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October 10, 2019 | A Critical Moment for Uranium?

Lobo Tiggre, aka Louis James, is the founder and CEO of Louis James LLC, and the principal analyst and editor of the Independent Speculator. He researched and recommended speculative opportunities in Casey Research publications from 2004 to 2018, writing under the name “Louis James.” While with Casey Research, he learned the ins and outs of resource speculation from the legendary speculator Doug Casey. Although frequently mistaken for one, Mr. Tiggre is not a professional geologist. However, his long tutelage under world-class geologists, writers, and investors resulted in an exceptional track record. The average of the yearly gains published for the flagship Casey publication, the International Speculator, was 18.5% per year during Tiggre’s time with the publication. A fully transparent, documented, and verifiable track record is a central feature of IndependentSpeculator.com services going forward. Another key feature is that Mr. Tiggre will put his own money into the speculations he writes about, so his readers will always know he has “skin in the game” with them

A slew of new reports on old news about Donald Trump’s Nuclear Fuel Working Group (NFWG) is hitting the wires today. That’s because the NFWG is supposed to report its recommendations by next Monday.

 

 

I haven’t seen anything of substance that’s new in these reports, but the reminder of the deadline is apparently enough to boost share prices in related uranium stocks today—despite uranium prices having ticked down to $24.88 per pound at last quote.

 

Base Case

As a reminder, the setting is this:

  • Uranium as nuclear fuel for essential base-load power in many countries around the world simply cannot be substituted in less than decades.
  • Only a handful of uranium mines in the world can make any money at current prices.
  • That’s nowhere near enough to meet annual consumption.
  • The global average cost of production remains around $40 per pound.
  • The “incentive price” to build new mines remains north of $60 per pound.
  • Huge stockpiles hit the market after the Fukushima accident, sending prices all the way down to $18 per pound in 2016.
  • The world’s biggest and most profitable producers, in Canada and Kazakhstan, have been shutting down uranium mines in response to the low prices.
  • Prices have started recovering since then. Japan is restarting 30 reactors, and utilities there have apparently stopped selling. China and other BRIC countries are building and have plans to build many more reactors than are being retired around the world.
  • Long-term contracts have allowed some miners to survive during this time of low prices, but many of those contracts have ended or are ending soon.
  • When power utilities come back to miners to secure new supply contracts, they will not find any miners willing to sell at anywhere near current price levels.
  • Barring another major nuclear accident, uranium prices moving quickly higher at some point is as close to a sure thing as exists in commodities speculation. I can’t say exactly when, but I don’t think it’s more than a year off—and I’d be very surprised if it were more than two.

 

Section 232

On top of the base-case scenario, there’s the Section 232 saga, which goes like this:

  • Facing dire consequences if uranium prices remained below the cost of production too much longer, several US producers petitioned the US Department of Commerce (DoC) for help, making a national security appeal under what’s called Section 232.
  • The DoC had until April 15 to submit a report to the president. I alerted readers to the possibility that this process could trigger higher uranium prices. But I warned that nothing was likely to happen on April 15 itself, as there was no obligation for the DoC to release its findings to the public, and Trump had 90 days to make a decision. Several related stocks rose before April 15, and then drifted lower when nothing happened at that time.
  • However, the DoC did find that with the US relying on nuclear power for about 20% of its electricity and importing some 93% of the uranium needed to keep the lights on, there was a legitimate national security interest in supporting US uranium producers. Trump had until July 15 to make a decision on the DoC’s findings.
  • Expectations ran high again, and related stocks rose as the deadline approached—some quite sharply. But with most of the imported uranium coming from close allies Canada and Australia, Trump decided not to impose tariffs or quotas. Instead, he established the NFWG to come up with more ideas. Share prices in high-flying uranium plays tanked. Some of the US producers dropped 30–40% the day before the White House issued its press release, the news having leaked.
  • The NFWG is supposed to report back by October 14. However, while the Section 232 petition had legal requirements for steps to be concluded by specific times, I don’t think the NFWG is legally bound to do so. As there have been changes in the Trump administration affecting the NFWG, it’s possible there could be delays.
  • Key point: US utilities have policies on how much nuclear fuel they must keep on hand, but they would be foolish to enter into any new purchase contracts if the US government is on the brink of changing the rules. I believe this uncertainty has kept many buyers off the market all year. This is why prices have stagnated, despite major producers around the world shutting down mines. One way or another, this situation cannot last.

 

Where We Are

This brings us to today, four days before the NFWG report is due. It’s interesting to see that while the most likely beneficiaries of anything Trump does to boost US uranium production aren’t soaring the way they did before, they are up as I type, with no company-specific news.

Now, I can’t promise that the NFWG will deliver a big boost to US uranium plays next week, but that is a possibility. They could even put quotas and tariffs back on the table. More likely, they’ll recommend executive actions that wouldn’t directly harm US power utilities while helping uranium miners. Ordering the US military to increase its uranium stockpiles and buy from domestic sources would be an example. Some GOP politicians have asked the EPA to reduce the regulatory burden on uranium exploration in the US—that’s something Trump could easily encourage. He could also offer new subsidies and tax breaks.

What I think is unlikely is that the NFWG will recommend taking no action. It’s extremely rare for any government body to be asked to “do something” and decide not to do nothing and let the market take care of things. I can’t see Trump bothering to set up the NFWG if he didn’t want to take some sort of action.

But remember: there is no law that compels Trump to take action within any specific amount of time after the NFWG reports.

So it’s a speculation on my part, to be sure, but I do think the odds favor the NFWG recommending action to boost US uranium production. That may or may not happen next week, but I think it will happen soon. And I think Trump will have been briefed and won’t take long to decide on what to do.

What if I’m wrong?

Well, remember the base case presented above…

Suppose the NFWG recommends no action. Laissez faire! Great. It still dispels the uncertainty about what the US may require of its utilities, which would bring their buyers back to the negotiation table with producers.

Even the worst-case outcome of the NFWG for US producers would still bring about the end of a major source of uncertainty holding the global uranium market back today. Uranium would be free to resume its march toward higher prices.

Or suppose the NFWG drags on forever, and Trump never makes a decision. At some point, the utilities will have to start buying anyway. Their spreadsheet guys will tell them their inventories are unacceptably low, and they will buy at whatever price is required to secure reliable supply.

Sooner or later, the buyers have to come back to the table—and the ask from the miners is going to be on the order of 100% above current spot uranium prices.

 

What to Do

One size does not fit all.

Say you’re tired of uranium prices refusing to go where uranium bulls have been saying they will for years and have given up hope. You may want to use any bump we see in share prices before October 14 as an exit.

If you’re bullish on uranium but skeptical the US will do anything to support US uranium plays, you should consider buying the best uranium picks around the world while they’re still relatively cheap. They should do well in time, whatever Trump does.

Since I do think the US will do something to support US production and since the relevant US plays were so brutally smacked down in July, I’ve put my own money into what I see as the best of them. I hope to bag some big wins in the near term with these stocks. But even if not, I expect them to deliver in time, due to the base case I started with above.

If you’d like to know which specific stocks I think offer the most leverage, please subscribe to The Independent Speculator, where you’ll find more in-depth analysis of each.

But whether you’re a bull or a bear, you now have my take on this situation for free. I just hope you’ll remember if I get it right.

Caveat emptor,

Lobo Tiggre Signature

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October 10th, 2019

Posted In: Louis James

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