Making sense of the great uranium disconnect

With the Section 232 decision on uranium behind us… the uranium market’s fundamentals look strong. Primary supply cuts are taking hold… secondary supplies are receding… and commercial utility inventories are within normal levels.

So why aren’t equity prices reflecting these fundamentals? Where’s the disconnect?

Adam Rodman, chief investment officer of uranium fund Segra Capital, joins me today to help sift through the noise and uncover what’s really happening in the uranium market.

Transcript

The Mike Alkin Show | 68

Making sense of the great uranium disconnect

Announcer: Free and clear of the chatter from Wall Street, you’re listening to talking stocks over beer hosted by hedge fund veteran and newsletter writer Mike Alkin, who helps ordinary investors level the playing field against the pros, by bringing you, market insights and interviews with corporate executives and institutional investors, like sift through all the noise of mainstream financial media and Wall Street to help you focus on what really matters in the markets. And now, here’s your host, Mike Alkin.

Mike: It’s Monday, July 29, 2019. We’re in the thick of the summer a little bit cooler here in the northeast this past weekend, and you’re still in the 90s but not oppressively hot, so it was a little bit better but am already got September in my sights, I can already feel opening my back door and feeling that crisp fall day and crisp moving out the summer, getting it behind us like I said that was I think a week or two ago. Summers okay for a very fleeting ball for me I am not a summer guy. I’m not a Scrooge. I’m not a … Curmudgeonly I hate the summer but I just … The heats not my thing. The beach, the Santa.

I mean I do it because the kids like it, will go to beach once in a while but bring on the fall, bring on the winter bring on the spring. So anyway, kind of had the trifecta this weekend. The weekend trifecta of chores. So my son who plays the cross, I mean they’re the equipment after they play every time we get home I air it all out in the yard. I let the sweat like crazy, so it’s just like if you play hockey, you know what a hockey bag smells like. Mine doesn’t, soon as I come home doesn’t matter, 2:00 in the morning, everything’s out and being aired out. And if it’s too cold out or if it’s road with too much snow out there I’ll put it out in the mud room, but it gets good air.

But the kids they don’t know, they keep it in the bag but every time my son gets home I take it out, aired out but even then it doesn’t matter it’s still nasty sometimes, so his glove is the cross gloves smell so bad. So like knock you off your feet bad and from all the sweating, and I guess it gets trapped in there. And so I decided was going to wash them this weekend. And I did, I used dawn dish washing soap and washing, washing, scrubbing and scrubbing and scrubbing them, and they put them outside and day later they’re all dry, and they smell the same. So my wife said why you put some Irish spring soap in there. Okay, so I did, I cut the soap, I put them in each finger, and I took the rest of the bar put it in the palm, put it in a brown paper bag each glove, closed it up. Unbelievable.

It smells like Irish spring, it just worked perfectly. So I mean that was a big win. Like he was excited and he normally, was a 13 year old boy, and they smell like cavemen. So he was actually happy about it, so I had that going. The other thing that I was able to accomplish, which I have 11 years in this house have not been able to ever get it my constantly I’m trying to figure it out, but I got it. It was the lights, I sat down I said the lights can’t beat me anymore. They go on at a certain time they go off, the kids must hit them or the automatic … I don’t know what happens. But just when I think I had it, my wife will say, “How come the lights are off outside.” “What you talking about?” And sure enough they are anyway, so a big win, I sat down for a couple hours, I took notes on how to get these lights.

And by golly I got them, for two nights now they’ve been going on at the right time and going off at the right time. And I know what you’re thinking like, is this guy kidding me? I mean, you do this in your sleep? You got, I’m sure whoever’s listening gets it done. It doesn’t work for me that way. Most things around the house doesn’t work that way for me. But I got this, so I was walking around feeling pretty good. Like I was the handy man who got it, so I got it. So that’s the second of the trifecta. And then the third thing was car shopping. My wife needed a new car and went around, and she’s a strong, independent woman and nothing for her to go into a car dealership. I say, “I’ll go.” “We’ll go together.” “I got it, I’ll catch it.” She’s out, she said, “I’ll be out, but I’ll pop in.”

And she came home one day this week she said, “If I have one more car salesman call me sweetie or honey. Or talk to me like I’m an idiot.” Now she is a CPA. She has two masters degrees. She has an important job. And she gets talk to you like she’s an idiot. So anyway, I went with her, we looked around a few different places. And we were able to … You’re near the model, your changeovers, which really plays well, and there was heartfelt press. It just happened to be the timing of it. And she has a Buick Enclave, which is perfect. Because they’re not your dad’s Buicks anymore. They have the third row seat, and its easy access, there’s two bucket seats in the back row, and you can get right to the third seat, and she loves that.

And we’re always hauling kids around, whether it’s for sports or for just taking our kids somewhere. So did that, and we’ve now I think, from this one dealer have had four or five cars from them, and called up and said, “Here’s what I want to pay, can’t do that. Here’s what we’re going to pay can’t do that. Just wait a little bit.” Next thing you know got our price, like a ridiculous price. So that was the trifecta. Lacrosse gloves, lights, cars, see what if I could duplicate that this coming weekend. So we’re going to bring on a lot going on uranium. And we are going to bring on a buddy of mine who also runs a uranium fund. And we’re going to talk about the disconnect between reality and perception.

So on the call Adam and I mentioned cam ago, which we probably will. Just want to let you know Tim Cook does own it. Please do not take that as anything, doesn’t mean you should own, it doesn’t mean you shouldn’t own it, it’s our own view. But it could be a tiny position, it could be a big position now that we don’t disclose that. But we will talk about it, I just want to let you know that just to disclose that is in the portfolio. But don’t use that as any reason or basis for you to consider owning it. So without further ado, Adam Rodman from SEGRO capital. Adam, how are you, buddy? Welcome.

Adam: Hey, Mike, thanks for having me. I’m surprised that you and everyone else aren’t sick of this SEGRO fair.

Mike: Heck, no man, no chance.

Adam: The good time to get that done.

Mike: How’s that Dallas summer going.

Adam: It is brutal. I don’t remember feeling fatigue by the summers. And I thought everybody who kind of felt the need to escape, was just a little thin skin. But I got to tell you, it’s weighing on me a little bit. It’s too hot to be outside. I have a little one also, which makes it all the more difficult.

Mike: Yeah, and your people don’t know this, but you have some Swedish heritage so there’s your family spent some time back there in the summer, but you wish that you were spending time back there right now during the dog days of summer.

Adam: I would do anything. I would do anything to get a little … Just even a cool breeze. Give me five minutes in the cool breeze.

Mike: So let’s talk uranium man.

Adam: Yeah, let’s talk uranium. I mean, I think it’s an interesting time certainly feels like there are a lot of questions to be answered, at least if your phone has been anything like our phone. Market seems to be as confused with Abba, which is a little bit surprising us. And maybe we can kind of start there. I don’t want to dictate things. Is there any way you wanted to-

Mike: Yeah, I mean, no we’re going to start there. Because this I’ll just set up a conversation for the listeners. Since really the last 18 months, there’s been this overhang in the uranium market, regarding a section 232 petition that was filed by your energy and energy fields to us, uranium miners that were petitioning the Department of Commerce, on the grounds of national security to put quotas on foreign uranium coming into the US. That’s the gist of it. And there what we started to see in the … That was in January 18, they filed a petition, and the Department of Commerce had some time to decide whether or not they were going to investigate it.

And that they decided in July of 18 that they would and then they had nine months to do an investigation and then make a recommendation to President Trump. And then he had 90 days to make a ruling. Now before we get to January of 18, what we started to see and Adam started to see in the marketplace was that there were some large size request for proposals coming from nuclear power utilities into the market, to the uranium miners, for uranium purchases, kind of like contracting. And that had been put on hold for a long time, you’ve always had contracting each year. But it’s been less and less the bulk of the contracting in this industry takes place at the peaks.

And when you’re down in your troughs, you typically don’t see it. But it has been many years since you started to see a major contracting cycle. But we started to see some really big RFPs coming to the market. And then once 232, was filed. The US utilities really pulled out of purchasing commitments because the miners were asking the Department of Commerce to require them to buy 25% of their uranium from them when they buy 1%. So there was uncertainty and markets hate uncertainty. So we saw it just stop essentially, we saw a drop of buying around the world but not significant. And so it created an overhang until people understood from whom they might be required to buy their uranium.

But during that 18 months, what we saw was all of the supply cuts that have taken place, start to take hold, we saw under feeding in the secondary market, which was a big source of supply. At the enrichment test phase of the fuel cycle, we’ve seen that start to slow down. And so we’ve seen tremendous healing taking place in the marketplace. But we had this uncertainty this overhang. Now there’s kind of two roads, there’s two roads that this market equities trade off, one was the 232 overhang. And then the other one is the what’s going on in the marketplace, what’s the perception of what’s going on in the marketplace. Now, these are deeply cyclical companies.

It’s an industry that’s been left for dead, most institutional investors do not follow it simply because the entire market cap of the industry is $10 billion. Two of those companies because out of prom, the majority state owned entity of Kazakhstan and Chemical makeup 80% of those market caps, those 50 companies but two of them make up 80% of it. So most institutional investors aren’t going to invest in the market cap of an industry that’s 10 billion, because they’d have to buy too big of a position in any company. So for years, especially when the markets been left for dead for years, institutional investors a, it’s too small for them and b, they’re not in the business of catching falling knives is a saying that we use.

And then on the sell side, those who opine on the research, the sell side analysts, they have mainly left the building, because there was no business to be done. And nobody, none of their clients were really interested in it. There have been a handful of firms around the world, mainly US and Canada, couple in Australia that cover it with their small firms. And if a bulge bracket firm had been covering it, it’s probably because they had Chemical was a client, and they needed to just keep somewhat current with some coverage. Because if Chemical needed to do a deal, they need to issue debt, whatever they might do, you just stick around. But most of the work has been following other sources of forecasting industry trade groups, a couple of consulting firms, not a lot of eyeballs on the space.

Now, what the market was hoping after 232 is okay, 232 is now behind this, we’re going to see contracting immediately. And that’s some of the commentary we see. And I think I’m going to turn it off from here, Adam will start from there. And Adam and I are going to start a discussion as to what’s really going on in the fundamentals of the industry, versus what the headlines might dictate and what expectations are. And so Adam, 232 comes and goes, we’ve had a month of July where the Department of Commerce recommended the President Trump to put quotas on, President Trump decided that it wasn’t an imminent threat to the US. And there, he decided there would be no quotas, but he puts a 90 day working group to kind of work it out.

The US stocks, which people were for the most part convinced we’re going to get a win in this the US miners, those stocks are down anywhere from 30 to 45% on the month, across the board, pretty much. Now, a few Australian stocks who the market things are not subjected quotas have had decent months. And we’ve seen the Canadian stocks, which by all accounts would be beneficiaries of the no quota system, and the highest quality of them getting pounded on the month. And that is less to 32. But more the market thinking the markets not healed yet. So let’s talk about your view on 232. That comes down at the July 14 or 15th. The ruling comes let’s talk about the back half of the month. And what your view about it, all of this and how it’s playing out.

Adam: Yeah, that’s a great starting point. To pull out one little nugget that I agree wholeheartedly with if that this is a bombed out and inefficient market, you’ve said least, so you couple that kind of with false expectations and maybe slight misunderstandings about exactly how this market works. And I think it leads you I should say the kind of periods of time like we’re experiencing now, which is, at least in our opinion, lots of short term, rationality. Sort of drawn to that a little bit more we think unequivocally the 232 resolution, lack of a decision to aid the US production profile via quotas, tariffs or some other mixture is unequivocally positive.

So the uranium thesis as a whole and without going into all the detail. The reason in the most basic kind of commodity economics one on one terms is that the 10 or 12 million US pounds, that would have come to market, subsidized through some sort of action, you are now no longer going to be in front of international pounds, whether those be Canadian, Australian Kazakh or other ones. So that is just kind of bottom line positive right 10 or 12 million pounds will stay on economic in the market. And generally speaking, those were higher incentives costs pounds.

So think of any other commodity, if you are going to subsidize and burden on high cost pounds and Sonos, lower cost international pounds, that would be a net negative for those international pounds. The fact that there was no quota or tariff announcement at the end of the 232 decision timeline should be positive for international stocks. And that’s what we saw the first couple of days. Most Canadian producers that offers and exploration companies, Australian and Kazan and Prom all rallied while the US petitioners were hit hard, I won’t comment on what they were hit to hard or not. But the market obviously saw the fact that they were not going to get help as negative.

And again, the International names rally because the natural course of economic some uranium market should have taken place for their deposits. And as you pointed out earlier, the contract cycle should start resuming now what’s happened in the last couple of weeks. And I’ll preface by saying, it’s a bit of a head scratcher even for us. But luckily, we have a very long term view on this investment, but it has been even a head scratcher for us. Because I guess what the market is sad is specifically for Canada, and Canadian producers, explorers and then development companies that their valuations deserve to be at, in most cases, multi-year, multiyear lovers.

And all that’s happened rather violently in the last week of trade intersect. And sorry I’m blabbering on here. But I think it’s important for the listeners, one, this market is not very efficient. And oftentimes, with a limited amount of capital that’s looking at a space, you’re consistently waiting, some cases praying for the next catalyst to work. And maybe 232 was one of those catalysts. And it did not bring money into the space generally, because again, there was no aid given to the US mining sector. But then further, and I think maybe equally important, you get a lot of people who thought that the passing of the 232, stalemate, let’s call it was going to usher in like a contracting Renaissance-

Mike: Tomorrow, the next day.

Adam: Tomorrow, the next day. And it’s taken me a long time to get to this point. So I apologize to all the listeners who’ve had to listen to all this. But that’s just not the way that the uranium market works. I think if you’d spoken to you, Mike, or if you’d ever spoken to us, we would have been very emphatic about the point that all this does is clear the runway for the next couple of years. And we are very optimistic, I think about the back half because of the year-

Mike: Back half of 2019.

Adam: Of 2019 Sorry, yes, because of the contracting needs that we see out there. And that’s both published in terms of the publicly available data, but also the proprietary due diligence and channel checking that we do suggest that you totally should be coming to market, but it’s also July, and July and August are not Business Month in this sector. And so-

Mike: Especially when there’s the WNA, the World Nuclear Association, has their annual conference in September, which is historically, where all of the buyers and the sellers and people throughout the nuclear fuel cycle, get together and have a lot of conversations now they signed contracts throughout the year, but this is the big event. And so anyway, sorry. So go ahead.

Adam: No, sorry, I completely agree, usually the Fall is more important, but the idea that like 232 capacity, and all of a sudden, like the idea that you’re refining a uranium contract and not just UCLA, we have to remember, obviously, that all parts of the fuel cycle come into this. And it’s a relatively complex process. And I won’t go into the details. But as Mike you talk about it in great professional detail on other podcasts and other things that you’ve put out. But the point is that I think some people, some market participants believe that 232 would pass and that name, your swath of large global utility is what kind of going to be in the market the next day to settle their long term fuel needs. And that’s just not how it works. So-

Mike: Yeah, I mean, the way it works is this is a Malcolm Rawlings, and on Twitter he has a great saying, it’s not like they go down to Walmart the next day and say, “Okay, let me buy by 308.” And that’s the truth. I mean, these are several months negotiated contracts. And it takes a while there’s three real different types of contracts that the different types that they would talk about, and negotiate, and they go back and forth, and their multiyear deals, and they take a while. And once this decision comes down, there you go to take a breath and say, “Okay, let’s think about now we know, now we can plan our course of action, now we need to step back. And now we need to start to think about it.”

And as you said, what our due diligence suggest, as does yours as Chemical confirmed on a conference call that there are several off market conversations taking place and what they mean by off market, what we mean by off market is the process by which contracting takes place is either through a request for proposal, so a nuclear power company will send out to the miners and the intermediaries, they will send out this is what we need, this is the pounds we need, this is what we’re looking for, and as a host of things in there. Or they proactively have conversations without a request for proposal. And it could be because they want to go into an insecure supply, they want to get a seat at the table, they being the nuclear power plants.

And if you just think about that process by having an off market conversation, that a lot of those haven’t occurred over the years. So you’re seeing the whole thesis at least ours and I think yours is very similar is that supply cuts have eaten into the supply into the surplus market. We believe there’s a meaningful deficit that is in the marketplace right now. I won’t speak for you, I’ll let you guys address that I believe you would agree with us. And the secondary supply has reduced a great deal. And 18 months, since 232 has passed and inventories are being worked out. And we’ll talk about that.

And now you start to see the dawn of a new contracting cycle as over the next several years and beginning not by end of 2020, you have uncovered demand, meaning the utilities have needs that are not yet covered by contract. And that starts to accelerate rapidly over the next several years. And it’s interesting, because so 232 comes, and many people thought that the US winning was a no brainer. And like I said those stocks got annihilated. On that ruling, now our view Adam and I’ve been very public on this has been to 32 is noise, we think there’s a significant deficit, the market today, the equity investors think we’re crazy, but I don’t care about them.

Because the vast majority of them aren’t doing the work that we’re doing. Or you’re doing or a few other people are doing because nobody cares, because the sector is so dead. And for many of them, they don’t have the time, if they’re not professional investors to do it. If that’s not their thing. But that will start to and when you start to get price discovery, you’ll start to see the prices rise to where they need to incent production, because all of the production that’s out there right now. Can’t go anywhere needing the demands, and that there will be required not only existing projects on Karen maintenance to come back online, but you need new projects to come into the hopper. That’s only gotten better over the last 18 months.

And so you’ve seen these other names, the Canadian names you’ve seen get hammered. And I think people look to there was kind of what I’m going to call as a seminal event in the uranium space that occurred last week with the Chemical conference call. Because the Chemical conference, Chemical being the 800 pound gorilla in the West, I had a conference call and the stock was down seven or eight percent. And as I’m listening to it, and I won’t speak for you, I’ll let you talk about it. As I’m listening to it. I’m thinking, my goodness, this squares with everything we are hearing in the fuel cycle. And our thesis is 100% spot on that they are doing everything. And with the effects that the things they’ve been doing are happening in the marketplace.

It’s squared the circle for us. So, we come out of that call with monster conviction, now so let’s kind of digest what the market is thinking right now. And some commentary that comes out of a Chemical call. And I think people need to realize that Chemical is not just talking to investors, they have different constituents that they’re talking to on that call. Everyone’s listening. They’re talking to investors, they’re talking to other suppliers. They’re talking to customers, they’re talking to utilities.

They’re all listening, other suppliers, their messaging, because that’s who they’re messaging, if you want to cut right to the chase, they have to be. Who else would they be messaging. So they’re messaging three different constituents. And that’s a fine balancing act. So on one hand, you want to make it sound as dire as you can. Because you want people to know we’re not bringing production back online. And it’s going to be quite a while, the market digest that is negative. Let’s go, Adam, what was your takeaway from the call? Am I delusional?

Adam: No, not delusional. Look, this is a maybe an unfair thing to say when people who are invested in the space have lost money. But you just can’t get swayed by the noise. I think it depends a little bit about what your thesis is and what your expectation of how it unfolds, goes. But I wanted to go back to what you kind of said from the beginning, which is that the thesis revolves around the fact that you have current and projected deficits in the market. The opportunity in the space emerges from the fact that inelastic demand and buying behavior need there to be period of time when deficit exists, but prices don’t respond.

I think that’s fair to say. So in a simple sense, this market has a very difficult or lagged price discovery schedule. And I think you get not addressing Chemical rhetoric specifically, but more what we know from the call. I would agree with you that things are better today than they did three months, six months, and certainly a year ago. My biggest and most important takeaway and anybody who reads the transcript, I did ask the question has to do with the restart, MacArthur and or ramp that you will get from the Kazakhs going out a couple of years from now, because you highlighted the fact that there’s a relatively tightly controlled set of information that influences this market, influences both utility buying behavior, price forecasting, and the way that the sell side models supply and demand.

And those sources can also be pretty slow to react information. So when we find out that MacArthur the decision to restart MacArthur doesn’t seem to be entered into Chemical management’s thinking, which given the lead time to restart etc. Now proceed without a few years past where consensus has it and give the Kazakhs while they’ve gotten the finger seemingly pointed at them on the Chemical call, they’ve been sticking to their sub soil cut, more or less. And their marketing arm has been publicly emphatic about the fact that Miss price environment, they will not read, accelerate production, even though their cuts on the last few the end of next year. And what we find is just that then in this pressure cooker situation the same as we were a year ago, the same as we were two years ago.

And I want to caution everybody that in a market where there is again, inefficient price discovery, you can get moves like we’ve seen the last couple of weeks and it may or may not happen again, you have the way that we need to look at business from the top down perspective. Has anything happened over the last 12 months, that makes the supply demand picture worse. And I would say that that is with no doubt the situation has gotten better. We have much more clarity on Chinese demand.

And they announced new construction starts just this past week. You have had positive momentum at the state level and US in terms of support for the nuclear industry, discussions around life, time extensions on the planet, and reinvestment in new nuclear technology, all of which, again, should help negate some of the draconian consensus numbers around the US nuclear industry. And you have, obviously throughout the emerging markets in specifically your continued momentum on the supply side of things-

Mike: Not to mention the French who said, By the way, this year, we can’t do that 2025 reduction we need to do. It’s going to be pushed out a decade.

Adam: Oh, of course, how did I forget? Obviously a big thorn in the side of the demands case. And as with most economies, when they come to that critical point of deciding, the nuclear wind down decisions get pushed out because existing nuclear power is definitely the truth, this clean energy that is out there. And again, it’s easy to politically campaign on shut down. It’s much more difficult to actually implement them when there is a tangible economic consequence, which is what you’ve seen in France and South Korea, and among other places. But I digress, the point is, on the demand side, it’s been positive on the supply side. Again, we know that every day without incentives pricing, tier one production remain vital.

It takes longer for to restart. And I guess, somewhat to Chemical point, the capex required for Brownfield and Greenfield development gets pushed out, meaning that the deficit forecasting going forward remains equally. And these are the key points. I don’t want to sound like a broken record. We come on these podcasts only to try, and go elusive delay or translate the way that we think about these markets. But if you’re asking me, point blank, is there anything that has concerned me over the last three or six months in terms of the macro thesis? The answer is no. And then we go to the micro thesis, you mentioned the Chemical call again, and maybe why Canada might be selling off again, because remember, the Australian market.

And because Adam problem, which would be the only other two kind of liquid destinations, for capital in the space, they’ve traded up, and they’ve remained supported, you’ll post 232 decision. So from a micro perspective, what’s going on? Well, I believe that clearly there was cross ownership between Canadian uranium related stocks and US stocks. And so when investors took pain on the US decision and or decided to abandon the broader thesis flows affected both markets. The other perhaps more fundamental question would be that Chemical lost their … Didn’t lose, I’m sorry, they won their arbitration on their capital uranium contract, but the settlement amount was, quote unquote disappointing.

Some in the market might have believed that the call of $700 million that they were asking for was immediately going to be turned around for M&A in the development or exploration space in uranium. And so as a result of that 40 odd million dollar award, instead of a $700 million award, M&A from Chemical was dead. And, I mean, unfortunately, just have to laugh that off. Because with exploration and development assets, trading between, 50 cents and $2 per down in the ground. Leading into that the TEPCO news, I would argue that there was a massive discount to any M&A Premium that ever existed in the uranium market. So the idea that they were somehow propped up on M&A expectations, I don’t think is really supported, but also means that if the market is selling them down further, I would think it’s a buying opportunity.

And then you have Chemical, which is obviously, which is the bellwether in the space, and people are concerned about TEPCO, and maybe what was interpreted as a tepid outlook on the spot market near term. And all I’d say, without going into our fundamental numbers is that we believe that Chemical stock is reflecting somewhere around 30, or sub $30, long term contracting, right now in the valuation based on historical mid cycle multiples, on their earnings if they were contracting things out. And I believe that that is irrational, purely because of those off market discussions that you mentioned.

And the price guidance that they had given the market of where those discussions would have to take place, I.e. in $40 plus range, meaning that the stock is I think irrationally discounting what they’ll be able to achieve. And we know now also, because of this, delay that 232 is caused, the lack of again, green and brownfields exploration and the widening gap that results going forward, that there’s a really good chance that as part of effectively a duopoly that they’re going to have a lot more pricing power as time goes on.

So the idea that they will actually contract out below their long term book started to current … Sorry, that they would contract out below the farcical published long term price as it is currently. Anyway, we will take the other side of that as investors.

Mike: Well, you do and as do not would you do and we do I mean, if you think about it, the spot price is a little under 26. And long term contract prices is 32. Now people you have to understand this is not a market that moves real time. In terms of the contract market. When Chemical says that on a conference call that they last quarter, they added 25 million pounds to their book at prices that are acceptable to them. Those prices have four handles on them, because they’re not signing them below that. Look at the numbers that they need.

And that’s in now beforehand. So right now a term contract, if you are looking at a term contract price, that’s published, it shows $32 off market discussions are not out for proposal and when they’re adding to a contract book, it’s got a four handle to it. So all right, right there, you’re seeing that you’re above the market. Now when you start to do the math. And if you were to go and look around the world, and say how much is state owned, how much is market based, and what our perspective projects that could come on to meet demand, the amount under $50, before the major print, before you have prospective demand, come on, under $50 can’t meet and isn’t anywhere close to what global demand is.

And then when you include in secondary supplies, it’s still meaningfully less. So I think what happens is I was saying earlier to the messaging and as you know from speaking to people in the fuel cycle, as we do, there are messages that take place when we listen to the call, our interpretation is when the company is saying the company being Chemical, other suppliers lack conviction or discipline and they are using the spot market for surplus disposal. Well, because what happens is the market that people automatically assume the spot market is flooded. That’s not what they’re saying. I mean, how do you interpret that, Adam?

Adam: Yeah, I think that messaging was really tricky. And I’ll give it my best stab. This market is easily manipulated, it’s not very liquid, the price transparency is limited. So, again, I think it can be easily manipulated, and Chemical is in a difficult … You’re not the easiest situation, in terms of how they telegraph and then best act on the amount of spot volume that they have to purchase. And I think when they were very transparent with the market starting last year, they feel potentially like traders mainly, intermediaries, short term investment funds, and maybe hedge funds or commodity trading funds, essentially used their liquidity on the way up, shorted it kind of when they felt like what had been telegraph terms of persons was done, and then made easy kind of mark to market money in an illiquid market, pushing it back down. That would be-

Mike: Not to interrupt you Adam, but what Adam means by Chemical telegraphing it, Chemical when they cut production, they said to the market, we have to buy X number of pounds in the market. And so traders will go out and anticipate what their needs are. And then those traders buy this uranium. And they go to Chemical. And they’ll say, “Hey, all right, we got it.” Again, this is very thin market. It’s a very illiquid market. And it’s a very opaque market. And they’ll accumulate the physical, they’ll accumulate the uranium and then they’ll say, “We got it. And if you don’t buy it from us, we’re going to have to sell it.

And we’re going to just sell it down.” Because why? Because they have quarter ends, and they’re trading for scrapes. That’s what they’re trading for. They’re trading flow, they’re trying to just capture short term flow, completely ignoring the supply demand picture, the bigger picture, they’re not seeing the forest through the trees, they’re trying to get ahead and to force the buy and Chemical saying it’s not going to work. We’re not here for you to make a scrape on us, anyway go ahead, Adam.

Adam: Yeah, or even though worst case, some more clever, more nimble institutions might buy ahead of Chemical sell into them, sell back to them at higher prices, again, knowing that they’ll have to be in the market. And then when they start affecting their physical sales, maybe they short stocks in the space, including Chemical, so they can win. I want to be careful with my words, I manipulate or game whatever you want to say maybe you’re doing it smartly, but that’s a way to make money. And I believe that is specifically with Chemical was trying to address on the call, which is that there are short term players that may be distorting the price. I think that’s the way that I would say it.

And look, this is the space, as you pointed out at the introduction of the call, that is down 95%. In terms of market cap, it’s an underweight your mining is an underweight, uranium made by Chemical relative to benchmarks as an underweight in every single market. So you need an incremental dollar right to enter the space, there needs to be a reason for dollars to enter the space for this space to trade up. And I think for that dynamic was in existence for many, many years, is exactly why the interpretation of the Chemical call was negative because you had somewhat muddled accusations around what’s going on in the spot market, which were taken as meaning oversupply and a lack of upward trajectory.

And on the other hand, you completely ignored continued constructive discussion about off market contracting, which is actually the driver of Chemical business, where they sell pounds for the long term. And the last point I would make about the call, and perhaps about the market reaction and Chemical specifically, is that, again, in a market that needs catalysts and new capital, there might be the perception that the company is out of bullets, that they went in, they tried to talk a strong game with the spot market, that they were going to be buying pounds in a relatively thin market. And because more than a year later, we’re essentially flat in terms of the spot price, that again, they’re out of bullets, that they don’t have a way to rationalize this market.

And obviously, time will tell, but it is my strong belief that you should not underestimate all the different levers that still remain in this market, both natural levers, one that happened on their own, and proactive measures that can be taken again by what is effectively a duopoly, both parts of which believe prices are far, far, far too low, as we look at three and five years into the future. And so Chemical still does have a stock market purchase program. The cataracts are a little more pain in terms of the way that they think about their production that they have never, at least that I’m aware of proactively taken a mind down. You hear a lot about the portfolio level costs.

But they’re different assets, have very different cost structures. The market certainly isn’t anticipating what would happen if they spoke completely took mine offline. And I’m not predicting this, but I’m saying it’s possible. Nobody wants to sell pounds at a loss or sell pounds that incentive. So again, Chemical spot still has a lot of spot to buy, and an accelerating amount as the years pass. They’re still not restarting MacArthur. Cigars still peeks out in terms of its production and starts with declines in the middle of the 2020s. The Kazakhs have levers. And all the meantime, there’s no real new development happening in the short term, and if you cut the lad, I’m sorry to beat a dead horse here. But if you cut all of that with the fact that price discovery is not liquid.

Meaning that it can come at random times. It’s not like the oil market where if you go into deficit today, it naturally balances itself out with immediate demand reaction in terms of buying, or an immediate supplier response in terms of cutting on economic oil, both sides of the uranium equation are inelastic in that sense, which means it always takes longer, and it’s always frustrating. And for anybody that’s listening to this podcast, or listen to any of the other ones, if it hadn’t been made clear by Mike or myself, sorry, Mike, I’m kind of speaking for you.

This is without a doubt, a trading, and investment that takes an extreme amount of patience. The reason why so many investors talk about the macro more often than the micro that currently at the bottom of a commodity cycle, at the bottom of the cashback cycle is highly, highly dependent upon the macro dynamics. And as hopefully laid out, the uranium macro dynamics is one that is inherently slow. And nonlinear in its development, even if you are in a deficit today.

Mike: No, I’m with you. So, Adam they talk about the good … I think that was a good explanation. But let’s address some of the questions that you get. Because like you I have peers who want to get up to speed on the industry, because they sense something is there, and we have conversations, and they’ll go in and obviously because they want to be educated before they come into a call with you or me, they will have done a little bit to work and to get up to speed. And the thing we hear a lot about is, so you say I guess with the setup to that is, is you talk about the surplus in the spot market the SERP and then, so you go to the question of well, what are inventories? Because that’s what people tend to gravitate towards.

What inventories are high, because they read a headline number that might say 1.8 billion pounds of inventory and round up the market uses 200, and right away the people say, “Well, my God, that’s nine years of inventory on current demand.” And utilities keep two to three years of inventory around historically. And so, people go to that and they latch on to that, not a bias. But to that first level of thinking. Now as we break it out, what we do is we look around the world. And we look at how much is sitting in the minors in the front end of cycle, how much you sitting at the enrichment plants, how much you sitting with financial entities, how much is sitting in government utilities, that will never come back into the market that staying there for strategic purposes.

And so we’re trying to wrap our head around the total commercial inventories that are available. And when you do that, you look at the US utilities, the European utilities, the Japanese utilities, South Korean, Canadian, Taiwanese. Look at the Indians, the Pakistanis, the Brazilians, the Mexicans, the South African, and you start to look around. And when we do that work, we come up with 415 million pounds. And what we do is we back out China from that number, and I’ll explain that in a minute. China’s its own separate beast in the marketplace. And when we look at the consumption x China, we’re looking at it, we come in, and we say, “You know what, there’s about two and a half years’ worth of supply, in the commercial inventory at utilities.”

That’s right in the sweet spot of where they are always in a marketplace where they haven’t had significant contracting in a very, very long time. And their needs are becoming more and more uncovered by those contracts. And so when you back out all of those other parts of the fuel cycle that will not hit the market, they’re not mobile. We hear a lot about Japan. That’s something I’m sure you deal with it, we deal with, what about the Japanese? Well, our math is we think the Japanese have a little over 100 million pound 105-110. When we look at that, but a lot of that is fabricated.

And when it’s in the fabrication when it’s already fabricated. It can’t be used elsewhere. So but what you tend to find in this market, and I guess all commodity markets, it’s very easy to attached to what was and not look forward to what is and when markets are as opaque as uranium is. And as difficult to find information on. You tend to see this. So how do you think about translating because the market translates inventories around the world to OXS. Applying the spot market? Oh my gosh, well, that’s not good. How do you guys think about that?

Adam: Oh, boy, well, where to start. I think before even getting into any numbers, I think inventory and the discussion around inventory and the uranium market is a bear market comment. That’s something that people focus on today in the same way they did it before the last cycle. And it’s a kind of cure all explanation for why prices don’t rise in this market when I believe that 99% of price moves depend on the contracting cycle, and what forward looking supply looks like relative to the contracting cycle.

But inventories are an easy Boogeyman. It’s not to say that they don’t matter. But it’s hard for me to get too concerned about inventory levels into a record deficit gap. Because as we’ve seen in just about every other prior bull cycle, inventory restocking happens in a rising price environment. And destocking usually happens in a weak price environment as counterintuitive as that might seem.

That’s generally the way that it works. Because like everything in this market, when fuel is a relatively small percentage of your cost structure. Your security of supply is more important than the price of supply. People can make kind of wonky, odd decisions, and I think inventory management falls into that category. But more specifically about the numbers. I think that generally we disagree I haven’t looked … I don’t know how you reckon this stuff line by line. But we certainly think China’s different and they’ve explicitly rather explicitly indicated that they are trying to build a stockpile.

Mike: Yeah, you disagree with our numbers, or you disagree with the-

Adam: Oh, I’m sorry I don’t know your numbers. But-

Mike: I was saying the ones that I threw out there.

Adam: Oh, yes. I’m sorry. Yes, I think I generally agree with your numbers in the way that you’ve laid it out. We definitely look at China differently. We look at them as a function of their forward pipeline demand, not their current demand. And that’s because of how strong the long term pipeline is. Their mobile inventories, as you mentioned is really key. And if we’re maybe three or six months elevated versus a baseline level, I kind of shrug, okay. Great and by the way, everybody should know the baseline levels that people usually reference in this case, are in a functioning supply demand market coming into a contracting cycle.

So you can believe us or not in terms of the severity of the deficit and the permanence of those deaths that you can disagree there. But if you do agree, or your own work suggests that the market is going to be in deficit going out over the next decade, then the idea of treating inventories as you would in a balanced market doesn’t make a whole lot of sense. But nonetheless, I get back to my point, which is that inventory discussions are a function of bear markets, especially in the uranium space.

Again, three or six months, I Shrug, we’ve been whittling down inventories for the last year plus, I don’t think from all of the discussions that we have with fewer buyers, that the inventories play into the contracting equation. They were a nice buffer, while the 232 decision kind of hogtied their decision making process and their contracting process. But if somebody were to say to me that three or six months of excess inventory on average in the US and Europe and in some of the developed Asian economies was going to shift the long term contracting behavior of utilities, I would just take the other side and say that, that’s ridiculous.

Mike: So what are the other things that you see when you think about the market, we talked about spot market, we talked about term pricing and again the function of how it’s reported. If deals are getting done off market with four handles, yet the average field buyer is seeing or not field buyer, but the market participant is seeing 32 as the reference price. And that tells you, you’re starting to see healthy marketplace occurring underneath the surface. And your inventories and check. The secondary supply market is one that’s been a big surplus source over the last several years in the form of under feeding and other what’s your view, what are you seeing right now in the secondary market?

Adam: Right, before I just comment on the secondary market, you reminded me of one thing, I thought the most important comment in Chemical release was the following. Or I’m kind of paraphrasing what they were getting at. But I think most investors in this space are looking for the spot price to rise. Which will drive equity prices higher, which will then converge the contract, price, spot price, gap and kind of kickstart things.

And the separate team sometimes we think that that’s a possibility, we understand that, but Chemical made you kind of in the weeds of everything that they said they made an explicit decision to talk about the fact that they believe it’s going to be the other way around, which is that their long term contracting activity and the off market discussions that they’re having is actually going to pull spot prices higher. And kind of almost working, I think in reverse from the way that most people expect us to play out, which is, again, spot has to rally. And I only mentioned that because it would be a big … You said that you mentioned or asked how off market transactions or discussions or actually a positive and how those end up meeting.

And in the slowest worst sense of the world we’ll see it in Chemical financials. If Chemical starts, if the market doesn’t want to pay attention or believe that that is the relevant price for the space. In Chemical case, you will see their average contracted price rise, they will be able to telegraph the context of where their discussions are now being struck once they’re finalized. And their operations will improve from that higher price. Development asset, I think will also respond on confirmation of those off market contracts.

Because currently, most people are skeptical that any project will come online or be financed if we can’t guarantee a long term incentive price. And I think that that’s like the flip of a switch, you see that there are projects globally that can be built and be viable based on a long term price. And you agree right there. I just wanted to start, I wanted to highlight those points, because you talked about how Chemical could be positively impacted. And then consequently the space be positively impacted by contracting prices. And I just wanted to point out that we’re also hyper focused on the day that sparks can rise first, and may not be there yet. Now to the second question about your secondary supply.

I think this is another Boogieman, I don’t mean to just last off every real criticism and critique in the market. But I just don’t think secondary supplies are massively impacting spot of did last year, or maybe even longer. I think there is a lot of short term trading. There are most certainly many shorts in the market, where there’s a promise to deliver at a higher price in the meantime. It’s being sold and traders benefit on their mark to market. There is some by-product that’s being sold.

But the idea that the market is deluge by secondaries, I don’t think it’s factually accurate. When you delve in, when you parse the numbers and the data from the reporting sources, that’s not consent. And I may or may not be answering your question, Mike, but one thing that I’ve been fascinated with, for all the people that are bearish price action out there, I would be fascinated to get a view on a volume weighted average price on uranium here today.

Mike: It’s interesting. Yeah.

Adam: Because I think it’s my intuition from looking at transactions. And I think it dovetails with the tempo was saying that one of the problems with this market is that most traders have had a short bias for the last 10 years, there have been a few short term kind of market gamers or market manipulators. And the reason that Chemical I think has pointed out, and they were upset about it is that the spot price traded relatively heavy volumes last year up into the high 20. And then it’s quarter end falls precipitously on offers that are not trading. So, people coming into the market with little or no volume and showing the price and incrementally lower levels with which optically brings down the price. Did I explain that? Mike, you listen to me say it? I’m not sure if that came out as a weighted price would make sense? Because you’d actually see that if you need real volume, even the spot market is much higher than people think.

Mike: Well, look, what I would suggest as you do as we do, I would suggest people who were really curious, just really take the time to understand what goes on in the spot market. And how it is played with and how it is. People think this is an efficient market. And it simply isn’t. And it’s very easy in the near term to make price move around a little bit on games. And you think that’s a fair way of putting it Adam?

Adam: Yeah, I think it’s a fair way of putting it. I don’t mean to downplay the issue, everybody that’s invested or thinking about investing in the space and including ourselves we’re in it to make money. So, days, weeks, months, in this case, years of having an adverse mark to market your position. That does matter.

Mike: Absolutely.

Adam: I’m not downplaying. But I think again, you have to stick to the fundamentals, understand how little capital in the grand scheme of things, is driving equity prices, and take confidence in the fact that what matters over the coming cycle. And what I think becomes particularly relevant over the next year or two is where the contracting cycle indicates, or long term pricing is going to be in size. And I think the market reaction over the last few weeks, is I think is reflecting an irrational disappointment with the idea that we’re not getting transparent stock prices above $30 and transparent contract prices above $40. And I think it was a misunderstanding by those market participants that you get that reaction in real time.

But if you’re patient, I believe everything that has happened not only in the last couple of weeks, but really since MacArthur was put on temporary and permanent shut down. And the Kazakhs decided to cut their forward production. Everything that’s happened since those momentous decisions is constructing the longer term bull case. And for whatever it’s worth, I think the equity fundamental disparity today is wider than at any time of the last couple of years, which is the period that we’ve been most supportive of the macro case.

Mike: Yeah, no, we would agree, we are the most constructive on this market than we’ve been ever based on fundamentals, not noise. And that’s how we think about it. Anything I missed?

Adam: I think we’ve covered a lot, I think it’s going to be an interesting six or 12 months going forward. And when in doubt, you look at value evaluation, I think take comfort in the fact that you are an owner in a business, or an asset that has some tangible value and if things are trading at a discount to that tangible value. And the macro looks better than everyone should sleep well at night.

Mike: All right, man, as always, it’s great catching up.

Adam: Great to catch up with you. And I’ll get to see you in the short term, but I’ll certainly see you in London. It’s not before.

Mike: Absolutely. All right, talk later.

Adam: All right Mike.

Mike: Thanks. Well, I hope you enjoyed the conversation with Adam. I know it’s kind of a deep dive on a few things. We kind of jumped out there, right into things. So, I hope I didn’t wrongly assume that many of you are current on some of the things, and I didn’t give a lot of explanations on discussions, but I just thought we apologize for that. But always enjoy talking to Adam, is good friend of mine, smart guy. And I’m always impressed with the work that they do. So till next week. Hope you have a great week, and we’ll speak again. Thanks.

Announcer: The information presented on talking stocks over a beer is the opinion of its hosts and guests. You should not base your investment decisions solely on this broadcast. Remember, it’s your money and your responsibility.


Editor’s note: Mike doesn’t offer uranium recommendations in his signature investment advisory Moneyflow Trader. But his proprietary work in that market allows him to shine a light on under-the-radar opportunities in the energy sector, like his latest—still in buy range. Learn more.

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