Why I am Selling (some of) my Best Investment Ever
Uranium has reached a price point that in the long run will stabilize supply and demand
I have been on the up-and-down roller coaster (although mostly up) that is uranium and uranium miners since March of 2020. When I first bought Dennison, it was at $.25 and Nexgen was under $1. I say this not to pat myself on the back, but merely to show the appreciation of each security. Dennison today is nearly at $2 and Nexgen nearly at $7. The physical price of uranium was around $22 and today has cleared $90! It has been and I believe will probably continue to be a great ride.
The thesis is all over the web today whereas in 2020 you couldn’t find a single thing out about this market (shoutout Sachem Cove, Kopernik, Segra, Azarius, and Old West). My initial thesis was incredibly simple:
There is a clear shortage of uranium supply (at prices under ~$65 where projects are economically feasible)
I modeled each mine and each reactor
I did a guesstimate on the secondary mobile supply
There were clear issues at lower prices
Sentiment was at all-time lows and the sector has completely bottomed out with uranium companies once numbering 500 down to <50
The sector had no research coverage, no information, and its top producers were cutting supply
The sector dropped by over 50% during March 2020 despite Covid having essentially no effect on the demand for nuclear power
Demand is inelastic and is not going to decrease at a fast rate if at all (buyers of fuel will pay for it regardless of price given the lack of any alternatives)
Fuel buyers, like government workers, do not care what the price is, but merely that the machine stays on, unlike other commodity markets. This was the key to my thesis and what got me excited.
There is a great Tegus transcript with a fuel buyer who hands you the thesis on a silver platter by explaining he doesn't care what the price is and how it will never go up.
There is no cap to how high the price could go, and it will likely overshoot the point of economic stabilization
There is nothing that can disrupt supply/demand mismatch before it causes issues which will lead to large increases in uranium prices
The only possible disruption would be a major nuclear disaster of which I put odds at roughly ~1-3% per annum
Pick the miners which have staying power, in understandable geographies, enjoy the leverage to the price of uranium and wait…
At $65/lb uranium NXE is worth ~$6-7, CCJ is worth ~$35, etc…
Ten-bagger upside potential in certain names with >50% chance of multiples of capital
As we sit nearing the end of 2023, the thesis has obviously worked out, and then some (financial buyers, geopolitical events, demand increases, SMRs, overfeeding, etc..,) with the actual outcome surpassing my wildest expectations from initial investment. The change in sentiment is great for the world as well.
However, the reality is today that the uranium price does not need to go higher to create economic stabilization in the U308 market. There is a ton of uranium out there, and at ~$90/lb there is enough economic supply in the long run and top mines can operate at insanely profitable levels. My initial target price for uranium to have supply = demand was $65 which moved to roughly $75 or $80 due to inflation, financing environments, etc…The fundamental aspects of my original investment thesis have largely concluded, the stocks have moved markedly higher and we are now in the trade phase.
The risk-reward has moved from insanely obvious upside with almost no downside outside of a nuclear disaster to just “okay”. I don’t like to be too scientific about things – in 2020 the uranium price had to triple, and the miners likely had leverage to that. Today the uranium price does not have to move higher, and the miners are likely pricing in long-term uranium in the ~$75-80 range in my view. I think the miners are more attractive than the physical today which is a change from the past peak miner levels in 2021.
To be clear, I think there is a good chance of multiples of upside from here, but I am not a trader, I am a fundamental investor. If you look at the valuation of certain companies, they are very accurately priced and unless you see a sustained uranium price above $100, it is likely worth taking some chips off the table. I have done so which I will explain below, but I'm maintaining some of my exposure to the “nuclear” scenario of extreme uranium price hikes due to there literally being no uranium left for a desperate utility within the next 1-2 years. I am doing so through long-term options but have now taken a significant chunk of my exposure off the table.
I still own a fair amount of NXE but have sold well over half of my position. Let's do some very quick back-of-the-envelope math. Let’s say NXE produces 20M lbs. a year (I think this is reasonably likely) and let's say it starts in 2030 (I think this is aggressive). Let’s say the average price is $80/lb. This creates $1.6B of revenues and let’s say their cost to produce is just $25/lb. (I know they think it's lower, but I am using this as an estimate of total company costs) or $500M. This gives them $1.1B of EBITDA. NXE will have to take on at least $1B of debt in my view and the current market cap is around $4B. A $5B EV to ‘30E EBITDA multiple is therefore ~4.5x. This is not that attractive, but you can probably still do pretty well assuming a normalized multiple in the high-single-digits for a best-of-breed, low-cost miner, or maybe you think it gets Cameco’s multiple. Remember mining businesses fundamentally are not good businesses and don’t deserve market multiples at stabilization. NXE or KAP are low-cost producers and as such deserve a higher multiple than other competitors. I think before Cameco’s recent acquisition, there was actually and potentially still is an outside chance that NXE would become larger than Cameco over time.
However, I think Nexgen’s costs could be higher, things could go wrong, and the mine may take longer to open. Heck, how many new uranium mines have come online in the last 15 years, not many. I think my first scenario above produces roughly a double in ~5 years which is not what I am looking for when investing in a miner that does not have a producing mine. The upside scenario of $100/lb. and 25M+ lbs. of production is still very attractive, but a lot has to keep going right. I like to bet on things not going horribly wrong. I will keep some exposure, but the days of uranium being 25% of my portfolio are gone.
This math is pretty comparable across the junior mining competitors save one or two. I think Kazatomprom is still very attractive, but there is a clear jurisdiction risk, similarly with Global Atomic.
Now there are a couple out there that are completely insane, but I won’t call them all out. Take a look at where Cameco’s multiple is today, and they arguably have questionable at best leverage to uranium price increases. Why anyone would own Cameco at these prices for fundamental reasons I am not sure.
UEC is the worst in my view. Not only do they have egregious compensation practices and incredible stock dilution, but they are also remarkably overvalued. I may also have a personal bias against them for taking out UEX at a low price, but notwithstanding that does not change the valuation. There is some option value to this name, but right now UEC can mine roughly 8-9M lbs of uranium/annum if all goes well. They claim to have costs in the $30s and $40s but are buying physical uranium in the mid $40s - not sure that makes much sense if you can produce for far lower prices.
Anyways, simple math, let's say their total cost to produce (company-wide expenses which are not small) is roughly ~$50/lb which I feel is generous and let’s say they don't dilute the bejesus out of the shareholders in the meantime. 8M lbs. of production at ~$75 uranium is revenue of $600M with costs of $400M or EBITDA of ~$200M. This equates to an insane 13x EBITDA in a very positive scenario. Why would you ever own this when you could buy DNN/NXE, etc…I don't think anyone would buy this asset given its relative valuation – if the sector got peaky, there are 5+ better assets out there for larger companies to buy. Check out this strong report by Kerrisdale - don't worry Sahm was long other miners so didn't lose his shirt on this report: https://www.kerrisdalecap.com/investments/uranium-energy-corporation-uec/.
I realize that these analyses are incredibly simplistic, and I only keep models on a few mines today, but the back of the envelop math is just different today than it was and it’s far worse for some than it is for others.
To me if you believe in the continued supply squeeze which I do (but I am not a trader) you should play it via options (or OTM option companies like a Bannerman) to capture the potential pop as fundamentally owning these securities promises to be at a minimum more difficult and with worse risk/reward moving forward.
Let’s for example utilize Dennison. If I buy an option to own Dennison at $2 in 2 years and it costs me roughly $.50 and I believe there is a 40% chance the stock goes to $6 and a 60% chance the stock is below $2.50, if it goes to $6, I make $3.50/share on my $.50 investment, or a 7x. At 40% of the time that is a 2.8x expected value.
If I use those same odds for owning the stock of DNN. 40% it goes to $6, 60% it goes to a $1.50 let’s say. My expected upside is just far lower owning the stock and I can buy cheaper exposure with options. I am a novice in options, but I find the ability to sell the stocks high today and maintain some minor exposure to the blow-off-the-top event relatively attractive. I think 2 years is definitely a safe time frame in which this event will either happen or not happen.
Given where the market is valued today, I don’t see a continued steady uptrend, in fact, I see the status quo or a downtrend, with a fair shot at a violent upswing. I’d like to be positioned to capture this potential upside but having this as a large percentage of my net worth on largely a trade without the support of the physical price needing to move higher to satisfy supply/demand is just not the way I choose to invest. I realize I may leave lots of money on the table, but such is life.
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