The Other Yellow Metal Part 2: A Coming Supply Crunch

This post is an update on my investment in the uranium space. For my bull case, you may refer to my previous writeup on https://www.drwealth.com/the-other-yellow-metal-why-uranium-could-be-the-trade-of-the-next-decade/

Recap

Low Uranium prices since the Fukushima incident has left the producers no choice but to start cutting production by closing mines in an attempt to increase the price. This has created a supply-demand deficit and I expect it to widen as long as the mines stay closed.

Nick Hodge from The Outsider Club (https://www.outsiderclub.com/) believed that the supply deficit will be felt somewhere in 2023. The shortfall should begin to affect price negotiations between the utilities and producers in the next 1-2 years since utilities tend to secure supplies three to four years before actual use.

However, I believe that things are starting to get interesting with the Covid-19 event affecting global supply and uranium prices should start to appreciate in the coming months.

The Utilities Should Be Getting Worried

I should explain why.

With the Covid-19 running rampant around the globe, uranium mines were also affected. Producers like Cameco (NYSE:CCJ) and CNNC(HK:2302) have announced that they will temporarily suspend mining operations at Cigar Lake and Rossing mines respectively.

https://www.cameco.com/media/news/cameco-suspending-production-at-cigar-lake-mine

https://www.rossing.com/bullet/continued-mining-operations-at-rossing-uranium.htm

In the previous earnings call, Cameco stated that they are already purchasing uranium from the spot market to satisfy their current contract obligations. With their last operational mine shutting down, their demand in the spot market would grow. The concern is where they will be getting their supply if we have more mines shutting down.

In 2018, 2 U.S uranium companies submitted a petition under Section 232 to the Department of Commerce for a quota that would guarantee that 25% of uranium sold in the country comes from local mines. This has caused some hesitation among US utilities in securing long term supply contracts as they are waiting for the verdict which is dragging forever. As such, they are burning through their inventories and the Covid-19 event have caught them unpreprared.

With 2 of the top 4 uranium producing nations suspending their mining operations representing 23.4% of global supply, the utilities should start getting worried about their inventory levels.

The Great Uranium Rush

The easiest analogy that everyone could relate to would be the Great Toilet Paper Rush 2020. When governments are issuing lockdown orders everywhere, worried citizens like us are scrambling for the most essential household item that we use in our daily lives. Similarly, when you have Cameco and the other utilities sensing a upcoming supply crunch, how do you think they will act?

Uranium prices has risen the past week (see the spike up in the chart above). I do not dare claim that it is 100% due to the upcoming supply shortage due to mine closures but it seems likely so.

How Am I Playing This?

Uranium analysts have said that the best way would be to invest in good junior mines that have good balance sheet and reserves. They are confident that these plays will give them a potential 5x-10x returns. However, I do not have the expertise in seeking out these junior mining firms

I’m playing it safe by investing in Uranium Participation Corp (TSE:U). What I like about it is its 25% discount to NAV and zero mining risk. In its recent presentation, we can see that their recent dip is the record low against NAV so far at 30%. I have taken some profits off the table from my recent stakes in the shipping sector and placed them into this counter.

Then again, readers should take note that UPC is not an investment in the mining space but a bet that uranium prices will not stay at current loss making levels and will increase (something like investing in Gold/Silver). This is because UPC only holds uranium and it has no operations and cash flows. Hence it really depends on your investment criteria whether this type of investment in UPC or Yellow Cake suits your style.

For those keen to start their research in the uranium space, you may refer to the link below for a list of uranium companies and how they are reacting to the Covid-19 crisis. https://investingnews.com/daily/resource-investing/energy-investing/uranium-investing/uranium-covid-19-coronavirus/

Summing Up

My bull case for Uranium is that the supply demand deficit will drive prices up to about US$50 above break even levels. The reduction in supply seems to have accelerated due to Covid-19 with demand sustaining and even growing albeit slowly.

As utilities scramble to find material to produce electricity, I believe that spot prices in the uranium market will go up due to the panic buying frenzy just like VLCC rates a few weeks back.

Of course, this will only happen if the spot market is tight and most buffer inventory is used up. If that is true, then we should see a significant increase in uranium prices.

Cheers

The Moss Piglet is vested in Uranium Participation Corp (TSE:U).

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