As a long-only value fund, we are drawn to bear markets. As alluded to in last year’s article titled Like buying oil at $20 a barrel’ we have a firm interest in the beaten down uranium sector. Whilst it seems we were one of the first Aussie funds to allude to the potential upcoming uranium bull market, we have certainly not been the last.

Since our article was published in January 2018, many other great articles have been published on Livewire. These articles are a great source of explaining the current uranium investment thematic.

Uranium: the bull market is upon

Uranium – the bull market has already started

Why 2019 could be uranium’s break out year 

The bull market nobody’s talking about 

Uranium: Interest is building

Betting on the perfect storm 

On the crest of a uranium wave?

It also seems many investment banks and brokerage houses are starting to warm to the idea of uranium as a strong risk vs reward proposition. It now seems Macquarie, UBS, Credit Suisse, Patersons, Morgans and I suspect many others are slowly turning positive on this other yellow metal.

Due to the plethora of great articles already published, I won’t go into too much detail on why we like this sector.  The uranium bear market is certainly showing signs of green shoots. We have had mine closures (i.e. supply destruction), demand growth now higher then pre-Fukushima levels, huge nuclear reactor growth from China, India, UAE and more importantly nuclear energy gaining popularity and acceptance in the global community.

It is a fact that nuclear power is the only carbon-free baseload power. Everything seems to be in place for this market to take off.

Except for one thing: Utilities signing long term contracts for uranium purchases.

Why are utilities not buying?

Simple - We feel it’s the uncertainty relating to the outcome of a US petition. As a way of background, two US uranium miners filed a S232 petition.

The US Department of Commerce (DOC) took up this petition and will release their recommendations to the Trump office on 14th April.  A Section 232 investigation is conducted under the authority of the Trade Expansion Act of 1962.

The purpose of the investigation is to determine the effect of imports on national security grounds. Investigations may be initiated based on an application from an interested party, a request from the head of any US gov’t department or agency, or may be self-initiated by the DOC.

The two applicants have requested for US utilities to be mandated to purchase 25% p.a. of their uranium needs from US domestic mines. Today, the US has the largest civil nuclear power fleet representing annual uranium demand of close to 50m pounds p.a. The US imports 99% of their uranium from foreign countries with less than 1% produced domestically in the US.

This is a far cry when the US produced close to 40m pounds p.a. in the 1980’s. On the surface it does seem like a US national security threat to be so heavily reliant on foreign imports of uranium. One must remember 20% of the US’ electricity grid is powered by nuclear.

Once the Trump office receives the DOC’s recommendations, Mr Trump then has up to 90 days to decide what action he will take. A S232 petition was filed for US steel and aluminium imports where Mr Trump imposed tariffs (as recommended by the DOC) only 10 days of his office receiving the DOC’s recommendations.

Although Mr Trump has a mandated 90 days, we feel he will make a decision a lot sooner than this. Most stakeholders within the global uranium industry feel there is a very good likelihood that Mr Trump will impose some sort of trade action that will benefit US uranium miners and incentivise more production from them.

Mr Trump has already shown precedent with aluminium and steel so why would uranium be any different?

Should this occur there is a strong likelihood that US produced uranium will trade at a premium to non-US production. As per the title of this article, this is the ‘Trump’ rocket fuel to a uranium bonfire.

US uranium leverage

Regardless of the S232 outcome, we feel a lot of uncertainty will be removed from the market. This should result in utilities starting to enter long term contracts. So, on a general level, one can assume most uranium equities will benefit and catch a bid once this uncertainty lifts.

Should a positive S232 occur for US producers it is common sense to think that the US producers will benefit the most and potentially have the most upside leverage. Overseas exposure to US uranium producers (whether producing or mines on care and maintenance) would be via US and Canadian listed companies such as UR Energy, Energy Fuels and Uranium Energy Corp.

For the ASX, there is only one alternative for US uranium exposure and that is via Peninsula Energy (ASX: PEN)

Source: Google

Although PEN has the smallest market cap of the three, it certainly packs a punch owning the single largest US uranium mine. Our house view is that if ASX: PEN was trading on the US stock market, it would potentially not be the smallest of the four market caps.

Liquidity & Institutions

What we find fascinating is that all four of the above-mentioned companies do not have much of an institutional shareholder base yet, even though one could argue all represent great leverage to the outcome of this S232.

Having listened to and spoken to many uranium industry insiders, most would agree that they feel there is a greater than 50% probability that Mr Trump will favour US uranium producers with some sort of trade remedy for them.

Assuming this is the case, there should be a risk-adjusted premium added to US uranium producers. The interesting and fascinating fact is there does not seem to be any premium placed on US uranium producers to reflect these odds. Hence this is where the opportunity lies.

Whilst it is anyone’s guess to why the ‘smart’ institutional money has not placed bets on a positive S232 from Mr Trump, our house view in trying to explain this is quite simple: Institutions prefer liquidity before entering positions.

Uranium and specifically these four US uranium producers are simply not liquid enough for the billion-dollar funds.

The fascinating thing about stocks in general is as prices rise 50%, 100% or even 200% liquidity magically appears.

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(Not Advice, only general advice in nature. Fund may hold positions in mentioned stocks)

 



Comments

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Chez Spigelman

Excellent writeup. Apart from PEN, are there any other ways to capture the potential upside?

M J

On the ASX DYL in Namibia BOE in Australia BMN in Namibia Canada TSXV GXU. In Niger Africa BSK. In Argentina On the nyse UUUU. In USA have Vanadium and a mine. Cameco huge mine in Canada, invested in GXU There are other companies in the USA but their ore grades are not good so mining Uranium is expensive there. If USA Utilities have to buy USA Uranium, the USA gov will have to chip in I expect.. Think quality companies and think bigger than the USA.. Nuclear reactors are being built everywhere. The USA uses a lot of uranium but so does the rest of the world. The looming supply deficit it the ball to watch. Get yourself and international trading account. Canada has some good junior explorers but uranium permits take years to get there.