Hi Everyone,
I hope you are settling well into the fall weather, falling leaves, and waking up in the dark. I have not been as active here as I would have liked to be but between the 500 of us and me, I feel I owe you an explanation. I write for fun and to help me clear my own head and make sense of my own investments. I read many smart guys’ articles such as Justin from Uranium insider, Steve Penny, Bad charts, Doomberg, Yellowbull, Kuppy, Patrick Ceresna, and Kevin Muir ( The market Huddle) Trader Ferg, John Polomny, Contrarian 888, Chi Girl, Josh young, 808sandu308, Lyn Alden, Tavi Costa, George Gammon, Daniel Dimartino Booth, Nick Jones, Adequate Ryan, Lookingforhyddenvalue, Cyclebottom and so on. You get the idea. Very smart People..They do incredible research. So why would anyone read this column of all things?? I have the imposter syndrome is what I am saying.. But enough about me, you did not come to read about my insecurities.
The uranium Flywheel
I did not invent this term. First, the flywheel effect is most attributed to Jeff Bezos and Amazon. The concept is straightforward: “By definition, a flywheel is a heavy revolving wheel that is used in a machine to increase momentum and therefore provide greater stability to the machine. Given its weight, the flywheel is difficult to push from a standstill, but once it starts moving it gradually builds momentum, which eventually enables the wheel to turn by itself and create even more of its own momentum through a self-reinforcing loop”1
What is the Uranium Flywheel you say? Here is my own personal representation of the said flywheel. Let’s define the below terms.
Sput is the investment vehicle, investment trust, started by Sprott. It buys uranium for delivery within 30 days, Spot market, and will not sell this inventory as John Ciampaglia, CEO of Sprott, as said many times over meaning that this investment vehicle is taking inventory needed for a nuclear reactors to function away from that Spot market. This in turn drives the price of Uranium Higher. How higher? 50% higher since it came into existence 2 months ago.. ETF, exchange-traded funds, are somewhat like a mutual fund but are traded like a single stock. They are made up of a basket of stocks. The biggest in the Uranium sector are URA, URNM and HURA. When investors see the Spot price of uranium increasing,they then turn to the ETFs to seek exposure to the sector.
2Let’s remind ourselves why this is important. This slide is 2 years old but still relevant today. On the y-axis, you have the cash cost which is the production cost without any CAPEX, reinvestment, and General and Administrative expenses. On the x-axis, you have the total output of Uranium we can expect to see produced. Depending on which source you use, we currently need between 180m to 200m lbs of uranium per year and that just keeps increasing as more nuclear reactors are coming online, new and old, and forecasted uranium reactors that were due to be decommissioned see their useful life extended. Let us recap, we needed to see a minimum of 50$/lbs to see the best performing miners make a profit. We need at least 65$/lbs to see lower grade production come online to meet the growing demand and we potentially 85$/lbs to see the lowest grade uranium mines come into production and meet the future demand.
As if this flywheel was not strong enough to drive the Market Cap of the entire sector from roughly 1 billion in Market Cap a couple of months ago to already 3 billion now, Kazatomprom, the largest producer of Uranium in the world, has now announced that they too will launch an investment fund to store physical uranium. “Once the Fund is operating, {after the first 50 million seed investment will have been used} a second stage of development is expected to be carried out through an additional public or private offering, with the timing and details to be determined by market conditions. At the second stage, the Fund is expected to raise capital of up to US$500 million from institutional and/or private investors, with the proceeds to be used for additional uranium purchases.”3 Wooza, even if the average price paid by Kazatomprom was 100$/lbs, they would remove at a minimum 5.5 million pounds and potentially up to 11 million pounds of uranium in a market which will become severely under supplied in 2024-2025.
Let us now revisit the newly updated flywheel effect. Missing from this picture is the fact that Sput can only issue shares when their premiun to their net asset value, NAV for short, is at least 1%. From that equation, we could say that Kazatomprom buying in the market would lead to higher prices which in turn would also lead to increased premium to NAV on the Sput investment vehicule leading them to buy more and potentially increasing the spot price further. The increased price in uranium catches headlines in the media and in the investment circles leading investors to flock into the investment vehicule from Sprott or in the etfs. Those etf prices keep rising which mean they in turn need to buy underlying stocks.. You could add that from an already forecasted short supply, Japan , and potentially Germany, has revisited its stance on nuclear and will restart more nuclear reactors therebuy exacerbating supply fragility by increasing the real end consumer demand for uranium. That was a mouthfull.
Here are my reflections following this announcement. Kazatomprom has realized that the Sprott investment vehicle can drive upward price momentum. Second, besides their own production, there is still uranium below 50$/lbs available for purchase from other parties. They likely want to capitalize on that instead of selling their own production knowing that the price will likely keep rising. Knowing that Sprott has sequestered, I use this specific word, already 13million lbs and that they can also intervene in the market in the future with their own investment vehicle, they must have calculated a new minimum price at which the utilities, that own the nuclear reactors, will need to purchase which must be significantly above 50$/lbs.
If our base-case was for the uranium spot price to settle around 65$/lbs to entice new production to come online, with those 2 entities inhaling the inventory currently, it begs the question, what is this new minimum spot price for our new base case scenario? The reverse side of this equation must be that these pounds will make their way into the market at some point. John has mentioned many times over that Sprott had no intention to sell their pounds especially in a weak market where it does not help anyone. They do make money from comission so even if they were to sequester these lbs indefenitely, they would still make decent profit. One has to wonder, however, in a latter part of the decade if Sprott would be willing to sell the uranium knowing that they would reap a very hefty profit. Time will tell how this investment trusts will behave.
I do not pretend to know the answer to these question but it would be smart for an investor to revise their price targets on individual stocks to reflect an increasingly probable scenario in which Uranium trades around 80$/lbs spot price. This in turn creates more positive cash flows and higher Net present value which should be reflected in the stock price moving forward.
The road out of serfdom portfolio
A new entrant this week as I participated in the private placement in Can alaska, a uranium explorer in Athabasca, located in very prospective area of the bassin. What fascinates me these days is pondering on the facts that we have seen so many multi baggers in thelast months, meaning stocks that go up in prices many times over their original purchased price. I used to think that if I lost an opportunity to invest in a stock that would potentially double or triple, my investment career was gone for good. Nothing could be further from the truth..
Things I am pondering on
1-China annoucing to the world that they would stop selling agricultural fertiliser when they make up 30% of that production. Not exactly great for the transitory theory of inflation.
2- China anouncing that they wouldsecure their energy future, whatever the cost might be, until at least 100$/barrel of oil. Again, not the best news for the transitory camp.
3- If the price of uranium at the current price last week did not recieve any bid, meaning no one wanted to sell at the 47$/lbs price what does that mean for bitcoin?Let me elaborate. Bitcoin has an increasing supply but coming at a decreasing rate. Its adoption is exploding. It used to be the case where miners would sell their inventory in the market but more and more, they are willing to “HODL” or hold long term. When, in the next 8 years, we see two more halvings, meaning further decreases in the rate of supply being mined, remember there are only 21million btc, what will be the price of bitcoin if no one sells for a couple of days.. weeks.. Its hard to explain has we have never had an increasing adoption or use of a good without an increasing supply of it. 1 million BTC? 2 million BTC?
4- When central banker say that inflation is transitory, I think they have effectively pu themselves in a corner.The interesting part of this story will be the mental gymnastic to justify why the inflation is transioty. If we exclude gas, rent and food, nothing is moving. The pint of beer you used to pay 5 euros is never going back to 5 euros.. The rate of inflation might decelerate but get comfortable with paying 6 euros in the first place and then 7 and soon 10 euros.
5-It seems a given that the price of oil is going back above 100$/barrel. How will that affect world demand and world gdp when this is extremely inflationary has the price of transportation is reflected in every items we consume.
6-Baselode and 92e have both found Uranium around the hook properties. They are 500meters apart. If that is the same geological deposit, at a depth that is suitable for open pit mining, that could be a mother load of uranium. Does cameco take them over before futhering any other work that they havein their pipeline?
Final toughts
I always welcome feedback and questions! Keep them coming and thanks for reading!
Max
https://feedvisor.com/resources/amazon-trends/amazon-flywheel-explained/
https://tradingeconomics.com/commodity/uranium
https://kazatomprom.kz/en/media/view/kazatomprom_obyavlyaet_ob_investirovanii_v_fond_fizicheskogo_urana
Great article as usual M. Clermont. I'm pondering your flywheel concept and I found it extremely solid. Currently thinking about what could make the flywheel collapse to get a sense of the risk. No super bright idea answer so far though - it must be demand decline but that would need a general economy slow down in a deflationary way which currently doesn't look the case.
Hey Maxime I have been shorting cameco successfully with heavy leverage after reading their most recent releases and talking to people that have contacts inside. Would love to chat with you about it. stevemueller@protonmail.com