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 10.5M lbs have been removed from the market. The split is as follows:

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

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

Second-order thinking

rocket launch liftoff long exposure

Today I will have a very short post about second-order thinking. A term made famous by Howard Marks from Oaktree Capital. I have applied some of his principles to my investment philosophy.

To explain second-order thinking, it is always good to use an example: Imagine that you have a company that is doing well in terms of profitability and the share price returns. One who uses first-order thinking reasons that this is positive and wants to buy shares in the company. Second-order thinking, on the other hand, can come to a different conclusion. The company is competently run and does well, but all investors already think so. The company might be overvalued and the stock overpriced. The second order conclusion may therefore be that it is best to sell.

When I started investing in stocks, it was mostly first-order thinking. I never thought I would buy shares in industries where most producers were losing money. First-order thinking says a company that is losing money will probably give a negative return, and maybe risk bankruptcy. This is quite simple and straightforward. If a company spends more money on producing something than they get paid, they lose money.

For investing in most industries, this is a good practice. I used this first-order thinking in 2011 and 2012 for my investments in banks. Banks were demanded to build a capital buffer to improve their solvency to be better prepared for a downturn in the future. The newspapers were at the time saying that the banks’ interest margins were unreasonably high, and the banks took too much from customers. I thought that instead of fighting against the banks, it would be easier to become a part-owner of them. I started buying shares in the banks that had better than normal profitability. The next few years this was a great investment. Several banks saw returns of over 100%. I would consider this first-order thinking, but no one said it has to be unprofitable to do the obvious.

Second order thinking

What I try to do more of today is second-order thinking. The person most responsible for this is Rick Rule, legendary investor and CEO of Sprott U.S. Holdings. (Now retired, I am looking forward to him saying what he really thinks about companies. He has said he can talk more freely about them in retirement). He has an expression that says: “The cure for high prices is high prices”, and “the cure for low prices is low prices”. This term applies especially to the commodities sector.

If we are in an industry that experiences high prices, it will attract more players. Think of the shale oil industry in the United States when oil prices were above $100 a barrel. With several offering the same product, the supply eventually became so high that there was a surplus of the product. This in turn led to falling prices. See below for the number of operating rigs in the USA and correspondingly for the fuel oil price:

Number of operating rigs in the US Baker Hughes

In 2014 oil production became so high, together with expectations of rising production, that the oil price dropped 50 %. It did not bottom out before the fall 2016. Leading to a long bear market in the oil market.

Brent Crude Oil Prices Makrotrends

Similarly with low prices for a product, you will eventually lose so much supply from the market that the price of the product has to increase to attract production. If not, no one will produce the product again. There are several industries that are completely dependent on raw materials to be able to produce their end products. Electricity, cars, or pharmaceuticals, all of them are dependent on commodities.

“The cure for low prices is truly low prices.” Prices can however stay low for several years. Excess supply has to be worked off. In addition, in most cases there needs to be a triggering factor that causes prices to start moving upwards. Often there is a perceived, abrupt shortage of the product. For example, suppliers may have production stoppages due to natural disasters, wars or a pandemic. If the buyers expect that they still can get the item product, they will not bid up the price. What makes raw materials special is that when the price goes up, the demand often goes up as well. This is contrary to what economists think is rational for market participants. The damage of running out of critical raw materials in production is far higher than paying higher prices for them. (Very often the price of the raw material is immaterial for the end product. Silver is in a lot of products. Very often it is in quantities that amount to a couple of dollars. If the price goes from $25 to $50 it does not affect the end product that much). 

In 2020 we had a great example of fear of running out of a product. You want to find similar opportunities in the commodity market.

How I have constructed my uranium portfolio

colorful fox walking on empty road

In the small community of uranium investors, I see many different ways of investing. Today I will go over how I have created my portfolio and some of the reasons for the choices I’ve made. Hope to hear some feedback from other people on how you decided on your allocation in the space.

When it comes to portfolio construction you can take several approaches. Some people have a really concentrated portfolio with under a handful of companies. Others are just focusing on a single company that they know inside out. Some people invest in micro caps, mainly explorers without a resource yet with very high risk. Lastly we have people who try to have some diversification when it comes to company size, jurisdiction, and how far they are away from production.  

A good place to start for many should be one of the Uranium ETFs. You diversify away some of the downside risk of owning a single company with a basket of companies. In uranium we have three viable ETFs to invest in. They have the tickers URA, URNM and HURA. To keep this post short I will conclude that URNM is the best for most people. Compared to URA they have 100 % invested in the uranium sector compared to 70 % for URA. Compared to HURA the assets under management and liquidity make them a better choice. (I only hold some HURA myself because it became available for trading earlier. The volume traded and assets under management in HURA is still very low and can cause problems if you want to exit your position). 

Before the next section I will just remind people that this is my approach and it is not what everyone should do. I have have a Finance degree where we have learned about the Efficient Market Hypothesis and how it is impossible to beat the market. If I believed in this hypothesis I would not invest in uranium but stick with a Vanguard fund. People should do their own due diligence in stock selection and portfolio construction. Taking into account their own risk preference, risk tolerance and loss aversion.

Constructing my own portfolio

Stock selection

When I construct my own portfolio of companies a good place to start is with the companies and weightings in the ETFs. If you do not own a single uranium company in the URNM ETF you either have expert knowledge about your selected companies, or you are carrying a lot of risk.

If you take a look at URNM they have a very good selection of 27 companies. However, they are very top heavy with 5 companies amounting to over 50 % of the allocation. Also they have around 14 % allocated to physical uranium holding companies in Uranium Participation Corp (edit 8. September 2021, now Sprott Physical Uranium Trust), and Yellow Cake PLC. They will move with the price of uranium going up, but not much more. If you want to be conservative with your investment this is great. If you want more upside, you might want to have a different weighting to the companies, or exclude the physical holders altogether.

The almost 30 % allocation to the two biggest producers does not give me the lift I want with a portfolio. Seasoned managers might say that this is a mistake. They will in most cases probably recommend that I should build my portfolio with the best of the best before I move down the list. I will however focus mainly on the near term producers, and also have some focus on the not so near producers. Companies like Paladin, who have the Langer Heinrich mine on care and maintenance, will get in production when this bull market gets going. Near term producers have shown before that they will have a lot more upside than the senior producers. For my own part I have also excluded allocation to Uranium Participation Corp (now Sprott) and Yellow Cake PLC, and only keep them as a part of my ETF holding. If I believed that we have two more years of waiting on the market I would have a bigger allocation to these alternatives. I believe we are closer than this.

I have also done a qualitative selection where I exclude some companies I don’t like. There are certain companies that have paid management huge sums in salary and bonusers during the bear market. I will say they have done this without any real outperformance compared to the other companies in the sector. I would like management to deliver results that benefit the owners before they give themselves bonuses. (You can find information on management fees and general and administrative costs on the companies websites. Companies have to disclose this information). It does not mean that these companies will not be of the best performers in the coming bull market. I just choose not to own them.

I also own some companies that are not on this list at all. The reason why a uranium company is not on the URNM list is very often because of low market capitalization or lack of free float. (Free float, also known as public float, refers to the shares of a company that can be publicly traded and are not restricted). I own some of these companies even though they are considered a lot riskier. Other qualitative factors that are important for me is the management of the company, asset(s), insider and institutional ownership, and the track record of the team.

There is a saying “the tide will lift all boats” that I believe will also apply in the uranium market. Some of the worst run companies will have the best performance. This is because a high uranium price will have a bigger effect on the worst run companies, at least in the beginning. After a while we will see who can really execute on their strategy. Owning the worst companies does however have some timing risks. If you own one of these “dogs with fleas” at the wrong time you risk a sudden 50 % dilution with a capital raise or conversion of debt. That is why you want to hold at least a certain quality in your portfolio.

Lastly I have about 2 % of my portfolio in explorers. The risks are high that they will not find a viable asset and will just mine the investors. I have enough potential upside in my portfolio already. If I had more of a geologist background I would probably be more active in this segment. 

By doing these changes my portfolio is a bit riskier than URNM, but I also believe I have a lot more upside for a bull market. My portfolio performance has also been higher so far.

judges desk with gavel and scales
Photo by Sora Shimazaki on Pexels.com

Position weighting

How you weigh your positions in the portfolio is very important when it comes to the risks and return you can expect. I will therefore have a short run through on Equal Weight Portfolio instead of the more regular Market Weight Portfolio used by funds like URNM.

Equal Weight Portfolio

Compared to Market Weight Portfolio, Equal Weight Portfolio might be a better way of constructing your portfolio. I first heard about this several years ago by Mebane (Meb) Faber. He is a co-founder and Chief Investment Officer of Cambria Investment Management. (He also has a podcast where he brings along many different guests with different perspectives on the market). Most indexes and passive ETFs allocate most of the money to the biggest companies. The companies are already big and they get even bigger when they get more allocated to them. Especially since passive investing has become such a big part of the market in the last ten years. This approach where big companies getting most of the capital will for people like me seem inefficient. After a while the big companies will be priced at much higher multiples than the middle- to small caps. Especially if one of the big companies misses on their earnings. The few discretionary investors will then sell their shares and move to companies that are more reasonably priced. This might start a sell off. 

Passive investing is therefore a two edged sword. Great on the way up, but horrible on the way down. Passive funds help exaggerate the move in both directions. The market penetration of passive ETFs might be a big reason we see the big tech stocks like Amazon being the best performers the last ten years. For me I would believe that getting closer to an equal weight portfolio after at least the initial tide coming into the sector is a better alternative.

I do not have an equal weighted portfolio myself, but I have depended a lot less on the two biggest public listed companies in the uranium sector than a market weighted portfolio would do. I have an equal weight position for most of my positions and a couple I have gone overweight because of conviction in the company and their performance. Not because of their market size. My two biggest positions consists of one mid cap and one lower mid cap company. 

After I have invested in the company I leave the position alone. I do not sell my winners, and I do not trade in and out of positions. The quote “Selling your winners and holding your losers is like cutting the flowers and watering the weeds” by Warren Buffet is fitting. If a small position grows a lot, I let it run. It might just be the first company out the gate, and the others will catch up eventually. It might also be the next big winner in the uranium bull market. I do not sell it and put it in a stock performing less. By selling down in your winners early you will potentially reduce the returns from a Paladin. For the few people who do not know the Paladin story, they did a 1000X in the last uranium bull market. I have a link to where Rick Rule talks about them here.

If I want to allocate more to other smaller positions I will put new money in them. The only reason I will sell down (or out of a company) is if I find something bad I did not know about them, or they do something terribly wrong. This has happened a couple of times.

Position Size

Most investors know that trading fees can stack up. (At least if you do not use free trading apps like Robinhood). If you trade in and out of shares with small positions you will use a big percentage of your funds in trading fees. Many investors also have accounts where they have to pay taxes on realized gains. You should therefore try to limit this as much as possible if you are not a trader. Your broker and the tax collector are the only ones who will be happy with frequent trades. They do not care if you have successful trades or not. I therefore try to make as few trades as possible and make the positions meaningful.

Except for my three smallest uranium positions, all my positions are more than my monthly (after tax) salary. My six biggest positions are all bigger than my yearly after tax salary. If my positions go the way I believe, they will have a meaningful impact on my life. (Time and freedom being more important than the amount I earn).

Some challenges I’ve had

To end this post I will touch on some of the challenges I’ve had. First of all, I do not have a million dollar I can invest at the ready. I have bought into my positions over nearly two years. In early 2019 I reallocated away from tech and into uranium. Still I have spent the following time adding to positions I want to own. Because of the lack of funds, a majority of the funds invested went to US companies in the beginning. This was in anticipation of the Section 232 decision. Looking back on it I would have had a lot better performance in July 2019 if I had more African, Australian and Canadian companies. Still, I think I would have done the same again in a similar situation.

Another challenge I’ve had was that I could not trade Australian companies on the ASX before the summer of 2020. I had to get another broker to get access outside Europe and North America. Therefore I was lagging behind with getting a position there. I have managed to get into three positions, but there is still a hole in my allocation here. There are some high quality names here that I do not believe I will be able to get a position in. 

Lastly I found out just recently that my allocation to Canadian operating companies was lower than what it should be for me. I have the big ones, but not in the size I should. I think this has been mainly because of the notion that permitting time will be too long. Projects taking 20 years before they get into production is a very long time. This is what I hear being tossed around as the average. However, if any of this is wrong, and the territories in Canada try to help mining in any way, we can get pleasantly surprised.

It seems to be all about the spot price

animal animal photography bear big

In this post I will bring up a couple of subjects that seem to be relevant at the moment. The main subject will be about the uranium spot price, and some of the concerns I see people in the uranium space have.

During the last couple of weeks I have seen more participants, some new and some old, focus on the uranium spot price. Many of the people I follow are selling down 10 % or 1/3 of their position because there is a lack of upward movement. The veterans do not necessarily sell down because they believe the spot price matters by itself. Many say they sell down because the generalists in the market believe it matters. When the generalists get tired of no action, many will sell and drag the market down with them. I believe that this is a valid reasoning because many come into uranium with an expectation of a GME or AMC situation. Veterans know uranium is mostly a quiet market until it’s not, with little warning before the big jumps in price. With the more veteran uranium investors selling down parts of their portfolio they are also contributing to the sentiment in the market. It almost becomes a self fulfilling prophecy.

I will repeat this every time I comment on other people’s tactics: people buy and sell for different reasons. I am not doing anything that is better than them as long as they are following their strategy. From what I see the strategy and allocation differ a lot among the uranium investors. Some are traders, some hold a big basket of companies, some own a few, some have invested a small part in uranium, some are all in. The only thing I hope is that everyone has come up with the best strategy for themselves. I know for myself, that at least in the beginning of this bull market, I will be applying the “Odysseus and the Sirens” strategy. I will tie myself to the mast and not sell out of fear or the pursuit of more tempting short term trades. 30 – 50 % drawdowns are expected on the way. Some might call the tactic “putting your head in the sand”. We will know in a couple of years if it was foolish.

The fact that spot price has not gone up is used as evidence by some that there is more than enough supply out there. Mike Alkin from Sachem Cove Partners says that this is mainly pounds traded back and forth without delivery, and it is nothing to look at. “Spot price moved a nickel today, who gives a sh#t.” On the other side we have Twitter accounts that say that nuclear plants topped off their fuel needs in 2020. Again, topped off inventories for how long? One year forward, two? It does not matter. Short term I see the spot price as the main concern for most people. This is very understandable when there is not much else to look at. Short term is not the problem. It is the period after 2025 that matters.

TradeTech

I do however believe that we should always check what we can be wrong about and if there are flaws in our thesis. I have come to the conclusion that maybe the biggest risk now is our faith in people like Mike Alkin as an “Uranium Savior”. Many people in the space are disciples of him similar as we have seen with Elon Musk and Tesla. Mike Alkin says that the work he has done in uranium is done with information available for everyone. However, if this is not a part of your full time job it is not very likely you will model out all the demand and possible supply by yourself. We have taken their word for it based on Sachem Cove Partners have staked their reputation on being right about this. They have gone out on a limb when few others have gone and spoken up against the recency bias in the sector. Others have followed after them. When I listen to other people, and myself talking,  I see we are almost parroting a lot of their talking points. If there is a massive hidden stockpile suddenly available, our investment does not look as attractive anymore. What makes me think this is very unlikely is I see similar communication from producers like Cameco, and Kazatomprom. We also see hints further up the fuel cycle of higher prices there on SWU and UF6.

Another valid concern I hear is that Nexgen will contract out their whole mine for $50 dollar and kill supply needs the next couple of years. (The same argument can be used about Kazatomprom). Answer number one is they do not have enough supply for the gap in US, European and Chinese markets the next couple of years. Answer number two, I believe they are rational actors. If they contract their whole mine production out for $50 dollars per pound they are not acting in their own shareholders best interest. If the shareholders of the company see that management starting to contract out the whole mine at this level they would have a riot. A mine gets depleted. If you sell all of it out at low prices, while the higher cost ones contract for higher prices, I would question your sanity.

Art Hyde from Segra Capital Management (@JekyllCapital on Twitter) has a great thread on Nexgen from January 22. Here he goes over a possible timeline for when they can get into production. You can find the thread here. Fun fact: Art Hyde torpedoed my best performing company to date with his comparison to Nexgen, Denison Mines and Global Atomic (shares I also have in my portfolio). I followed him right after and have a notification on every time he makes a tweet. To go against Art Hyde would be like trying to beat a NBA professional as a part time player. We are not even in the same league. However, I do not expect the market to be rational at all the time when it comes to pricing. 

Brandon Munro from Bannerman Resources is one of my favourite experts on the uranium market. He just had an interview where he explained the number of virtuous cycles that happen as a market, particularly uranium, starts to pick up:

«The first virtuous cycle is that when a price starts to rise utilities and other market players hold tighter onto the inventory that they’ve got. When a market is flat for some period of time as we’ve seen with uranium, you see for example the finance department says to the fuel buyer you know you’ve maintained two and a half years of inventory for the last five years that’s just sitting on the balance sheet doing nothing. We could have sold two years of that (or one year of that) a few years ago and used that money, and you could have bought it back cheaper because the price has been going down. How do we justify carrying this much capital in the form of inventory.»

This is the «Just in Time’» attitude that has been used by many sectors the last couple of years. This can at times leave you very exposed for supply shocks. We all saw what happened with toilet paper in March 2020. Uranium is just as important to keep the power in several places in the world. Texas being one of them.

«Now what we are seeing is increasing prices, and increased understanding that prices need to rise further. Not only will they hold on to the inventory and resist any attempts to optimize balance sheets. The view will become that we’d better top up and make sure that as this cycle kicks off, we are perhaps on the higher side of historical inventory, rather than being on the lower side.»

To end this post I do not sit with any great answers for people. If we are able to get a raise from Uranium Participation Corp the next couple of weeks to buy 3 to 4 million pounds of uranium we might find out how deep the spot market is. If they can fill their order without any problems we might have some more waiting ahead of us and a sell off in equities. If they can’t, this might act as a trigger for the spot price moving upwards.

Uranium – This market is on fire

photo of fireworks display

This is the first blog post that will be published in English. I have been at this blog for almost a year now and see that I have more international readers than Norwegian. Therefore I want to make it easier for most of you to read without Google Translate. First up is a short update on the Denison Mines Gamma Squeeze.

For the first update it is fitting to talk about the uranium markets. They are on fire at the moment. In light of this, I also see a lot of people trimming their positions. The stocks charts are stretched and the RSI levels are high along with other technical indicators. This can make anyone want to take some profits. We also have to remember that people also invest for different reasons. I am not to judge anyones decision to sell if they act according to their plan. I also do not know what these overbought levels on the RSI compares to in Bitcoin and other cryptocurrencies. From what I have seen in these markets anything can happen. I would kick myself if I sold out of a position and did not get back in. My goal for this bull market is to ride it to potentially financial freedom. Therefore I am not selling anything yet. The move in Denison Mines can blow off and we can fall 50 % down from here, but it can also continue climbing. Denison can even drag along other uranium companies with their move. They are putting the spotlight on uranium for other retail investors and make them look into the investment case for uranium.

The Reason why Denison Mines is having such a great run these last couple of days is said to be a Reddit group in the vein of the one for Gamestop run. This reddit group is trying to force a gamma squeeze on the Denison Mines. The speculators buy a lot of call options of the company’s underlying stock. The issuer of these options then need to buy some of these shares on the open market as collateral in case they have to deliver the shares in the option trade. As of now, we do not know if this group will be successful or not. I am not participating and am still sitting on my shares bought in 2019.


The thing for me is that I do not sell on price targets for the shares, at least this early in the bull market. Compared to other shares, Denison has not even gone 10X over its oversold bottom in March 2020. There are a lot of shares, like Encore Energy and Paladin that in the last year have gone over this. I am not going to let myself get carried away and will stay with the share if it goes down 50 % from here. I have this article as my inspiration and preparation for this bull market: Would You Have Made a Fortune in Uranium? There were some hard pullbacks in the last bull market and I am prepared for this.

Denison Mines 1 year return

I am trying to zoom out and not get caught in the day to day frenzy from the market. We can just go back to the start of 2020 to find the situation being completely different. At the start of the year my uranium portfolio struggled sideways and downwards from my entry in early 2019. It then dropped even more with everything else in March before it took off with increased spot price and mine closures. I did not have cash on the sidelines to buy in at the bottom. (Being honest, I do not know if I would have been able to buy any stocks at those levels, cash or no cash. Buying at the bottom is very hard to do mentally. Not selling was hard enough). After that the portfolio was in a sideways pattern well into fall. At much the same time, my precious metals portfolio was doing great. The precious metal shares held my portfolio up when it looked the darkest for my uranium shares. It kept me in the game and stopped me from doing something stupid like selling down in uranium. 

Now the tables have turned. Uranium is catching a bid and gold and silver are struggling. From what I see, this is also temporary. We are seeing the paper markets fighting the physical markets with real physical allocation increasing every day. March is a delivery month and a lot of the futures contracts want to hold for delivery. For anyone following this we know that this can be a very interesting time.

For me the plan going forward is to watch my gold and silver positions now and let uranium take care of itself.

Uranium – When the Levee Breaks

huge cooling towers in nuclear power plant

If it keeps on rainin’, levee’s goin’ to break

If it keeps on rainin’, levee’s goin’ to break

I det siste har det kommet penger inn i uraniummarkedet som har fått langsiktige motstandsnivåer i prisen til uraniumsaksjene til å briste. Dette er på grunn av de større institusjonelle investorene ser avkastningen som har vært i aksjene de siste månedene og vil være med på moroa. Flere er også investorer som var med i det forrige bullmarkedet frem til 2007. De ser nå muligheten for å kanskje gjenta bedriften. For leserne som ikke var med på reisen forrige gang (som jeg antar er tilfellet for flesteparten) er det greit å ta et grovt sammendrag av hva som skjedde da. Etter over et tiår med lave priser i markedet gikk prisen fra under 10 dollar til rundt 140 i perioden 2000 til 2007.

Uranium Price History 1968 – 2016

Dette gjorde at de stort sett ulønnsomme uraniumselskapene, som hadde vært elendige investeringer frem til da, gikk over til å bli svært lønnsomme. Ved inngangen til år 2000 var det bare rundt 5 selskaper som fokuserte utelukkende på uranium. Da vi nådde toppen av markedet rundt 2007-2009, hadde antallet selskaper økt til rundt 500. Hvis selskapet hadde uranium i navnet sitt i denne perioden så fikk det en umiddelbar boost i verdsettingen. Selv om de bare eide jaktterreng i Kanada. Vi har nå i 2021 rundt 60 uraniumselskaper å velge mellom, noen bedre drevet enn andre. Det betyr at det fortsatt er overkommelig å gå over selskapene og vurdere hvilke som er gode investeringer. Fremover vil det dukke opp mange nye selskaper og gjøre det mer uoversiktelig.

Jeg tror ikke jeg har brukt grafer fra det forrige bullmarked i uranium i de tidligere innleggene mine. I dette innlegget har jeg derimot valgt å legge ved et par av disse. Mest for å ha noe å sammenligne med kursutviklingen vi ser i dag. Grafene er med for å gi en indikasjon på hva som er mulig, ikke et løfte om at det faktisk vil skje. Vi starter med selskapet Cameco:

Cameco var et av selskapene som var i drift i forkant av forrige bullmarked. Selskapet hadde ved inngangen til år 2000 en kurs på rundt 2,5 kanadiske dollar. Fra dette gikk selskapet, med en god del bevegelser opp og ned, helt opp til 55,6 kanadiske dollar hvor de toppet ut. Noe som tilsier over 22X avkastning hvis du hadde investert ved inngangen til 2000. Det er bortimot umulig å selge helt på topp, men det er mulig å se for seg å eie selskapet på deler av denne reisen.

Videre har vi den aller mest kjente aksjen i forrige bullmarked som er Paladin. De var et av de få selskapene som kom i produksjon i forrige syklus med Langer Heinrich gruven i Namibia. Aksjen fikk derfor en helt fantastisk avkastning. (Så bra at det er absolutt nødvendig å bruke logaritmisk skala på grafen). For investeringsguruen Rick Rule er dette en av favoritthistoriene hans. Han investerte inn i selskapet på 10 cent fordi han møtte teamet bak selskapet og hadde troen på at de kunne få til noe. Videre så han aksjen falle helt ned til 1 cent. Et 90 % tap fra finansieringen. Han gikk da over hele investeringen på nytt for å se om han skulle ta tapet eller ikke. Etter å ha gått over investeringen igjen endte han opp med å øke posisjonen sin ytterligere til verdsettelsen på 1 til 1,5 cent. Når markedet tok virkelig av gikk selskapet opp til over 10 dollar. Det tilsier over 10 000 % eller 1 000X! Absolutt helt astronomiske tall. Jeg har lagt ved en link til en video hvor han forteller historien her. En kan ikke forvente å kunne sitte i aksjen over hele denne utviklingen. Derimot kan en, hvis en er dyktig og heldig, få med seg mye av denne bevegelsen i aksjen.

En skal derimot være svært forsiktig å trekke konklusjoner fra tidligere perioder. Det er mange som har vært rike på papiret basert på slike sammenligninger, og som har blitt skuffet med utfallet. Det som likevel gjør at sammenligningen har noe for seg er at uranium er en syklisk bransje. Det vil si at de opplever veldige topper og bunner. I perioden vi har hatt etter 2007 har vi opplevd et fall på over 90 % i markedsverdi for selskapene fra toppen. Produksjon av uranium har blitt ulønnsom for de fleste selskapene. Gruver har derfor stoppet opp produksjonen og blitt satt på “care and maintenance”. Å få en gruve fra vedlikehold til å komme tilbake i full produksjon tar lang tid. Det er ansettelser av arbeidere, innkjøp av utstyr, godkjenninger fra staten for drift og en rekke andre organisatoriske hindre som må krysses for å komme i gang igjen. I de fleste tilfeller er det forventet at det vil ta to år å bringe en gruve tilbake til 100 % drift. Det vil si at vi er i 2023 før noen av disse gruvene er tilbake online hvis de får beskjed om å starte opp i dag. Videre tar det mellom 18 til 24 måneder fra uraniumet er tatt opp av bakken frem til det er er klart til å sendes til atomkraftverkene. Det betyr at hvis et kraftverk ønsker å ha tilgang på uranium i 2025, er tidspunktet å forhandle på dette i dag.

En ting som er positivt sammenlignet med 2007 er at det aldri var et underskudd på tilbud i markedet i noen perioder den gangen. Det var derimot et markedssentiment som sa at det ville komme mye etterspørsel fremover fra nye atomkraftverk som var planlagt før resesjonen i 2008 (etterfulgt av Fukushima ulykken i 2011). Dette var etterspørsel (i tillegg til tilbudssjokk med oversvømmelse i Cigar Lake) som flyttet hele markedet oppover. I 2020 ble det produsert mindre pund i året enn det ble konsumert av kraftverkene. Markedet er allerede i ubalanse og det vil heller ikke komme mer tilgjengelig uranium på banen før prisene går oppover. Jo mer dette drar ut, jo flere må komme til kontraktsbordet på samme tid. Dette kan derfor gi en supply squeeze hvor prisen skyter oppover.

Det som trekker imot at vi vil få tilsvarende utvikling som i 2000-2007, er at vi i forrige bull marked ikke hadde selskapet Kazatomprom på samme størrelse som de har nå. Kazatomprom har i etterkant blitt den dominerende aktøren og har tilbudt svært mye billig uranium til markedet. Det trengs derimot mye mer tilbud på banen enn dette selskapet kan tilby alene de kommende årene. Kazatomprom har bidratt til å holde uraniumprisene nede enda lenger, men har de siste årene fokusert mer på profitt en utelukkende produksjon. I tillegg har de solgt unna mye av de lett tilgjengelige pundene sine med uranium. Den lavthengende frukten er allerede plukket. For å produsere mer så må også disse øke CAPEX.

For de som lurer på om vi nærmer oss toppen så er spotprisen fortsatt på 30 dollar per pund og aksjekursen til Cameco er rundt 2,5X fra den absolutte bunnen de hadde i mars 2020.

Hvorfor har prisen på selskapene gått så mye opp uten bevegelse i spotprisen?

Hvorfor flytter aksjekursen seg selv om spotprisen ikke beveger seg er et spørsmål jeg ser en god del nye deltakere inne på twitter spør seg. Det vil jeg forklare med at markedet diskonterer inn forventninger til fremtiden og at selskapene vil inngå kontrakter som er betydelig høyere enn på dagens nivå. Hvorfor vil kontraktene bli inngått til en høyere pris? Fordi til og med gruver som kan starte opp relativt fort (innen to år) vil ikke ta i en spade før vi når minst 40 dollar. 

En annen grunn til at vi ser bevegelser i aksjene, men ikke spotprisen er indeksfondet  URA sine handler i 2018. Indeksfondet URA inneholdt en stor andel uraniumselskaper, men solgte seg ned fra 100 % uraniumselskaper til 50 % uraniumselskaper i januar 2018 på grunn av dårlige resultater. Aksjene som hadde gjort det dårlig frem til da ble ytterligere solgt ned av fondet.

Prisen for uranium bunnet derimot ut i 2016 på litt over 18 dollar og har med pris rundt 30 dollar gått opp rundt 66 % fra bunnen. Når man i samme periode observerer at URA er opp 18 % fra 2016 bunnen, forstår en at selskapene har hatt litt å ta igjen på prisen. Begge disse effektene kan være med å forklare bevegelsene vi har sett i det siste og forventningene til fremtiden blir viktigere jo høyere vi går.

Hvilke forventninger har vi fremover?

Analytikeren Lawson Winder i Bank of America er optimistiske til uraniummarkedet fremover  og tror at flere av atomkraftverkene som er planlagt å stenge ned de neste årene vil få forlengelse av levetiden sin. Hvis 11 av de planlagte nedstengingene blir utsatt til 2030 vil det tilsi 26 millioner pund ekstra etterspørsel til markedet i perioden. Dette vil utgjøre rundt 2 % av verdens etterspørsel. Selv om dette ikke er så høye tall i seg selv, så er det bare en liten del til som er med på å bedre utsiktene fremover. I tillegg studerer Nuclear Regulatory Commission (NRC) om det er mulig å strekke levetiden til atomkraftverk til opp til 100 år. Noe som kan gjøre at kraftverkene kan operere frem til 2069, og i tillegg gjøre de enda mer konkurransedyktige mot andre alternativer som kull og gass.

Cameco sine uttalelser om fremtiden ved fremleggelse av Q4 tall

Onsdag 10. februar la Cameco frem tall for Q4 2020. Mer enn resultatet til selskapet, var investorene interessert i å høre hvordan selskapet uttalte seg om fremtiden. Cameco er verdens nest største uraniumselskap kun slått at Kazatomprom i størrelse. Cameco har også de to største “high grade” uraniumgruvene i verden med Cigar Lake og McArthur River. Den ene av disse, McArthur River, er derimot satt på “care and maintenance” fordi prisen på uranium er for lav. Cameco ønsker ikke å tømme denne gruven til prisene som tilbys i markedet i dag. I tillegg Cigar Lake er også stengt for øyeblikket, men det er på grunn av Covid-19 smitte. Selskapet har derfor ikke hatt nevneverdig produksjon i 2020, men har levert på kontraktene sine ved å kjøpe tilbud i spotmarkedet. Cameco har et eksepsjonelt godt rykte i uraniumbransjen, når de uttaler seg så lytter markedet.

Cameco er mer positive enn de har vært på lenge. Etterspørsel begynner å bli mer sikker samtidig som tilbud tilgjengelig i markedet blir mindre sikkert. Det er etterspørselsestimater er på 170 millioner pund i 2021, som vil øke opp til 210 millioner pund i året i 2035. Samtidig vil produksjon falle til 100 millioner pund innen 2035 på dagens prisnivå. Det trengs derfor høyere priser for å sikre nok tilbud i fremtiden.

Hva flere bet seg merke til var at Cameco sa at det vil være nødvendig å ha produksjon tilsvarende 6 ganger produksjonen til McArthur River for å dekke denne etterspørselen. Arbeid for å få denne mengden produksjon tilgjengelig bør gjøres i dag, men til dagens priser er dette umulig. Det er ikke lønnsomt for produsentene. Atomkraft utgjør 10 % av verdens energikilder og er essensielt for å ha stabil tilgang på strøm. (Vi finner artikler om hvor vellykket det er med fornybare kilder som sol og vind i land som Sverige, Tyskland og Japan i løpet av vinteren. I perioder med lite sol og vind så produserer disse alternativene langt under kapasiteten sin). Prisene på uranium må opp for å sikre stabil tilgang på strøm de stedene hvor atomkraft er tilgjengelig.

Konklusjon

Avslutningsvis er det viktig å huske  på at vi er fortsatt relativt tidlig i dette bullmarkedet i uranium. Vi har begynt å se visse nødvendige strukturelle endringer som svært lovende for fremtiden. Derimot er vi ikke i nærheten av den utviklingen som trengs for å kunne drifte flåten av atomkraftverk de neste 10 til 20 årene ennå. For at dette skal skje så må prisen på uranium opp over 45 dollar per pund for at flere gruver skal starte opp produksjon. Selv da vil ikke tilbudet være høyt nok til mer enn at noen få av atomkraftverkene får levert inn til lagrene sine. Dette er det fortsatt en stund igjen til, så det er ikke grunn nok til å få høydeskrekk selv om flere av aksjene har beveget seg mange hundre prosent opp de siste månedene. Dette er bare slik det ser ut når selskapene beveger seg fra bunnen i et marked som har solgt ned over 90 % i et tiårig bearmarked.

Siden jeg har planer om å ri dette bullmarkedet langt og ikke selge meg ned etter å ha doblet et par ganger, så visualiserer jeg litt. Jeg ser alltid for meg om hva ville jeg ha gjort om jeg allerede var en mangemillionær og bare hadde 5 % investert i uranium. I det tilfellet ville jeg ikke hatt problemer å fortsette med å holde og tåle fall i 50 % på vei oppover.

Hvordan skal du forholde deg til vinnere og tapere

Det er nå to uker siden forrige innlegg hvor jeg sa jeg var forsiktig optimist med tanke på uraniummarkedet. I ettertid kan vi slå fast at vi hadde god grunn til optimismen og vi har sett at flere av aksjene har doblet seg. Denne uken vil derfor tema være om det psykologiske ved å være en kontrær investor. Utenom valg av investeringer så er kontroll av følelsene sine den aller viktigste faktoren for suksess.

En må starte med en plan

Først ut for en investor er at man må følge en plan. Hvis ikke vet man ikke hvor man skal, og hvordan man skal komme seg dit, vet man aldri om man har kommet frem. For investeringer så har denne planen en hypotese man skal teste om holder vann eller ikke. Man leter derfor etter informasjon som er med på å bygge opp eller tilbakeviser hypotesen. Å lete etter bevis som tilbakeviser hypotesen er kanskje det viktigste du gjør. I kontrære investeringer har ofte selskapene en flat eller nedadgående trend. Vilkårene som har fått selskapene ned på dette nivået må ha begynt å avta eller forsvinne før det er aktuelt å investere. Hvis du ikke finner momenter som får deg til å forkaste hypotesen så er du kommet et godt stykke på vei. Videre er ikke nødvendigvis aksjekursen informasjon som bygger opp hypotesen for en kontrær investor. Det kan i stedet for eksempel være spotpris i underliggende råvare, eller lagerbeholdning av varen som er tilgjengelig mot fremtidig etterspørsel. Til slutt er det lurt å se etter en trigger i markedet som vil utløses innenfor rimelig tid. For min del så er rimelig tid innenfor tre år, lenger enn dette så bør en velge andre investeringer og komme tilbake og sjekke med jevne mellomrom.

Photo by Andrew Neel on Pexels.com

Innstilling

En ting som også er relevant for psykologien er om du har en formue allerede. Om du sitter på ti millioner kroner (rundt en million dollar) og er investert 10 % i et kontrært veddemål, er det svært annerledes enn en person som har mesteparten av formuen sin i investeringen. En person med formue lever komfortabelt, kan investere bredt, men kan fortsatt få et svært godt resultat for porteføljen sin totalt hvis veddemålet slår inn. For min del har jeg har ikke en slik formue ennå. Jeg har valgt å legge størstedelen av min formue i kontrære bransjer og verdien av beholdningen har derfor fulgt svingningene av disse bransjene på godt og vondt. I lengre perioder har disse gått tregere enn det generelle markedet, og til tider har også investeringene mine falt mer ned enn markedet generelt. (Jeg har heldigvis ikke giret porteføljen slik at tapene blir enda større, og jeg har heller ikke investert slik at jeg er avhengig av pengene investert i hverdagen).

En strategi jeg bruker på meg selv i denne situasjonen er at jeg visualiserer at jeg tilhører denne formuende gruppen i dag. Det betyr at investeringen min utgjør kun 10 % av min teoretiske beholdning. Hvor mer jeg er istand til å zoome ut og få avstand til porteføljen, jo bedre er det for å takle kortsiktige fall.

Utålmodighet

En annen ting er oppgittheten eller utålmodigheten med at du ikke ser noe endring i markedet. Du blir rett og slett lei av investeringen. Det skjer bortimot ingenting på overflaten. En kan til slutt bli helt apatisk og tenke at du kanskje tar feil likevel og at en bedring i markedet kan være flere år unna. Dette er svært vanskelig å håndtere, spesielt om dette er hovedinvesteringen din. Selv om du har sterk overbevisning er alternativkostnaden høy ved å være for tidlig ute. Det siste året har for eksempel selskaper på NASDAQ gått fra topp til ny topp med jevne mellomrom. Om du sitter igjen med selskaper som ikke beveger seg er ikke det motiverende. Her er det ikke noe godt råd for om du skal selge ut eller ikke. Selv om noen få enkeltselskap har gjort det greit innenfor uranium har markedet under ett vært forferdelig. Det kan være et alternativ å sette nye midler i andre bransjer i mellomtiden som du også har tro på. Da er ikke alt avhengig av den ene hesten du spiller på.

En siste måte som hjalp meg med å vente på aktivitet i markedet var å koble helt ut. Jeg forsøkte å få avstand til investeringen og de daglige svingningene. Jeg hadde derfor en periode hvor jeg ikke logget inn og sjekket konto, men så bare trenden i markedet fra utsiden. Selv om jeg har lest mange bøker om investering så valgte jeg en periode å kun lese skjønnlitterære bøker. Jeg tror hodet var lei av å være “på” hele tiden og trengte en pause fra jaget på avkastning. I mitt tilfelle var det faktisk i denne perioden hvor jeg var mest koblet ut at markedet snudde. Jeg jobbet mindre, men markedet jobbet for meg. Jeg vil sammenligne det med en bonde som har satt poteter på våren og som må vente før han kan høste om sommeren eller høsten. Jeg fulgte mottoet med: «Sit tight and be right».

Til slutt vil jeg fortelle litt om hvordan reisen har vært til nå så det ikke ser ut til at avkastningen jeg har nå bare har vært i medvind.

Reisen min til nå i uranium

For min egen del gikk jeg inn i uraniummarkedet i april 2019 fordi markedet var i ubalanse, og det lå en potensiell trigger i markedet. USA hadde nemlig et lovforslag om toll på uranium fra utlandet for å redde den nasjonale uraniumsproduksjonen i landet. (USA har 20 % av energiproduksjonen sin fra atomkraft. Hvis mesteparten av dette uraniumet kommer fra russiskvennlige regimer kan dette bli brukt som en geopolitisk brikke som for eksempel Putin har gjort med gass til Europa tidligere).

Dette forslaget ble ikke godkjent av presidenten, og dagen det ble offentliggjort i juli 2019 falt de amerikanske mine over 30 %. Dette medførte et dramatisk fall for porteføljen min som rett før dette tidspunktet var opp rundt 20 % for året. Siden dette var rundt halvparten av den likvide formuen min så gav dette høy puls rett etter offentliggjøringen. Avgjørelsen som skulle være en positiv trigger ble svært negativ for porteføljen min. Aksjene mine allerede hadde diskontert inn forhåpningene om positivt resultat og da dette ikke var tilfellet solgte mange seg ut. Resten av året gikk verdien opp og ned i porteføljen, men markedet hadde fortsatt mye pessimisme for fremtiden. Et greit år midtveis endte med et tap på rundt 10 %.

Avkastning på kontoen i 2019

Videre kan vi se på hvordan utviklingen fortsatte for porteføljen i løpet av mars 2020 da effekten av Coronaviruset påvirket aksjemarkedene. For det som viste seg å være bunnen av markedet var jeg nede i rundt 60 % av verdien jeg hadde hatt ved inngangen til 2019, og hadde tapt over 50 % av verdiene jeg hadde ved inngang til juli 2019. (Hvis det ikke hadde vært for at dollarkursen styrket seg mye mot kronen i perioden så hadde porteføljen vært enda lavere). Dette var kanskje den hardeste perioden å være investert i markedet. Det var et par ganger at jeg var fristet til å logge inn på kontoen og vurderte å selge meg delvis ned. Å tape halvparten av verdiene sine oppleves svært tungt i øyeblikket. Jeg har spart stort sett hele livet og noen av pengene jeg sparte som avisbud som 13-åring har sannsynligvis funnet veien inn i porteføljen min. At verden så ut til å ende og at sparepengene forsvant i store biter foran øynene på meg var svært ubehagelig. Vi hadde ingen anelse om dette ville fortsette nedover eller ikke i øyeblikket.

Porteføljen fra januar 2019 til bunnen av markedet i mars 2020

Likevel skulle dette vise seg å være bunnpunktet for hele markedet. Sentralbankene kom med stimulipakker som løftet hele markedet og medførte at vi fikk mange arbeidsledige som begynte å bli daytradere. Disse pengene kom ikke inn i uraniumsbransjen, men nedstengningen av samfunnet gjorde også at gruvene som hentet opp uranium måtte stenge ned. Dette fikk en større effekt på markedet som så en stor usikkerhet i å få nok tilbud til kraftprodusentene. På kort tid gikk markedet fra fortvilelse til eufori. I løpet av mars – april var porteføljen min tilbake på nivå som jeg var på i juli 2019 med en oppgang på over 100 %. Markedet fikk en helt annen dynamikk og spørsmålet om tilgang på fremtidig uranium var tilbake i diskusjonen. Selv om aksjene ikke beveget seg så mye i løpet av sommeren og høsten var overbevisningen høy hos meg. Jeg økte posisjonene mine i løpet av sommeren selv om selskapene ikke beveget seg så mye. Fra november 2020 begynte igjen markedet å bevege seg i påvente av kontrakter som skal inngås i 202. Situasjonen er at produsentene ikke vil signere kontrakter på nivåer under 30 dollar per unse som er spotprisen i dag, men trenger minst 40 dollar for å gjenoppta produksjonen. Med litt under 2 uker igjen av året er utviklingen svært positiv for meg som investor. Siden bunnen i mars er jeg opp nesten 200 %, og tapet jeg hadde i mars er et svakt minne i bakhodet. Hvis jeg ikke hadde hatt overbevisning om investeringscaset, eller hadde brukt penger jeg hadde måttet tatt ut i perioden hadde situasjonen sannsynligvis vært helt motsatt. Da hadde jeg kanskje solgt meg ut på bunn. Nå er porteføljen der jeg ønsker og fremtidsutsiktene er bedre enn noensinne.

Avkastning i porteføljen fra 2019 til desember 2020

Avslutningsvis så er det en helt annen ting å takle et marked som går oppover enn nedover. Mange som har vært gjennom lengre perioder med tap selger seg ut med første anledning når de er tilbake til break even. Dette er helt feil. “If you have been along for the pain, why not stick around for the gain” gjelder i dette tilfellet. Dette vil sannsynligvis være et tema jeg tar opp senere hvis dette markedet virkelig tar av. For de som mener at aksjene har steget for fort i det siste så tar jeg det med ro. Jeg anslår at aksjene har kommet frem til startstreken og startsskuddet er i ferd med å gå. Vi er langt fra toppen.