Quick Thoughts
This missive is going to be one of the less long-winded ones in recent memory dictated by the reality that I really don’t have much new to say or share. So, why waste anyone’s time. One exception is that I included a note from an analyst that attended last week’s World Nuclear Symposium. I didn’t want to chop it up as I thought the entirety of his notes were useful for those that are interested.
Most of the major markets: S&P 500, U.S. dollar, 10-year U.S. treasury rate, gold, and oil prices – are all stuck in a prolonged period of chop. Each weathering periodic bouts of tailwinds and headwinds, but at the end of the day holding their ground and/or doing a lot of nothing.
Below is a chart of the S&P 500. It’s at the same level today as it was in September 2021 – two years bookended by a year of decline (2022) and a year of recovery (2023) to end up where we were two years ago.
The chart of the U.S. dollar looks a bit different than the S&P 500 on a two-year lookback, but similar when viewed with a one-year window. The chart below uses the Invesco DB U.S. dollar index (UUP) to measure the price movement over the past two years. The U.S. dollar put in a multi-year low in May 2021, just after the Fed started to ramp up its aggressiveness in tightening monetary policy. From May 2021 to the end of September 2022 the U.S. dollar rallied by 25% as the Fed hiked rates from 0.75% to 3.25% and at the time the futures market got the message that the Fed was serious, and more rate hikes were coming. Also keep in mind that November 2nd 2021 was the last +75 basis point hike of the cycle and the pace of hikes from that point forward was accurately discounted to moderate. In hindsight, this is a good case study in how markets discount future expectations of outcomes.
From the end of September 2022 to the start of February 2023 the dollar corrected by 11%. This breathed some life into risk assets (S&P 500 bottomed on October 15th 2022) as the dollar is a significant contributor to the tightening or loosening in financial conditions.
While the dollar has gone through a couple sustained trends over the past 27 months it really is at the same level today as it was back in July 2022. Without question the Fed being at the end of its tightening cycle has a lot to do with the price movement of the U.S. dollar. Keep in mind that all currencies are relative price levels to other currencies, commodities, gold…so the weak economic performance in China (Yuan) and Europe (Euro), inflation rates, and interest rate differentials have been drivers of U.S. dollar strength.
As for the interest rates and the bond market – yields across the Treasury curve have pushed back up to their highs for the cycle, and the highest levels investors have seen in a decade-and-a-half. Below is a long-term chart of the yield on the 10-year T-note going back to 2010.
The chart depicting the price level of intermediate term treasuries is the exact opposite (bond prices and yields move inversely to each other) with prices near cycle lows. Below is a chart of the iShares 7-10 year Treasury bond that is trading near its lows over the past two years, but virtually unchanged from October/November of 2022. I am of the view that yields are in the process of topping and bond prices are at the point of bottoming, but time will be the ultimate arbitrator of whether this view ends up being right or wrong.
As for gold. It’s a very complex investment when attempting to determine what is driving the price action at any given moment. Sometimes it’s the U.S. dollar. Other times it’s Fed policy and interest rates. Then there is geopolitics and the standard supply/demand that take priority at times. At the end of the day gold has a low correlation to stocks, historically a negative correlation to the U.S. dollar, and historically a positive correlation to the bonds, but ultimately it is a good diversifying asset in portfolio of financial assets. As you can see from the chart below, it too is little changed from where it was eighteen months ago. Yes, it’s had some rallies and some sell-offs, but rather flattish in the overall scheme of things.
The same story goes for emerging markets – choppy, yet flat over the past fifteen months.
Inevitably something will give, and these markets will move out of their respective ranges. But identifying such a catalyst at this moment is mere speculation. I wish I could be more prophetic, and sure our research has us leaning in certain directions, but our view isn’t that much different than what the charts above or indicating – INDECISION. Unfortunately, there is nothing exciting going on outside of some major developments in specific areas and that should be just fine for most investors.
Most of the time investing should be and is boring, and this is one of those times. While that’s not nearly as fun and sexy as whipping around meme stocks and YOLO’ing (You Only Live Once) call options, successful investing requires – patience and nothingness. Sitting on your hands but being prepared to act when an opportunity presents itself. Our work just isn’t revealing a lot of actionable opportunities at the moment.
I will end this missive with some thoughts on what has been my favorite investment opportunity over the past five years – uranium and the Nuclear Energy Renaissance. This past week global leaders in the nuclear space gathered in London at the World Nuclear Association 2023 Symposium. Below is an excerpt of some thoughts shared by Kevin Muir in his Macro Tourist weekly roundup from Winston Miles at Eight Capital who attended the conference.
“I just got back from the WNA Friday and am already on the tarmac at LGA, waiting for our gate to open in the rain... aboard one of Air Canada’s finest (read oldest) CRJ900’s (like >30 Celsius temps... they’re the enemy of the big man). It must be September!
A bunch of you asked if there were any little tidbits worth sharing from the conference so here it goes. So here you go...
1. For a space so obviously entering a bull market, it didn’t look much different from years passed (which is a good thing). Don’t get me wrong, attendance was up significantly from last year, but when Cannabis was in full-on bull market mode (18/19), the Las Vegas conference was ridiculous. The floor was lined with booth babes, every brokerage house was having 6-figure+ parties, and their CEO’s were not only in town but practically shaking hands at the door. There was NONE of that. Sure, a lot of people close to this get the trade. But the big generalists are nowhere. Which tells me we are early.
2. Consensus seems to be Uranium prices are going from $60 to $70 in 2024 and higher to $80 in 2025. Aided by a deficit of somewhere between 40 and 60 million pounds in 2024 and then expanding from there for a few years until new mines come online. But no one seems to think a huge upside surprise is possible despite that. Which is weird.
3. The utilities seem totally sleep walking into the deficit too. I mean, if they were really scared, it would have been obvious. They’d have been hosting all the events, the dinners, vying for CEO’s time (seriously, who cares about bankers when a utility wants to lift your whole book, at whatever price you desire), but I didn't get that sense. At all.
Call it blissfully unaware, or call it complacent in the nicest, government bureaucrat kinda way. Maybe that is it... all these guys have sunk, call it, $5-10 billion into the reactors they’ve got... so what’s a $150/lb spike in U308 really going to do to the economics? Fair enough, our gain.
4. A question I heard almost hourly was “so how screwed is Cameco”?
On the recent production issues, I spoke to a very good source who tells me generally when these things happen, it’s one of three things. Freezing isn’t far enough ahead of mining, they moved into a new pod and the grades aren’t there, or lateral development is a productivity gap. None of which are particularly out of the ordinary, or as bad as a flood, BUT (and it’s a big but)s, none of which are one-press-release-and-problem-solved issues either. The real issue if you are a Cameco bull is that they made no money at $55/lb uranium over the LTM. More on that in a second.
5. The difference between this bull market and the last one is two-fold. One, back in 2006 the world’s top 5 mines had 10+ year lives and none of them are around now. And two, geopolitics have simply become a complexity the market isn’t prepared for. The bifurcation of the market between the Western producers, and the Western consumers who cannot easily now access Russian, Kazakh, Uzbek, Nigerian pounds, is a real problem. That wasn’t the case last bull market. So, things have changed, for real. But the world even at WNA doesn't seem onto that.
6. Riddle me this... because this is where things get kinda nuts to me...
Let’s say supply is 150mm lbs a year (seems to be consensus).
And there is a 50m lb/yr deficit with 210m lb worth of demand and climbing?
What happens? Most utilities just say... “No worries, we’ll call our fuel buyer and pay the price”. Fair. For the last decade, they might as well have handed out hats that said “WNA: There’s Always More Supply”. Because there has been.
But because of #5 above, things have changed.
Either I am totally out to lunch, or this is the big-short and all you had to do is look...
Think about it. It’s like the scene when Steve Carrell goes to the strip club and the dancer tells him she owns 8 houses. The utilities are all max short this decade. They just don’t know it yet. No offence but imagine how naive you have to be, to think you have “contractual coverage”, because you underwrote a junior developer, in really tough country, that may never produce, oh and you sold the lbs forward already!... That contract isn’t worth the paper it’s written on if that junior falls down and your reactor needs lbs still. The two choices are pay any price to keep the grid from failing, or pay more. Because ‘no lights’ ain’t an option.
I don’t think the utilities mean any harm. By no means do they want to create this upside price surprise. But they are doing it. It’s like they’ve been admitted to the scene of the crisis but given no serious purpose. They’re the Frenchman after the war resolution has passed. Or the carrot in the school play. It’s kinda nuts to a rational economic actor. Which they aren’t (I guess).
7. Just like bear markets find the mistakes auditors can’t, bull markets pull forward investment demand. At the bottom 2 + 2 = 3. But at the top 5 or even 6. We are moving from the former to the latter. And U prices are at a 12 year high, but the registers of the issuers look nothing like they did 12 years ago. There aren’t 500 companies like back then, there are 50. We all saw what happened with Lithium stocks. Look at their aggregate market cap relative to Uranium. And then remember what the real green metal is. One stores power in a battery, the other provides it. Uranium is the most undervalued green sector going and the next 12 months I think reveals that.
8. WHAT TO BUY:
Cameco trades at >20x ebitda, but makes no money even at $55/lb. And NXE will make money at $15/b but you can buy the stock at 10% of the market cap because people are worried about capex creep?! No matter what anyone says, CCO’s assets are almost toast, which we saw in their PR last week. That’s great for the market, but crap for CCO. There management team are selling shares like they’re going out of style. Frankly, I’m a bit perplexed why they haven’t taken a run at NXE and FCU already. For starters, neither of them is in the DRC. And both are 100% levered to the uranium price (whereas CCO has none). And you should own both in size.
Arrow is a category killer, capable of something like 23% of world supply (the Saudi’s are ~11% of Crude for context), in the best jurisdiction in the world to mine. Their capex to build the mine is less than CCO’s sustaining capex. On a less than one year payback at $60 U - even with a 50% blowout in costs. If costs balloon by 100% then the payback is slightly over a year. Ie. has zero bearing on whether they can build it or finance it. And they will produce double CCO’s lbs, at 1/8th the cost. And Triple R boast crazy grades, beastly economics, and with NexGen’s mill, it’s only a matter of time in my mind until the two are consolidated.
I guess what I am trying to say is not only should CCO buy NXE (and FCU), I don’t see how they even have a choice.
If their plan is to stay in the uranium business.
PS.
There has been a lot of chatter around the SPUT redemption clause stuff and the ATM size. My buddy Kuppy knows the ins and outs of this better than I do, so over to him; “The details are still vague and in need of approval from OSC, but the basic premise is that there will be a redemption feature, but it will be constricted to a smallish number of pounds that can only be redeemed a few times a year. The goal of this is to ensure that the trust trades closer to NAV, by allowing arbs to short pounds, buy the trust and then unwind either through a redemption of a time when the NAV narrows. While nothing is certain, we think this will reduce the possibility that the trust really blows out to a serious discount for long periods of time once approved (GBTC risk is off the table) and we applaud the guys at Sprott for finally doing the right thing (after we pushed and prodded for many months)”.
Translation = it’s bullish. Either way, with deficits of almost a million pounds a week, the bull thesis doesn’t depend on SPUT and YCA cornering the market, like people thought it might in 2021... in other words, does a few hundred thousand of investment demand even matter versus the bigger issues. No doubt nice to have, not need to have.
Have a great Sunday can’t believe Week 1 is here!! And most importantly, Go Bills...
Your pal,
W.
Let me say one thing for anyone new to looking at this opportunity in the uranium market. This is a very volatile sector that can move +/- 20 – 40% in a matter of weeks and for good reasons or no reason at all. Do your own work because this space will require some intestinal fortitude from time to time in order to stick with it. It has already come a long way in the past five years, and while I don’t think it’s over, it’s not the ‘set it and forget it’ layup it was back then.
As for everything else, I’m still of the view that you sit back with a well-diversified portfolio, a decent stack of cash or short-term T-bills earning 5% and let the broad markets reveal themselves rather than try and force the issue.
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