Uranium: Staying Long

From The Maven Letter: 28 February 2024

The spot price of uranium dropped 10% over the last two weeks…and some investors freaked out.

I am not freaking out. In fact, I’m using this pullback to buy more uranium exposure. Let me explain why

Uranium doubled in price over the last year because there is not nearly enough supply to meet demand. The market is also being split into two halves, east and west, and that is making the supply gap worse, especially for the west, where production is lower and demand keeps ramping higher.

Canaccord just issued a report called The State of the (Nuclear) Union in the United States, which summarizes all the legislative and financial supports for nuclear underway across the country. Federal legislation has gotten fair coverage already – major support for nuclear fuel and power in the Infrastructure Investment and Jobs Act of 2021 and the Inflation Reduction Act of 2022, for instance – but there has been a lot of pro-nuclear movement on the state level as well. Below I’ve listed some – not all, just some – of those.

• Virginia: new legislation promoting nuclear power, de-risking project permitting, and establishing a Virginia Nuclear Innovation Hub
• Texas: Governor Abbott just mandated the Public Utility Commission “to establish a working group to study and plan for the use of advanced nuclear reactors in Texas… I charge the working group to submit a plan and recommendations to my office by December 1, 2024, outlining how Texas will become the national leader in using advanced nuclear energy.”
• Tennessee: new Nuclear Advisory Council to address regulatory, workforce, and education barriers limiting the expansion of nuclear energy in the state
• Many state: have recently passed legislation labeling nuclear power as “clean energy”, which opens doors to big pools of funding and reduces barriers
• West Virginia, Connecticut, Montana, Kentucky, Wisconsin: all removed restrictions on building new nuclear facilities in recent years

The US is becoming decidedly pro nuclear. Public sentiment has shifted dramatically on this in just the last few years.

It all means that uranium demand is ramping. And there is just no quick answer to on the supply side. It will take years to get enough new uranium production online to meet demand. In the meantime, utilities will have to compete for pounds, which is the recipe for higher prices.

Why then did the price fall recently? Because a single trader is messing with the market.

Uranium traders often get their pounds through small deal with producers that let the trader buy up to a set amount over the month at the spot price from the end of the previous month.

That sets up a pattern: traders try to knock the spot price down at the end of each month, so they can buy their uranium cheaper. And they often succeed because the uranium market is so thin.

So a trader got to sell his January-priced pounds at a higher price in the first half of February, after Kazatomprom’s guidance downgrade and all that. Then the surge subsided, just because prices had run a lot and Cameco provided some production reassurance.

As the end of month approached, a trader saw a chance to take advantage of the pause. He offered some pounds for sale at well below market pricing – and of course found buyers. That pulled the spot price down from $103 to $94 per pound.

It’s February 28^th today and the price has been sideways at $95 for a few days. I bet the price stays here until the end of tomorrow other traders with month-end-priced contracts are playing…but as soon as March hits they will pull their underpriced bids and the spot price will rebound, to everyone’s benefit.

So that’s what happened. Uranium stocks slid more than the spot price because newer uranium investors, including some who piled in during the latest surge, often don’t understand these monthly pressures. They just saw a notable price correction, freaked out that the bull run was over, and sold.

This is a buying opportunity. While this was playing out in the spot market, the term (contract) market was heating up: a utility issued very large RFP (request for proposals) for a contract providing 21 million lbs. over 14 years, with deliveries starting in 2026. Putting this RFP out to the market sparks two comments.

First, utilities usually start by asking the producers they know for new/renewed contracts. Putting this big ask out into the market suggests this utility tried that and got nowhere, which is to say that none of the miners it usually buys from were willing or able to sign a deal of such scale.

Second, contracting volume had slowed some later in 2023 as the uranium price really rose. Fair enough – utilities wouldn’t want to sign long-term contracts at a top in the market, so they paused to see if that’s what was unfolding. (There is no way it was a top, but I suppose they were optimistic?) But for a utility to now issue this big contract ask to the overall market sends a clear message that this utility thinks securing pounds is more important than worrying about the price of those pounds.

That’s bull market thinking right there. Utilities are herd animals; they all wait until the last minute, being ‘conservative’, and then all act at once. This large contract RFP essentially gives other utilities permission to start acting. We’ll see what impact this has over the next few months.

The uranium bull run is far from over. But uranium is a bit of a complicated market, which means lots of investors don’t understand details like traders pressuring the spot price at month end.

You can try to trade these patterns…or you can just stay long uranium, which is what I’m doing.