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Uranium Excitement!

I was going to run through the outlook for copper today but I’ve shifted gears, for two reasons.
One: copper is relatively boring right now. After going on a major run it is stepping back and the near term is not particularly interesting.

Two: in the last two days uranium jumped up and started yelling Pay attention to me!!!

So I’m covering uranium instead.

Here’s what happened in the last two days:

Denison announced a $75-million financing that it will spend to build a strategic 2.5-million-pound uranium stockpile. Denison wants to own a whack of uranium, for two reasons. One: if the price ramps up in the coming years it can sell the stockpile for a nice profit and use the proceeds to build its planning-stage Wheeler River project. Two: if it does build Wheeler River, Denison will negotiate deals with buyers and a stockpile of uranium would give it flexibility around the scale and timing of such deals (the stockpile would be a cushion of supply around the risks of getting a new mine into production)

 Yellow Cake PLC, a fairly new company with a mandate to hold physical uranium for the long term, closed a US$150-million financing on March 2. On Monday, it deployed 70% of those dollars by

exercising, in full, its option with Kazatomprom to buy US$100 million worth of uranium annually at spot. Yellow Cake and Kazatomprom signed the option go-ahead documents in mid-February, when the spot price was US$28.95 per lb. (Yellow Cake then went out and raised the requisite funds, after which they announced the deal). They also seemingly convinced Kazatomprom to sell them another 440,000 lbs. outside of the option deal. When the dust settled Yellow Cake will take delivery of 3.94 million lbs. uranium from Kazatomprom between April and August, which will boost its holdings to 13.2 million lbs.

 In response, Kazatomprom’s chief commercial officer Askar Batyrbayev told Bloomberg: “We will evaluate our inventories and it’s possible we will buy material from the market” to cover part of this option obligation.

 On Monday Uranium Energy announced it had already spent US$10.9 million buying 400,000 lbs of uranium, at a price of US$27.29 per lb., to establish a strategic stockpile. Two days later UEC tripled that stockpile, announcing deals to buy another 800,000 lbs. uranium. To help finance the buys, UEC is raising US$30.5 million. UEC’s motivations for developing a stockpile are similar to Denison’s reasons (to profit by selling into a stronger market and to give flexibility in negotiations with buyers when UEC starts producing uranium from its various mines at its central processing plant), plus one: to take full advantage of high demand for US uranium, stemming from the US government’s move to create a USorigin uranium reserve.

In response to all of this move, the uranium spot price jumped US$2 per pound yesterday!

I have been encouraging investors to get interested in uranium for a long time. Too long, really. I remember being on a panel at the New Orleans Investment Conference in 2016 and replying “uranium” when Rick Rule asked me what one commodity would outperform the others over the following year.

I haven’t been blindly bullish since, I should note. I realized I was early and eased off my enthusiasm for a time. But in the last year – it’s been game on again. COVID shutdowns brought the bull market forward. And now the buying to fill these strategic stockpiles plus Cameco and Kazatomprom’s ongoing need to buy spot uranium to cover contracts (Cameco isn’t producing anything right now but still has to supply its buyers) means the spot market is about to get sucked totally, totally dry.

Not only is the bottom in but we’re on our way up.

The fundamentals here, in short, are:

 Current uranium pricing is too low. It’s too low for most operating mines to make money and it’s way
too low to incentivize anyone to build a new uranium mine.

 Supply is already insufficient to meet demand and it’s going to get worse (because no one has been building new mines – see point above). Demand is expected to be 175 million lbs. in 2021 (not
including strategic stockpiles, I’ll note) versus supply of just 128 million lbs. Over the next four years the shortfalls add up to 205 million lbs.

 The market is now finally tipping bullish because producers worked together to soak up excess supply that had been sloshing around in the spot market since the Fukushima Daiichi disaster. They cut production and major operators (including Cameco) bought in the spot market to make up shortfalls. Importantly, this collective effort included Kazatomprom, a major producer that had previously produced as much as possible.

 COVID brought the bull market forward: COVID reduced uranium production significantly, shutting down Kazatomprom’s new wellfield development for months and suspending Cigar Lake (the largest uranium mine in the world) twice, with the second suspension still in effect.

Bottom line: if you are not positioned in uranium stocks, I would buy some now. It’s not early but it is absolutely not too late. Yellow Cake, Uranium Energy, and Denison aren’t building strategic uranium stockpiles right now because we are at the top; they are building them because there is finally enough momentum that the bull is now undeniable and they know they will make a lot of money buying physical today and holding it.

What should you buy?

 Uranium Participation (TSX: U) – for straight exposure to physical uranium

 Cameco (TSX: CCO; NYSE: CCJ) – the largest publicly-traded uranium producer in the world.

 Uranium Energy (NYSE: UEC) – poised to produce into the budding market from low-cost in-situ leaching wellfields and its permitted Hobson processing plant, all in the US

 Dension Mines (TSX: DML), NexGen Energy (TSX: NXE) – building strong assets into the bull market

 IsoEnergy (TSXV: ISO) – the only new high-grade uranium discovery in recent years; set to define a maiden resource this year

 Other explorers, miners – honestly, if a uranium company has survived this bear market and is still going, it’s got some inherent value. There are so few uranium companies out there that almost any company exploring for uranium, let alone building new uranium mines or producing uranium, will do well in this bull market.

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