Investment #1: Uranium
Supply deficit worsening, inelastic demand
I know, I know… not another Uranium post… There is now a huge amount of information out there on twitter, podcasts and various investment letters. I’ll link to some of these sources below. However given its my biggest position and still my favourite risk-reward setup, I couldn’t resist. I’ll give a brief overview of the thesis and try to address some of the push-back.
Once again, I’d like to emphasise, I am not an expert on the nuclear and uranium industry and I would defer to some of the sources cited below.
Long-story short I think downside is well protected by supply-demand imbalance, and see potential for at least a double from current levels in the three securities cited (current U price ~$100).
This, to date, has been my best investment. The more it works the more it underscores my conviction (rightly or wrongly). I have not sold any of my initial positions and have tried to add periodically, albeit averaging up is still a psychological weakness of mine. The trade remains the highest conviction and largest weighting in my active trading account. Hence, forgive me an indulgence, this will be a longer post than usual and actually includes three separate positions.
Securities
Yellow Cake (YCA LN):
First entry: Dec-22
Position size: ~$30k
Average entry price: £4.18
Current price: £7.28
Sprott Physical Uranium Trust (U-U CN):
First entry: Dec-22
Position size: ~$30k
Average entry price: $17.03
Current price: $33.78
Sprott Uranium Miners (URNP LN):
First entry: Dec-22
Position size: ~$50k
Average entry price: £6.33
Current price: £9.75
Current Uranium price as of writing: ~$100
A summary of the Uranium bull thesis
A supply crunch. High level the world produces about 125mn pounds from primary mining, 25mn from secondary sources and is consuming about 180mn lbs per year - so a deficit of around 30mn lbs per year. This will only increase as more reactors come online in future years. Existing mines are becoming depleted and consistently fail to meet production guidance. There is plenty of Uranium in the world. However regulatory and environmental requirements, together with skilled labour shortages, mean brining a new mine online is hard and at best takes several years. Recent update: $KAP is one of the largest Uranium producers released results last week: new guidance is effective 9mn lbs less than before. That’s 7% of global production.
Sanctions: US sanctions on Russian Uranium are set to come into play this year. Russia is 6% of global supply, it provides 15% of US and 20% of European uranium. Furthermore it is the world’s largest supplier of enriched uranium at c. 40%.
Ability to sequester Uranium: this is only a recent phenomenon. Remember the market for Uranium is far less liquid and now there is a new(wish) player in town - The Sprott Physical Uranium Trust (SPUT). This is one of the vehicles in which I am invested. SPUT buys and sequesters Uranium for investors. So you have a shrinking free float of Uranium anyway (because of supply-demand imbalance), it issues shares to investors and then is legally obliged to buy physical uranium. This can be somewhat reflexive as in such a small market relatively small SPUT purchases can force up the price. A flywheel of sorts could be created (more shares, more purchases, higher prices an so on) albeit this relies on SPUT trading at a premium to its NAV, which it currently doesn’t. There are several other smaller funds which essentially do the same thing with different structures. The non-financial buyers are the utilities, they are forced buyers at any price should they need the fuel. They are effectively short Uranium given the deficit. These are mainly government or quasi government utilities. These are the main market actors, they are not traders in a traditional sense and differ significantly from other commodity markets. They acquire U at any cost, they are not paid to capture profits.
Rising demand: Economies the world over are waking up to gas not being reliable enough and coal still being too dirty. Wind and solar too distributed and unreliable. France reversed its decision to close its nuclear fleet and has greenlighted an expansion. Japan is in the process of turning theirs back-on. Korea has also changed its mind. Dozens of reactors from California to Illinois have been extended. China and India are aggressively building out new plants. The EU has agreed to treat nuclear energy as “strategic” and one of the pillars of its net zero targets. COP-28 was a milestone with 22 nations agreeing to triple nuclear capacity by 2050. The demand side has been a new part to the thesis, several years ago it was assumed Western nuclear was in terminal decline post Fukushima.
Small spot market: it's a very small market. The “marginal buyer” drives the price. 85% of all Uranium is sold under long-term contracts which are typically 3-5 years in duration. Most of which is linked to spot with a collar. Thus you don’t need a large marginal buyer to completely upend the market. SPUT initially did this in 2022 buying ~30mn. Fleet extensions and financial buyers can have a meaningful impact on the price.
Underfeeding vs. overfeeding: there is a shortage of Uranium enrichement facilities. The cost of enrichment keeps ticking up. We are essentially moving to enrichment being a drain on U, as more is required for the same amount of nuclear fuel.
LT strategic case: the case for nuclear energy is improving rapidly, brought into sharp relief by Putin’s invasion. All “green” energy (I use that term as it is used in common parlance as opposed to agreeing it is environmentally friendly) requires base load energy to fill in the gaps when the wind doesn’t blow, reservoirs don’t fill up or sun doesn’t shine. Nuclear is the lowest carbon option.
Anti-fragility: to sum up I think this is a very convex trade and positively exposed to anything going wrong on the supply side, which it virtually always does.
Pricing: first I’d acknowledge it is up significantly already. But it hasn’t gone wild (yet). I don’t have a price target, in these situations I think it is impossible. On the downside I struggle to see how the price can be maintained materially below $80 over the next few years given the marginal cost to produce and the existing supply/demand situation. What about the upside? Previous peak bubble was in 2007 the price topped out at ~$140. Accounting for inflation this could feasibly be a lot higher. I think the fundamentals are a lot stronger this time round. Plus we have added kicker of the ability for retail and institutional money to rapidly invest.
Addressing the critics
This is Twitter/retail meme stock nonesense. The is a small, vocal and kind of hilarious community of self-styled “Uranium Assholes” on Twitter. It is full of memes, one-eyed bullishness, defensiveness and plenty of irony. This can put “serious” investors off, as it looks like some sort of meme stock joke. However I’d make a couple of points. 1. In spite of the strong presence on Twitter, you’ve got to remember in the grand scheme of things this is a tiny community of investors. 2. Just because there are a lot of jokes and memes… it does not mean they are wrong. The underlying case is extremely compelling. 3. Normal financial investors, and in particular retail, cannot affect the underlying price of Uranium. This last point is crucial and differentiates between U and other commodities.
This is known and already in the price/I’m too late. The main buyers of U are price insensitive and have no substitute product. Utility buyers are not motivated by trading and price dynamics, they simply need to ensure there is enough U for the reactor. Hence I’m not actually sure how the market could appropriately front run the trade. The price of U is a very small portion of the overall cost of nuclear energy. The supply deficits have only just started to be impacted by utils (as opposed to financial buyers in 2022). There remains scope for significant upside in price IMHO.
The sentiment is overwhelmingly positive (especially on FinTwit). This is linked to point number 3 above. Sentiment and (most) financial buyers cannot directly buy U. YCA and U-U still trade at material discounts to NAV. Perhaps overwhelming positive sentiment could be a negative if they were trading at material premiums, but this is not the case. The sector is very small compared to other commodities and has failed to attract notable institutional inflows.
Nuclear is expensive, dangerous and unpopular. I think the popular narrative on this has really changed in the last 18 months. While this was not originally part of the bull thesis, it is now an added kicker. COP-28 included pledged to triple nuclear capacity from 22 nations. There have been multiple stories of existing nuclear life extensions in The UK, France and the US (a particularly bullish signal for U price). Net zero acoloytes are increasingly realising that nuclear is a crucial part of reducing emissions and providing unremitting base load capacity. Now Germany look the outlier and not the trend setter (and incredibly foolish). Compared to other sources Nuclear has a leading safety record. New generations of reactors are even safer (albeit I appreciated the Taleb tail-risk argument). The expense is mainly driven by the lack of a standard nuclear facility, poor regulations and a lack of new builds. China has proved this it is possible to build cheaply at scale.
Why these securities?
The safest way to play the theme to me always seemed to be via exposure to the physical commodity. Hence Yellow Cake and U-U CN. The junior miners and explorers for me just fell in to the too hard pile. URNP became part of the portfolio mainly because it was easier for me to buy an ETF without approvals from my employer. It also had relatively large exposure to the physical funds and the major miners (Cameco and Kaz).
What are the risks?
Opaque spot market trades in a vacuum. The spot market is shady. From the outside you never really know what is going on. The price is based on a very thin market, so if there are 2-3 months without any spot buyers it could cause the price to decline significantly. Given the above thesis, I think this would be only temporary, but these drawdowns will get larger as the price goes higher and can be enough to scare people out of the trade.
Discounts to NAV. There isn’t a specific mechanism for YCA or U-U to close their discounts to NAV. Hence it is possible that as the Uranium price increases this gap could widen and fail to track the uplift.
Nuclear accident. Fukushima was devastating for the Nuclear sector last time around. Another similar disaster could also kill the trade.
Government intervention. Given the prospect of a unsubstitubale nuclear fuel going stratospheric in price, I would not rule out government intervention. I cannot say in what guise it may come, but price caps could theoretically be a possibility.
Credits, sources and where to find more
Twitter is an absolute gold mine of information on the sector. The number 1 person to follow is “The Prof” @quakes99
Kuppy is also heavily involved @hkuppy and has put put plenty of posts in twitter and his fund letters. I can credit him with introducing the trade to me.
For the memes and comic relief: @UrTokenCorgi.
Several podcasts I’ve listened to on the subject, Value Hive have done a couple.
There are also a few investment letters out there and increasingly more focussed sell-side research. The natural resources investment firm @Go_Rozen has also put out some fantastic industry publications.
Happy hunting,
The Geez
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