Stocks have crashed then rallied.
People are falling over each other to buy government bonds.
Gold is at seven-year highs. Oil has capitulated. Industrial metals are rebounding. A bit
Oh, my goodness the noise!
And yet there is one essential strategic metal that has quietly, discreetly crept to four-year
highs.
I’m talking about uranium.
Stealth bull markets are the best kind of bull markets. Nobody mentions them. The media
aren’t onboard yet. The story hasn’t broken, and yet the asset in question creeps upwards.
We could be in the early stages of one of those.
I stress the word “could”. There have plenty of false dawns, since the uranium mania
of 2006, if any you remember that. One of the most amazing bubbles you will ever see.
But a supply shock has long been forecast. It may finally be here.
Covid 19 or not, there is no shortage of demand for electricity, nor is there likely to be,
and, for all the investment that has gone into clean energy, fossil fuels still account
for more than 65% of world electricity demand.
Hydro power accounts for 16%, wind and solar about 6%. And nuclear power comes in at 10%.
China is by far and away the world’s largest electricity consumer. For those of you that
like your stats, its electricity generation came in at 7.3 PWh (that’s petawatt hours)
last year. The US comes in at second at around 4 PWh.
On a per head basis, the world’s largest consumer of electricity is not, as you might
have expected, the US, but Iceland. It kind of makes sense when you think about it. It’s
cold there and power is cheap. Hot on the heels of Iceland come Liechtenstein, Norway,
Kuwait and Bahrain.
Around 69% of China’s electricity is generated by burning fossil fuels, mostly coal. Air
pollution is a major problem. Nuclear power is part of the solution, although it currently
only accounts for 4% of its electricity generation. That 4% comes from the 45 nuclear power reactors
that are currently operating (increasing to 56 this year, it is hoped).
China’s stated goal - and it has a habit of meeting its goals - is that by 2050 that
4% figure will be 28%. That is a big uptake.
In the US, on the other hand, around 20% of its electricity is already nuclear generated.
So there is no shortage of long-term demand.
So to supply. The world’s largest producer is Kazakhstan (40% of global supply), followed
by Canada (13%), Australia (12%) and Namibia (10%). The world, then, depends on four countries
for 75% of its supply. Indeed something like 65% of global supply comes from just six mines.
This represents an extremely vulnerable situation.
Kazatomprom is Kazakhstan’s national operator and the world’s largest uranium producer.
It announced last week that all uranium mines in Kazakhstan will cease production for three
months to slow the spread of the virus. Kazakhstan’s major cities, meanwhile, are in lockdown.
The week before, Canada’s Cameco said it was closing Cigar Lake, the world’s largest
uranium mine, for at least four weeks, following directives from the Canadian and Saskatchewan
provincial governments. Other North American operations are similarly mothballed. Denison
Mines, for example, has suspended the environmental assessment for its Wheeler River uranium project.
Namibia, another key supplier of uranium to China, has also closed down all mining until
the virus comes under control. Its vast Rossing mine is operated by a state-owned Chinese
company. (If you think things are tough here in Europe, 25% of Namibia’s national income
comes from mining and the whole industry has been put on hold).
Australia, which has not been hit as hard by Covid-19 as elsewhere, suddenly finds itself
under the scrutiny of the uranium investment world. Its uranium junior mining companies
have been going bananas.
So is this a new bull market? Or is this a temporary situation brought on by Covid? That’s
the question. The fact is that the market was always vulnerable to a supply shock and
now we have it.
The uranium price has been locked in the $24-26/lb range for about a year, but this last fortnight
it has broken up to $31/lb – three-year highs.
That’s promising, but we have a long way to go to get back
to the 2006 highs above $140/lb, when uranium mania swept the world.
One way to play this is to speculate in uranium mining companies. “But what is the point
buying a company whose operations are currently suspended or about to be suspended?” you
may ask – and I tend to agree. Suspended operations can drain capital fast (though
bail-outs may come).
Those companies whose mines are at the exploration or development stages may see better gains
as the values of their ore bodies are being re-rated, but it’s not like a great deal
of development can actually take place until further notice.
So the safest way to play this (to avoid operational risk) is to play the spot price of the metal
itself. It’s far less racy, but your risk is lower. London-listed Yellowcake PLC (LSE:
YCA) has been set up with this purpose in mind. It is, basically, a uranium holding
company. You buy the shares and hope that the value of its uranium stockpiles increases.
It currently holds 9.6m lbs of U3o8, which, at $31/lb gives it a valuation of around £240m
(US$300m). Currently the share is trading at 220p, giving it a market cap of £190m,
so you’re getting it at a discount to NAV - net asset value. (But don’t get too excited
about that - holding companies almost always trade at a discount to their NAV).
So there you go. The uranium supply shock is here. But is this a veritable bull market?
We shall see.
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