Let the Uranium Bull Market Begin

“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.

  1. 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.
  2. 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.
  3. 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.

23 thoughts on “Let the Uranium Bull Market Begin

  1. Thanks for beginning writing about the uranium business, it woke my attention. I joined the party due to the american petition 232-angle (invested in Energy Fuels, UR and a tiny position in UEC), but the other catalysts for the uranium price seem to come to life quickly now. I have been looking at Yellow Cake and Paladin as well (+Bannerman Ressorces) but have difficulties getting access to them (I use Nordnet). Any hints? Thanks again for you going public with your research.

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  2. Hi Hammerinvest,

    I have long admired your work.

    I ended up investing in a few companies, among them UUUU, URG and UEC, since
    there is no information available what might be the resolution for petition 232 and
    if positive, in what form and schedule the decision will be implemented. E.g. gradually
    increasing the amount of U.S. uranium that should be used in the U.S. utilities.

    Additionally, I invested in Goviex and Paladin. Now here’s what’s interesting about Goviex.
    Madaouela in Niger requires 359 M$ to build the mine. Mutanga in Zambia requires 121 M$ as well.

    Goviex, i.e. their CEO has indicated that roughly 2/3 of the required total investment
    500 M$ (I rounded this upwards) will be financed using credit. 1/3 will be
    financed using equity.

    Let’s assume that 1/3 is 167 M$ and let’s assume Goviex is able to get 0,20$ per share.
    This means addition of 830 000 000 shares. Counting the current shares, options and warrants, roughly 577 M, the total number of shares will be then around 1 400 M.

    Now, this changes a bit the landscape of Goviex’s profit / share and P/E calculations.

    According to my rough calculations this makes Paladin “cheaper” than Goviex.

    I assume the uranium price will increase at least to 60 $/lbs (probably / hopefully over 70 or even more). Paladin is able to produce faster (restart maybe in 14 – 18 months) while Goviex will open Madaouela in 2021 IF EVERYTHING succeeds.

    Any comments? Do you have preferences between those two?

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    1. I think you are exactly right, Jokke.

      I prefer proven mines over not-yet-built ones. So much can go wrong in the process of constructing a mine. On top of that new Paladin shareholders benefit from the fact that much of the debt financing of those mines have been wiped out by the recent restructuring. I agree completely with your view that Paladin is the better investment at current prices.

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      1. I have a spreadsheet with a few names, cost and price comparisons, which I would be willing to share if you are interested.

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    2. Your math is exactly right. but consider this: The GovieEx management is not silly and will only even consider seeking financing (in deed being able to do so) when we have a sustainable Uranium price recovery. At this point, there is no way that the stock is at exactly the same price as now when no miner earns any money.

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      1. Excellent point, German reader. One counter point: Shareholders being aware of upcoming dilution will sometimes suppress the price. There is also a second reason I prefer Paladin: Their flagship asset has a proven track record. Before a mine has been constructed there are multiple things that can go wrong.

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      2. Oh, absolutely. Everything can go wrong, but I am not sure if it is that relevant in the beginning of a bull market.
        Actually their shareholder base is quite strong in my opinion with Denison, Friedland, etc.

        Can you explain how current shareholders would keep the stock down?

        Now if Paladin will do better or worse, I do not know to be honest, most likely neither will disappoint.

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      3. I suspect you are right on that last point. And also that Goviex will move in a bull market but what I am saying is the fear of dilution may put a cap on that move in relation to what other U stocks are doing.

        This may be part of the explanation why Energy Fuels has moved while UEC has not.

        And Goviex hasn’t done much either so far despite the U spot move. The way the two stocks ought to move in my opinion is that Paladin will lead in the $25-50/lb U spot price environment, while Goviex will outperform Paladin once U spot is above $50/lb, or perhaps even a bit earlier than that. That would be my base scenario due to where they each sit on the cost curve.

        I agree on the shareholder base. Probably strong hands that aren’t letting go anytime soon. But to lift a stock you need interest + lack of fear.

        I do own a little Goviex by the way but more due to the optionality play aspect. At $70-$80 I think it will do extremely well in relation to other U stocks so I really hope they are patient and wait as long as possible to dilute and make a mine construction decision. Hopefully above $55/lb before they even consider it.

        What do you think?

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      4. Agreed. But I think Energy Fuels has done well mostly because of section 232 and their other business lines (vanadium and waste).

        What I also like about GovieEx is actually the location. People like Katusa seem to think it’s an AK47 country, but if you look a bit deeper that seems not quite to be the case. Further Daniel Major is extremely familiar with these countries and seems very focused on good relationships to the people in Niger. Not to mention how easy permiting is there and regulation in general, on top of which GovieEx has optimized the mining plan for a long time and cleaned up the balance sheet giving me some confidence.

        Have you considered other optionality plays and UR Energy? I have normal positions in Energy Fuels and GovieEx, smaller ones in NexGen, Laramide, Forsys, Denison and UEC (the latter I am thinking about very hard currently).

        So the spot price…I think it will come down to section 232 at first. Then it will be really important which individual contracts are closed. When Paladin gets contracts at $55/lb U will they further appreciate at spot $80/lb U? Are explorers revalued with the spot price or off take agreements? On a pounds in the ground basis? Hard questions.

        I appreciate the excellent discussion here by the way.

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      5. I do too. Good questions to think about 🙂
        Paladin will still be affected positively in a rising price environment even if they sign contracts for Langer Heinrich at $55 or perhaps even lower as they also have the Kayelekera mine in Malawi I think it is and this mine requires prices in the $80 dollar range to come on. Also they have exploration projects that will all benefit from rising prices. So I think the rise probably won’t be _as_ steep as Goviex post $55-60 but it will still be a very healthy one.

        My three core positions now are with Energy Fuels, Paladin and Yellow Cake and I am thinking of adding a fourth one but I have to do more research on it.

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      6. Good discussion, thank you German reader &b Hammerinvest!

        I agree with your comments of the price levels and comparison between Paladin and Goviex.

        Goviex will complete and publish Definitive Feasibility Study (DFS) during 2018 i.e. in a few months time. Then we will know more about their AISC (all in sustained cost level), schedule and hopefully they can also optimize the level of costs of building and operating the mine in Madaouela / Niger, which is a considerable safe place for a mine.

        The longer Goviex will wait for the price increase – and they must wait, this is a guess but a strong one – the later the mine will be an operating one and the later the expected cash flows will come.

        For me Goviex is a long play. When the uranium price is max US$50 / lbs, Goviex is not yet so attractive but when the uranium price will reach US$60 – 70 they will really create strong positive cash flow (as well as earnings with very low P/E).

        And when the price of uranium will increase, let’s say over US$30 / lbs and will stay in uptrend, Goviex will be able to secure debt financing with reasonable interest rate at some point, to proceed with building the Madaouela uranium mine.

        I hope they are able to secure the debt financing first in the increasing uranium price environment in order to minimize the effect of the dilution i.e. higher stock price, maybe bringing in an institutional investor or a Chinese corporation a la Fission Uranium.

        Considering the strong shareholder base of GoviEx, I guess Friedland and others will definitely stay. Probably even buy more when the dilution comes. Further, according to my knowledge the Sprott fund sold 3 M shares of Goviex during (summer) 2018. GovieEx hasn’t been a part of Global X Uranium fund, and therefore, didn’t suffer from their selling. This maybe a kind of positive, since if Global X Uranium fund will include Goviex, and the price of uranium have increased, this may increase the demand for Goviex stock.

        Paladin has just entered in the process of placing Langer Heinrich into care and maintenance. Once in care and maintenance, Paladin will begin a number of restart studies to identify precisely what the restart costs and timeframe will be. This will include various options to optimise production and lower production costs. Hence, they currently do not know neither exacts costs nor schedule for restart (18 months?). According to my preliminary calculations, Paladin will be much more profitable and have lower P/E when the uranium price will be around US€60/lbs, supposing Goviex will need equity financing and will dilute the abovementioned 830 000 000 shares.

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  3. I didnt think Paladin would still be a buy? I am a long term shareholder of Energy Fuels as they really are the main player behind Cameco in the uranium space. Not selling until Energy Fuels is well over 11 dollars. Stocks get high because more people want to own them and this one is a stock to own in this sector. As there really arent many good uranium plays out there. When will this market really get going??

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  4. Thanks for your reporting on uranium, your work has been helpful while trying figuring out the technicals. There seems to be lots of logical arguments for why uranium is mispriced, as you have mentioned the question seems to be more of when whether then if it will get more expensive.

    It would be interesting hearing more about your view on UR-Energy. Its not the highest EV bet but from what I have understood its the one with the lowest risk(?). As you mentioned they have their long term contracts making it less expensive waiting for an upturn and they are also a low cost producer. Kind of impressive having those long term contracts still and they also break out the costs of producing making it easy for me as a potential shareholder understanding the costs of producing.

    Regarding underfeeding. If I have understood it correctly it should create both deeper and higher price cycles. When prices are to low to mine uranium profitable they underfeed/squeeze out more of what they have, dump the extra in the spot market and create even cheaper prizes(?). Reversed, If the spot prices were to go up due to high demand they would stop the underfeeding creating even less demand in the market. If not true that they would stop underfeeding if prices were to go high – isnt underfeeding then setting a cap on how high prices can go?

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    1. Good to hear you appreciate my work, parveny 🙂

      On Ur-Energy.
      The positive: They have some nice contracts till 2021 and perhaps the lowest cost asset in the US.
      The negative: They have less scale than UUUU and UEC but more importantly I hate their new equity raise. It was both too big and the price too low. And giving out warrants in the current positive uranium environment was not necessary. So for that reason I have lost faith in them and their ability to do right by shareholders longer term. I will be very interested in hearing opinions that are contrary to mine in this matter.

      With regards to underfeeding I am not the best person to ask as what I said in my first uranium video about SWU isn’t quite right. The way I understand it is when enrichers have extra capacity they use tails from previous spins. It also makes no sense to do when they are operating at full capacity, so one needs to look at whether enrichers are expanding capacity or not. Judging from their recent annual reports by Urenco and Tenex they are not expanding.
      Also, generally, the lower the SWU price, the more underfeeding. And now that SWU has finally started to tick up I would expect underfeeding to gradually become less of a problem. And yes, from my understanding you are right that underfeeding is a double edged sword creating higher highs and lower lows.

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      1. Wow, this equity raise is an absolute disaster. Huge red flag.
        The warrants are already in the money. That is why the big boys have such an advantage: They can immediately sell their shares (or sell other shares short) and get the warrants for free with zero risk. And this just at a moment when the tide turns in the U market.

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  5. I have been thinking that as long as enrichers arent working at full capacity and if the SWU price is high enough to incentivize them they will keep underfeeding. Will the higher SWU price automatically make enrichers work at full capacity and stop them from underfeeding?

    According to World Nuclear Association they estimate that underfeeding will be able to bring extra 6-8 mt lbs to the market by 2025 underfeeding should not be of to big importance when making a investment decision. And at the moment its directly negative creating excess supply so the downside of it should be limited while you could speculate about the upside. Ive read that equipment for enrichers are very expensive to buy but cheap to run so Ill guess the current SWU prices are far from incentivizing investments in the area.

    Thanks for sharing your view on UR-Energy, I have nothing more to add and will focus on URE and Energy Fuels from now on. Yes I like your work and especially your videos, the one about Wilhelmsen was very learnful for me as a want to be value investor.

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