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.
This week I have struggled to find anything inspiring to write about. I do not want to write another post about how to deal with draw-downs or volatility. I have written posts about that already. As long as we are under the marginal cost producer, I still think we have a long way ahead of us. This is just one of many corrections to come.
Instead I will write a short write up about my first 10 years of investing my own funds and some anecdotes I have found and learned from on the way.
My investment story so far
In the beginning of my investment career I was a third year student at business school without a lot of money. I wanted to learn about investing and found the best thing was to experience it for myself. I therefore created an account for myself and started trading. The first thing I learned was there was a big difference from theory to practice. The rush of endorphins if I saw my stocks go up 5% in a day at the beginning can only be compared to winning at a slot machine. The clinical descriptions in the textbooks were not good at describing how investing felt.
I learned about diversification, the efficient market hypothesis, how it is practically impossible to beat the index at school. At the same time I read a lot of books on investment strategies, the stock market, and economic history on my own time. In the beginning I just about followed every strategy I read about at once. This led to results that can only be explained like the decisions were made by a headless chicken. Long story short, I lost money. In retrospect I will choose to call it my school money. Luckily the amounts were 0.1% of what I have invested today.
In the following years I tested out a lot of different strategies, I just made sure it was one at a time. In 2012 I was very enamoured with dividend stocks and wanted to receive as high cash flow as possible from my investments. I was not alone in this sentiment. Many people have felt the allure of cash flow from investments. Andrew Carnegie, one of the more famous tycoons, being one of them:
Like every other investor I also had a stop by Warren Buffet and value stocks, but I did not have the experience at the time to stick to that plan. In the end I found the best thing for me, as an impatient investor, was investing in quality stocks that had steady revenue growth. The FAANG stocks, and other tech giants, became the staple of my portfolio for years. Something that was very profitable for me. Instead of the index beating me all the time, I started to outperform it. I also had to pay a lot less attention to the markets. The companies just continued to go up.
This could very easily have been the end of my investment journey, but I was always looking for new inputs. I was looking into angel investing and the “Unicorns”. A lot of what I saw there did not make any sense to me. You had competing ride-share companies Uber and Lyft, who were both valued in the billions. Both of them did not have any plans to be profitable for years. (I think the low interest environment has been a big factor in these valuations. Very low discount rates for future cash flows, increase the value of the company today).
What put me over the edge here was WeWork and their failed IPO in 2019. Angel investors had just inflated the valuation of the company on the way up to $47 billion. When the company was ready for the “dumb” institutional and retail investors, interest just evaporated when they scrutinized the numbers. Afterwards we saw SoftBank come out with this graph saying “some time into the future we will be profitable”. It did not specify the amounts, or the years it would take. I would rather choose to invest with 50 Cent and “Get Rich or Die Tryin’” as my only strategy over this.
At the same time I learned about Howard Marks and his view of the general markets. He talked about a group of companies in the late sixties that were called the “Nifty Fifty”. These were quality companies that were great investments no matter what price. They were improving profitability, had moats against competitors, and would be around for decades to come. Still, these companies in the end became overvalued. Before the bubble burst in 1973-74 they had a P/E of around 100. After the market turned, these companies fell much more than the market in general. The reason was simply that these companies were overvalued. They were not outcompeted by others in the market. You can find most of these companies today, and they are still market leaders. (Pfizer, Coca-Cola Company, General Electric, Procter & Gamble, McDonald’s, The Walt Disney Company, American Express, Xerox og Black & Decker). In the end valuations matter. At work I was hearing the same thing being said about a lot of the companies I was investing in.
That is why I decided to look for new sectors in 2019, and what made me look to the uranium and commodity markets. The change from growth stocks to deep value in commodities was not without its challenges. From the beginning I had trailed the Norwegian Benchmark Index (OSEBX). This was a natural result of my horrible beginning. After I went over to the growth stocks I started to outperform the markets some of the years. I even started to catch up to the head start I had given the index. When I switched my portfolio over to uranium I had a big test of conviction in my portfolio from July 2019 until March 2020. My investments in uranium were performing horribly, and I just lost more and more ground to the index. After 8 years investing I was having my worst year. It seemed like I just had invested in hopes and dreams. (The investments I had exited were still performing very well during this time). If I was at one point doubting my thesis, this was the most important time for me. Without faith in the investment thesis I would have exited my positions during this time. Instead I went over it again and invested more. From March 2020 the different commodity markets started their run and I started to outperformance the index. (The OSEBX index is heavily weighted to energy).
I am here showing my first investment account that I still have today. (I have started other accounts that have beaten the index for longer, but I show the first one to make a point). You do not need many great ideas in your career to outperform. You just have to survive long enough to catch the big wave when it comes along.
I do not plan to marry my investments. I am constantly looking for new places to put my money, but I will not scale out of my current positions before I see better opportunities elsewhere. I talk a lot about investment strategy, but not so much about change of strategy. I am not saying change strategy every year, but as the conditions change, I am always willing to scrutinize and change it. So should you.
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 SaskatchewanCanada. 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.
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.
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.
We are always getting new people coming to the uranium sector and we sometimes forget that everyone has to start from somewhere. The supply and demand imbalance is the reason most of us have invested, but how much people know about the sector varies a lot. How well covered utilities are is of the highest importance.
Many have heard of two to three years of inventory, and concluded that utilities will run out of fuel in 24-36 months if they do not buy more in the spot market or contract now. Then, one year later at the year end reporting, we hear they still have the same amount of inventory. What gives?
Utilities have on average two to three years of inventory as their security stock. They still get supply from continuous deliveries from their contracts (long/mid/short-term suppliers, spot and carry traders) that they consume. (While many visualize that utilities just get everything in one big batch, and then draw it down over several years). The time that these contracts run off in the future is what is important, because that is the time when the clock starts ticking. How many are covered in 2025?
How long of a runway do they have?
We might have just simplified too much, but the bullish case and contracting will still improve going forward, and now utilities can not top off inventories with cheap spot or the carry trade. Spot market is now being occupied by financial players for the most part.
Next year (2022), 16% of US utilities will not be covered and have to eat off their inventory. They do not want this inventory to get too low. We hear the average inventory has two to three years of supply, but I expect individual differences here. (There are always some who are better covered than others, and we always look to the extremes). Activity will pick up, and utilities who have contracts ending later in 2025-2026-2027-2028 will observe. They will see how much of supply will be made unavailable by the ones who contract first, and maybe contract earlier to avoid risk of being uncovered.
2021 98% covered (2% uncovered)
2022 84% covered (16% uncovered)
2023 72% covered (28% uncovered)
2024 61% covered (39% uncovered)
2025 55% covered (45% uncovered)
2026 42% covered (58% uncovered)
I do not know all the ins and outs of the market, but I know human psychology, and that has not changed much in the last 10 000 years. Just as most investors prefer to buy as part of a crowd, most other buyers in other sectors do the same. Grant Isaac, CFO of Cameco, talked a bit about that subject a couple of weeks ago and I made a post about it then. If the short term uncovered companies contract a lot of supply in the future, the companies that are covered in the 2026-2030 and onwards timeframe also have to start paying attention.
We know that three years is tomorrow in terms of getting production online. At least if you need supply from hard rock mining, and not from ISR. Kazatomprom has their 20% below subsoil agreement through 2023, so they are not filling that gap for a good time going forward. Kazatomprom CEO Galymzhan Pirmatov said
«Consistent with our market-centric strategy, we intend to continue exercising commercial discipline, which will result in 2023 production remaining 20% lower than previously planned subsoil use contracts levels, keeping production essentially flat in 2022 and 2023».
The market has spoken and Kazatomprom has acted according to this demand. They have to increase their CAPEX the next couple of years to get new mines online, when the older ones are depleted. They want higher prices in the future to supply the market with uranium. As the most reliable producer for the last five to ten years they can demand this from the market.
To end this post I will just remind people that if your inventory is well stocked or not depends entirely on the situation. Something people experienced with toilet paper in March 2020. If you had supply for two weeks, but the next supply of toilet paper could not be delivered before three weeks, you were screwed.
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.
With two weeks away from everyday chores and work I have had some time to think and look at the big picture. That has led me to consider my initial investment plan. Should I stick to it, or should I change it in light of the developments we have seen in the uranium sector?
I am not that original. I think I have seen this song referenced in other articles about investing:
«You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
And know when to run»
Kenny Rogers – The Gambler
This applies both to when you are winning and when you are losing.
I am trying to stick to my plan and start scaling out of my positions around certain targets that I set in advance in 2019. (You can see posts and videos from Ferg and Smithweekly for inspiration on how to scale out of your positions). That is hard to do when you see the case you invested in just continues to get better and better. (In a bull market, all of a sudden, everything seems a lot better than you imagined. This is also the time you have to be extra careful). You hear about people who rode the market all the way up and down the last time. Most do not want to end up doing that.
Talking about scaling out is not me bailing on the sector. So far I have done very well by not listening to other peoples advice of “taking my initial investment off at a double”. If I had followed that advice I would have limited my upside by a lot. My initial plan has been to sell down at certain spot price levels. (I hoped that the portfolio would be at 10x the value of my initial position in 2019 by that time. — At the moment it seems to be within the realm of possibility). I will still have a massive allocation to the sector if I sell down 1/10 of my allocation (as an example). Anything can happen anytime with investments, and the blue sky potential can turn on you very quickly.
Still I am a greedy bastard…
I have thought about the bold people that history remembers, the Rockefellers and the Carnegies, and what they would have done. (I just need to remember that there are many that lost most of their fortune doing similar things). If you diversify too early you will have nice returns, but they will not be life changing. I am still aiming for life changing.
The base case for uranium has always been the supply and demand imbalance. We have new production waiting for higher prices, inventories running low, and growth in nuclear from the East. The developments we have seen the last couple of months have not been part of my thesis. I invested in a sector priced for liquidation from 2019 and early 2020. I had the base case that we would go from the sector being absolutely horrible to being OK. We are in a very different place right now.
SPUT, Yellow Cake and ANU Energy (with help from Kazatomprom) stacking uranium. Uranium developers (Denison, UEC and Boss among others) and producers (Cameco and Kazatomprom) buying uranium from the spot market. Nuclear looks to get into the green taxonomy with renewables. Japanese restarts seem a lot closer to happening. (One certain guru wanted to see this before he would give a green light on the bull market in uranium). UK and France leading the way for nuclear renaissance in Europe. The US turned from closing down plants to fighting for extensions of them and a lot more I have forgotten to mention.
To help me with sticking to my plan, I have done one adjustment. I just increased my investment to the sector by about 5% in September. (The 5% increase is about half my yearly salary, so it is a substantial amount). When I do my first scale down it will be from this «extra» investment from the September amount, and not the longer term investments that have been through the ups and downs the last couple of years. I managed to invest 5% extra into the sector by postponing renovation of me and my wife’s apartment. History will prove if I am right about this call or not.
The later you start investing (or invest in a sector), the bigger the amount you need to invest to keep up with a person who has been there longer. (At least if they have several 100% in return already). My biggest edge is that I have invested hard the last 10 years, and that I have been in uranium since early 2019. They often say something like «The best thing is to have started 10 years ago, the second best is today». I felt like late to the party in early 2019, and I am grateful for all the extra time I have had to invest in the sector.
If I learn something new, or get a new perspective on the uranium sector, I think that someone else might find it useful too. That is the reason why I write this short piece. It is about the time around 2010-2011 that most people skip in favor of the 2007 run, and price formation/discovery.
TD Securities just had a Virtual Uranium Roundtable yesterday (October 7, 2021). Among the speakers were Grant Isaac, CFO of Cameco. He had a very good talk. What I, and other more recent investors to the uranium sector should take note of, was the topic of price formation. I will therefore try to recap and elaborate on what he said here:
Utilities are covered 2022-2023, and some do not expect us to get price formation/discovery in the market for a long time. However, two things might be true at once here. Utilities do not need to be involved in the market, at least for long periods of time. (We have not seen a real move in the long term price until recently). Still, this sector moves differently than other sectors (like natural gas and oil).
Grant Isaac, explains what happened when the Chinese entered the term market and contracted 150M lbs of uranium (1/3 with Cameco, Kazatomprom and Orano respectively) in one big move during the Summer of 2010. They contracted for the 2015-2024 period.
Utilities were covered 2011, 2012, 2013 and 2014. However, the Chinese moved in with contracts in the period 2015-2024. The time slot when the rest of the utilities were uncovered. Suddenly a lot of pounds were made unavailable by one big move. Therefore the rest of the utilities had to make sure that they also had security of supply for their nuclear plants. The spot price went from $40 to over $70 in a couple of months. Long term prices also improved from $49 to over $70 in the same period.
This trend continued until the unfortunate events at Fukushima in March 2011 that put brakes on the uranium sector for over a decade.
Long term 2030
According to WNA we are seeing an increasing production gap in the 2030s. Some of the utilities are investigating contracting in that period now. As things are today, not everyone will have enough supply. Communication out to utilities from UxC and TradeTech must be stronger. – This production gap will continue to manifest itself the longer we wait, and there is only one solution, we need higher prices.
We need all the assets in the pipeline to come online. This includes the tier 1, tier 2 and tier 3 assets. Price for all of these different players will need a price of at least $70 to cover their all in sustaining costs. (We will also need greenfield development and new discoveries).
I for one am looking forward to when Kazatomprom and Cameco start communicating to the market about contracted supply to see the response from the market.
I have not written about silver (and gold) for a while, and there’s no secret why. Even with the #silversqueeze movement early 2021 the price has still not moved anywhere. However, the lack of interest in the sector only increases my conviction long term.
Gold and silver are my most frustrating investments, at least so far. The interest rates go up, precious metals go down. Interest rates get pushed down, no response from the precious metals. (Don’t get me started on the money supply). This is an exhausting situation, and I think many have given up on the sector. I am stubborn, and have been in a similar situation with uranium, so I still hold my position. (If I had started with investing in uranium earlier, maybe 2017, I would maybe be fed up by the start of 2020. Right at the beginning of the turn for the sector). A year of underperformance or flatlining can turn around very quickly.
Gold and silver trade very similarly, but with my risk tolerance, I follow silver more closely. Silver also has the more interesting demand structure with about 50% from retail and 50% from industrial.
Why are we here
As in many other commodities I think investors do not believe in it after several years. We are in a “The boy who cried wolf” situation. We even had the #silversqueeze this Winter and retail trying to drain the COMEX. (COMEX is the primary futures and options market for trading metals such as gold and silver. However, they mainly offer paper contracts, and do not want customers to stand for delivery. Their physical supply is more what you see at a car dealership showroom. They do not have that many cars parked outside). With the massive buying of physical silver, both from coin dealers and through the PSLV (Sprott Physical Silver Trust) we had a spike up in the paper contract price over $28, but it was soon pushed down again. Still, the movement continued to stack silver and buy PSLV for months afterwards. It is therefore frustrating for many to see the silver price is trading lower than it did a year ago.
The big inflation of silver
The reason why the price of silver is trading lower is the inflation we have in silver supply. (In this case I am talking about “paper silver”). With so many paper contracts for silver, the amount of “silver” in the market gives the market an image of oversupply. If you have an oversupply of a product the price usually moves down. Very few of the paper contracts are expected to be held for delivery. Some people are talking about a 500:1 ratio for paper to physical silver. In the midst of February 2021, when the #silversqueeze frenzy was at its highest, you suddenly saw a tremendous supply of paper silver being sold in the market. The silver market seems to be trapped in a situation where the paper contracts decide the price, and not the supply demand of the physical silver.
The supply and demand we see for physical silver
Production of silver is falling, and according to First Majestic Silver, mines produce about 800 Moz a year. Annual consumption of silver is about 1.0 Boz. The 20% that is not covered by mining comes from recycling and above ground supplies. How big these above ground supplies are is difficult to estimate. No one really knows. (We have a similar situation with estimating above ground mobile inventories of uranium).
57% of silver consumption is from industrial applications. We are talking electronics, medicine, solar, water purification, window manufacturing, etc. (Silver used to be in high demand due to its application in photography, before digital cameras became widely available. Industrial use of silver fell due to the transition to digital photography. This slack has now been picked up by demand from photovoltaics (solar panels) and EVs).
The remaining 43% demand comes from coins and bars who absorb 22%, jewelry with 17%, and silverwarewith 4%. With the #silversqueeze movement this year, the demand for coins and bars have been a lot higher than normal.
Why do you invest when the market is rigged?
At the moment, financial players are able to control the market, but I do believe that one day we will see an end to this silver manipulation. If silver had 100% industrial demand there would be more held for delivery. (The retail demand for coins and bars we are seeing now, is trying to force the same effect). The more people try to force delivery of actual silver, the less paper silver will be able to dictate the price.
In the Palladium sector they had a situation we hope will repeat with the silver sector. (The key commercial use for Palladium is as a critical component in catalytic converters – a part of a car’s exhaust system that controls emissions). Palladium had a futures market that broke down because strong physical demand broke the short interest players.
Sprottmoney had the following explanation for the price going vertical from $1,600 to $2,600 in just a few months in 2018: “After a rally from January 2016 to January 2018 of over 150%, or $682, Palladium fell just 28%, or $318. Then it took off again, and as we know now, after a vain attempt to cap the price they decided to give up this time and not risk being even more record short this time around. They realized that paper futures no longer had the same effect on the price of the underlying commodity anymore and did not want to risk being caught massively short as the price continued to soar higher.“
The increasing demand for the physical product, together with a high short interest in the futures market, made the massive price increase possible. The longer the price is kept down, the more energy is stored. This is the reason why I am not letting my eyes off silver. If $21 is the floor for silver, or we might have to go lower remains to be seen. I am keeping my silver position and hope to get rewarded in the long term.
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.
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.
I have already compared the uranium sector to a roller coaster. Today I will expand on that a bit more. The peaks and valleys you will have to go through will only increase with the higher valuations. You therefore have to be prepared for it.
It is not easy to hold on to uranium positions in a bull market. (I have used a graph for Global Atomic for illustration, but the story is similar for most of the companies in the sector). Since mid June 2021 we’ve had a two months long correction that lasted till the end of August. Most of the companies went down 25% or more during this time. When we reached the second bottom in August, the sentiment was close to rock bottom. Most people knew that Sprott was coming during these months, but towards the end several were doubting that it would have an effect on the spot market. This however quickly turned with SPUT launching their ATM on 17. August. We saw the spot price going up from about $30 to $50 inside one month. Many of the companies doubled during this time. Suddenly investing in uranium was considered a sure bet. Just buy SPUT and count your gains. We went from one extreme to the next.
This did not last long. When sentiment did not seem it could get any more positive, we got the news from China that the real estate giant Evergrande may become the Lehman Brothers equivalent for the markets in 2021. Several uranium companies then corrected down by more than 25% within two to three trading days. These moves up and down within a month can make the most veteran of investors nauseous.
A question for many is, how should you deal with this? Should you sell down and diversify your portfolio? I can share some thoughts I have made on my own portfolio allocation.
Value, volatility and allocation of positions
From 1. August 2020 the value of my portfolio has gone up almost 3X. (I picked August 2020 because the value of my uranium portfolio was still reasonably low then). The increase of almost 3x is partly from new money invested, but mainly from returns on the existing uranium positions.
At 1. August 2020 my allocation to uranium was just over 60% with gold, silver and other investments amounting to the last 40%.
As of september 2021, my allocation to uranium has gone up the most because it has had the best returns. Uranium is the most volatile of the sectors I am invested in. For my portfolio this means that for any given day, the volatility is now expected to be higher than it was in 2020. I have allocated funds to other positions, but my uranium positions have grown a lot more than my new ones. The volatility in my portfolio is therefore mainly uranium.
From the June top, my portfolio value was down about 27% of its June value when it had its first bottom in July. After a failed recovery, it dipped again in August. At the beginning of September we went vertical with SPUT purchases, and the portfolio recovered its losses and went up to about 30% above its June value in just a couple of weeks. (From the bottom in July the value was up almost 78%). After the latest week of fear in the market I am now down to 5 % above the June high, or about 18% down from September the top. The difference from the June top is the sums are a lot higher, and it feels worse to loose the higher amounts. Other, less volatile sectors can take a year to make any of these moves we have had the last couple of months.
You can compare holding your uranium positions through a bull market to raising a tiger. At the beginning it is not that big and scary, and it is still relatively easy to control. When it is fully grown, you risk losing your arm if you are not careful.
I will take my initial position off at some time to reduce the risk, but we are not there yet.