Pebble Forever Theme: Yes, The Uranium Rally Can Go Further
One of the frustrations with writing this newsletter is that often it can take a bit of time before you get back to a long running theme or even just an idea we are pretty excited about.
There are just lots of interesting topics out there and that is before the inevitable and totally unpredictable "Black Swan" type of events - bank collapses, terrorist attacks, pandemics etc etc. - that occur unexpectedly and disturb the publishing plan.
Right at the top of this list of topics we wish we had more time has been: Uranium.
As we wrote last week, we have covered the serious issues plaguing Boeing from the very inception of this newsletter but our coverage of Uranium is nearly as old.
We first began writing about the commodity in 2021 when we argued that, of all the crazy things bandied about on Reddit's WallStreetBets, their passion for uranium might actually make a lot of sense.
Our reasoning was simple: like other commodities and forms of energy, uranium was incredibly cheap back in 2021 and into 2022. Additionally, as the fight to combat climate change got serious, we felt uranium would naturally benefit from the realization that we need more nuclear energy. Crucially, this could still happen even if the US and Europe did not agree. China alone could use a lot more uranium.
As usual with investing, some of what we theorized has occurred and other things have happened that we didn't foresee but overall the direction has been pretty consistent.
Uranium had a good but not spectacular 2021 but then the Russian invasion of Ukraine occurred and this super charged the trade almost overnight. We wrote about that as well and gave particular attention to the "Russian angle."
The Russian angle was what we termed the rather unpleasant fact that the US nuclear industry is heavily reliant on Russian uranium imports. The issue isn't so much that most uranium is mined in Russia itself but rather that Russia enriches the commodity and makes it usable in our nuclear power plants.
Being dependent on a Russian-enriched strategic mineral is a tough look in a day and age where Vladimir Putin is murdering innocents daily and riding roughshod over international norms.
Furthermore, it might be even tougher in a day and age where a certain type of American commentator enjoys lecturing Europeans on their dangerous and strategically foolish reliance on Russian energy.....
Lastly, there has been some useful financial innovation in this space with the arrival of funds that hold physical quantities of uranium. For every dollar that are invested in Yellow Cake or the Sprott Physical Uranium Trust they will purchase an equivalent amount of real uranium.
This puts pressure on the market and the price as it takes real amounts of the commodity out of circulation and simply stores it.
It is true that there are fees associated with these products and they are not small compared to a low cost index fund but they might be worth it, depending on your outlook.
So, to summarize:
We have long liked uranium. We still do.
The commodity has done really well over the last 2.5 years.
It has gotten easier and cheaper to participate in this rally because you can easily buy either a uranium miner or even a physical commodity ETF.
What has all this meant, objectively speaking?
Well, the price yellow cake substance has more than doubled since Russia's attack on Ukraine.
The chart is pretty eye catching:
This brings up the next key question:
Fine it has done well, but will that continue?
We think it easily could.
There are other supply issues:
Kazakhstan has issues extracting uranium.
Niger hasn't produced any since a coup last year.
Canada somehow missed production targets.
All three of these top producers could return to the market but it won't change the enrichment problem nor will it change the higher demand from Japanese and Chinese plants coming online.
Furthermore, unlike other commodities such as oil covered earlier, high prices do not necessarily damage uranium demand. In fact, with the rise of physical commodity ETFs, higher prices could attract more buyers, retail or otherwise.
The reason that high prices do not damage uranium demand is that functioning nuclear power plants require constant supply. It is very difficult to turn the reactors off and they run 24/7. This is great from a power production standpoint but has drawbacks when it comes to buying the fuel on the open market: when operational their owners are forced into being price agnostic buyers.
That means they pay the going price, whatever it may be. The good thing from their perspective is the cost of a uranium is a minuscule part of running a nuclear power plant. In this respect, it is very different from, say, a coal or natural gas equivalent.
The bad thing, however, is you need a constant and steady supply. There is no mothballing a nuclear power plant.
Obviously the higher uranium prices should attract more capital flooding into uranium mining, especially in the West trying to ween itself off Russian supply. That is happening but developing a mine takes years to fund and permit and build so there will be no solutions any time soon.
This may be bad for those who own nuclear power plant businesses but it could be great for owners of uranium. The metal may be yellow like gold but it actually has a productive use that can be modeled and assigned a real value. You might not want to eat uranium but under the right circumstances it can keep you warm at night....
So, as we have periodically reminded you before, we think that uranium could be a great "buy and hold" investment. It could also be a great asset to hedge your exposure elsewhere. All that to say, keep an eye on and if it pulls back a bit, you might want to consider it as a wonderful hedge to US stocks, the return of inflation and, perhaps above all, something that is very uncorrelated with lots of other risk assets.
We haven't even mentioned the fact that any serious attempt to properly fund the carbon transition and combat climate change will almost certainly require massive investments in nuclear power.
With this many positives, it is almost enough to forget that the US hasn't approved a new nuclear reactor design since 1972.....
There is a negative and shameful fact to send you off into your week after such a positive and uplifting edition.
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