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.

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.

Uranium looking at 2022

Happy New Year to everyone. 2021 is behind us, and we have 2022 ahead of us. Today I will mention the three biggest positive triggers I am looking at in the uranium sector in the coming year. I hope that 2022 will be a great year for us all.

Long-term contracts

We have heard of some contracts being signed in 2021. I expect we will see even more of this activity in 2022.

“a reactor that runs out of uranium is just an expensive paperweight.”
Kuppy

There is no substitute for uranium. We are now one year closer to the years 2024 to 2026 where a lot of contracts roll off.

I used the above graph a lot last year, and I hope we will see a 2022 version of it.

Companies like Kazatomprom and Cameco need communication from their customers if they are to increase their production after 2023. Producers increasing production will however not be enough. New mines need to come online to cover demand at the end of the decade. There are some developers aiming to get in production after 2025, but you only want part of your supply coming from an unproven entity.

EU green taxonomy

It looks more and more like we will get nuclear power (and gas) included in the green taxonomy. A draft for the taxonomy text was sent just minutes before central Europe went into the new year and 2022. There are still possibilities for delays with the EU bureaucracy, but getting a draft out before 2022 leaves me hopeful.

Getting access to financing at more favorable terms, and access to a bigger pool of investment groups can do a lot for the build out of more nuclear reactors. The sector has had several regulatory disadvantages that have made construction of nuclear plants very slow and costly compared to other alternatives. Just changing this slightly can be very positive for the future of nuclear power in the European Union. Before 2021 this was not on our radar so this change is already very positive.

SPUT NYSE listing

The last factor I am looking at is the listing of Sprott Physical Uranium Trust on the New York Stock Exchange. With an investment pool that is about 10x the size of the Toronto Stock Exchange, ($28T vs $3T) this can have a very big impact. If we get interest from big financial players, we might see a price where more of the above ground inventory moves into Sprotts hands. Mobile inventories of uranium being sold into the market, and Kazatomprom flooding the market with cheap pounds, are two of the most popular bear arguments for the sector. The more answers we get to these arguments, the better it is for investors.

Conclusion

These are the three things I am looking at in 2022. If you have other ones just leave a comment here or on Twitter.

Can nuclear get a Messmer moment in 2022?

We are at the moment looking at a future with nuclear power growing in the western countries for the first time in decades. With growth in the sector mainly being designated to the East so far, this is not something to scoff at. On Wednesday 22 December we will probably get a decision if nuclear power will be included in the green taxonomy. This will open up the possibility for cheaper financing and make it much easier for many funds to invest in the sector. The coming week is therefore a very exciting one.

This comes at a time where people in Europe have to deal with high energy prices, and an uncertainty about availability of energy in the coming months. As with almost everything, we have experienced similar situations before.

Looking to history

Certain things seem to repeat from time to time. In the 70s we had an energy crisis that showed the world how dependent we were on oil for our energy needs to keep society running.

«The oil crisis arose in the western countries in the winter of 1973–1974. The price of petroleum increased when production was reduced, which led to austerity measures and restrictions on, among other things, driving. The background to the crisis was the war between Israel and Egypt/Syria, called the Yom Kippur War.
The member countries of OPEC, decided to raise crude oil prices by 70 percent, from $3 to $5.11 per barrel, and to cut production by five percent for each of the following months until Israel withdrew from the occupied territories.
On January 1, 1974, OPEC raised prices to $ 11.65 a barrel».
(Translated and abbreviated from the Great Norwegian Encyclopedia).

We also had a drop in oil production in the wake of the Iranian Revolution in 1979, known as the 1979 Oil Shock, or Second Oil Crisis that pushed the price of oil even higher.

You have probably seen pictures of the 70s with lines at the gas stations, and similar situations. In Norway there was a ban on driving cars during the weekend for a time. (One of the most famous pictures from 1973 was of the Norwegian King Olav V, taking the tram together with the regular citizens to go skiing. It was mainly a publicity stunt, but this helped solidify his reputation as “The King of the People”).

The oil crisis led to many trying to find solutions to be less dependent on oil. Necessity is the mother of invention. Just as people managed during World War II with rationing, with most goods in short supply, many people came up with ingenious solutions. As an example we had people driving cars that ran on coal, or even wood.

You also had solutions being made on the national level. Many of the 56 nuclear reactors in France were built following the 1973 oil crisis. In March 1974, the French Prime Minister Pierre Messmer announced what later became known as the “Messmer Plan”. This was a huge program aimed at generating all of France’s electricity from nuclear power. (At the time of the oil crisis France was dependent on a lot of foreign oil for their energy needs). France looked to nuclear power as a solution to this dependency.

At the moment we look to be just as dependent on oil and gas as we were in the 70s. The last decade we have scaled up intermittent renewables, and made them a bigger part of the energy mix, and at the same time underinvested in the fossil sector. The underinvestment in fossil fuels has led to lower supply available, and higher prices.

We’ve already had heads of state like Macron and Johnson coming with announcements about renewed investments in nuclear power in France and the UK respectively. Several other western countries have done the same. With the possibility of a colder winter than usual, and supply lines stretched already, we might get more countries on board with nuclear power. One winter similar to 1973 and we might get another, if not a Messmer moment, maybe a reversal of the opposition to nuclear power from other countries.

Is the market going to go down the toilet?

Friday the markets tanked on news of a South-African version of Covid-19. People, who have been waiting for the November to December seasonality in uranium, were not happy about this. No matter what people tell you about probabilities, the markets have always been full of factors that can not be controlled.

Maybe you do not believe me, but I did not check my account on Friday. I am not trading my positions, and without money available to take advantage of the situation I did other things. I went in and checked a snapshot of my positions on Saturday morning when the markets were closed to know where I am at.

To no one’s surprise it is down, and some of my positions I suspect to be down close to double digits.

Now I want you to imagine that your (and everyone else’s) house is in a market similar to the stock market where they can see daily price fluctuations. Do you think you would see anything similar to the stock market on Friday? I do. Even if the housing market and stock market are not the same, there is correlation between them. The key for me is that I do not obsess over the value of my home in the short term. I do not follow all the daily fluctuations of my investments either.

I am not going to do a big pep talk here about the investment thesis, but in short, -nuclear power is still needed. Where I live the temperatures are going down for the Winter season, and we still need to heat our homes and live our lives, lockdown or no lockdown. I have lost track of all the different strains of Covid, but there is now a new South-African one. It is interesting how the media, and the stock market is treating this. The stock market is now starting to price in a possibility of a new March 2020 lockdown.

I have talked to people who have sold down a bit already because they do not want to experience a similar situation to what we saw in the stock market last time. They might be correct, but I have instead just prepared more mentally to stomach another hard drop. Even if we are at a much higher level now than February 2020. (I also want to repeat that if we have a hard drop, nothing says it has to go up again afterwards like it did the last time).

What can happen on Monday?

I get told that I think too much and analyze past and present events too much by my immediate family. I do however look at this as one of my bigger edges when it comes to investing. I remember how different the stock market acted, or society was 10 years ago. If I can not use that part of history, and my interpretation of it, to set my personal and investment course I would just be like a leaf blowing in the wind.

I want you to remember back to where the world was in March 2020 and compare it to today. At the time we had a new virus spreading across the globe at a very rapid pace. No one knew how contagious or deadly it was, but what we saw from China was not promising. Some places like Italy were hit very hard, and because countries did not have enough information about the situation yet, most of them went into lockdown of some form or another. There were at the time several unknowns, and even the most level headed persons were paying attention. I remember when the government asked our country to go into voluntary lockdown, most of us were having more existential thoughts than usual. I dare to say we have answered several of the unknowns at the end of November 2021.

The only reason why I am writing about the virus is because of the effect it has on the markets. Are we going to close down as hard as in March 2020 for this new variant?

We most likely will not have an answer about this by Monday. I do however not expect a similar situation like we had in March 2020. If we do, I will try to deal with the situation better than what I did then. I will not sit at home glued to the computer screen refreshing the latest stock charts.

scenic view of snow capped mountains during night — Photo by Stein Egil Liland on Pexels.com

It can’t all be positive news

It has been two weeks since my latest uranium update and it has been a very eventful time. We had the announcement of China planning to build 150 reactors last week. This is massive news that will have a huge impact on demand going forward. Late this week the sector got more somber news with the Clearwater River Dene Nation serving notice on the uranium industry regarding impacts of uranium mines and exploration in Saskatchewan Canada. This has led to some heated discussions and a lot of opinions.

The CRDN community has:

grave concerns about the potential impacts and risks posed by an increasing number of uranium mining and milling projects and exploration activities occurring within its Traditional Lands.
newswire.ca

This is a serious issue and should not be swept under the rug. The mining industry has a long history of not treating all the different stakeholders fairly. (Workers, the environment or investors etc). In Canada it is not unusual for mines taking 10-20-30 years to get into production. There are a lot of environmental permits and social approvals needed before you can start production. I wrote about my allocation to Canadian companies on 14. March 2021, and permitting is a big reason why it was on the smaller side compared to other jurisdictions.

Challenges in terms of permitting in Canada have never been a secret. Compared to grades, and quality of assets, the Canadian companies have been trading at a discount compared to companies in other jurisdictions. Episodes like this proves that a discount might be warranted. Social licence being an important part of the mix. I am also certain that some companies are better than others in this area, but I do not want to touch the specific First Nations case here because I do not have all the facts. This is a reminder of how important this is. (In Norway we just had a Supreme Court ruling that a wind-park has to be taken down because it was in violation of indigenous peoples’ rights).

Going over some of my earlier thinking

I have read over some of my older articles and I am happy to say that I know more today than what I did a year, or six months ago.

One thing I firmly believe in is that the stock market will very often turn before the general market. When uranium companies rose rapidly at the end of 2020 there was no price movement to speak of in the spot or long term market. Still the equities were anticipating the sector would improve. I mentioned this in one of my posts in July 2021:

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.

I think I was right about that one. We can compare the change in equities over the last year compared to the move in spot price. The move in the spot price did not really start before the end of August. If we compare this to three companies: Fission Uranium, Energy Fuels and Global Atomic, they went up about 88% (CA$0,26 to CA$0,49), 174% ($1,74 to $4,77) and 275% (CA$0,64 to CA$2,4) before the spot in earnest started to move from $30 to $47. You miss out on big gains waiting for price confirmation.

Equities have continued climbing up afterwards, but people who have waited for spot price to start running are a lap behind.

Going forward

For me the easy part of this investment is over. Holding conviction when everything is horrible is easy for contrarians. The minute things start looking better, it gets harder. Contrarians want to exit the party when other people arrive. You do not want to leave too early, and let everyone else have all the fun.

I have dipped my toe in the more mainstream crowd this week. I am happy to report that no one I talked to had heard about China and their 150 planned nuclear power plants. (They had only heard about them not attending COP26 in Glasgow). I therefore see the most eager guests are arriving, but we still have a long way to go.

Down for the count

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

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

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

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

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

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

Uranium, why do we hold?

To invest in the uranium sector you need a bare minimum of conviction. If not you will be thrown off the investment by the violent corrections we see at regular intervals. We are in one of these now, and there are more to come moving forward. I am of the opinion that if you are not holding strong now, you will leave a lot of money on the table.

Disclaimer: nothing of what I say here can be interpreted as investment advice.

Going back to basics

Before you invest there are a minimum of questions you have to answer. John Polomny challenged you to do this in one of his videos a couple of months back. If you can’t answer these, you should maybe do more research before you increase your exposure to the sector. The most fundamental of them are:

How many nuclear reactors are operating in the world?
How many are under construction?
How many are planned?

As of September 2021 there are 443 operating reactors in the world. (The US has the most with 93, followed by France and China with 56 and 51). The last couple of years we have seen the number of reactor closures roughly match the new reactors coming online. The only difference being the new ones have a higher output than the old ones.

The more encouraging statistics are the 57 nuclear plants under construction. (18 of these are in China, with India and South Korea next with 7 and 4 under construction). If you dare to hope, we can at least expect some of the 101 planned nuclear plants to become a reality. (38 of them in China, 25 in Russia and 14 in India. The future growth is mainly in South East Asia). By the latest developments we are looking at a healthy growth for the sector. You can find all of this information after five minutes visiting the World Nuclear Association.

Growth in a sector is not a must to get a higher price. Even a sector in decline can experience periods with higher prices, or spikes in price. Look to the coal sector. In the West we have said we will stop using coal entirely by a certain date, and the Norwegian Oil Fund sold itself out of its coal investments. (Something I, as an indirect investor of the fund, do not like). Still, even if we have decided to stop using coal in the West, reality is completely different. Recently renewables have really shown how unreliable they are with the weather we have seen the last couple of months. The developing world is completely dependent on fossil fuels to cope with their increasing energy needs. There is an ethical argument for coal. If you look at the chart of Peabody, the most popular coal miner, you see a sector that has been oversold and left for dead, but suddenly sees an increased demand. (This is what we look for with our uranium investments).

You just need a couple of years with low demand, leading to lower production and inventories. When just about everyone needs your product at once, and there is not enough to go around, the price goes up. Sometimes violently.

WNA expects modest growth for uranium demand in the coming years. We have gone through years of lower production, and drawdowns of inventories. There have also been encouraging developments, where it seems that nuclear has become more of a palatable political solution for phasing out fossil fuels in the West. With the energy spikes in Europe in the last weeks, because of the low winds, the case for steady baseload power from nuclear power is even more evident.

When did the last uranium mine come online?

This has not been as easy to find as I thought, but I got some great help from John Quakes who pointed me to the “Uranium 2020: Resources, Production and Demand” report. Also called the “IAEA NEA/OECD Uranium Red Book”. In that report I found what I was looking for: The Husab mine in Namibia started up production in 2016. After that there has been no new major developments completed in the sector. The 2020 report also mentioned the possibility of expanding Olympic Dam, but those plans were scrapped late 2020. Low prices do not tempt new production to come online.

I also looked to Kazatomprom, the company that has increased their production the most over the last 15 years. They actually increased production on their Inkai mine by 20% as late as in 2019. (This mine is a joint venture with Cameco (who owns 40%) and production went from 2,643 tonnes to 3,209 tonnes in 2019). This is the last big production increase I have found in the sector. This increase was in the very middle of the bear market.

How many mines have come offline and how many pounds have left the market?

In 2021 we have seen two mines coming offline in Cominak and Ranger. Cominak is located in Niger and it had been in operation since 1978. The mine was approved to produce 5,2 mlbs per year, even though the last couple of years the production was about 3 mlbs. Together with the closing of Ranger in Australia, about 5 Mlbs has been removed from the market in 2021. This has to be sourced from somewhere else.

Before this we have seen mines like McArthur River, Langer Heinrich and Honeymoon go on care and maintenance. This has helped deal with the oversupply we saw after 2011. None of these will come online before they get long term contracts. Preferably in the $50-70 range. They will not start up production to sell into the spot market.

We also have the entry of the Sprott Physical Uranium Trust that has already removed about 10 Mlbs from the market in 2021 so far. A total higher than the two mines that closed down production in 2021. SPUT will continue removing available supply from the spot market if they trade at a premium.

How many mines can we see come online in the next few years?

In the next 2-3 years we expect mainly that the care and maintenance mines will come back online. We have many previous producers around the world, and all of them are saying they can get their mines up and running quickly. In a sector where a lot of knowledge has left, and workers have gone elsewhere, getting into production can take a lot longer time than most people think. What we have seen from the presentations is the company putting their best foot forward. (Correction 27.09.2021: There is one mine on track to come online the next 2-3 years. ARMZ Uranium Holding Co. (owned by Rosatom) is on track to come into production with its Mine no.6 in Siberia in 2023, and fully operational by 2024-2025. The assumption is that CNNC would take 49% of the output (maybe 1250t/year), with ARMZ taking the rest).

We can also not expect that all the near term producers will have a smooth ride into production. There are always obstacles that make things take longer than expected. Getting hold of equipment will for many be a challenge with all the supply chain problems we have seen around the world. The companies also have very different levels of expertise at running a mining site. As John Borshoff says, many companies are in the market to sell flights, but they do not have a pilot to fly the planes.

I do not agree that “all in” sustaining costs (AISC) are as low as many of the companies say. They are at least not accounting for all the costs they need to cover. We have several mines, McArthur River being one of them, who have been on care and maintenance for years. This comes at a cost and when it comes back online it will have to cover this cost, and produce at a profit. The company needs profits so it can buy new assets and give something back to its shareholders. The higher costs you have up front, before you produce a single pound, the higher price you need for starting up the project.

Even Kazatomprom has a coming production gap. They need to increase CAPEX by a lot to close this. That equipment is most likely not produced in Kazakhstan and does not benefit from a currency that is devalued. They are also committed to a 20% production cut out 2023. If they break this commitment they will be punished by investors selling out of the company.

Conclusion

These investments are burning matches. They will probably peak out a very long time before supply can cover demand. Just as the market anticipated a rising spot price months before even the announcement of SPUT, the market will anticipate lower prices when the market seems to get closer to an equilibrium. Investment returns are made on expectations of the future, not on today’s situation.

With a price far under the costs of the marginal producer, we are no way near a solution for the supply/demand imbalance. For me this means we are a long way from selling or trimming for my part. I will use Rick Rule who has said: “The uranium juniors have gotten ahead of themselves.” By mid September they were closer to pricing in the spot going to $70 than $50. I would say that today they are pricing in spot going towards $30 again. If you sell now, I believe veteran players like Rick Rule can be on the other side of the trade. The coming months ahead have a lot in store for us, and one has to be prepared for anything, positive and negative.

Why saving nuclear plants set for closure is a big deal

low angle photo of nuclear power plant buildings emtting smoke

I hope you all have recovered from Friday’s euphoric mood in the uranium sector. With some time away from the markets, I hope you have had time to digest all of the impressions.

Sprott stole most of the headlines on Friday. They released a press statement saying they had filed an amended base shelf prospectus for their Physical Uranium Trust. The total is now for a $1.3B ATM financing to buy more uranium. This is up 1B from their 300M financing they already had in place. What many forgot about in the gif fueled excitement were the life extensions of the Illinois power plants. I think there are reasons why we should not ignore them.

First of all, saving Byron and Dresden is great for the climate. (One can get into a discussion about if subsidies are the right solution for this, but I am not going to get into that here. Nuclear has had enough headwinds and resistance the last 50 years). If you want to convince me you want to save the environment, you can not close down the most effective and most reliable power source there is. You can not run your country on 100% renewables. You need steady base load power.

The Byron and Dresden plants were set for closure, and therefore they do not have a lot of inventory on hand. With the extensions they now have to go looking for fuel, as soon as possible. Exelon, the owner of the plants, says they have ordered fuel to keep the Byron plant running past its 13. September deadline already. I will quote Harris Kupperman (also known as Kuppy) who wrote: “as a reactor that runs out of uranium is just an expensive paperweight”. Short term Exelon might want to source fuel from the spot market, but the mid and long term market is where they would want to go longer term. The demand of the power plants who got life extensions is about 3M lbs per year. This has to be updated in the supply and demand models of the research and analysis companies. A couple of more life extensions and the models have to be completely redone.

The last couple of years the utilities activities have been very low in terms of contracting. This might be the first step, helped by Sprott, to get more utilities into the contracting game. If the Sprott uranium trust is not there to buy the pounds, you risk the price going down again. (FYI, I do not expect Sprott to stop buying). Now we have at least one of the utility companies having to source more uranium. Our thesis has mainly been about utilities demand. I look at Sprott as the lighter fluid and the spark, with the utilities as the logs you put on the fire to keep it going all night. I might have to reassess my view and admit that Sprott is more important than I first thought. It is more like another energy source to both light and keep the fire burning, and not just the spark. Maybe I should compare Sprott to oil.

Up until now, the spot market for uranium has been a disaster. The lack of activity has made it impossible to get real price discovery. In short, it has been a broken market. Together with very low long-term contracting, it has created the whole investment opportunity for us. Being taught about the Efficient Market Hypothesis in business school, I should not have a chance to beat the general market. I have avoided this by investing in a non functioning market. Why would I go fishing where the competition is high? I would rather pick the far off, hard to climb mountain lake that no one wants to use.

Going forward my plan is simple: Do not do anything stupid! (Sell too early).

What to do if you get questions on why you support nuclear

I have seen a couple of people discussing nuclear power this week. This is a natural result of the interest in uranium going up on Twitter with the returns. Some people say that they can’t invest in uranium because of ethical reasons. This usually means that they think uranium mainly goes to nuclear weapons. They do not know that the uranium and nuclear market is heavily regulated. Every pound of uranium has to be accounted for through the whole supply chain before it reaches the end user. The main user for uranium is nuclear power plants.

We have the age-old: «What about Three Mile Island, Chernobyl, and Fukushima?» Nuclear is just too dangerous compared to the risks. We also can’t forget about: «What are we going to do with all the waste?» objection.

If you have had problems answering any of these questions or objections, I suggest you watch this video:

I hope you have a great week, and that we continue to see more positive developments for the sector.