Are you going to make your fortune in uranium?

person holding dollar bills while using a calculator

Investing is not easy. Over and over again I experience it is another game to actually invest by yourself than what you can read in books or see in interviews. The uranium thesis can be bulletproof by itself, but outside factors always come into play. That makes holding on to winners a lot harder than people think.

I have spent a lot of time thinking about living with the volatility we have been through in the sector. How would I be able to hold on over a longer time period without going crazy? What is worse: selling out way too early, or outstaying your welcome? The most helpful article I have read about the subject is: Would You Have Made a Fortune in Uranium? (An article that is getting harder and harder to come by mainly because it is so old that many of the links are dead. You do however find the article as a PDF as the first result in google). I have returned to this article on several occasions to take stock of where we might be in the cycle, and more importantly, take stock of where my head is at.

I will not recap the article as I believe it should be read in its entirety. I will instead give it a very strong recommendation. I read it again today and it gives me a good indication of where we are in the cycle. The big questions the article asks is:

How would you react to catching a tiger by the tail? Assuming you had a good thesis, it started to be proved right, and your investment is now up significantly – Are you going to bail out or are you going to stay in? Or add to your positions? What information do you use to decide? Can you hold on to a big gain and not fear losing it?

The more experience I get, the more I am convinced that I need to keep my rule based parameters in advance for selling. I have to be content with selling most of my positions a long time before the top. I would rather sell 90% of my portfolio too early, then be stuck with 90% of my position after we have passed the actual top. Selling after you already have given back 50% of your returns is hard, even if it turns out that it continues to fall afterwards. (Something we are only going to know in retrospect). I know several people who have held on to positions down to zero because they did not want to realize a loss.

Another realization I have had is that if I hold too high allocation to the sector, I will be more inclined to sell early to lock in gains. Increasing allocation to other commodities, other sectors, or increasing my cash position is therefore not a bad idea. Something that has been a focus for me over the last year. Now the positions in some of my other commodities are big enough that I need to set up similar parameters to the ones I have for uranium. I hope with doing this I have come close to my “Goldilocks Zone”. Sitting 100% allocated to one sector is only feasible for a select few.

My risk tolerance is also not what it was in my 20s. (Like many other people I could live on basically zero if I wanted to). With responsibilities for home and family I can not put everything on the line like I could in the past. More money is going out each month, and more money has to be set aside for emergencies.

My plan

My allocation to uranium companies is pyramid shaped, with the majority of my funds to the (perceived) solid developers, then the more speculative developers, and lastly the most risky developers.

Since the last top during the fall of 2021 I have continued to invest heavily in the sector. Both in developers like Denison Mines, but also more to some of the more speculative explorers. I have also gone over which companies had the highest beta to the move in the spot price we saw August to September 2021, and added some funds there. The best performer I could find went up 275% in less than a month. I have added a bit to this company in the event that we will se a similar move soon.

Where the market moves the next couple of months will decide if I will continue to allocate more to the sector, continue to hold, or even start scaling back on my positions. Things change quickly in this sector, for better and worse. How you react to this is however your responsibility. A bull market wants to throw you off. The important thing is to hang on.

Investing mistakes

After watching Antonio’s excellent video «I Lost Money in 2022, Here are my Mistakes» I thought I would make a version of my own. (I have made many of the same mistakes since I entered the uranium trade in 2019. The one recurring for me has been: “Don’t go in all at once, ease into a position”).

With this as the backdrop I thought I should look back at what I consider my biggest single mistakes of the last 1,5 years. All of it with the benefit of perfect 20/20 hindsight.

To do that I will go over what I wrote and did during late August to late November 2021 when we experienced a euphoric sentiment in the uranium sector. The Sprott Physical Uranium Trust had just launched their ATM and they were draining all available supply in the spot market. This led the spot price to shooting up past $50/lb from the low $30s mid August 2021 by mid September 2021.

During the same time we saw the uranium equities soar, many up more than 2-3X in less than a month. I do not think I was alone with refreshing twitter often for new numerco updates at the time.

I have the great benefit that I recorded my thoughts on “paper” during this time. The post I wrote on 23. October: «Are you keeping to your investment plan?» is the most damning evidence. There it says I increased my allocation to the uranium sector by 5% during September 2021. To put money to work when the sector is soaring is not exactly contrarian investing, to put it mildly. (This amount is now just barely in the green almost 1,5 years later).

Almost everything that I mentioned in the post as a possible bullish trigger for 2022 came to fruition (nuclear included in the Green Taxonomy, nuclear plants saved from closures, and Japan moving towards restarts), but the market did not reward any of this. The following year would come to be focused on the fear trade. Something that was far from our minds in September 2021.

With perfect prescience (Paul Atreides from Dune style) I should have kept my money in the bank longer. If you want to be a contrarian you deploy funds when the market is more despondent. People with more experience in the resource sector took some money off the table at this time. As my strategy is set on not taking anything off the table until my own set targets, I would not have done this, but I could have been much more disciplined at deploying the funds available. That is what a contrarian would do. I was acting like a trend follower.

I have been able to mitigate this mistake a bit by continuing to deploy funds to the sector in 2022. Sometimes I have hit bottoms, other times the shares found new lows after I had put my money to work. I deployed a large sum in December 2022, and it looks like that may have been the bottom for now.

Conclusion

I do not beat myself up too much with my mistakes, but I will try to learn from them, and I still have a lot of room for improvement.

Even if I have some money available at the moment, I will be more disciplined with deploying them moving forward. My position is already more than big enough that if the market goes on a spectacular run I will be handsomely rewarded. On the other hand, if we see another low in 2023, I will have money to deploy. With some cash set aside I can be aggressive instead of defensive. In the words of Rick Rule: “You are either a Contrarian or a Victim.”

Position sizing in uranium explorers

As a speculator I have put most of my money in developers, but I also have a small (about 3%) allocation to explorers. Today I thought of how I would position size a portfolio of uranium explorers if I was to do it from scratch.

Before I start I just have to make some disclaimers:

Explorers basically have zero value until they find anything of value in the ground. There is a reason why many say that exploration companies are only buying hunting ground in Saskatchewan. Still, exploration companies are exciting for speculators. A great drill hole can be the first step in finding a deposit with value in the billions. Therefore many look to explorers to get the big multi baggers.

For my part, I find that allocation to explorers should be a lot lower than I have to developers. If the exploration company is not able to find anything they will not be able to raise money and survive.

A qualitative selection of explorers based on the team and geology is not what I will go through today. That is a whole other subject. I do not have a background in geology and exploration investing. I however follow some great people on Twitter that do. This is more of a quantitative selection.

My suggestion for position sizing:

For my example I have $10,000 I want to spread among 10 uranium explorers. Because exploration is not the easiest thing in the world, I want diversification in terms of the number of companies. (The shotgun tactic).

I will, although begrudgingly, rely on some of the assumptions behind the Efficient Market Hypothesis. In this case, the assumption that the different companies are fairly valued, for the most part. The companies that have hit targets already are valued higher than companies that have not hit anything of value yet. The higher valued companies are further along in their journey in terms of de-risking the project.

I am looking for a company to find a deposit that will value the company between $300 or $500 million in the future. To achieve this with the lowest possible risk I should invest more in a more de-risked company than a more risky one.

For my portfolio I have selected 9 exploration companies from John Quakes´portfolio and added one of my own. (I do however not own, or know all of these companies myself):

Fission 3.0 (FUU)
Baselode Energy (FIND)
Skyharbour Resources (SYH)
CanAlaska Uranium (CVV)
92 Energy (92E)
Purepoint Uranium (PTU)
Forum Energy Metals (FMC)
Kraken Energy (UUSA)
Standard Uranium (STND)
Strathmore Plus Uranium (SUU)

The important input for allocation is the market capitalization of the company (in yellow). The higher market value, the more de-risked the company. The more de-risked the company, the higher score, and amount allocated of my imaginary $10,000 amount. (The score is calculated based on “Goal MCAP” divided by the “Bagger” number needed for reaching the “Goal MCAP”).

The winner (at this time) is Fission 3.0, which the market tells us is the winner for now. They need only to do a 3,2 bagger from today’s valuation to reach “Goal market cap” of $300M. Strathmore Plus Uranium is at the bottom for now, and the market finds the highest risk with this company. With a market cap of just $8,5M they need 35,2X to reach a market cap of $300M. Because of the higher (perceived) risk I should invest a lot less in this company than in Fission 3.0.

Conclusion

I am happy with this allocation as a starting point for an exploration portfolio. The list will however change from day to day, based on the valuations of the selected companies.

I do not know all the companies I have used in this example. You should try to bring in as many qualitative measures as you are able to and tweak the list based on other factors. The most important one: Is the company fairly valued? (Is the market wrong? The smaller and more illiquid the sector, the bigger chance for this. Has the company found anything the market has not valued enough already)? Does the team have a track record with finding uranium? Does the company have a drill program for January/February? Has the company put most of the dollars in the ground, or have they spent most of it on G&A?

Not every company will find anything. I therefore have a very small allocation to explorers altogether.

Going over the tin market: part deux

Today I want to go back to the tin sector. Tin is one of the smaller sectors out there, and because of the smaller size there are fewer investment banks and analysts that cover the sector. That means less competition and a bigger chance of getting an edge. I have followed the sector since late 2020/early 2021 and been through some ups and downs along the way.

The short reason for me investing in the tin sector is that it is cyclical, demand is increasing, there has been massive underinvestment because of low cost supply, but this supply is drying up. If you want a longer explanation you can go to my first article on tin (“Going over the thesis: the tin market” ) I wrote about the tin sector.

Recent developments in the tin sector

In the second part of 2022 we have seen a hard sell off in many commodities. Something that is not fun when you own a lot of mining shares. Tin has not been sheltered from this sell off, and has fallen together with the other commodities. Electronics amount to about 50% of the tin demand worldwide. Electronics need tin for soldering, and the electronics demand has been lower due to two factors: The first factor is the lockdowns in China in 2022, the country that makes the most electronics in the world. They have therefore produced less electronics and needed less tin for soldering. The other factor is that with increased uncertainty for the economy overall, people postpone purchasing certain products like electronics and the demand goes down overall.

When I wrote the piece about the tin sector a year ago, sentiment in the sector (and the commodity markets in general) could not be more different than what it is today. In the last three years the tin price has gone from a low $14,000, to a price close to $50,000 in March 2022, and down 64% to under $18,000 in October 2022. Thereby giving back almost all of the gains over the last three years. As of 23. December 2022 we are up 35% from the October bottom, but only about 39% above where we were 3 years ago. At the moment this does not look like a market in a massive deficit for the coming decade.

The tin equities have tracked this development on the way upland the way down.

Short term this is hard, and timing when the markets will turn around is not easy. Still, a falling market leads to possibilities to get companies on the cheap.

Is now really a good time to be invested in the tin sector?

A market can stay down a lot longer than people think. Instead of months, think that the situation we are in today lasts for years. If we see a big recession demand will continue to be low for a very long time. Even if a tin producer is profitable during this time, valuations can be low because overall sentiment in the market drags everything down with it. Few can imagine how bad it was during the 1930s depression, but mass unemployment and a weak economy for years will be bad for all equities. (In this scenario I will be worried for a lot more than just how my investments are performing).

There are also other unknown unknowns I do not know already that can influence the supply or demand for tin. I would be more worried about the supply side suddenly increasing than demand for tin going down because we have found a cheaper and better alternative to tin soldering. Tin is a very small part of a lot of products. A doubling of the price of tin does not make the sales price of your iPhone or smartphone more expensive in any meaningful way. This also makes it less interesting to engineer an alternative to tin soldering. A new cheap source of tin supply is therefore higher on the list for me.

Although the worst case with a long lasting depression probably is not priced in, I think today’s valuations offer a good potential entry into the sector.

The options for people who want to speculate in the tin sector

Alphamin Resources (TSXV: AFM)

Alphamin Resources is the best alternative for people who want to look closer at the tin companies. They are the owner and operator of the Bisie Tin Project 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 with an all in sustaining cost of between $10,000 – $12,000 per tonne.

During 2021 and 2022 they have completed a lot of drilling on their Mpama South exploration property with great results. Mpama South is about 1,000 meters center to center from Mpama North, the mine where they are producing today. Being this close to Mpama North makes use of the existing equipment at the production site instead of adding more production facilities. In June we had Alphamin announce a 46% increase in their Mpama South inferred mineral resource estimate. At the same time the price of tin was falling, and dragging the company valuation down with it. The valuation of Alphamin is now down almost 50% from the top earlier in 2022, but looks to have recovered from the bottom.

With a much bigger resource than last year Alphamin is a much stronger buy today than last year if you believe the tin price will recover within a reasonable timeframe. In addition, if we have a long lasting recession, the low cost profile of Alphamin will make them better suited to survive than most of its competitors.

The biggest concern most investors have to the company is the jurisdiction in the DRC.

Metals X Limited (ASX: MLX)

Metals X Limited is the other clear alternative if you want to invest in a tin producer with operations in Australia. They hold a 50% stake in the Renison Mine in Australia.

With all in costs at a higher level than Alphamin Metals X has a higher beta to the price of tin because it will affect the profitability in a bigger way. Something that was great when the price of tin was on the way up towards $50,000 per tonne, but a lot worse on the way down to $18,000 where we were at the bottom. The share price of Metals X was at the worst, down more than 70% from the top earlier in 2022, and as a higher cost producer, they have a bigger downside than Alphamin.

The big advantage with Metals X compared to Alphamin is the jurisdiction in Australia.

Most of the other tin companies are more of a speculative nature, and are in the exploration and developer category. If we see the general markets improve drastically these names will probably do a lot better than the two aforementioned companies, but they do also have a bigger downside. I will therefore only mention them in passing and say I would only put a small part of my allocation to these. The other names I have found in the tin sector are: Cornish Metals, Afritin, Elementos Limited, Stellar Resources, Tungsten West and First Tin.

Year end review of 2022

The second half of 2022 has been busy. In addition, the market has been going sideways most of the time. Not the most inspiring environment for writing. I have therefore not written any updates for the last six months. Still, I want to share a year in review for my uranium investments in 2022.

My uranium investments have not performed great this year and have as of 22.12.2022 a return of about -17% . Still, even though I would have been a lot better off betting on coal and the oil market, it could also have been a lot worse. I could have had most of my money in ARKK type investments like Tesla or Peloton down around 63% and 74% year to date respectively. Even “Nifty Fifty” style companies like Amazon (-48%) and Disney (-45%) have struggled in 2022.

Inflation fear and increased interest rates can take a lot of the blame for the 2022 returns. After more than a decade, there is actually a time value on money for investors with interest rates going up. Investors have just lived without meaningful interest rates for so many years that many have forgotten all about them. Valuations and P/E ratios have therefore inflated the last couple of years.

The cooldown in the markets we have seen in 2022 has thrown a spanner in the works on the uranium bull market. Without this happening, and the market still being “risk on”, we could’ve been somewhere completely different than where we are now. (Rocket and moon emojis come to mind). I do however not like to speculate on where we could have been. We have to deal with the situation we are in today.

The uranium sector has had many great fundamental developments in 2022, but in the financial markets the sector has struggled. With sky high energy prices I have never seen the general public being more in favor of nuclear power. I will link to this post by @Yellowbull11 (Mart Wolbert) for more of an in -depth run through of the positive developments in 2022.

The question for me is what are the alternatives to holding on to the positions during drawdowns like this? Should I change my approach in 2023?

To start off, trying to guess the exact time Powell will change his course is not how I run my investments. A lot can happen before that happens and we see other sectors bucking the trend today. I position myself as to not get too hurt by tighter monetary policy and keeping some cash on the sideline for flexibility.

The first lesson I learned in the stock market was that I do not make money if I chase after all the hot sectors or companies. When I did that, I bought companies near the top, and sold them on the way down just to buy the next company near the top. In addition, this was also a very short term strategy, and guessing the direction short term was not my strong suit. I have made most of my money by positioning myself in something over time and waiting for it to move. This meant that during the first 1,5 years of investing, before the end of 2020, I was underwater on my uranium positions.

If I had been 100% allocated to uranium it would have been a lot worse. That would require a higher risk tolerance than what I already have, and I would not be able to function day to day. I do have some diversification to precious metals, oil, tin, copper and nickel, and investments outside the stock market. I have added to all of these in 2022 in addition to investments in the uranium sector. This is an approach I will continue in 2023.

Still, I am not a fan of too much diversification. I am closer to the “put all your eggs in one basket and watch the basket carefully” camp than the other way around. If you are spreading the net too wide, you lose the opportunity to get any meaningful returns. I have had one big investment outside uranium in 2022. It was a private placement outside the stock market and it has taken up more than 50% of my investable funds in 2022. This was a follow on investment of a position I have initiated in 2017. For most of the time it has struggled, but in 2022 the prospects of the company have changed for the better.

Moving forward I will follow the uranium market as closely I have done the previous four years. As long as the fundamentals or valuations do not change I will stay with my positions. During the last six years the price of uranium has seen a rise of 166%, from under $18 in 2016 to around $48 in December 2022. Still, we are at the beginning of the contracting cycle. For people worried about there being no interest for uranium I will direct you to the price of spot conversion and spot enrichment that have gone up 150- and 250% respectively in 2022. As a utility fuel buyer you secure these services before you buy the uranium. If you have millions of uranium pounds, but can not convert them to finished fuel, you will not be able to fuel the reactor. Therefore fuel buyers are perfectly rational in securing services before they secure uranium pounds.

We have seen a great deal of positive fundamental developments in the uranium sector in 2022, but I expect a lot more in 2023. If the market moves up with these developments I will be very happy.

Happy Days

fire in the middle of the city during night time

Our resolve can wear down a lot after a couple of months of being hammered in the market. Choppy action for months can be harder than a steady grind down. You get your hopes up that the sector is decoupling from the general market just to get the rug pulled out from under you.

It is hard to see that equity prices go towards, or below, prices the equities were at a year ago. Getting closer, or below, your entry price is even worse. When you are up by a lot you are playing with the house money. It does not give that much consolation that commodity stocks are performing a lot better than the overvalued tech stocks or the other overvalued sectors. The only thing that matters is that we do not lose money. If you give it all back, you get angry at yourself that you did not take some of it off the table.

Still, keeping things in perspective is very important. Yes, a recession, or a several year long depression is a possibility. In that case a lot of wealth will be wiped out in the world, but we will still need food and energy to survive. I do not believe that uranium and other essential commodities will fall as much as many of the speculative options out there. (We do however see the uranium sector has outsized beta to the up- and downside again and again). If they do, I believe they will bounce quicker. Why? Because they are essential for our way of living. Most of the speculative cryptocurrencies and tech companies (with unproven business models) can not proclaim the same place in the Maslow hierarchy. Well funded companies with great management in a sector essential for the world energy supply will survive. Compared to other investments many commodities have few to no substitutes, and many of them also have very inelastic price demand. Demand can go down a certain amount during a recession, but if the commodity already is in a major supply deficit, there is a bigger margin of safety compared to other investments. You still have to pick the right companies. (Picking the wrong one, who has to do a capital raise at the worst possible time, can be the difference between bad and spectacular returns).

With hindsight on the last couple of years, I would maybe have been a little less aggressive and been more patient with putting on my positions. Lobo Tiggre, the Independent Speculator, is someone I want to emulate more. The markets have time and again given us great buying opportunities. I am however not changing my overall strategy. As with diets or fitness programs, the best strategy is the one you are able to follow. What helps a lot for me is having a job with a cash flow coming in every month. I have diversified some of my new funds into the oil sector, but I am still buying uranium. If we continue lower, I will have some money ready to take advantage of it.

Getting on the offensive

One of my older posts “The Big Commodity Short” has been shared this week. I think that most of it is still on point. If I could have made one change for my own part, I might have invested more in the oil and gas sector that has been on a tear the last year. Still, I think that I also may have dodged a bullet. The cheapest and most undervalued oil and gas equities were in Russia. When I wrote this piece we knew that rising commodity prices would lead to higher prices on other products. That this again would put pressure on the central bank banks to curb runaway prices was a given.The question is still if the central banks will continue to increase rates and cause a major recession.

One should not be in the situation where you doubt the thesis every time the market is going down. The markets do not move up or down in a straight line. I see proof almost every week that the thesis is unfolding:

On Thursday June 16th Borja (@piterloskot82) reported that CGN (China General Nuclear) and CGNPC (China General Nuclear Power Corporation) have entered into a new sales framework agreement for three years between 2023 and 2025 for 3.12 million pounds per year. The interesting part was that 40% of the contract was fixed at $61.78/lb multiplied by an inflation multiplier, but the majority (60%) of the contract was linked to the spot price:

I have two takeaways from this contract: The first one is that the fixed part of the contract is way higher than the spot price at the moment ($61.78/lb versus $46.98/lb). The second part is that CGN has the majority of the contract linked to the spot price at the future delivery date. CGN would not have 60% linked to the spot price if they did not think it would be a lot higher than $61.78 during the contract period 2023-2025.

We also got the news that Global Atomic has received a Letter of Intent from a major North American utility to produce 2.1 million pounds of uranium from 2025 to 2030. Utilities are looking for pounds outside the major producers with developers to diversify supply. (Previously we have seen companies like Encore Energy contracting pounds for delivery in 2023). We did not see a lot of this before 2021. Focusing on just the general markets and the spot price of uranium going down (while SPUT is getting stink bids filled) becomes very myopic with this backdrop.

The challenge now is to get on the offensive. When looking back at the time we are now five years in the future, what do you think will be the best decision you can make today? Do you believe this is a buying opportunity or should we abandon ship and wait for better times? I am looking for more cash to deploy more steadily, but I will try to be a bit patient the next couple of months.

Avoid spreading yourself too thin

I have invested in uranium, gold, silver, tin, oil, RRE, and copper. With several of the sectors seeing new highs, people (with or without credibility) calling for a top will increase. Conviction to hold on to a trade when people come with differing opinions can not be given, it has to be earned. Mentally and financially there is a limited number of sectors I can follow at once.

What has worked out for me has been to focus more on a select few sectors and let a lot of the other ones go by the wayside. By being very focused I have missed trades in coal and lithium where companies have gone up several times their value the last year. In both of these sectors I was told in advance, and could have deployed some funds, but I decided not to spread myself too thin. Maybe some people are able to jump from the best performing sector every six months and catch all the trains, but I do not. I stay in a select few and wait until I have that big opportunity. There are just too many opportunities for me to take advantage of all of them.

Learning from previous mistakes

When I was younger I was well diversified with my investments. Among others, I was invested in the fish farming sector, which is very important in Norway. I was in this trade from early 2014 to mid 2016. Here I was invested into one of the most quality names in the sector (Salmar) who was executing on their strategy without fail. Salmon was a growing industry, and had been a great sector for several years already, when I started investing. I had an OK entry at NOK 76 (about $10-11 at the time), but I had nothing but random newspaper headlines and maybe some price charts to guide me. My investment in the fish farming business was just one among several different positions. Being invested in a lot of different companies and sectors had left me with too little time for in depth research. (If you seek diversification it is easier to have a broad index fund do that for you and focus on select areas for yourself).

There were a thousand reasons to sell. The most prevalent was, according to the financial newspapers, that the price of farmed salmon was unsustainable. People would not go on with paying an increasing amount for salmon. After a certain price point, people would switch to other protein alternatives. All this together with the fear of giving back the returns caused me to sell. I got out at a price of NOK 236 (about $28 at the time) mid 2016 for a 3x return in my home currency. With hindsight I do not look at the chart that continued on to a 9.5x return (excluding very generous dividends on the way) with regret. I do however take some lessons from it.

Conclusion

By knowing the sector more thoroughly, by knowing the dynamics and having a knowledge of the different milestones one should look for, you take out a lot of the guesswork in the trade. There are people who are experts in the fish farming sector and who have harvested a lot more gains from this trade than me.

For my part, I find several of the commodity sectors to be a lot less complex than the fish farming business. There is no good substitute for tin when it comes to solder, if you are a nuclear plant you can’t switch from uranium to oil to fuel the plant etc. The commodities are also more cyclical than most other sectors where you go from a market that is oversupplied to undersupplied. Supply also takes a very long time to reach the market. For speculators this cyclicality is a feature, not a bug. The less developed a market is the more potential there is for outsized gains.

Can you feel it?

After a break I am back at it again writing about uranium. This week there have been several exciting developments and I will mention a couple of them today. We have had news about possible restarts of idled mines by Paladin and Boss Energy. We had the month end reporting from UxC and TradeTech showing increasing prices in the nuclear fuel cycle. In addition a merger has been announced between Deep Yellow and Vimy Resources. These developments have me very optimistic for the times ahead.

I have tried to get away from following the sector closely every day for the last month. I have done this to try to become more objective and see if the news flow actually is as positive for the uranium sector as people are claiming. A lot of the news flow is noise, but getting back at it, a lot of the recent developments are material improvements and not just part of the hype.

Langer Heinrich and Honeymoon Uranium Mine getting closer to a restart

Late this week we had Paladin Energy announce that they had successfully completed an institutional placement to raise approximately A$200 million. The raise will mainly be used to restart their Langer Heinrich Mine.

A formal restart project launch is expected in July 2022. The commencement of early works activities will commence immediately. The Company is targeting commercial uranium production from Langer Heinrich in CY2024 4/4

I have seen comments that their market capitalization today is equal to what they can expect from producing and selling their supply at $60/lb. One counter argument to this is that the financing for A$200 has been done with bigger funds and institutions that demand returns on their investment with the company. That means demanding that Paladin be smart with their contracting. They have agreed to fund the company on a better outlook and strategy than contracting out the mine at $60/lb.

Boss Energy is also set for a final investment decision on their Honeymoon Uranium Mine. They completed a Front-end engineering study that found costs, technical performance and financial returns to be in line with their 2021 feasibility study forecasts. A formal announcement of a mine restart is therefore likely not that far away.

My take is that Paladin and Boss are not moving their projects along without them seeing increased interest from utilities. Both companies have talked about being approached by utilities to start up production earlier. These moves are only made when they are confident that we will see sustainable higher prices in the future.

Things are moving along in the fuel cycle

Retail investors can at times be too focused on the spot market. We should however not forget about other parts of the fuel cycle. I have to credit John Quakes (@quakes99) for sharing these figures with the changes in price month over month from UxC and TradeTech. (Both companies provide information to the nuclear sector about uranium prices and more).

No doubt, a lot of the movement in the rest of the fuel cycle is because the situation with Russia. According to WNA, Russia provides about 35% of the enriched uranium globally. Possible sanctions are making fuel buyers looking for other suppliers. John Quakes has also shared this picture to show where in the fuel cycle we find U308, conversion, UF6 and enrichment.

If you see the spot price move down US$0.50lb in the future, it is good to not lose sight of the rest of the cycle. This development is clearly telling us that there is an increased focus on security of supply for the nuclear utilities.

Merger between Vimy Resources and Deep Yellow

John Borshoff from Deep Yellow has on several occasions said that not every uranium developer has a team that can build (or run) a mine. There is not enough know-how in the sector for every company being able to bring a project into production.

We might have seen an example of this with the merger of Vimy Resources and Deep Yellow. If Vimy was capable of building the Mulga Rock Mine by themselves they would not have agreed to the merger with Deep Yellow that easily. Based on their feasibility study, Vimy Resources is one of the more leveraged companies in the sector on a discounted cash flow basis from their projections. Still, the feasibility study is made with the assumption that they will get into production. A lot easier said than done.

You don’t necessarily have to build the mine yourself to add value to a project. If you have done a great job by derisking the property, you can see great valuations on the asset alone, without getting into production during a buyout from a producer or competitor.

The new merged company is very exciting in terms of the size of their combined resources. With the correct strategy for getting into production the new company has potential to become one of the winners in this bull market.

Conclusion

After a lot of turbulence in the start of 2022 it looks like most of the news coming out at the moment is positive for the sector long term. With Paladin and Boss Energy getting closer to restarting their mines there is a noticeable optimism for the future in the sector. I am not going to speculate on timeframes and price targets for the spot price, but from what we have been seeing the last year my view is that we are probably going to see a move sooner rather than later. The peak price of uranium will also most likely be a lot higher than what you could hope for when I entered the trade in 2019.

To end this post I just want to remind myself and others that anything can happen. Do not invest more than you can afford to lose.

Security of supply

Before today’s post I have to acknowledge the situation in Ukraine. I am against war and invasion of any country. I am not cheering what is happening, and I do not talk about nuclear war in an offhand way. All of my positions were set long before any talks about Ukraine and I am not trying to profit from war. Still, this conflict is making it obvious that security of supply is becoming more and more important.

Even though few people had war on their calendar for 2022, some speculators have been positioned for scenarios that are similar to what we are seeing today. One of the biggest arguments for strengthening the US domestic uranium fuel cycle during the Section 232 hearing in 2019 was the West’s dependence on Russian, or Russian influenced supply, of critical commodities. It was not only fear mongering to further US producers/developers interests. A substantial part of the world’s enriched uranium is coming from Russia. Sanctions on Russian commodity exports will lead to utilities having to look for supply from elsewhere. This is a big part of the reason we are seeing the upturn in the uranium sector at the moment.

The spot market

On Friday 25. February SPUT moved up over 7% with very high volume. I was watching the follow through closely to see if the spot price would react. I invest, at least partly, in uranium because it is not an illiquid market. If a high volume day of SPUT buying had not moved the price of the trust into a premium to raise money, it would have been a big red flag for me. (Earlier in 2022 we had a Friday where over a million units of SPUT were traded in a couple of minutes, but there were no units issued. There was liquidity enough for this trade to happen without a premium to NAV. For me this was a bad sign that volume like that could be absorbed without a move in the market at all).

Luckily Friday 25 February did not go the same way. SPUT was able to issue 6.66 million trust units raising $83 million in cash to stack about 1.41M lbs of uranium. This led to a two dollar move higher in the spot price to $46.5. For me this is another confirmation in the uranium thesis.

I would like to remind everyone that we are at the “end of month smash” period for the spot price of uranium, where some players are usually trying to force down the price for their spot referenced contracts. With SPUT still at a premium and cashed up, there is at least for the moment a ready buyer for anyone who wants to sell off some pounds to lower the price.

Positive developments for uranium

city skyline across body of water during night time

This has been a very interesting week to say the least. Cameco delivered their Q4 2021 numbers, France announced plans to build up to 14 new nuclear reactors and the U.S. Department of Energy announced a $6 billion Civil Nuclear Credit program.

On Wednesday 9. February we had Cameco reporting their Q4 2021 results. What got most people talking was the announcement that Cameco will start up production at McArthur River production again (although below the annual licensed capacity). Cameco has already communicated on several occasions that McArthur River will not start production before the pounds they are producing are under contract. I read some publications interpreting the call as negative, but I could not disagree more. Cameco has signed 70M lbs under contract since 2021, and 40M of them in 2022 alone. For all of 2020 Cameco signed 12.5 million pounds in long term contracts. Long term contracting finally looks like it is increasing, although from very low levels. It will be very exciting to follow the developments in the next couple of quarters.

Out of France we had President Emmanuel Macron saying that France will construct six nuclear reactors, and study the possibility of commissioning a further eight.

Macron said: “Given the electricity needs, the need to also anticipate the transition and the end of the existing fleet, which cannot be extended indefinitely, we are going to launch today a program of new nuclear reactors.”

Following this, on Friday 11. February, the U.S. Department of Energy announced a $6 billion Civil Nuclear Credit program.

The U.S. Department of Energy (DOE) today released a Notice of Intent (NOI) and Request for Information (RFI) on the implementation of the Bipartisan Infrastructure Law’s $6 billion Civil Nuclear Credit Program. The nuclear credit program supports the continued operation of U.S. nuclear reactors, the nation’s largest source of clean power. Both the NOI and RFI are critical first steps to help avoid premature retirements of nuclear reactors across the country, preserving thousands of good-paying clean energy jobs while avoiding carbon emissions.
energy.gov

We have already seen several positive developments in other parts of the world. The US taking action is great.

Anchoring

With all the positive developments, and possibilities of high returns, it is important to remember to prepare for the best case and not just for the worst. I use anchoring actively at the moment to be at least prepared for this.

Anchoring is a behavioral finance term to describe an irrational bias towards an arbitrary benchmark figure.

We see several examples of this. In oil there is for example something magic about trading above $100 per barrel. We see similar price levels in many commodities. You also have anchoring used in sales. For example you have a used car salesman offering a very high price for a car at the beginning of negotiations well above its fair value. The high price acts like an anchor and often results in a price higher than if the salesman started at a fair value. Also, if you see a t-shirt selling at $1,200, the next one you see, even if it costs $100 will seem cheap in comparison.

There are also real life examples of anchoring. They can look very similar to the ones we have in investing. I had a running buddy that for years could not break the 2 minute barrier in the 800 meter race. This can be compared to a resistance level in a trading chart. (A price level a stock is not able to get over). However, when my running buddy finally got under 2 minutes, he was able to repeat this for several years in a row. Even if he got injured, got out of shape at times, he knew he had done it before and managed to do it again repeatedly because he had done it before. What was impossible before was possible, almost inevitably possible. Analogous to trading the 2 minute barrier had become what you could consider support in a stock chart.

With investing I’ve had a similar situation. When I first started out, the big round numbers were always far away impossibilities. However, after several years of investing I broke down several of these barriers on the way. At the November 2021 highs I was around an area I had found almost unattainable at the start of 2019. (And yes this was in hindsight a great area to take some profits off the table and buy back cheaper three months later). The benefit for me after the fact is that I broke a mental barrier by just holding on and getting to this level. Now I have an anchor at the valuation my portfolio had in November, and it does not look that imposing anymore. I am getting more used to that level, and I will not be as stressed by getting there again as I was three months ago.

When we talk about anchoring in psychology, we mostly consider it as a behavioral bias. There is absolutely no rule saying my portfolio has to go back to its November 2021 high. There are a million things that can happen to the market, and the world in general, that can stop a market in its tracks. (In addition, nothing says you have to get back to the same level the same way you got there the first time). As an investor I am aware of this. I am also aware that people self sabotage themselves at important inflection points in life, and in trading. People talk themselves out of doing stuff that would improve their life considerably every day, and many do not get to the next level because of this.

I am therefore using this anchoring consciously to avoid the worst of this. I have obviously invested in the natural resources markets because the fundamentals say that for production to increase, the price has to go up. I have a very strong conviction in this, and I have put most of my funds in on this bet, but there are no guarantees in life. If we get back to previous highs I will at least be ready for it. It is important to think about the worst case scenario, but you have to know what to do when you find yourself in the best case scenario.