Description

Macro and event-driven winds have converged to create a potential coiled spring in an asset that value investors have been trying to arouse out of its slumber for years.

It’s finally time for Uranium.  Seriously...this time it’s diff…(can’t quite bring myself to finish the sentence even though I think it’s true).  In July, Uranium Participation Corp. became the Sprott Physical Uranium Trust (SPUT) and has galvanized the uranium market over the past three weeks. 

Kuppy has been touting this dynamic recently on Twitter, so hat-tip to him for being on top of this.  I wanted to bring this to the attention of the board since the uranium convo has been pretty quiet here lately, it’s been 8.5 years since Uranium Participation Corp was last written up, and this thesis could play out in spectacular fashion very quickly.  My preferred exposure is to own shares in SPUT directly, although a basket of producers is another option, as well.

The uranium thesis has been around for years (first premiering on VIC in 2008, I believe).  For various reasons, the predicted supply/demand imbalances have never materialized, as above-ground stockpiles always proved able to offset any supply deficits.  Excellent threads on uranium can be found in Moneyball’s “U” write-up and Veritas500’s “CCJ” write-up, but the salient points for people new to the theme are as follows:

The Macro Winds

1.       Uranium does not trade on an open market like other commodities.  Buyers and sellers negotiate contracts privately, and prices are published by independent market consultants UxC and TradeTech.

2.       Supply dynamics:

a.       Low uranium prices and government-driven trading policies have prompted many producers to preserve long-term value by leaving uranium in the ground.

b.       The impact of COVID-19 has led to a number of unplanned supply disruptions that have further impacted supply.

c.       ~90% of uranium consumption occurs in countries that have little-to-no primary production.  ~80% of primary production comes from countries that consume little-to-no uranium.  ~80% of primary production is in the hands of state-owned enterprises, leading to potential disruption in the uranium market on account of perennial government trade spats.

3.       Demand dynamics:

a.       The world wants and needs more and more electricity.

b.       The push for a reliable replacement to fossil fuels continues to pick up speed (electricity isn’t enough – it has to be “clean-air” electricity.

c.       Many countries, states, and utilities are now announcing electrification and decarbonization goals, and nuclear power will be a critical tool to achieve these goals.

4.       Supply – Demand:

a.       The nature of the finished fuel process requires that customers contract to purchase uranium years in advance.

b.       Like other commodities, the uranium industry is cyclical.  When uranium prices are declining and low, as we have seen over the past few years, there is no perceived urgency to contract and investment in new supply drops off.  Eventually, concerns over the security of supply overtake price concerns and utilities re-enter the market to ensure they have adequate supply to run their reactors.

c.       We are at just such a point today.

d.       UxC reports that over the last five years ~390 million pounds U3O8 equivalent have been contracted in the long-term market, while ~815 million pounds U3O8 equivalent have been consumed in reactors.

As utilities’ uncontracted requirements grow, annual supply declines, demand for uranium from producers and financial players increases, and with trade policy potentially restricting access to some markets, the available pounds in the spot market will not be adequate to satisfy the growing backlog of long-term demand. As a result, there will be increased competition to secure uranium under long-term contracts on terms that will ensure the availability of reliable primary supply to meet growing demand.

The Event-driven Winds – Why now?

The past three weeks have seen a flurry of activity:

·        Largest rise on record for the price of uranium (now at $40/lb.)

·        Largest spot market volumes since 1966

·        Long-term uranium forecast price of $60

A primary factor in the above has been SPUT and the launch of its At-The-Market equity program 3 weeks ago.  SPUT is a closed-end trust created to invest and hold physical uranium.  Through its ATM, SPUT intends to issue up to $300m in units of the trust. 

When SPUT announced its ATM, it had 75.2m outstanding units.  As of yesterday, it had 98.3m units.  In other words, SPUT has issued 23.1m units in the 15 trading days since the announcement, or roughly ~$220m.  At an assumed avg price of ~$35/lb., SPUT has purchased over 6 million pounds of uranium during this time.  That is equivalent to 3-4% of annual global production…in 15 days.

Perhaps more important, the launch of SPUT and the sudden price movement in uranium appear to have attracted incremental buyers to the uranium market, which has traditionally been dominated by utilities buying long-term contracts.  As the spot price of uranium increases, the pressure on these utilities to contract future supply will increase, as well.  Add in a positive outlook for nuclear energy and increasing concerns about the security of uranium supply and we could easily see the spot price explode as utilities, institutional investors, and SPUT all continue to gobble up what is already a small, relatively illiquid market that is now starting to see huge inflows.  I can’t even imagine what’s possible if the Redditors get wind of this…

If you landed from Mars and observed the increasing concerns about the security of supply, the increasing demand, and the presence of SPUT issuing new shares to suck uranium out of the market as quickly as possible, what kind of premium would you guess SPUT trades at relative to its NAV?  40%?  60%?  We have a similar and recent example of just such a dynamic in the Grayscale Bitcoin Trust.  At one point, GBTC’s premium to NAV was over 150%.  Remarkably, SPUT isn’t even trading at a 10% premium to its current NAV.  It’s impossible to say when or whether the current dynamic in uranium markets will reach such heights, but two critical factors standout:

1.       Uranium, unlike bitcoin, is not a speculation vehicle.  The vast majority of the owners of the world’s uranium fully intend to consume it in their reactors.  They actually need this stuff to earn a profit on their large reactor investments.

2.       This dynamic appears to be in the very early stages of its life cycle, and as SPUT continues to issue more units, liquidity increases, more buyers are attracted, and things can get crazy quickly.

Catalyst

- Continued purchases of uranium by SPUT

- Continued issuance of new units by SPUT

- Continued increases in spot price of uranium

- The squeeze begets a squeeze begets a squeeze...