing in our portfolio of long-term contracts, including mechanisms to protect us when the market price is declining and allow us to benefit when market prices go up. 

My biggest question here is, barring another nuclear accident, what are the reasons why Cameco should be protecting themselves from a falling market price? Are they seeing another supply demand picture than the rest of us?

After a 10 year bear market where uranium producers have been in the “hole”, getting bent over daily, I do not see a reason for this. You do not go and be nice to utilities when the tables have turned and you are in the driving seat. After 2011 uranium miners were small chickens that you could easily scare and chase. This is not the case anymore.

«Pay me». 

Cameco is signaling they will be «nice» to utilities and limit upside somewhat for their shareholders with the unreliable mistress in utilities. This will limit the upside, and sounds similar to what happened in the last bull market. If they believe the price will overshoot $45 by a lot, they should communicate that the fixed price portion will have to be a lot higher than $45. You have the highest grades and a great reputation with the utilities. You should demand a premium compared to untested near term producers (or past producers). This premium you either get by raising the fixed price above $45, or increase the percentage that is linked to spot. Cameco does not have to be the lowest price producer in the market. Especially given their market share and reputation with uranium production.

Another option we need to consider is that Cameco does not believe the price will go over $50 by a lot, or that it will go high quickly, but overshoot and come down hard at a price lower than $45. This is not in line with my thesis on uranium and is therefore not a reason to invest with the company.

We also have to admit to ourselves: the reason why uranium price is as low as it is now is because uranium miners overproduced, not utilities behaviour. As Jeff G, a nuclear professional that goes under @808sandU3O8 on twitter has said; “The utilities didn’t overproduce tens of millions of pounds into an obviously oversupplied, nosediving uranium market from 2012-2017”. The miners did this. The miners had spent several hundred millions, or billions, to get into production, but they should have curtailed production a lot sooner than what they did. (For those who are interested, Jeff G has an excellent blog about the nuclear fuel cycle: 808s Online. It is more on the technical side, but something you might find valuable).

This also goes the other way when the tables have turned. From 2017 to 2021 nothing has stopped the utilities from contracting with uranium miners. We know a select few have topped off inventories, but most of them have been complacent.

Today we are seeing investors who are funding near term producers to get in production at higher prices. Most of these investors will also gladly have the companies wait a bit more for uranium prices to rise. The billions of dollars going into the sector over the last year is not looking for a mere 100-200% return. I remember an interview with Dave Iben, Chief Investment Officer and Lead Portfolio Manager of Kopernik Global Investors. He was on The Grant Williams podcast, saying he invests in uranium and gold producers that have reserves in the ground, but are still far from production. He does not want them to sell their pounds out cheap. Uranium companies are mostly cashed up if they do not spend too much of it on G&A expenses going forward. They should now just mind their own business and let the utilities come to them. Utilities have had the upper hand for 10 years. As John Borshoff, CEO/Managing Director at Deep Yellow Ltd says; as a miner he does not have to contact them, they will need supply and have to come to him.

Conclusion

I think Cameco is a great company. They have been among the biggest producers for years and have a proven track record as a supplier of uranium for the utilities. For the more conservative investor in the uranium sector this company is a must have. Cameco has the least amount of risks, they are operating today, have a skilled workforce, and two of the best assets in the world with Cigar Lake and McArthur River. (Kazatomprom, with higher geopolitical risk, is the only comparison here). It is just that for me this is not tempting enough with the strategy they are using today. I do not see them easily getting 5x from these levels of $20 share price if they put a cap on 40% of their production.

What makes a 10X bull market possible

abundance bank banking banknotes

I have gone over some interviews with Sachem Cove Partners (with Mike Alkin & Timothy Chilleri) to see what happened in the last bull market, and what has laid the groundwork for the coming bull market. These interviews are publicly available already, and I have listened to them several times. However, I get something different out of listening, reading or writing on a subject. I therefore hope you get something out of this post, if you have listened to these interviews already.

The last Bull Market in Uranium

As a history buff I believe that history repeats, in some way or another, because people do not learn, or are educated enough about it. A good place to start is therefore to go back to the early 2000s and see how the uranium market behaved then. The price of uranium was at the time $10-14/lb. Long term contract coverage had been sitting in the 31-38% range as a percentage of utilities yearly demand for many years, and you had lived through 15 years of oversupply (and a narrative of that the oversupply would continue). The price of Cameco from 1996 to 2000 can be seen as an example of this narrative. There was not a lot of faith in the market improving anytime soon.

Where was this oversupply coming from? In the late 80s you had supply coming from the Soviet Union and the Megatons to Megawatts program. (The program had bomb-grade uranium from dismantled Russian nuclear warheads recycled into low enriched uranium (LEU). From there the LEU was used to produce fuel for US nuclear power plants). You also had the Olympic Dam mine coming online in Australia in 1988. (The Olympic Dam mine is the fourth largest copper deposit in the world. More importantly to us, it is the largest known single deposit of uranium in the world. The underground mine is a giant made up of more than 450 kilometres of underground roads and tunnels. Copper production accounts for approximately 70% of the revenue, with the remaining 25% from uranium, and around 5% from silver and gold). Last but not least, McArthur River, the richest uranium deposit in the world, began production in 1999. (Olympic Dam is a much bigger mine, while the grade of uranium at McArthur River is a lot higher. This means you have to move a lot less earth at McArthur to get the same amount of uranium from the ground). When in production, McArthur River was the world’s largest producing uranium mine, accounting for 13% of world mine production. With uranium mining entering the new century, you had seen a plethora of supply coming online with prices staying low.

With prices staying low there was less exploration, development and production from producers. However, the saying of “Low prices is the cure for low prices” was starting to work itself out. In the early 2000s you saw that there was a tremendous amount of under contracting, with utilities not contracting their annual consumption needs. Because of this, inventory was down right before the uranium bull market of 2004.

I have seen presentations from Sachem Cove Partners that have shown this under contracting, and I have compared this to the numbers Kazatomprom has been given by UxC. (UxC is, according to their web page, the industry’s leading source of Publications, Data Services, Market Research, and Analysis, on the Global Nuclear Fuel Cycle Markets). Sachem Cove have done the graph in percentage of yearly consumption, and Kazatomprom have been given the amounts in million lbs. Even though the graphs do not match 100% the picture is very similar. When I took the numbers from Kazatomprom over a simplified assumption of 180 million pounds consumption per year, I got a graph very close to the one Sachem Cove Partners have been using.

In the early 2000s you had a much higher supplier/producer inventory compared to 2021, and lower utilities inventory compared to 2021. However, when you add both of those together, the inventories are lower in 2021 than they were then. (People who cherry pick data will focus on utilities inventory, and say they are well covered now and do not look at the total). The longer we wait, the more these utilities inventories will be drawn down. With a lot less readily available supply from producers when utilities run out, you do not want to be the last one to contract. You do not want to be the one without a chair to sit on when the music stops.

We can continue our story and look at what happened when the prices started to tick up: 

Back in the early 2000s there were a host of factors that had an influence on the market. First of all there was a narrative of increasing demand from planned nuclear plants around the world. Nuclear was going through a bit of a Renaissance and several countries looked to nuclear as the solution for their energy needs. Experts in the sector therefore saw that there was a bigger probability of a supply deficit in the future. 

At the same time the sector was experiencing supply shocks. There had been a flood at McArthur River. There had been a fire at the Olympic Dam mine. There was a failed delivery of uranium with a ship carrying uranium that had run aground. Inventories were already low and the market was tightening. This was because you had all this under contracting in the years before. If you want to know what was being said back then, the UxC Winter Survey is a good place to start. In the February 2003 issue they had a quote saying: «This perennial optimism actually makes the future imbalance between supply and demand worse. Buyers don’t believe there’s a problem, so they delay contracting, failing to send the needed signals to producers. For their part, producers have been burnt so many times in the past that they are not about to invest more on the mere promise of an improving market. Consequently, nothing gets done.» (UxC does not have all its work public, but I found it republished in their November 3, 2003 issue of The Ux Weekly). 

Price of uranium was in 2003 at about $10-14/lb. Even with all these supply shocks and a bright future the spot market was still not responding. In the more forward looking stock market, the price of Cameco had started a run from under $3 in 2002 and was between $6-7 in November 2003.  

The ingredients were low inventory levels, underinvestment by suppliers (exactly like we have seen the last couple of years) and supply shocks. The difference today is that you have an even better demand story and there is no new mine supply coming online before at least $45/lb. (Last bull market we already had McArthur River coming online at the bottom of the market, before the turn up towards $137/lb).

Why has the market been horrible for the last 10 years?

Uranium has inelastic demand. This is both an advantage and disadvantage. There is no substitute when it comes to fuel for the nuclear plants. You need uranium to be converted to enriched uranium and fabricated into fuel pellets to wind up in a nuclear reactor. Whether it drops or is rising in price, utilities have to buy it. The nature of the market is one that is characterised by very long term contracts between nuclear utilities and uranium mining companies. The reason for that is that it provides the utilities the security of supply (because there is no substitute for uranium). 

Typically you see long term contracts (which by definition according to the industry is a contract that’s signed today but delivery is in the future) and they typically last seven to ten years. That is how it historically has worked. What happens with those contracts is that it gives utilities security of knowing they have supply, but it also gives (when you have changes in supply and demand that are natural to any business cycle) uranium miners a false sense of security when prices are dropping. 

After Fukushima in March 2011 the price of uranium was in the 72-73/lb range before it started its march down to $18/lb. Today (in May 2021) the price is off the bottom around 30/lb. Before Fukushima had its meltdown, Japan was 13% of world nuclear power generation, and it was a significant buyer of uranium. Within 18 months all the Japanese nuclear plants were shut down (54 in total). That took a big chunk of demand out of the market. What you started to see was the price being adjusted. Like in any market that works off regular spot pricing, it adjusts very quickly. When price starts to go below the marginal cost of production, you would tend to see supply come offline. You don’t do it immediately because these are long lived assets that cost a fortune to build. If you expect demand to come back you are not going to just shut them down because price dips below $45-50 per pound. However, when it stays around, and below, these levels for a fairly long time, you’ve got to start thinking about cutting production.

Well, the uranium mining industry didn’t cut production so a lot of where the price is today is self afflicted. The reason why is because they had the security of those long term contracts. So as the price was dipping in the mid-teens in the 2014-2016 period, miners were saying the Japanese have to come back to their nuclear power. It’s a third of their electricity generation (just around the time LNG was really ramping up). The population was still adjusting to the perception of Fukushima. 

The miners kept producing, they kept exploring, they kept expanding their businesses while prices were plummeting because they had the security of supply (from long contracts). We also had Kazatomprom ramping up production in this period and emerging as the world’s biggest producer of uranium. You finally got to a point where you still saw production growth into a declining price market and as those contracts rolled off you started to see a bleak picture. Most producers could not sell at those prices. If they announce tomorrow that they will start up, it will take time to get their production rate back up.

Conclusion

In broad strokes this explains how the sector has come to where it is today. (This is not an exhaustive list of all the factors. For that I would need the post to be a lot longer, and dive even further down into the rabbit hole). The stock market has up until 2020 priced the sector as it is in a liquidation phase. When a sector is priced this way there is a great potential with just a handful of positive news.

With several years of production cuts, utilities drawing down their inventories, this surplus has been worked off. Uncovered demand is getting bigger and bigger and we have experienced supply shocks with close downs of mines from Covid-19. We are seeing extensions of nuclear plants and big new build programs in the East. The spot price has still not moved, but just like in 2003 the stock market is forward looking. If we exclude the March 2020 sell off, Cameco is up more than 100% from $8-9 early 2020 to almost $20 in May 2020. If the market will continue as it did the last time still remains to be seen, but there are arguments that the conditions are just as positive as they were then.

The interviews I have used for this post is: SMITHWEEKLY RESEARCH: Uranium Sector Update – The Cycle Has Turned and Capitalist Exploits: Big Question – Mike Alkin & Tim Chilleri from Sachem Cove

My uranium portfolio

backhoe bucket barren dirt dirty

There has been a lot of exciting news this week, but I see a lot of great information about this already. I am therefore not going to repeat what others have written, but I can say that it looks very positive for the future in uranium. Instead I am going to write about my uranium portfolio.

Disclaimer

I do not not say that this is the best possible allocation to the uranium sector for people. This post can not in any way be construed as investment advice. What I own today can change drastically on short notice for a wide variety of reasons. I will not be responsible for the results anyone might have for adopting my positions or ideas. Some of the positions I sit on now might not be the same if I started from scratch today, but are in the portfolio because of my strategy and investing rules I have given myself.

When I shared my post “How I have constructed my uranium portfolio” I got a lot of questions about what shares I have in my portfolio. At the time I was not interested in defending my positions to other people than myself, and people have different reasons why they own a specific company. I have some shares that many really do not like, and I am also missing some of the more popular shares in the community. The reason why I do not own one of your favorite shares is that you can not be on top of every company. Some of my smaller positions are small because I got late to the party and I do not generally sell out of my positions. At least not now as we are at the beginning of the bull run.

In my previous post I said that I have a rule to my investing strategy, and that is that I generally do not sell down in any of my positions except in very special circumstances. I have to admit that I have made two exceptions to this rule. One was that I sold out of my Uranium Participation Corp position. I only kept this position as a low risk alternative in the sector until I was certain the bull market was on. I followed some advice from one of the Youtube videos of John Polomny (@JohnPolomny) of just being exposed to the uranium price during the bear market in the uranium shares, and avoiding company specific risk with dilution etc. This has been a very good strategy for people who came in before 2020, but during 2020 I decided the bear market was over and switched into other positions. The other exception I made was selling down some of my position in Horizons Global Uranium Index ETF. I entered into this position when I did not have that much experience in the sector and did not end up with just the worst possible picks in my portfolio. When I started to get my bearings I decided that I could scale this position back a bit and deploy more by my own discretion. There are always exceptions to a rule, but going forward the rule is still; just add to positions, do not sell.

Enough teasing. Here is my portfolio:

CompanyInvested %ReturnPortfolio weight
enCore Energy Corp7.49%547.83%19.11%
Energy Fuels Inc15.71%133.96%14.48%
Global Atomic Corp7.30%373.85%13.62%
Ur-Energy Inc.13.83%79.49%9.78%
NexGen Energy Ltd6.62%213.51%8.18%
GoviEx Uranium Inc10.97%57.50%6.80%
Denison Mines Corp7.45%85.71%5.45%
Bannerman Resources2.70%362.50%4.93%
Laramide Resources Ltd.7.09%60.00%4.47%
Forum Energy Metals Corp6.09%44.44%3.47%
Horizons Global Uranium Index ETF3.52%134.13%3.24%
Vimy Resources2.61%125.00%2.31%
Fission Uranium Corp4.65%17.86%2.16%
Deep Yellow2.25%36.51%1.21%
Standard Uranium Ltd1.14%4.35%0.47%
Baselode Energy Corp.0.56%45.95%0.32%

The first thing you should notice is enCore is my biggest position with a portfolio weight of 19%. Many people do not like this company for one reason or another, but you can see it is just 7.5% of my invested amount. The reason why the position is so big is because of the returns. I have built this position in tranches and have positions at CAD 0.13, 0.16 and as far up as 0.67 with the biggest amount around the 0.16 tranche. My rules have stopped me from selling out of the position when it has been on a tear, and by that limiting my upside. I will not be married to this stock, but from experience I have made the last 10 years is that when you sell a share in an uptrend, the next leg is usually up. I will only make a reassessment when we have a definitive spot price move and reach one of my spot price targets.

My biggest positions when it comes to invested amounts are Energy Fuels (15.71%), UR-Energy (13.83%) and Goviex Uranium (10.97%). Energy Fuels and UR-Energy were bought in anticipation of the Section 232 decision in July 2019. (Section 232 was a bill that suggested quotas or tariffs on imported uranium). They were an even bigger percentage of the portfolio then, and were probably about 40%. I was already over 50% allocated to uranium at the time so when the decision was announced, and was negative for the US producers, I noticed. The 30% drop in a day for the two companies had a very negative effect on the portfolio. I had overestimated President Trump’s protectionist side after seeing the ongoing trade war with China. This was the reason why my bet fell apart. I bought Energy Fuels and UR-Energy when they were trading at a premium compared to the rest of the sector in anticipation of this announcement. This premium disappeared in an instant and made for a very interesting work day when it happened. It is easy to be caught up in narratives like this, but I do not know if I would have done it any differently if I had a similar bet again. It took a long time, all the way into 2020 before the two companies broke even. That is the reason why my returns on the two companies are not that impressive. I entered at the top instead of the people who entered at the bottom of March 2020. I have been more lucky with other companies, but these two are more of a learning mistake for me. 

Global Atomic is a company I came a bit late to the party on, but managed to get in my positions in tranches at CAD 0.55, 0.57 and lastly at 1.05. They were not really on my radar, but the Twitter community were talking about them so much that I had to give it another look. I am very happy with having a 13.5% position in them now.

People might think that I had a bigger position in Bannerman with all my praise of their management and CEO Brandon Munro. The thing is that I did not begin positioning in the company before August 2020, and the Etango-8 study. At that time all of my capital was already employed, and I had to use my monthly salary payments to get a position. With them being 5% of my portfolio I wish I had more, but at least I have a lot more than the ETFs. If the market goes the way I believe it can, they will become a much bigger part of the portfolio after $75 spot price. I might also still add to the position going forward.

The companies I have with low returns are either bought at a (then) top like UUUU and URG, or they are recent purchases. I have been buying monthly the last two years with between 25 to 50% of my after tax salary. With days like this Friday with several companies up over 10%, some of the companies are getting more expensive, and therefore less attractive. If the market does not really fly away I will still add to my positions in the months going forward.

Conclusion

One can criticize my portfolio for having too high weighting of US companies, but my Section 232 positioning is a big part of this. Other than that, enCore has with their outperformance increased the US weighting. One can say I am too diversified, or that I am not diversified enough. You can also say I have too few Australian names, or my weighting towards the Athabasca Basin is too low. One thing I am very aware of is that I should increase my cash position. In March 2020 I was not able to take advantage of the fire sale going on with being fully invested. I had to wait until April to get a small position in. (If I had been able to buy around the absolute bottom is another question. I remember shaking a bit in my pants when I saw my portfolio at the time). 

You can also say I am missing some key companies. PDN, FSY, UEX, WSTRF and PEN are the most popular ones. They might be a part of the future for the portfolio. I will say that several of the  companies have very high risk and I am comfortable with that positioning.

Did we experience our Day of Days in Uranium?

people having a concert

My biggest problem now is making sure I am not a victim of confirmation bias, or that I am missing a key piece of the bear case for uranium. With the newsflow coming out at the moment, I have to admit it is getting harder and harder to see the downside arguments. For the beginning of today’s post I will try something different and hope it is not too out there with my example.

I will start my post with a reference almost no one outside Norway will have heard of. In 1982 Norway was hosting the World Championship in cross country skiing in Oslo. (For people who do not know, skiing is a very big deal here). In one of the events Norway was competing against the Soviet Union in the men’s relay. On the last leg, going into the last kilometer, they were neck to neck when the Norwegian skier made a move to pass the competitor. They bumped into each other, and the Russian skier fell, and the Norwegian broke his skiing pole.

vg.no

The moment when the Norwegian skier, Oddvar Brå, broke his ski pole has gone down in history as one of the big exciting tv moments. “Where were you when Oddvar Brå broke his ski pole?” is a very common question from my parents’ generation. The end to this dramatic moment was that Oddvar got a new pole, the Russian competitor caught up with him, and they crossed the finish line at the same time, splitting the victory. Also prompting video control of the finish line, as it was the first time the teams were so close. I will add a minute of this moment for people who are curious about it. It is all in Norwegian, but I think the intensity of the commentators will explain the importance of the situation.

This long introduction is to illustrate that most countries have certain collective moments. (The US has the Moon Landing in 1969 as one of the positive moments, in addition to several tragic ones with Pearl Harbor, the JFK assasination, Challenger and 9/11 among others). This week we might have had a similar moment in the uranium sector with the announcement of Sprott taking over management of Uranium Participation Corp on Wednesday 28. April. 

For explaining what possibilities this has for the market I have to give a shoutout to Kevin Bambrough @BambroughKevin for his information on the topic. I will award him MVP of the uranium market this week based on his two threads on the subject that are linked here and here. (If he was not retired many of us would have wanted to suggest him as a person responsible for the new Sprott UPC vehicle). I will try to explain the importance of an investment vehicle like Uranium Participation Corp can have in a uranium bull market.

The previous bull market

In the previous uranium bull market, Uranium Participation Corp was founded on 15. March 2005. By this time the uranium spot price had bottomed out in 2000 and had doubled from about $10/lb in 2003 to the low 20s by 2005 over two years. When UPC started trading they began eating up millions of uranium pounds in the spot market. This started forcing the utilities hands with them having to scramble to enter into long term contracts. In about a year from 2005 to 2006 it doubled again to $40 per pound before the price started to go vertical in 2006 and into the peak around $140 in 2007.

Fuel buyers will always try to avoid buying on spot and pushing the price higher. All they want to do is secure long term contracts for supply and secure production for their power plants. Over supplied markets have meant they could point to a weak spot price and contract as such.

In 2021

The new Sprott version of UPC will become much like the Silver and Gold trusts Sprott has already, and will be able to do ATM issuance. This is very important and not having to wait for a 10-20 % premium before you go to your investors for a capital raise. This is a complete game changer and removes most of the barriers you have in UPC today. The added bonus of having the new Sprott UPC listed on NYSE will give it much better market exposure and make it eligible for many US based funds that can’t invest in Canada. The US market is also 13 times bigger than the Canadian market.

What does it do to market psychology?

Fuel buyers are soon going to see the new Sprott version of UPC emerge and issue shares and eat up supply in the spot market. When they do this the utilities will be following the spot market and price closely. We will also finally be given an answer to what is the depth of the spot market. Another psychological development we will probably see is potential sellers of the spot will likely decide to hoard their supply and see what happens with the price. Brandon Munro has earlier talked about virtuous cycles in the market and this is one of them. If more supply is waiting on the sidelines buyers will have to raise their price up to tempt the potential sellers. I imagine a vacuum cleaner near a pipeline waiting for more supply coming out. Another virtuous cycle we will see is with the increased spot price is valuation of the companies will go up. This again will lead to more liquidity moving into the sector. From being a sector too small for institutional money, growing the market cap of the companies will attract more money from investors looking for returns. Rick Rule has talked about some of the participants in the last bull run who want to relive the past. Some of them might have been caught sleeping and want to jump in as fast as possible.

We are not done with corrections, and there will be negative news also in the future, but we are also seeing more and more positive triggers around us. 2021 looks to be a very interesting year, and maybe we have seen the Day of Days for the uranium sector.

Are people suddenly bearish on uranium?

low angle photo of nuclear power plant buildings emtting smoke

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 10.5 mlb have been made unavailable for the market. The split is as follows:

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

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 10 mlb, 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 180 mlb 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 (10.5mlb supply), and most of the buyers have now left the market. We now have two to five more buckets back for sale (0.2 – 0.5mlb 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).