Authored by Kevin Muir via The Macro Tourist blog,
An interesting aspect of living in Toronto is the different people I get to meet. For example, although I know plenty of Bay Street types; traders, investment bankers, securities lawyers, portfolio managers (you know, all the people you try to avoid at cocktail parties), I am fortunate enough to count as my friends a more eclectic group of entrepreneurs that expose me to ideas that are a little different.
One of these individuals is a buddy who made his fortune in the mining business. I lose track when he tells me of all the different companies he founded and sold, but the important thing to note is that today he owns a uranium mine. Yup. You got that right. My pal, the uranium miner.
Last year, in between beers, we were chatting about the state of his industry. He was pitching the idea uranium had finally bottomed. We were going through the story bit by bit. He told me of the Paladin Energy bankruptcy. He told me of the fact that no one could make any money at these spot prices. He explained how some shrewd buyers were showing up to buy some uranium names on the cheap. I complained that this was nothing new, and that this value story had been known for the past year, but that hadn’t stopped uranium stocks from languishing.
We started talking about the extra cold war stockpiles that were continually overhanging the market. And this is when my pal said something I immediately realized was a potential game changer. Our conversation was occurring in the initial days of the Trump win. Although most people were focused on his ambitious tax plan, or his promised infrastructure commitments, my buddy said, “you know, Trump might decide to just stop selling any extra stockpiles. And in fact, he could turn into a buyer. It makes absolutely zero sense for any government to sell uranium below the cost of production.”
Bingo! This was the catalyst I was looking for. I made a note to write up the idea and start buying some uranium stocks.
But then, life took over and I got busy. Thinking there was no rush, after all, everyone was focused on Trump’s economic policies, not his nuclear plans, I let it slip.
It has now become common place, but this was my first taste of being run over by a Trump tweet. Out of the blue, the US President made an abrupt U-turn in American nuclear weapon policy.
According to the Guardian, Trump went on to warn about a new age of nuclear proliferation:
“Let it be an arms race,” the president in waiting was reported to have told Mika Brzezinski, co-host of MSNBC’s Morning Joe programme, in an early phone call on Friday.
According to Brzezinski he went on to say: “We will outmatch them at every pass and outlast them all.”
And just like that, the spark the uranium market was waiting for ignited the simmering bull market.
Uranium miners ran like they stole something. The Global X Uranium ETF rose from a little under $13 to almost $19 in the space of a couple of months.
I have spoken before about the series of rolling mini-bubbles, and this was another perfect example. A rally of 40% in a space of a couple of months was excessive. Like a mope, I kept waiting for a decline to write up a bullish piece, but it never came. Instead of chasing, I let it slide and chalked it up to a lesson learned about never knowing when cheap stories will become less so.
But look what happened since then.
I don’t know if the market realized Trump’s tweets were empty characters, or if the abysmal market for resource companies simply overwhelmed the sector, but uranium stocks completely retraced their early spring rally.
So here we are again. A cheap, unloved sector, that can’t seem to get off the mat.
I will not go over the bull story. Instead, I will point you to a couple of great resources. The first is Mike Alkin from the Stock Catalyst Report. Mike’s website has a link to some of his presentations, including a terrific Real Vision TV episode that outlines the compelling case for being long uranium. If you haven’t taken the time to watch it, I suggest you make room. Next, wander over to Palisade Radio’s interview of Denison Mines CEO David Cates.
In the interview, David Cates puts in black and white the problem with the uranium industry:
With uranium at $19 to $20, the price is too low to be rational. The lowest cost mine in the world, operates in an all in basis to breakeven of 21 to 22 dollars. I don’t lose sleep about whether the price will stay at $18 or $20. It’s fair to believe that price will not sustain itself.
In Mike’s presentation, he speaks about the fact that few companies are willing to commit to selling in the spot market, and that longer term contracts will all need to be executed much higher.
I am not smart enough to know if this is the bottom. Or if uranium miners are cheap, expensive, or fair value. But I do believe that a spot market trading under the all-in-cost of the lowest cost miner is not a long term sustainable situation.
I am bearish on equities in general, so I am in no rush to run out and buy uranium miners, regardless of how cheap they might be. Yet I am looking for somewhere to hide, and buying spot uranium is something that interests me.
But how to accomplish that?
You can’t just run out and buy uranium and store it in a vault. There are few entities that are allowed to own and transact in this controlled resource.
Lucky for us, there is a closed-end fund that owns a big slug of the two different types of uranium. The Canadian company, the Uranium Participation Corp, is a unique fund that offers the ability to buy spot uranium (symbol in Canada – U. Symbol in the US – URPTF).
This is not an ETF, but a closed end fund. So it can trade at a premium or discount to NAV. I did some work to back out the premium, and have created an index (Bloomberg IM me if you want a copy of the CIX):
As you can see, the premium has expanded a little over the past month. I am not going to chase it up here, but I will keep my eye on it, ready to buy it on a dip towards NAV.
I don’t think there is any rush to buy. Yet for me, this is a perfect uncorrelated value story. Somewhere cheap to hide while the rest of the crazy extended market swings around.
Then again, maybe you should buy it. My timing when it comes to uranium has proved terrible. It would be just like me to miss it once again…
via http://ift.tt/2tXCtmA Tyler Durden