(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long PLU.V, U.TO, and EFR.TO).
Unless you've been sleeping for the month of January, I don't need to point out the fact that uranium stocks have been busy digging themselves out of the basement in a very rapid fashion. This is a sector that was pretty much left for dead by late October last year... and then, all of a sudden, something changed. Was it Trump's election and pro-nuclear comments? Maybe. Was it that every other commodity had rallied already and uranium was overdue to play catch up? Maybe. Was the rally helped along by a new Kazakh approach to the market (clearing sales through Switzerland) and the subsequent telegraphing of the removal of roughly 5 million pounds per year from that market? Probably. Does it also have something to do with the fact that utilities are looking at a huge wedge of uncovered uranium demand for which they will eventually have to sign long term contracts? Probably a bit of that too. Whatever it was, sector bellwether Cameco saw its lows in early November 2016, and since that time the whole uranium sector has staged a very impressive rally to the upside. Literally every stock that I have looked at in the sector is up somewhere around 50-200+% over the last three months and yet they've barely even started to move if you step back and look at the bigger picture... they are moving up from brutally low levels. Judging by the record volume (and I mean record volume) in the Global X Uranium ETF (URA in the U.S.), something is clearly up.
Perhaps even more telling is the fact that Uranium Participation Corp (U.TO) now trades at a premium to NAV rather than a discount. When that happens, this physical ETF can raise money by issuing shares to the market via financings and it's always accretive... that means that it can keep raising money to buy spot uranium as long as the market is willing to fund it. That sets up a very interesting dynamic. Does anyone really think that if they buy physical uranium at $30 per pound that they won't be able to sell it for at least $30 at some point in the future? Given the cost of producing uranium and the economics of actually building a mine, I would say that's a pretty safe bet. $40? Probably still a safe bet. $50? Now a couple of projects start looking attractive. $60? A couple more. At anything north of $80 I'd probably be a seller, but that's a looooong way from here and prices can certainly go higher if the market really wants to squeeze the spot price.
My point is that it looks to me like the market has started to remember what it learned more than 10 years ago, which is that when spot prices are too low, the best way to cure that is to take the short term "slop" out of the market (through a vehicle like U.TO for example) which leaves the utilities with no choice other than to start securing long term contracts at higher prices as their short-term gamble of "running uncovered" starts to unravel. It's a bit of a game of chicken between the market and the utilities, but the uranium market is so far out of whack that I think there's a lot of runway here. If you want to learn about the scale of the uncovered utility needs I suggest you reach out to either Rob Chang at Cantor Fitzgerald or Dave Talbot at Dundee... those guys are pros in this sector and know these "uncovered demand" numbers cold... and they are big numbers (some discussion of it here). The best part is that utility demand is almost perfectly inelastic, due to the fact that the cost of uranium fuel is a drop in the bucket compared to the cost of the reactor itself. If you have a reactor, you are going to fuel it at pretty much any uranium price and it won't have a big impact on your generating cost.
I'll even take it a step further and suggest that, if backed by the market, a company like Uranium Participation Corp could soak up as much spot material as it can get its hands on (by raising money in the market and buying spot uranium with it), put it in a warehouse, and then turn around and contract that material out in the term market with some consideration for the cost of keeping that material in inventory over the required period of the contract (like setting up a "synthetic mine"). The crazy thing is that the amount of material that could actually be secured in that manner is dwarfed by the actual uncovered future utility demand. While the market has been focused on the fallout from Fukushima, a number of other countries, led by China, have been busily building reactors while new mines have been, well, mostly sitting as ideas on paper. Without question, new mines are needed and, without question, to meet that supply the uranium price has to move higher in order for those mines to be ready in the 2020-2025 window. It's never been a matter of "if", just a matter of "when"... but we've all heard that before, right?
I'm not going to pretend that I know if "this is the big one", as a colleague of mine likes to say about trades that take years to set up and are initially met with nothing but disbelief, but what I do know is that the uranium sector is starting to stir and it may be only just starting to wake from its long slumber. But what if it is the big one? What if Uranium Participation Corp starts pumping out $50-100 million financings and soaks up everything in sight in the spot market, leaving the utilities with no choice but to start trying to secure long term supply? The utilities have had a sweet ride for some time now and it may be time to even things out. If that's the case, and based on the recent performance of the uranium equities when the spot price is barely even moving yet, I can see it being a good idea to have a couple/few uranium horses in the stable. Personally, outside of playing the physical metal, I want great assets in good jurisdictions that have a realistic chance of capitalizing on the looming structural supply shortfall in the uranium market.
So how do I play this theme? This is already a long note, so I'll run through some names very quickly here. Cameco (CCO.TO) is the first logical (and biggest) choice, but then again there's that pesky CRA issue that needs resolving there. For pre-development, Nexgen (NXE.TO) and Fission (FCU.TO) are both excellent picks in the Athabasca Basin although they are higher up on the in-situ-value-per-pound scale and may have long permitting and development timelines. There's Kivalliq (KIV.V) up north with some very good looking geology who just landed a royalty deal with Sandstorm, but I don't know much about remote operations that far north. Wandering down to the U.S. I have to say that Energy Fuels (EFR.TO, or UUUU in the U.S.) is my favourite way to play the U.S. market. Energy Fuels is diversified across assets, has a proven team, is already a producer (with quick ramp-up ability), and has a reasonable balance sheet... so I own it. It's my "Buy America" uranium trade. There are other ways to play the U.S., but I felt like I only needed to pick one and I have the most history with EFR.
Internationally, there are assets of varying quality all over the place, but the one that gets me the most excited is Plateau Uranium (PLU.V). So few people have actually taken the time to get to know this project that it's a bit of a unicorn. Most other international assets are in Africa or Australia, so people can compare peers to one another in terms of relative project parameters and valuations. PLU is on its own down in Peru, which makes it an outlier. PLU's mineralization style is also different (in a good way) than any other project that I'm aware of... the uranium is contained in easy-leaching autunite, pretty much at surface, in easily crushed rock that appears to have low acid consumption. Testing indicates that the metallurgy is remarkably clean and free from deleterious elements which means that concentrates should be easily produced. Power, labor, highway access is all there and Peruvian officials appear to be very much onside with the concept of entering the uranium producers club on behalf of South America.
And it's big... Plateau last reported a total mineral resource of 124 million pounds of U3O8 on just a portion of their lands. That gives PLU an enterprise value per pound of just 26 cents, which is incredibly low relative to any peer group you can come up with. I've written at length on PLU in the past and you can link to the past articles on the right side of this page for more detail, but I think that this is one of those projects that gets better the longer you look at it. I've yet to meet anyone who isn't impressed once they actually look at the project. It has some of the best indicated economics of anything I've seen out there with projected operating costs of around $17/pound and a US$603 million post-tax NPV on a project with initial capex that's expected to be less than US$300 million (link to the press release detailing the preliminary economic assessment results here).
Let me say that again... projected operating costs of around $17/pound and a US$603 million post-tax NPV on a project with initial capex that's expected to be less than US$300 million. With economics like that, they could be mining ancient llama dung and I'd still be interested. In any mining project, for any commodity, those are just amazing economics for a project of this scale. And the best part about those numbers? Those numbers are based on $50/pound uranium. Yes, I know that the spot price is nowhere near $50/pound, but given what's in the global project pipeline, very few new projects would make economic sense at $50 uranium. One of those that would make the cut is Plateau, which is why I like it so much. It's positioned at the low-end of the cost curve in a very mining friendly jurisdiction. Some people focus on the fact that Peru doesn't currently cover uranium in its mining laws. This is more because no one had ever found a commercially singificant uranium deposit in Peru before than it is because of any fundamental aversion to yellowcake.
With respect to Plateau's Macusani project, the most comparable deposit in terms of grade, scale, and capex that I can think of in recent memory was Mantra Resources' Mkuju River project in Tanzania (a country which incidentally also did not have a uranium mining history). Russia's ARMZ paid around $1 billion for Mantra in 2011 making for a very nice win for shareholders. Did I mention that some of the very same (and deep-pocketed) early players on Mantra are backing Plateau as well? Now, I'm not saying that Plateau is going to sell for a billion dollars, but with only 54.6 million shares out, I think it's important to put PLU's current $0.59 share price into context. That gives PLU a market cap of C$32 million, which is a long, long way from the project's US$603 million after-tax NPV. Even if PLU doubled tomorrow it would still be valued at less that 10% of its project NPV. That's low by most standards, especially when you are looking at what has the potential to be to be a Tier 1 asset at the bottom end of the cost curve.
Estimates from Plateau's corporate slide deck suggest that the company will need $15-20 million to get to the completion of a feasibility study on this project which, at this rate, should result in relatively modest dilution on an existing tight share structure. If they were going to be the builders of this mine, project financing would probably come in late 2018 or 2019 for PLU, but my current thinking is that they don't make it that far... after all, unicorns are hard to find.