Uranium: Dawn of a Bull Market?

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Uranium miner stocks sound like a laughable investment in 2021, however institutional investors are waking up to uranium equities and the speculative allure of multi-bagger upside returns. The bull thesis on uranium equities is simple: extreme supply and demand dislocations. In the last 70 years, uranium has gone through two legendary bull markets. During the 1950’s and 60’s, the boom of nuclear reactor construction facilitated strong demand for U308, uranium reactor fuel. The OPEC Oil Crisis only accelerated demand for uranium as reactor construction accelerated upon the discovery of a new cheap, baseload, and green energy which could divest America away from dependence on foreign oil. During the first boom, successful junior miners and exploration teams hit it big, the uranium craze even entered the mainstream with the creation of uranium glass.

Adding uranium derivatives to glass gave the glass a strong green glow when put under ultraviolet light. This craze didn’t last. After the Three Mile Island and Chernobyl disasters, nuclear energy was shunned by the American public, a slowdown in new reactor construction combined with excess uranium supply caused prices to hibernate in a 20 year secular bear market, killing off speculative activity in the sector. Renewed optimism came in the early 2000s when rampant supply deficits combined with anticipated growth in Chinese and Indian nuclear programs facilitated underlying catalysts for a bull market.

The flooding of the McArthur River and Cigar Lake mines were immediate black swan catalysts that further accelerated the existing bull market into a mania moving uranium spot prices to a peak of $160/lb in 2007. The flight to commodities as an inflation hedge following the Great Recession served as an additional catalyst underpinning the macroeconomics behind the commodity boom of the 2000s. The last bull run ended when higher supply combined with the fallout from the Fukishima nuclear disaster sealed uranium into a now decade long secular bear market. Given the lack of speculation, mines today have been idled and the industry has been in consolidation and liquidation ever since. Today uranium prices have descended into the abyss.

Because it costs more than $50/lb to mine uranium, the current spot prices indicate an extreme imbalance. The former Soviet state-owned-enterprise, now publicly traded Kazatomprom has forced cheap supply onto the market over the last decade, however overly bearish sentiment has held back the necessary investment in new mines leading to consistent annual supply deficits. New reactor construction in China and India has lead to strong growth in uranium fuel demand. Given the extreme asymmetry and cyclicality of uranium spot prices, investors are obligated to investigate.

The current uranium spot market is thinly traded and void of liquidity given the fact that the majority of nuclear utilities purchase their supply of uranium fuel directly from miners through long-term contracts. Kazatomprom and Cameco who own the few mines still in operation, service long-term legacy contracts signed more than 5–10 years ago, where the prices were high enough to warrant production. Other mines owned by Dennison, Uranium Energy Corp, Ur-Energy, and Paladin have been idled, or are still in speculative exploration and/or development. The divergence between the spot market and long-term contract markets are extreme and will likely change as massive contract renewals in the 2020s force spot prices higher, potentially rewarding patient speculators.

Covid-19 has led to mine closures in Kazakhstan and Canada, and an overall rotation by institutional investors into undervalued commodity plays has significantly benefitted uranium spot prices in 2020. By extension, uranium equities have begun to rally alongside distressed oil and natural gas equities. The possibility for the extreme divergence between spot and contract prices to close combined with a change in investor sentiment towards pricing-in the extreme future supply shortage could serve as tinder for a massive rally in uranium related equities which may have already begun. At the moment, uranium stocks are extremely overbought and risk short-term correction, however the larger and longer term bull trend remains solid.

Uranium has likely left the “stealth” phase as institutional investors begin to take notice; if the bull thesis is correct, tremendous upside likely remains.

Right now, uranium and nuclear energy is actively being pumped by Wall Street Bets, Zero Hedge, Bloomberg, Hugh Hendry, Michael Burry, and even Bill Gates.

Caution is necessary, however it appears that the stock promotions are still in their early stages as a UraniumSqueeze Reddit page was formed February 1st on Wall Street Bets to squeeze some of the highly shorted uranium stocks like Energy Fuels $UUUU and Denison $DNN. Uranium also has tremendous ESG applications since nuclear energy is green energy with net zero carbon emissions. Unlike fossil fuels, uranium would potentially fit in an environmentally-friendly portfolio making it appealing to younger investors.

The entire uranium mining sector has a market cap under 15–20 billion dollars. If a large mob of unsophisticated investors pile in, extreme alpha could arrive early. In a mania, investor psychology is of the highest priority. A smart investor would slowly build diversified positions in senior miners like Cameco, juniors like Denison Mines or Paladin Energy, and more speculative plays like Deep Yellow, also possibly adding in ETFs for broad diversified exposure.

Buying the dips into a rally, or averaging down a position would work as a position-building strategy depending on the investor’s conviction level. After building a meaningful position, avoiding burnout, temptation, or greed would mean not checking share prices until the uranium spot price reaches at least $60 or $70. Mining stocks, particularly exploration and junior miners are some of the most volatile stocks in the investing universe, presenting the greatest possibility of extreme asymmetry if the bull case is correct.

Given the extreme historical cyclicality of uranium prices, the potential for mispricing and the development of feedback loops is high. Investors are often irrational and subject to manipulation by friends, family, media, etc. If uranium picks up more steam, it can become self reinforcing, as people can’t stand watching their neighbors get rich, they will pile in and assume the underlying fundamentals back their position. As the bull market heats up prices begin to diverge from underlying fundamentals, and hence the formation of a bubble. Financial bubbles may be identified in real time, however calling the top is near impossible. Take one of the smartest people in history, Isaac Newton, the inventor of gravity:

I can calculate the motion of heavenly bodies, but not the madness of people”

Newton’s experience in the South Sea Bubble is no different from today’s retail investors, the psychology hasn’t changed, all that’s changed is that the bubbles are in different assets. Understanding the crowd is critical to becoming a successful speculator. Betting on the price movements of assets as opposed to the fundamentals separates speculation from investment. Uranium mines are horrible long-term investments as the underlying businesses are capital intense, highly cyclical, highly leveraged, and constantly dependent on cycles of new cash infusions either from share dilution or bond issuance to avoid bankruptcy. Furthermore, uranium is a commodity, the production of which in an economic sense is oligopolistic. An identical product produced by a few producers who only compete on price. Setting the price of U308 above their marginal cost of production only through legacy contracts.

Eventually, market demand combined with extreme supply deficits will push prices higher attracting an influx of new miners to enter the market while share prices rise on positive price and miner sentiment. In this market structure, economic profits are zero in the long run and only low cost producers with economies of scale can survive. As speculators, it is imperative to get long uranium through currently struggling or idled higher cost producers and developments to benefit from the coming infusion of capital into uranium production as spot prices inevitably rise. Many junior mining operations only become feasible if spot prices rise above $70 or $80 a pound. Buying shares in these companies presents unique risks as many are small cap, pre revenue, penny stocks with hollowed out balance sheets, however if spot prices rise substantially, these junior mining stocks will enjoy a leveraged, outsized gain; acting like call options in relation to the spot price. Although horrible businesses to run long-term, similar to coal mines today, speculators who are able to successfully forecast future spot prices can leverage up the increase in spot prices by buying equity in junior miners that will raise significant capital when the industry captures attention and money from the investing public as higher spot prices make new production feasible.

Outside of higher spot prices, or renewed capital allocation to the industry, these firms will slowly consolidate and die-off. Given their cyclical nature, uranium mines have a short period of high profitability or interest during bull markets few and far between. If the bull thesis on uranium is correct, many of these stocks could be multi-baggers despite the inherently flawed business model and despite the fact that the vast majority of junior projects will never reach production. Unsophisticated retail investors often ignore this, so correctly anticipating a future bubble in uranium equities by buying into an asset that is mispriced based on fundamentals and hoping for reflexivity on the upside, could yield tremendous capital gains.

Understanding George Soros’ theory of Reflexivity is critical to successful speculation. Reflexivity and positive feedback loops are even more extreme today with social media and technology. If the uranium bull thesis is correct, the ESG qualifications combined with the exciting prospect of investing in “uranium” could lure retail investors into low-volume, small cap uranium equities, driving share prices of uranium miners significantly higher on the backdrop of an upcoming “Commodity Supercycle.”

Disclaimer: the author Kevin Habek is not a registered financial advisor. This article constitutes the opinion of the author and should not be misconstrued as financial or investment advice. Stock and options speculation is highly risky and investors employing these investment strategies run the risk of losing all or more than their original invested principal. The author recommends readers perform their own research and due diligence and consult with a qualified investment professional before entering into any investments. The article in reference: “Uranium: Dawn of a Bull Market?” by Kevin Habek, is designed for entertainment and informational purposes only.

I enjoy breaking down financial and economic trends.