Is The Uranium Bear Market Finally Over?
Speculators Anonymous | May 21, 2019 12:23AM ET
I know that for uranium investors – the last few years have been rough.
Really rough.
We keep hearing – and being promised – that the uranium bull market’s “finally approaching” – only to watch uranium equities sink deeper into the red.
But – finally – I do believe that the fundamentals for the uranium market have changed. And for the better.
It appears uranium prices bottomed a few months ago – and since then continue climbing to higher-highs and higher-lows (all while a strong U.S. dollar has weighed on general commodity prices).
Thus – I believe the uranium market now offers the type of positive asymmetry (low risk – high reward) I look for – especially as uranium mining equities lag the uranium price.
Here’s why. . .
First – a little context: back in December 2017, Kazakhstan – the world’s largest uranium producing country – announced that they were cutting 20% of planned uranium output. (Note that this 20% alone represented nearly 8% of global annual output).
They made this decision because of excess uranium supplies in the market that’s weighed on uranium prices. (They also didn’t want to waste mining their finite uranium reserves at heavy losses).
And although a 20% output reduction is a lot – it just wasn’t quite enough to end the brutal uranium bear market.
But – it did send a powerful message to the market – which was. . .
Global uranium producers are at their breaking point. And if prices aren’t going to rise – then they would force them to.
Meaning – if the market wasn’t absorbing the excess uranium supply, then the producers were going to stop mining it.
Then, not too long after Kazakhstan’s announcement, Cameco Corp – Canada’s largest uranium producer – followed their lead and suspended production at their McArthur-River mine (which remains on an indefinite shutdown). This mine alone produced 11% of the world’s annual uranium output.
Thus – because of all these major mines reducing output – there’s been an estimated 25-35% of global uranium supplies that have already been removed from the market since late-2017 (and with more reductions coming).
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Now – this is a huge amount of uranium output that has disappeared over the last 16 months. . .
But why did it happen so suddenly? And why’s it happening only now?
Well – that’s because after the 2011 Fukushima Tsunami crisis (which kicked off the uranium bear market) – global producers believed that they could weather the storm (i.e. continue producing at weaker prices).
But – many years later – and uranium prices were still falling (all the way down to multi-decade lows). . .
Why? Because most producers of commodities (whether it’s silver, oil, copper, etc) will try to increase production so that they can make up for the lower prices.
For instance – if a pound of uranium (aka ‘yellow cake’) drops from $60 to $30 – then producers must more than double output just to make up for the lost revenue.
But when all producers do this at once – it floods the market with excess supply.
And eventually – it pushes prices even lower. Which triggers producers to further increase output in attempt to make up for larger losses in revenue (repeat the cycle).
Thus – by 2018 as uranium prices eventually fell to around $20 a pound – roughly 95% of global producers found themselves operating at a loss.
This forced firms to face and accept the reality that they needed to reduce output significantly.
So – flash forward to this year – and there have finally been meaningful reductions in global uranium output.
For perspective – global production is expected to decline to 135 million from a global peak of 162 million (a 16% drop) from 2016.
That’s a huge drop in annual supply (and the first large decline in many years).
I believe this trend will continue for many years as producers continue slashing output. And also remain cautious about bringing on new supplies and projects (until higher uranium prices truly justify it).
Thus – in summary – we’re finally seeing the deep uranium supply cuts happening worldwide. Which is ridding the market of excess supplies (all while demand further grows).
And this is where the opportunity comes from. . .
One of my favorite books about commodity cycles is Edward Chancellor’s Capital Returns (2015).
In this brilliant book – Chancellor pieces essays together from his years studying various boom-and-busts throughout markets while at Marathon Asset Management.
But the main point in this book is to understand where things are in the industry’s ‘capital-cycle’. And how to position yourself properly.
Over the last few years (since 2011) – the uranium industry’s had a poor return on investment (ROI) because of excess uranium supplies pushing prices lower. (And remember – the lower prices caused miners to overproduce so that they could make up for lost revenue – making the supply glut even worse).
This lowered investor returns – and capital soon fled to other higher-yielding sectors.
But – don’t forget – this process always plays out in cycles. . .
Or otherwise said – bull markets create bear markets, and bear markets create bull markets (study the chart above).
This means that as uranium prices continue higher – the surviving uranium producers will generate higher returns. And capital will flow back into the sector – kicking off a bull market.
Now – Chancellor wrote that a good indication of a bear market nearing its end is when major industry supply cuts happen. And when firms stop investing in new assets – like building new mines. (In fact – many begin divesting – selling marginal properties or shutting down mines).
We’ve seen both these things happen in the uranium sector over the last two years.
So – in summary – now that the uranium sector’s finally having large and meaningful supply cuts needed – I believe this marked the bottom. And is in the early stages of a supply-side bull market.
Now – I still want to see continued supply cuts. But I am finally opening positions in the uranium sector via buying shares of junior exploration firms. And via buying long-dated, out-of-the-money call options on major uranium firms – such as Cameco Corp (NYSE: CCJ).
I will continue monitoring the uranium sector and writing about any meaningful events. I will also fill readers in if my ‘long uranium’ position changes (meaning that uranium loses it’s positive asymmetry).
Stay tuned.
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