“The most exciting returns are to be had from an asset class where those who know it best, love it least, because they have been hurt the most.” – Done Cox
Major supply destruction
Sector analysts in the uranium space have been saying that the world’s largest uranium mine, McArthur River, would likely reopen after a 10-month temporary shutdown that started in February and their overly conservative supply/demand forecast models have reflected this. Meanwhile, the owner, Cameco, had repeatedly said they would not bring it back unless uranium prices were meaningfully higher as it would make no sense economically.
Last night a decision was made to put the mine on hold indefinitely until nuclear utilities are willing to sign long-term contracts at a price that reflect their true costs plus a reasonable return – probably north of 45 USD/lb – the spot price is now at 24 USD/lb and the latest long-term contract price was around 29 USD/lb. This shutdown equates to supply destruction of 12% of the global production that nuclear power plant utilities thought would come back online as they have relied on paid analysts and consultants filling their ears with the sweet words that it would.
A domino effect is likely
I believe this marks the beginning of a new bull market for a few reasons.
- The nuclear power plant utilities will have to wake up from their dream state to a new reality in which cheap uranium below the cost of production is no longer available in quantities they had been hoping for.
- Cameco will have to buy significant amounts of uranium in the spot market to fulfill their contracts to customers. This will inevitably push prices higher.
- Kazatomprom plans to IPO in a few months time. It would make sense for them to delay any action that will result in higher uranium prices (such as further production curtailments) until after Cameco has made the decision to put McArthur River on hold indefinitely. This game of chicken has now been won and they can now pull whatever levers they please without shooting themselves in the foot.
There are many other reasons that I have already covered in previous posts but the above three are linked directly to the news release from last night.
The final de-risking of the case for uranium
I cannot imagine the risk/reward will get any better than it is at this moment. My opinion is that the McArthur River decision is the straw that will break the camel’s back and if one prefers to wait for further de-risking it will almost certainly come at the cost of more expensive stock prices, thus reducing the risk/reward. In my opinion the way to handle risk is in how one sizes a position, not wait for all the stars to align because all opportunities will be gone when the skies are completely clear and everybody can see it. One wants to be positioned before the price of uranium moves because now it is pretty much inevitable that it will.
My current uranium positions
For the record and for transparancy, my bets are primarily with US producer Energy Fuels and London-listed Yellow Cake. The latter being the safer “in case I am wrong on the time horizon”-type of bet – like Uranium Participation, that I have highlighted previously in a video, but YCA trades at a larger discount. I also have smaller positions in Paladin Energy and GoviEx as well as a tiny position in the optionality play Virginia Resources.
Disclaimer: Note that this may change at any time and while I intend for all of these positions to be longer term I may enter and exit positions without notification of this on my blog. I do not accept responsibility for any loss that may occur as a result of any recommendation I make and urge readers to perform their own research and due diligence. My posts are intended to be treated as a starting point only.