Hey,
Posted this on the STT trading thread and thought it may be of use here.
Added it to this thread as there was some good discussing from people in this thread earlier.
Defensive Sectors
There seems to be a bit of a market wide sector rotation at the moment.
Investors are starting to move from more growth orientated stocks and into more defensive stocks like Consumer Staples, Utilities and Gold.
Gold is a well known safe haven at times of uncertainty in the world, this can be seen by some Gold stocks rising up to 15% last week when the rest of the market was correcting itself.
I believe there's another yellow metal out there that could end up having a stronger bull case than Gold..
You guessed it,
Uranium...
Uranium - a safer bet than Gold?
Uranium is currently on the cusp of one of its famous super-cycle bull runs.
This setup has not been seen since the famous 2003-2007 bull run where spot prices shot up from lows $9 to a highs of $134 a pound in a little over 3 years.
In that short period of time, you had companies like PDN rise from half a cent all the way to $10.
Even the worst Uranium companies went 22:1!
The 2018 Uranium bull run is shaping up just like the last one where we saw,
- New reactors under construction, creating an increase in demand
- Some of the biggest and highest grade Uranium mines being shut down, causing a supply shortfall.
The factors that created the last super-cycle bull run are eerily similar to what is happening now, except this time around there is actually a lot more demand that's required and a lot less supply that can come online!
The previous bull run (2003-2007)
At the start of the Uranium bull run there was,
- An increasing demand from
23 reactors being constructed.
- A supply shortage of approximately
1/3 of the current demand
(Although in 2007 there was approximately 20-30 mil pounds of excess supply expected to come online in the years next few years)
The Current bull run (2018)
Now at the start of the current Uranium bull run there is,
-
60 reactors under construction plus 150 more proposed and 300 in planning stages!
(this doesn't include Japan restarts that are expect to be another
20-25 reactors come online by 2020 when they host the Olympic Games)
- A supply shortage of
1/3 of demand or 60 million pounds.
(No future supply expected that could cover demand until Uranium prices are in the
$55-$65range)
A very important difference now to note is that because prices have been depressed for so long, there hasn't been much in the way of exploration or new projects being bought online to cover future supply.
Most new projects and existing mines on "care and maintenance" need a Uranium price closer to the
$55-$65 a pound mark before they would consider bringing supply back online!
There is also several private investment vehicles seeing the impending bull market unfolding and "front running" the market by buying $100's of millions of Uranium on the spot market recently.
Where does demand come from?
A very big thing to note is that unlike almost every other commodity that's mined on the planet, Uranium's demand isn't tied to general consumer spending.
Uranium is only produced for governments and major utility companies around the world to supply power to their countries and for military use.
Even in a stock market downturn Uranium purchases will still need to be made.
Uranium purchases cannot be made if there isn't price incentive to produce at profitable higher prices...
Currently nuclear energy provides around 11% of the worlds electricity and is expected to increase to 14% as China brings on more reactors over the next few years.
Currently the US is the biggest consumer of Nuclear energy with accounts for 20% of their total electricity use or
1 in 5 homes and businesses.
Is this this beginning of the bull run?
Uranium's price has been beaten down to a low in 2016 of US$18 a pound, to the current price of $27.50.
In 2018 alone Uraniums price has gone up 35% from lows.
This indicates that,
1. we are by definition
in a bull market (up 20%)
2. we may be witnessing the start of the another famous Uranium bull market.
Here is a 12 year seasonality chart of Uranium stock buying and selling.
Going by the current dip we have just experienced in October the Chart may hold some merit..
So let's recap the current Uranium setup,
- Massive supply deficit
- Massive increase in demand
- Uranium isn't tied to general consumer spending unlike majority of other commodities
- Only governments and major utility companies buy Uranium - even in market down turns
- Japan reactor restarts
- Private Investment vehicles soaking up excess supply on the spot market
What are the expected future price drivers for the Uranium sector?
1. Kazatomprom
- 25% IPO of their state owned enterprise this current quarter.
- Kazatomprom have announced that
they expect a Uranium price of $35 when listing their IPO (
current Uranium price is $27.5).
- Kazatomprom has been able to dominate the market over the years from having some of the lowest cost producing mines in the world and have also been a big contributor to over supplying the market.
- More and more Uranium analyst are finding information to suggest that the figures for the supposed "lowest cost mines in the world" aren't entirely accurate...
- Uranium analyst believe that the only reasons that they have been able to keep their AISC figures so low was from the devaluing of their currency, poor environmental standards and being a subsidised state owned entity.
- Analyst are now also suggesting that the production curtailments from Kazatomprom may not be voluntary at all and may indeed be forced curtailments from no reinvestment into existing mines and
depletion of their lowest cost mines from oversupplying the market!
2. US - Section 232
- Two US Uranium companies have filed a petition for the US government (Trump) to enact Section 232.
- Basically Section 232 is a request for the government to impose that American utility companies have to
buy a 25% quota (12 mil lbs) of Uranium from American mines.
- The section 232 has put a halt to the signing of long term (5-10 year) contracts until the decision is made in the first half of next year.
- If/when passed I imagine there will be a rush to sign up long term contracts and that the sudden surge of buying would cause a massive price spike in the price of Uranium.
- Being that
Trump is very Pro nuclear, Pro American made, anti China/Russia there is a very high probability of this passing.
- As it is physically impossible for US producers to make up the 25% quota in the next 3-5 years, there may be a
huge catalyst for the only ASX listed Australian Uranium companies.
More notes on how Section 232 could benefit Australian Uranium companies is on the
BOE forum.
https://hotcopper.com.au/posts/36114303/single
3. Cameco - buying on the spot market
- Cameco has shutdown 2 of its mines that are the lowest cost, highest grade and biggest in the world because even they can't make money at todays prices.
- Cameco have also announced that they will be
buying about 14 mil pounds from 2018-2019 in the spot market
that only holds an estimated 20 mil pounds of Uranium (this excludes private investment vehicles that have been buying spot as well..)
As the famous resource investor
Rick Rule put it,
"Either the price of Uranium goes up - or the lights go out"
(20min delay)
