The Uranium Market Path Forward

John Polomny
Posted by John Polomny February 17, 2021

Our good friend Justin Huhn, also known as Uranium Insider allowed us to reprint his recent email to his email list. The title of the post is, “Uranium and Uranium Shares: Where Do We Go From Here?” If you are interested in Justin’s work, and he has many uranium stocks that are up triple digit percent wise go to his site at this link.

In view of the markets being closed yesterday and the current price action in the uranium stocks, we are re-sending this piece that went out Sunday evening. The sector continues to rally, and we highlight below some of the reasons why we believe uranium shares are seeing resounding strength.

  1. What has caused the recent sudden sharp up move?
The uranium shares started surging higher the first week of December. Did the underlying fundamentals supporting the bullish uranium thesis change materially change at that time? The answer is, “No, they didn’t.” But, what did change in a very significant way was the sentiment surrounding the sector.
The rally began in Australian trading on the last day of November. The North American shares did not follow the Aussie lift the next day…but then, three days later on Friday, December 4th share prices and volumes exploded in North American trading. Certainly, one can point to an analysis distributed the same morning by Larry McDonald in his institutionally-followed Bear Traps Report. Mr. McDonald has an institutional background and is widely respected, but in truth, many elements of his report were widely known to those who have been residing in the sector for some time. He did however proffer the idea that the uranium market was ripe for a “squeeze” and it would only take the action of a few middle-sized hedge funds buying physical uranium to effectively start a “squeeze” in this market…a market whose supply and demand fundamentals are tightening by the day.The reality though is that McDonald shined a light on a sector that had been largely languishing while all other manner of financial assets had been ripping higher, and have now been joined by a broad-based rally in commodities. Why should uranium be left behind? So…institutions scrambling to find value in a very frothy – if not an over-valued – market…or at least in arguably a “fully valued” market, might have sensed the opportunity at hand. Apparently some did, and continued to as uranium shares have skyrocketed since that first week of December and have barely paused since that time.

After the closing bell on Friday, December 4, 2020 and the huge move that occurred in uranium equities that day, ZeroHedge put out the article below that detailed the Bear Trap’s Report thoughts. To read the entire article click on the URL below:

https://www.zerohedge.com/markets/uranium-stocks-soar-beginning-next-esg-craze

In previous “Uranium Macro” sections of our monthly Uranium Insider Pro newsletters we had stated, “The fundamentals are there for all to see but the overwhelming number of investors respond to ‘price action,’ not narratives. Much like Pavlov’s dogs, the vast majority of investors’ ‘animal spirits’ are not ignited until they see price movement.”
The strong price action in the uranium sector over the last several months has undoubtedly brought in more players and focused new eyes on the space as volumes have soared. Ten days after that early December strong upturn in the sector, on Monday, December 14th, Cameco announced it was re-shutting down Cigar Lake because of renewed Covid-19 concerns. In short: more gasoline on the fire. The change in sentiment from the end of November has been palpable. It has become clear that judging by the last several months’ price action that the “weak hands” had been flushed out of the market over the last few years as a result of 2-3 years of frustration and false starts. Uranium shares have been climbing sharply as offers have thinned out simply due to the fact these shares had been steadily moving into stronger hands over time. The sentiment has changed in the uranium sector, and markedly.
Skepticism has been voiced by those who have been remarking that the uranium equities are running in the absence of any real movement in spot U308. While this observation is irrefutably true, astute observers know from the action of shares of other mining companies outside the uranium sector that mining equities oftentimes move in advance of the metal.
In a Haywood Securities Research Report dated December 8, 2020 they summed up their view of the current state of the uranium market as follows:

“Sector fundamentals in terms of demand/supply are the best we have seen since pre-Fukushima. Major producers which account for more than 50% of global supply are moderating production to elevate uranium prices. This coupled with the uranium names seemingly gaining recognition for their low GHG (“Greenhouse Gas) footprint and their essential role in clean energy, is the perfect setup for investing in uranium explorers, developers and producers.”

We couldn’t agree more with the Haywood’s summary of the backdrop for uranium and uranium shares. It is clear now that only those who truly understand the uranium fundamentals were strong enough to hold onto their shares through the tedious price action that dominated the sector for several years prior to the December 2020 “liftoff.” That is one reason why we devote the first section of every Uranium Insider Pro monthly newsletter to a thorough review of all the various elements and rapidly-changing factors that give rise to the bullish uranium “Macro” picture. We devote a great deal of time and research to this effort in order that our subscribers do not get shaken out by the sharp sector pullbacks that will invariably occur from time to time.

  1. What are the factors that can continue to propel uranium shares higher? The “Flywheel Effect”

We at Uranium Insider Pro have also spent a considerable amount of time over the last twelve months in our newsletters detailing that investor psychology would come into play in this emerging uranium bull market. Clearly in December 2020 the starting bell went off. There is little doubt that “new money” entered the uranium shares over the last several months and has continued since then. Volumes have surged and price action has been very responsive to these new inflows.

Now, there is a new phenomenon that we call the “Flywheel Effect.” Let us start off by explaining our terminology.
We have already seen the negative side of the “Flywheel Effect.” Over the course of 2018 and 2019, Global X Uranium ETF (URA: NYSE), the largest uranium ETF in the world was a consistent seller of uranium shares. This was a result of two factors: 1) investors were liquidating their shares of URA out of fatigue and disgust…the ETF was constantly retiring shares and therefore was forced to sell the underlying constituent uranium shareholdings; and  2) on top of this, URA had changed its weightings of “pure play” uranium shares within the ETF from 70% to 50%, thereby further increasing the amount of necessary selling of uranium shares.Now we are witnessing the positive “Flywheel Effect.” It started quietly in the summer of 2020 when URA decided to reverse its allocation of “pure play” uranium” shares from 50% back to 70%. Then in 4Q 2020 and continuing into 1Q 2021 investor demand for URA has led to the issuance of newly created shares of URA. URA’s outstanding shares have increased from a low of 12.731 million shares outstanding in late July 2020 to 19.331 million shares today. URA assets under management (AUM) have increased from

US $104 million in late March of last year to US $337.4 million today. In a small sector like ours, the ETF-mandated price-indiscriminate buying can have a material market impact. Newcomer, North Shore Global Uranium Mining ETF (URNM: NYSE) which allocates all its assets to uranium shares has seen its AUM grow to US $78.2 million from less than US $3 million at the beginning of 2020. Between these two ETFs, that is roughly $300+mil in new money that has come into the sector via these two vehicles in only the last 12 months. 

So as public and generalist interest grows, many of these investors choose the “one size fits all” model and buy these ETF’s that offer broad, sector-wide exposure and sufficient liquidity. Once again, their buying of the underlying constituents is indiscriminate and not price sensitive. They have “fresh cash” to place and they simply throw in buy orders according to the allocation of that underlying uranium company in the ETF. Investors worldwide haves seen the effect of these passive index flows in the broad market – what they haven’t seen yet is when those flows are directed in a relatively small market where liquidity is diminished. We at Uranium Insider Pro take a much more “targeted” approach to investing in the sector.  Nevertheless, we wanted to explain the effect of the growth the largest two sector ETF’s is having and we expect will continue to have on the space.

The other important driver of the uranium space are the two large physical trusts: Uranium Participation Corporation (U: TSX) and Yellow Cake PLC (YCA: LSE). These funds hold physical uranium (U34O8), the commodity, and to a much lesser extent in the case of UPC, UF6. Their outstanding shares and AUM are enumerated below:

         Uranium Participation Corporation (U)      134,939,651 shs.      AUM: $524.0 mil.
         Yellow Cake PPC (YCA)                                     88,200,00  shs.      AUM: $276.1 mil.
                                       
                                                    (All numbers above are in USD)

For the bulk of 2020, both of the physical trusts that hold uranium traded at a substantial discount to NAV. This is no longer the case with YCA nor U. This will allow them to issue new shares without being dilutive to their existing shareholders, and in turn purchase more physical uranium. Obviously, any new capital that comes into these trusts represents more demand for physical uranium resulting in the removal of that uranium from the physical market, resultantly making it unavailable to traders or utilities. Suffice it to say that both the uranium share ETFs and the physical uranium trusts will play a growing influence on the physical uranium market and will be an important element of the “Flywheel Effect”.

The next leg of the “Flywheel Effect” can be expected from “Generalist” money managers and dedicated natural resource funds around the world. As generalists gravitate to the bullish case for uranium, they oftentimes will choose the widest and easiest door for entry. That means they will look for the most liquid and largest cap names in the sector, or some may simply choose to wet their toes via one of the sector ETFs. Dedicated resource funds may choose to increase – or establish – an allocation within their funds to individual uranium names. Clearly this process has begun based upon the enormous jump in volumes in the uranium names. If uranium becomes an acceptable theme for ESG (Environmental – Social – Governance), and we think it will, mandated flows from “ESG-mandated funds” would open an entirely new source of demand for uranium shares. We, perhaps, are not quite there yet…but this prospect which once seemed laughable is becoming more realistic by the day. Nuclear Power emits zero carbon emissions, and is becoming increasingly embraced by environmentalists and those concernced with climate matters.

The third and perhaps the most combustible element of the “Flywheel Effect” will be hedge fund participation in the space. That is because they are the most aggressive investors and are comfortable with taking large-sized targeted bets. This is the group that Larry McDonald of The Bear Traps Report cited in his December 4, 2020 piece that initially ignited the uranium share market. Now we have seen that despite the spot uranium price not moving at all over the last several months and the uranium shares exploded upward. If hedge fund activity has started in the space –and we think it has – it would make perfect sense to “load the boat” with uranium shares before putting upward pressure on the commodity itself.
This is not a novel thought and was expressed by Mr. McDonald himself in his piece (the URL link to the ZeroHedge piece that discussed his report in further detail was provided earlier in this piece.) Playing this theory out…presuming that hedge funds have been swooping up shares in the open market they can now begin to invest in uranium itself.This line of reasoning is not without precedent. Brandon Munro, CEO of Bannerman Resources, recited the history: “Dedicated uranium historians will recall Bob Mitchell’s Adit Capital, who was a first mover in 2004 making a bet on physical uranium by acquiring 2 million pounds at below $20/lb.”  Munro goes on to say, “By 2007 Bob’s fund returned 500 percent to investors (after his well-earned fees). Investor holdings of physical uranium had increased to an estimated 40 million lbs. at the peak of the last boom, exaggerating upward price movements during 2006 and 2007.”

One veteran industry observer proffered the following scenario, “Wall Street types will see an opportunity here, and not only to participate in uranium’s unique asymmetrical risk profile. With both Cameco and Kazatomprom having to buy pounds in the spot market, (and the market presently clearing less than 500,000 lbs. per week) what would some competitive spot buying action continue to do for those newly unwrapped share certificates they have been voraciously acquiring over the last several months? If you think my insinuations are far-fetched, take the afternoon off and read the 2004 US Senate report on Wall Street Bank Involvement with Physical Commodities. However, the recent flow (dare I say, flood) of money from Wall Street into uranium equities should be a warning sign of what 2021 could continue to deliver. The brute volume of hedge fund money that can be applied against an attractive thematic like uranium can be defining in a thinly traded spot market. A proportion of that investment will find its way into Yellow Cake Plc and Uranium Participation Corp (either through direct investment or through their prominent weighting in the URA and URNM ETFs).”

Can anyone think of a sector where the two largest producers have to buy the commodity they produce in the open spot market?

So there you have it…the “Flywheel Effect.” Increasing fund flows into ETFs – both uranium share ETFs and physical-based ETF/Trusts – as well as increased allocation by generalist and natural resource funds combined with possible aggressive investing in the space from the hedge fund community. All of that in a market whose fundamentals were poised to give rise anyway. All of this in a sector that still only has a global market cap of less than US$20 billion with a freely tradeable float of perhaps 70% of that (US$ 14 bil.).

Investors worldwide have seen the effects of momentum investing on various sectors of the equities markets. In the broad market, just over the last year, investors have witnessed the spiking price action of e-commerce companies, EV manufacturers and stay-at-home products/aps. to name a few. We opened this piece citing the sentiment shift.  “FOMO” (Fear Of Missing Out) is a real concept in the movement of stock prices and can profoundly affect equity prices. There is a greater than small probability that “FOMO” has entered this tiny space.

  1. Where do we go from here and is this the right time to invest in this sector?

I’m sure there are many of you saying to yourselves “I missed it!” We don’t believe that. Look, we are not naïve…we of course recognize that there could be a corrective pullback at any point in time. Analogously from a historical perspective, we remember the same investor lament being uttered when the “Reagan Rally” shot out of a cannon in August 1982 with the Dow Jones Industrial Average at 875 and by 1984 with the Dow Jones just over 1100 many investors were saying the same thing: “I missed it!” The Dow Jones Industrial Average is 30,000 today.

We are not suggesting we are headed into a 40-year bull market, but on the other hand, we are quite confident that we have entered into a 3-5 year bull market. We can reassess that supposition further down the road. And don’t just take our word for it. Famed investor Dr. Michael Burry of “The Big Short” fame – we are sure many of you remember seeing the movie “The Big Short” regarding the events that led up to the 2008 financial crisis – is telling the world that nuclear power is the solution to the reducing the world’s carbon footprint. He is virtually imploring politicians to embrace nuclear power. Oh by the way, this is the same Dr. Michael Burry who last year built up a huge position in a stock called Gamestop (GME: NYSE) at $ 5.00/share. That stock recently peaked at just under $500.00/share. Now of course we don’t know where Burry exited Gamestop, but we are very confident that it was at many, many multipes of his $ 5.00/sh. cost. The Biden administration’s focus on “clean energy,” its’ decision to re-enter the Paris Accord, and the growing momentum for corporate ESG are all coalescing around the already fundamentally-bullish uranium fundamentals. Stated another way; the uranium market is already in a structural imbalance and that supply/demand gap is poised to grow much wider as this decade progresses.

This excerpt below is from the ZeroHedge piece released just today, Sunday, February 14, 2021:

In a tweet from Michael “the Big Short” Burry (who communicates with the outside world almost exclusively by twitter with tweets that are spontaneously deleted after a few days), the hedge fund manager who recently made a killing on his Gamestop long, said that “If the government is going to spend $2 trillion, there is no better use than converting the US to nuclear.  Dems can do it! Jobs +”potentially limitless electricity…no greenhouse gas emissions” #greenfuture NOW!”

The same ZH piece goes on to say, “As for who would get to benefit from such a nuclear transformation?  Why uranium of course and the handful of uranium names that still are trading at depressed valuations, although judging by the recent surge in uranium stock prices, the market is starting to sense which way the wind is blowing. Needless to say, a commitment by the Biden admin to nuclear energy, would result in further massive outperformance for the sector.”
To read the entire Zerohedge article released today click on the URL below:

Finally, to put this all into perspective, during the last uranium bull market that started in 2004 there was a 72 million pound uranium surplus five years out.  In Feb 2007, near the top of last uranium bull market with the U308 price at $75/lb. (spot uranium is $ 29.25/lb. now) there was no supply deficit. Not once did the market go into deficit over the period 2004-2010. Now we have a growing consensus that the market is in a sustained structural deficit for the foreseeable future. UxC’s (the industry consultant for utilities) recent report showed the market was in a 57 million pound primary supply deficit in 2020. This time it’s a supply story and no short-term spike is going to balance this market.

So, to sum it up, “Can we say that we are still in the first inning of this uranium bull market?” No, but perhaps we are in the bottom of the 2nd…and as experienced investors in the sector know, this has only just started. Things don’t even get crazy until we are metaphorically in the late innings and we are several years away from that, in our estimation.
  1. How Can Uranium Insider Pro help you?
The fact that you have placed yourself on our list for our “Market Updates” tells us that you have a sense that there are opportunities to make money in this young uranium bull market. We provide the only uranium equity publication that is solely dedicated to uranium stocks via regular monthly in-depth newsletters as well as actionable intra-month Uranium Insider Pro Bulletins covering Focus List holdings changes as well as market moving events. If you plan to be invested in this new uranium bull market, we believe a membership in Uranium Insider Pro will be of service to you.