Our first test of conviction

cold glacier snow landscape

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

Recent developments

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

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

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

Keeping calm

Have you passed your baseline test?

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

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

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

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

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

Going forward

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

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

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

Choppy Waters in Uranium

crashing waves

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

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

The Ghost of Fukushima

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

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

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

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

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

Conclusion

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

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

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

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

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

Why I do not invest in Cameco at the moment

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

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

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

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

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

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

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

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

«Pay me». 

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

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

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

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

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

Conclusion

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

What makes a 10X bull market possible

abundance bank banking banknotes

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

The last Bull Market in Uranium

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

My uranium portfolio

backhoe bucket barren dirt dirty

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

Disclaimer

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

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

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

Enough teasing. Here is my portfolio:

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

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

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

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

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

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

Conclusion

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

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

Did we experience our Day of Days in Uranium?

people having a concert

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

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

vg.no

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

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

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

The previous bull market

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

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

In 2021

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

What does it do to market psychology?

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

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

Are people suddenly bearish on uranium?

low angle photo of nuclear power plant buildings emtting smoke

At the moment we are seeing a lot of short term noise on Twitter about the spot market. I do not see it being too useful to comment too much on it on that platform. I do however want to start out this post by giving my two cents on the subject. In addition I will try to take a more long term view on the market.

This week I have seen some people worried about the prospects of uranium on Twitter. I have also had some friends asking me about what is happening in the market. I have done enough to prepare myself for the ups and downs, but that does not mean that everyone else has done the same.

After a couple of weeks of spot buying, with Yellow Cake and Denison Mines in the lead, about 10.5 mlb have been made unavailable for the market. The split is as follows:

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

We need to mention that Denison needed 17 separate transactions from 12 separate counterparties to fulfill their 2.5 million order. (Some of it will be from production later this year) After these transactions were done, the activity in the spot market has gone down a lot. There are few buyers left. Now we are seeing some tiny drops of supply offered again without any buyers, resulting in that the spot price has done down under $30/lb again. We have been waiting for Uranium Participation Corp to do a raise and buy pounds. Uranium Participation Corp is a physical holder of uranium and has been trading at a premium to spot for weeks. I believe they would have seen a lot of interest in a raise to get pounds away from the spot market the last couple of weeks. They have however put on the brakes and said that they need a premium to NAV of at least 20% to raise money to buy pounds. This clarification has put a lid on the expectations for Uranium Participations involvement at the moment.

People who are taking a bearish view on these developments are commenting that they were able to get a hold of over 10 mlb, almost everything sourced from the spot market, easily.   

I try not to put too much stock in any of the views. In a market with 180 mlb of demand per year from utilities, we have now removed supply which amounts to 5,5 % of this demand in 2021. I look at it like Denison and the rest of the companies have carried away 105 buckets of water (10.5mlb supply), and most of the buyers have now left the market. We now have two to five more buckets back for sale (0.2 – 0.5mlb for sale) and no one is buying. It is not enough to cover the needs of Cameco, Kazatomprom or utilities by any means, but enough for entertaining the market with more questions.

Long term view on the market

With all this focus on what is right in front of us, I have tried to look more long term and see what is in front of us the next couple of years. We have seen prices increase further up the nuclear fuel cycle. This will reach the U308 price in the end. I am reaching a conclusion of that slow rise in the spot and term price to an equilibrium of $60-70/lbs seems less and less likely. If contracting had started in 2019, instead of being delayed by Section 232, then the Russian Suspension Agreement and then Covid-19, I think we would have had this as a reasonable result. What I now expect with higher and higher probability is that we will have a game of musical chairs where not every participant will get a seat.

Contracting among utilities and miners has been a game of chicken. After Fukushima in 2011 the power was at the utility side, but gradually this power balance has changed. With inventory from utilities and miners, the advantage has turned more and more in favor of miners. As Trader Ferg has said, utilities are like racing cars that have to go to refuel to continue the race. No one wants to be the first car that has to buy fuel at a price over $50/lbs. By leaving it this late, there will not be enough pounds available for everyone, which in turn will lead to an overshoot in price.

Is Paladin overpriced?

Yesterday I read a post by Mikko Leivo that found companies like Paladin, Denison and Goviex overvalued at today’s spot price, and will continue to be overpriced until we get a price above $60-70. I recommend everyone to read the post and have linked it here. I agree with Mikko’s view, and think there are some speculative tendencies in the market. The market is also forward looking and expects a higher price in the future. Some of the investors think that long term contracts price will shoot over $70 with the reasons given above. 

I will take some extra time on Paladin because it is one of the companies mentioned in the post, and Paladin is also one of the most popular companies in the community. Some of the best heads in the business have also taken big positions in the company with Sachem Cove Partners and Segra Capital Management among others. I do not think that these two Specialist funds will be happy with just a 100 % from today’s levels. I think they are expecting contracts to be a lot higher than $50-60/lbs for them to be happy.

I have done some of my investments outside the public stock market. Investing in the private market you expect more than the average return for the increased risk from illiquidity. Management in the uranium companies have a similar set up where they can’t get in or out of their positions as easily as retail. A lot of the management teams in uranium have been in the sector for decades, and have made uranium their lives work. After a 10 year bear market they are not just going to accept the first and best offers that come their way. (I would say that investors that have been through a restructuring like the one we saw in Paladin in 2017/2017 also would demand higher than just 100% returns. The restructuring saw 98% of Paladin’s issued shares transferred to creditors with existing shareholders retaining 2%). I have shown the graph for Paladins meteoric rise in an earlier post, but the graph is just as impressive on the way down. People have lost a lot of money in Paladin, and other uranium companies. If they are still investors in the sector, they want management to maximize their returns. You will not see that with $50-60 contracts. You could say that asking for more than this is unreasonable, but a lot of miners would have accepted this selling price in 2016/2017. At the time utilities did not want to pay this price and would rather postpone long term contracting. Utilities outplayed their hand and now they have to accept higher prices. Miners that had to dilute and restructure their companies will not be as happy with $50-60 contracts anymore.

A surprising bear case in Global Atomic

Global Atomic has long been one of my absolute favorites in the sector. The company is very popular with a low all in sustaining cost for the asset and a short time to production. This is not necessarily a good thing for investors if they contract at $50 dollar for a big part of their asset. If they contract out too much at $50/lbs they put a cap on the upside. The risk I see here is not a company who has had 10 horrible years, but companies that have had a steady rise the last couple of years.

You can defend contracting early with that the cash flow can be used to buy up competitors, but I believe the competitors will become more expensive as the time goes by and the price of uranium goes up. You will then have sold most of your assets at $50 dollars and competitors will be able to contract out the rest of the demand at higher prices. I do not find the current conditions, with demand higher than supply, to favor first movers. If we were expecting the market to be covered by supply the case would be different, but at the current standing I would call it a first mover disadvantage.

I do not think Global Atomic will put a cap on their upside potential, but the probability is higher with a low cost supplier that can get into production quickly. Another thing that I will hold against Global Atomic is that it has had a very strong run already. Global Atomic is 400% from when I bought into the company a couple of years ago, and many have gotten in a lot earlier than me. A lot of potential gains have already been taken out of the company. Rick Rule says that a company that has gone 2x, all else being equal, is half as attractive as it used to be. I am still holding my shares in the company, and I think the market can get more crazy than it did in 2007. However, the best time to buy is always yesterday when the company has had a good run.

Second mover advantage – Bannerman

We have heard a lot about first mover advantage, but very often there is an advantage to going after the first ones after the waters have been tested. Bannerman is a company I would say has a second mover advantage. They have a higher cost profile and have to enter into negotiations later than the lower cost producers. They will enter negotiations in a rising price-environment. The more time that goes by without any long term contracts, I think this is becoming a bigger and bigger advantage for the high cost producers.

In 2020 Bannerman came out with their Etango-8 study which made the company more investable. Before this the company had relied on a study from 2015. In the 2015 study they had an almost $800 million upfront CAPEX investment with a company valuation under $100 million dollars. It was very hard to see being made a reality for investors and had been a damper on interest in the company. Then, in August 2020 the Etango-8 study came out. It had only $250 million in initial CAPEX investment. This lower capital requirement was what made me pull the trigger and invest in the company. (Now, in a rising share price environment, I hope with patience, Bannerman will be able to go back to more from the original plan).

With the original 2015 plan they are worthless at $55 price of uranium, worth US$86 million at price $65 and US$419 million at price $75. ($65 and $75 gives a 4,9X difference in value of the project). Comparing this to the US OTC listing value of $0.1138 (from Friday 16. April 2021) and outstanding shares of 1.19 billion, the difference between US$86 million and US$419 million amounts to $0.072 and to $0,352 per share. If you try to make a similar calculation between prices with other companies you will not see this dramatic change in value. When Brandon Munro talks about Bannerman as an out of the money call option on the uranium market, he is not joking. 

I believe that the longer we wait, the quicker and higher the price will shoot through the $50-60 dollar area. When looking at numbers like this I just wish that I had invested more in Bannerman. (If you do not believe in that the price will overshoot, you will off course not invest in this company. You should stick to Kazatomprom, Cameco, CGN and some near term producers like Global Atomic).

The Inflation King

Preserving or increasing my purchasing power has been a big reason why I am investing in commodities. At the moment there is no agreement on what the massive amounts of money printing will lead to: Will we have massive inflation or deflation (or will we have stagflation)? For this week I have focused on the Inflation King.

I love reading about historical figures like the Robber Barons: I’ve read about the Vanderbilts, Rockefellers, Carnegies, Mellons and Morgans. The topic of today is Hugo Stinnes, the Inflation King, or “Inflationskönig” in German. I did not know that much about this Tycoon. Most of the information on Hugo Stinnes has been in German. Not before I read the book ”The New Depression” by James Rickards did I get to know about this man.

If you have grown up in the West and paid attention at school, you know that Germany in the 1920s suffered hyperinflation. This led to a devastating loss of purchasing power for the general population in the country. People lost all their savings they had in the bank, and they had to pay for products with more and more of their currency. There are pictures of people carrying cash in wheelbarrows and kids playing with their useless currency.

The hyperinflation was caused by massive money printing for paying reparations for the First World War from the Treaty of Versailles. The result of this devastating loss of purchasing power for the population. The depression that followed sowed the seed for what came to pass in the 1930s and 1940s.

The reichsmark became worthless. The exchange rate between it and the US dollar went from 208 to 1 in early 1921 to 4.2 trillion in late 1923.

Hugo Stinnes was born in 1870 and was from a prosperous German family who had interests in the coal mining industry. Later Hugo inherited the business, and expanded it by buying more mines and diversifying into shipping, buying cargo lines. He could then use his own vessels to transport the coal. (With John D. Rockefeller making a lot of money on transporting oil, it was probably not a bad idea to be in charge of your own transportation). He also expanded the shipping to include lumber and grains.

Hugo Stinnes

Prior to the Weimar hyperinflation, Stinnes borrowed vast sums of money in reichsmarks to make more purchases in the different sectors. (I have not found out if he was just a very big gambler, or if he had read up on the works from the Austrian School or similar). When the hyperinflation hit, the value of coal, steel and the price for shipping retained their value, while the reichsmarks fell in value. (Hugo Stinnes also had investments outside Germany where the currencies had not lost their value on the same scale).

Stinnes was able to repay his debts in worthless reichsmarks from his profits from his investment in commodity production and shipping. The price of the product (commodity) and the shipping of the products went up while the debts stayed the same. Stinnes made so much money during the Weimar hyperinflation that his German nickname was ‘Inflationskönig’, which means ‘Inflation King’.

The reason why I bring up the example of Hugo Stinnes is that we have heard mostly about the middle classes being destroyed. If you are prepared you can take advantage of this instead of becoming a victim. Hyperinflation has happened in several places. Three examples are in Hungary, Venezuela and in Zimbabwe. There are cautionary tales throughout history which illustrate the consequences when too much money gets printed.

My takeaway

Writing this I have not run to the bank and borrowed as much as possible to do the same. (However, I did increase my mortgage a bit. I had already paid down a lot on it, and the mortgage is less than two times my yearly salary). I am also using most of my monthly salary to add to my commodity investments. With countries printing trillions of fiat currency with no end in sight, the value of the currencies will go down. The deflationary pressure we have experienced since the 1980 and forwards with products imported from low cost countries will not be enough. The price of labor might still be low, but the price of the commodities that go into the products will go up. For commodities we have no new supply coming online at today’s prices.

As for currency default, my home currency is one of the few in the world that is not printing itself into oblivion. I am more worried about the USD than the Norwegian Krone. I have most of my investments outside my home currency in CAD, USD and AUD. I do not expect hyperinflation but a steady devaluation of most currencies and the commodities going up or keeping their value.

Printing new money (stimulus) is far easier for governments than the alternative, which is a full-blown deflation, crashing markets and a subsequent depression. In a depression, prices of everything fall and the purchasing power of the currency actually goes up, which encourages savings and hoarding cash. Why buy a car today (if you have the money), when you can buy the car next year for less currency. The thing with inflation is that it hurts people that have been good savers the most.

Inflation is already here. I go by the definition that inflation is an increase of money supply. “Inflation is always and everywhere a monetary phenomenon.” Increasing prices, which we often call inflation, is a result of the inflation. The question is if we will see increasing prices on goods and services. For anyone who has seen the price of copper or lumber, or anything that is not included in the reported  CPI, the answer is yes. We get a decline of purchasing power of a given currency over time.

I do not care if you are a Tin Baron or Uranium-, Silver-, or Gold bug. We will all be inflation kings.

The case against nuclear power

afterglow alternative energy clouds dawn

In the uranium space we should always check our hypothesis and find out what is the bear case for uranium. Barring another accident, I don’t have that many bear case scenarios. This does not mean that the case for nuclear is obvious for everyone. Advocates for nuclear power are still a minority. I have therefore dug up another perspective on the sector.

The basis for this post is the podcast Redefining Energy and the episode “Nuclear Industry, the autopsy.” The hosts are Gerard Reid and Laurent Segalen. Laurent Segalen is the founder of Megawatt-X, a London-based platform for investing in Wind and Solar assets. Megawatt-X has listed 178 wind and solar projects, on three continents, amounting to 14GW. Their guest is Mycle Schneider, a nuclear energy consultant and anti-nuclear activist. This information might be useful before you listen to the episode.

We do not have to go further than the description of the episode before we find the first dig at nuclear vs renewables:

“In 2020, every two days, wind and solar added more net capacity to the world than nuclear in a year.” At first glance a staggering statistic, but let us go a step further. The key word they have used here is capacity. This does not mean actual production. Every time you hear about renewable energy, you have to listen carefully to whether they are discussing production capacity or power production. These two terms sound like they have the same meaning, but they don’t.

The difference between production capacity and power production

Germany is the perfect case study if we want to see what production capacity actually means. Their build out of solar and wind is probably on the biggest scale in all of Europe. They have increased their production capacity considerably, but actual production has hardly moved at all. The production capacity shows how much they can generate with 100% access to sun or wind. Like most people know the sun goes away at night, and the wind does not always blow. The capacity is not what you end up with.

Deutsche Bank Research

Germany has increased its capacity by almost 80%, but their gross power generation has only increased by about 20%. (Let us not mention that they have also increased their dependency on coal power during the same time).

Capacity utilization in Germany has declined correspondingly in line with this investment in renewable energy. We are getting less and less in return with increasing investments. In economics we say that the marginal utility is going down. (We see the same case in Sweden and California).

Deutsche Bank Research

Outside the US and Europe the story for nuclear power is completely different. Developing countries in Asian are planning to have nuclear power in the mix together with solar, wind, coal and gas. They need all the energy they can get. Advocates for nuclear are not against renewables. You just can not rely on them for 100% of your energy needs. If you follow the mainstream narrative, that is not what is being proposed. As advocates for nuclear we have to be happy that Germany has given us a case study for a country that tries to be 100% dependable on solar and wind. 

A narrative about nuclear power not growing, but dying is actually irrelevant for the investment case. The Tobacco industry has been in decline for decades, but have offered great returns for investors. There is still a big demand for uranium in a sector like nuclear power, dying or not. (We go by the small 1,5-2% projected growth in the industry). With more proof of the realities of renewables gross power generation there might be a bigger push for nuclear power in the long term.

Getting into the actual podcast

Starting off the podcast they say that nuclear power is an incredible technology and has an incredible potential. Their problem is that the industry has had a big problem with execution and persuading the public and the governments that this industry has a future. (That many different groups are influencing this opinion is not mentioned. Please see the first minutes of this video for some of these influences).

We are told that one of the hosts of the show became anti-nuclear after Fukushima, something that is perfectly reasonable. The lack of capital discipline in the industry, and the lack of growth of the industry is used as proof that nuclear power is just a pipe dream. During the podcast I added up about 10 reasons why nuclear power is dead, or dying. The list is as follows:

  1. Accidents like Three Mile Island, Chernobyl, and Fukushima
  2. Nuclear power in not a growth industry like hydro, wind and solar
  3. Focus on Covid-19 response in France
  4. EDF is technically bankrupt
  5. Nuclear Power does not work in harsh weather
  6. Lack of build out
  7. Corruption
  8. Only use case military use
  9. Age of workforce
  10. Small Modular reactors will not work

1. Accidents like Three Mile Island, Chernobyl, and Fukushima

No talk about nuclear power is complete without bringing the three nuclear accidents: Three Mile Island, Chernobyl and Fukushima. This is to show that the sector has a horrible safety track record. This is the most common complaint, and is also what has been given the most media coverage. 

Starting with the Fukushima accident in 2011 we have after 10 years added up the numbers. We have been able to link one death directly to radiation, while over 2,000 died from the evacuation, and about 18,000 from the tsunami. There is no doubt about that there has been great psychological and economic loss for the area. People have had to move from their homes where they have been living for decades. The whole country of Japan has also switched to importing more natural- and petroleum gas as a substitute for the nuclear power they turned off. Nobody has tried to minimize the damage done with this natural disaster. The nuclear industry has taken responsibility for what happened at the plant and done everything to comply with new standards. Still, most people get the impression that there was a tsunami that made a plant blow up, and it was the plant that killed the people. Popcorn movies like Godzilla (2014) have helped perpetuate this. 

The biggest harm the natural disaster has done is the cancellation and postponement of nuclear projects. Nuclear power was in 2011 on a very good track with planned projects for the future. They got mothballed or cancelled overnight. Countries like China would probably have more than a dozen more operational nuclear plants if this accident had not happened. This could in turn have saved countless lives from smog related deaths.

Chernobyl was the only accident that caused real harm and deaths. This is something we hope never will happen again, and is still top of mind for most people. This disaster happened 35 years ago, but it has been a constant part of the discussion about nuclear power. This accident was partly a construction failure and part human error. This is such a discussed topic that I will link the article “What About Chernobyl?” Ranking World’s Deadliest Energy Accidents for people who want a more in debt dive on the topic. 

To keep some perspective I will finish this point by pointing out some accidents that did not end up in most school curriculums for kids growing up.

2. Nuclear power is not a growth industry like hydro, wind and solar

For uranium investors this is not a point (with reference to the Tobacco industry). It has relevance if you invest in the nuclear sector, but here also there are differences from country to country. However, I would like to say that the podcast has mainly focused on the US and European markets and here you can agree with their conclusion. Capacity is going down. In the developing world the situation is very different.

China has maxed out its hydro capacity and are building out everything they can to cover their energy needs. They are increasing capacity in solar, wind, coal and nuclear power. They need it all. Their recently published 5-year plan says that will reach 70GW produced from nuclear power before 2025 from 51GW in 2020. By 2035 the number is even bigger.

It is with countries in the developing world you end up with 1,5-2% growth per year, even if all the planned closures in Europe and the US goes after plan.

3. Focus on Covid-19 response in France

Not a single reactor has been shut down as an effect of Covid-19. However, at the same time EDF reduced their nuclear staff by two thirds to reduce risk of infection. There was a big focus on the fact that maintenance has been postponed, and the possibility that the plants are not run safely. 

By the number of actual accidents, nuclear power already has the utmost strict rules to follow. EDF reduced staffing and decided to only keep those in charge of safety and security. Everything is a trade off. You can keep 100% of the workforce on site, but you will risk more infections.

4. EDF is technically bankrupt

There has been a drop in energy consumption during the early phase of Covid-19. This has led to a reduction in income for the utility companies. Standard & Poor’s downgraded EDF to BBB+ rating for their debt.

Going further they believe EDF is technically bankrupt because they have not set aside enough money for the decommissioning of plants. (This interview came out in December 2020, before the announcement that the  decommissioning that was planned for 2025 has been postponed to 2035). The plants become more profitable with longer life, and the decommission costs can be moved back 10 years. It does not fix the problem, but it helps a lot. 

If EDF goes bankrupt I would still expect there to be a buyer for the nuclear plants (at the right price). There should be very low incentives for France to try to copy countries like Germany with removing perfectly operational nuclear plants. 

A lot of industries are facing the same challenges. Without subsidies and government contracts you would have very little solar or wind power generation. The profitability numbers for renewables does take all costs into consideration in most instances. If you are dependent on subsidies to work. You are in no position to talk down on other sectors.

Compared to France, Germans have an electricity bill that is 79% higher than France’s (Source: Eurostat). In a low margin industry one would think it would be possible to raise the margins a bit for the low carbon alternatives, or increase fees on the carbon intensive alternatives. That is what has been done in many countries.

big waves under cloudy sky
Photo by GEORGE DESIPRIS on Pexels.com

5. Nuclear Power does not work in harsh weather

This must be maybe the funniest point that was made. In harsh conditions nuclear plants sometimes have to be turned off. We are talking about severe storms, hurricanes and tsunamis here. There are also certain locations that are not suited for nuclear power plants. Nuclear is not perfect, but you can’t make this a point on its own. Renewables like wind and solar also have problems during extreme weather. Windmills can’t operate in hurricanes and solar has problems with snow. Certain parts of the Northern hemisphere get very little sun during the winter months. There are also countries that get very little wind.

For extreme weather look no further than Texas, Japan or Germany this winter.

6. Lack of build out

How do you look at the future? There were four start ups and four closures in 2020. (I checked, it was five and five in 2020. The capacity of the decommissioned ones were lower than the new ones that were brought online).

1 in 8 of construction sites are given up over time. They will never be completed. There were only 6 construction starts in 2019, followed by just 2 construction starts in 2020. There are not enough construction starts to keep the sector healthy. Another problem is that most of the running plants were built in the 70s. Experts here say there will be more closing down, and the capacity leaving nuclear then will be higher than what we are able to bring online. For the trend to stop, construction starts have to be double of what it has been in the last decade. 

One has to remember what happened a decade ago in 2011. It might have a connection. In the West there is still a lack of investment while the East is ahead.

7. Corruption

There was a reference made to corruption in the sector. The Ohio legislature is close to revoking the nuclear power subsidy after it was revealed that it passed the legislature through alleged acts of bribery. 

This example is a single incident. It does not prove anything for the whole industry. Renewables like wind, solar or hydro very often have projects that are not popular with the locals. If you believe all of these projects are free of corruption and above all suspicion I have some magic beans I want to sell you.

8. Only use case is military use

After a long time focusing on the negative, the use case for defence is the first thing that gets a pass. There is a big advantage to being a nuclear power. Militarily nuclear power has a high strategic importance.

I do not object to it having strategic military importance. I just believe a stable power grid is of paramount importance too. For countries without hydro, nuclear power is a better alternative than coal and gas. Rolling blackouts in California is a direct effect of closing down nuclear power plants. This is not something countries, or states, should emulate. I would also like to remind people that NASA has switched from solar panels to nuclear power on the Mars Rover because it needed to be more reliable.

9. Age of workforce

The age of the workforce near retirement in the nuclear industry is also a concern. For EDF half of the nuclear staff are eligible for retirement in 6 years. This poses a big HR challenge. This is a complex industry where it takes time to educate people and train the right people.

For me it is interesting to observe that this is a big problem. The nuclear sector is not the only one with this challenge. One would not find it impossible to educate and attract new talent. It all is a matter of incentives and salary. If there is a change in public sentiment and support (financially and morally) you would be amazed how quickly things can change.

10. Small Modular reactors will not work

The use of small modular reactors (SMRs) will never come to fruition. The development takes too long and they are too expensive. SMRs need economies of scale and they have to sell dozens for ever turning a profit. In addition we have a climate emergency and commercial SMRs will not be available for use in time by the 2030s. 

I believe that there are use cases for SMRs in several locations where one before had to depend on coal or gas power. Just in the Canadian wilderness one could find more than a dozen locations. Without enough time left before 2030 I do not see Germany on track with their Energiewende either. If we go by that timeline the only solution seems to go back to the stone age.

Conclusion

Their conclusion is that nuclear has had 70 years to get it right and is not a new technology anymore. They find it stunning that the sector asks for government handouts for a technology that has been around for decades. (I guess solar should get the same treatment because that is not a new technology either. Wind power has been around for centuries, just look to the Dutch windmills. By this argumentation windmills should subsidize other technologies. One should also not forget that smart people like Bill Gates are investing heavily into new technology for the nuclear sector).

In conclusion I do not see any dangers to my hypothesis after listening to this podcast (twice). I would recommend that you still give it a listen and see if you get something different out of it than me. Listening to other people’s opinions to check and control your viewpoints is healthy. I already have changed my mind in favour of nuclear power, and one would expect me to be biased. Just like I believe these people are biased.

I am not here to make a dig at renewables. I am here to defend nuclear power as a way forward. Nuclear power has always said that it should be a part of the mix alongside renewables. They are not enemies, but allies for carbon free electricity generation.

If you want to know more about the limitations of renewables I would recommend two articles by Fergus Cullen called “Non-Renewable Renewables” and “Renewable Debate.” If you have not read these before you are in for a treat.

The Big Commodity Short

large bison

This Sunday I will give my thoughts about the coming supercycle in commodities and why I am bullish on almost all of them going forward.

Most people are aware that I am a Uranium Bug and that I have a good allocation to precious metals. I have also just recently made my first allocation to the oil business, but I have to admit that I am optimistic about the whole commodity sector. I have tried to give an explanation for this enthusiasm in the following paragraphs. 

Backdrop

Commodities are currently 50% cheaper than their lowest point the last 50 years if you compare them to the S&P 500. There are several reasons for this. The cyclical nature of commodities is that we go through boom and bust cycles. We have seen many of these over the decades. Still, the latest downturn has been exaggerated by a number of contributing factors:

A big factor is there is so much passive money waiting to chase the next big thing. We are looking back at 10 years where everyone has been piling into tech companies, weed and cryptocurrencies. Some people are maybe a bit agitated that these sectors have taken away money from commodities, but there is also a silver lining. Instead of having a better funded market, that might be in a supply and demand equilibrium, we are seeing great potential for outside returns on our investments.

I listened to a great interview with Mark Thompson on the podcast “Mining Stock Daily” in their “Tin Special”. He put into words what has been in the back of my mind about the commodities sector for a long time:

The median fund in the world’s allocation to commodities is zero, and most funds do not touch it. In the 80s and 90s, the risky part of people’s portfolios were either allocated to biotech or to commodities exploration. That part is now consumed by tech companies or bitcoin (and other cryptocurrencies) instead. We therefore have not had the needed allocation to commodities that you need to find new deposits. This has in turn affected the supply side. This underinvestment makes commodities very attractive after 10 years of underinvestment.

In the meantime commodities, which are essential for maintaining our living standards, have underperformed. The cost of producing the commodities is in many cases higher than what the companies make selling them. This has led to production cuts and supply being removed from the market. Prices have to increase a lot to incentivize production. However, this supply can’t be turned back on with a flip of a switch. Ramping up production takes time. The companies have to hire and train workers, permits have to be granted and CAPEX investments have to be made. 

The easiest example I can choose from here is uranium. The world is totally dependent on uranium for the 10 % of energy production coming from nuclear power. If we want a snowball’s chance in hell of making the climate goals, we can not depend on windmills and solar panels alone. At today’s prices the cost of producing uranium is higher than what they get paid by utilities. For incentivising new supply the price of uranium has to go up. If not quoting Rick Rule the lights go out. 

We have the same scenario with battery metals like #lithium #nickel and #copper needed for electrification of the world. There are many other commodities that I have not mentioned, but safe to say I am bullish on most of them.

In the coming commodity super cycle we will see massive amounts of passive funds crowding into the different commodity sectors. Passive investing has increased by a lot the last 10 years, and this will hit the very small markets like a ton of bricks. This will have a bigger impact than most people can imagine. When 50% of the market is passive, it will be very different from the bull run in the early 2000s. Passive flows say: let’s buy what is going up no matter what price. Because of this you get big moves. I believe we will see new all time highs in most of the commodity sectors. Many of the sectors today are trading for a total value under the value of companies like Apple or Amazon. When passive funds see the outperformance of the different commodity sectors sustained over time, we will see a rotation away from growth/tech stocks. It is just a question of time. 

We are seeing some evidence for this already. Again, I will give some examples from the uranium sector, it is the one I am following the closest. In Australia Paladin will be included on ASX 200 and 300 later this year. This means that there will be passive flows coming into the company and give the valuation of the company a tailwind. In Canada we have the same situation with Nexgen and Denison Mines will be added to the S&P/TSX Composite Index.

The picture above is a comparison between QQQ (an ETF that includes 100 of the largest companies listed on the Nasdaq stock exchange) and URNM (the NORTH SHORE GLOBAL URANIUM MINING ETF). The last year URNM has a return of 222% compared to 63% for the QQQ.

I expect this to be a trend we will see continue over the next 5 years. After overperformance the funds will rotate out of their old favorite sectors and enter the commodities sector. A couple more quarters of outperformance and we should witness the metaphor about forcing the contents of Hoover Dam through a straw coming to fruition.