I recently sat down with Andrew Weekly of SmithWeekly Research to get his position on the uranium market, a sector that has been the majority focus of the group going back to 2016, when they started data compilations and networking within the sector. We also reviewed current stocks he likes in the uranium market.
Katherine: It is good to talk with you, Andrew. Before we get into this very interesting market for uranium, please tell us about yourself.
Andrew: It's a pleasure to talk to you, Katherine, as well as your audience at the Streetwise Energy Report. My background and experience is diverse, but I'll summarize the key areas. My formal education was in business, finance, and history at university. My initial career started in 1999 within the construction industry servicing primarily energy infrastructure on hydroelectric projects with a period of managing contracts with various U.S. government agencies, among other clients.
I'll mention a key client of Berkshire Hathaway Energy; I've worked with these folks. Today I remain to be a consultant of a long-time client of mine, and they serve a very specialty segment within the heavy construction industry on the energy side. I'm originally from Oregon but moved away about ten years ago to pursue other opportunities overseas.
In 2012, I decided to start an investment research group that had an interest in numerous areas of the markets, eventually narrowing down that focus to the junior natural resource sector in 2015. We've been here ever since, establishing an impressive network within the junior sector as well as some good performance along the way.
About SmithWeekly Research
Katherine: Tell me about SmithWeekly Research. What do you do there?
Andrew: SmithWeekly Research does a number of interesting things that revolve around the junior natural resource sector. That is our focus area. We are differentiated and distinct, which I'll support with a few points. We perform research, form a view, and then act on that work by investment. We wrap this all together in the form of a written letter and model portfolio, which we provide to our membership, which is a wide demographic of market participants who are receiving our work.
As any experienced allocator would, we must take care of our positions by constraining them but also by concentrating them, as well as managing cash at all times. Remember, this is a model portfolio that we treat like a fund.
The broken nature of the uranium market is the most compelling at this time, and we see the uranium market is among the best commodity cases, if not the best.
As you know, Katherine, there are the so-called newsletter services out there that don't do any respectable job of actually managing cash or controlling positions, which any sophisticated investor or fund would do on their own. Our membership is currently waitlisted, but we encourage anyone serious to contact us to get on that list for when we open up to new members.
We also do a small amount of work on the awareness side, which is effectively a networking tool for us, but we do manage a very simple and non-promotional podcast called SmithWeekly Discussions, that enables some very basic research and idea generation, as well as providing entertainment and education to a general audience.
The group also provides business strategy consulting work within the junior sector on a select basis. Our consultant side is active, and we are delighted to review your needs as long as it falls within our work scope. Lastly, being overseas in various jurisdictions over the last ten years has put us in a position to provide substantial experience with a strategy called internationalization, which is something that every successful person should become aware of because it carries notable benefits and a global perspective formed by a multi-jurisdictional approach. So without further explanation, that is SmithWeekly.
Focus Area: Uranium
Katherine: Interesting, and what specific commodities are you currently focused on?
Andrew: The large majority of our focus is currently on uranium, of which we've been working since 2016. For reference, back then, the price of uranium was about US$18 per pound. More on that later.
Additionally, some resources are allocated to company-specific opportunities in copper, gold, and related areas of the market due to our extensive network of people we know in the junior sector. For us, the broken nature of the uranium market is the most compelling at this time, and we see the uranium market is among the best commodity cases, if not the best.
Katherine: I'd like to get into uranium with you now. Unpack that for me?
Andrew: There is too much to cover just in this conversation, so let me get to the key points about the setup, but still, your readership will want to settle in and get out the note-taking materials, ok?
Now, first, let me establish my experience in the sector. We know the sector very well, and I don't say that from a point of arrogance; there is already enough of that in the sector. We don't proclaim to be experts or professionals, but we've done the work, we know all of the meaningful people who matter, and we know all of the meaningful companies.
With any junior sector, there are a lot of fakes and promotes that we just don't have the time for. They are incidental. We were among the very few who actually showed up at the very starting line of this sector back in 2016. When we say we've done the work, we first started on two fronts: data gathering and networking. There is a lot of publicly available information out there about the sector; all you have to do is take the time to sort it all out.
We did this on the supply side, gathering up figures on primary supply, secondary supply, the costs of that supply, each mine, operating mines, mine closures, mine restarts, development projects, secondary supply dynamics, and all of the things you would need to evaluate as a serious analyst that is incentivized by your own capital. This provides the pieces to the puzzle to see a larger picture of where the supply side is, what the schedule is, what the costs are, and those important parameters.
The marginal producer will set the uranium price for this cycle. Why? Because the marginal producer is the one that can start backfilling demand due to special circumstances like lead time and because they are in a position, in a development sense, that brings on meaningful production, filling a big bite of demand.
Then you are forced to dive into the fuel cycle to understand conversion, enrichment, and fabrication because the fuel cycle impacts in different ways the uranium mining side. Pricing, capacities, and even things like jurisdictional alignment are important. Then we went to the demand side last because we already knew that demand was there and that it wasn't being turned off.
We did the same thing here, compiling reactor consumption, utility lists, retirement schedules, immediate-term new builds that were in their advanced construction stages that we knew would be finished, plus some other considerations that are for our internal consumption only.
All of our work remained conservative, on the side of worst-case scenarios. Then we performed the supply and demand comparisons against factors like term contract timing, price incentive, development timelines, and even people factors. We were very pleased with the results, favoring concentrated investment, to put it lightly.
Next, we networked in all of the key areas to confirm or debate the results. Everything was done from scratch. In our networking efforts, you also get to form a baseline view of the different characters that you are working with. This is important later on down the road for establishing patterns and a record to classify these different people. You meet good people, and you meet a lot of bad actors. That is the junior sector.
Ok, so that is the backdrop that people need to understand when establishing credibility in doing the work. We don't pump our chest about it like others; we are humble people.
Everyone has an Excel spreadsheet, but the differentiator is the quality of work that goes into them. Many people in the sector, including many CEOs of listed companies, still haven't actually done the work.
What does that tell you?
Lazy, among other things, come to mind. The arrogance and intelligence level of many management teams that prevails today is laughable. They often say, "We know everything."
The reality is often the opposite, and it should be well noted if you hear those words. The more time you spend working in the sector, the more obvious it becomes. Now this is not to be confused with the real people in the sector that do real work. We also find the sector fascinating still today from many angles that aren't key to this discussion, a conversation for another time.
The uranium market is the most niche and obscure segment of the junior sector. Uranium itself is the feedstock for commercial nuclear reactors. These reactors are the last to be impacted by changes in energy demand, crises, and changes in economic cycles. There is no substitute for uranium; it has a very strong moat. There is no substitute for nuclear power at this time, and its only competitor is its bigger brother, fusion power, which won't replace the existing reactor fleet in any meaningful time frame important to us.
The uranium price will move higher to incentivize new project development. The majors alone don't have the ability to fill this market. The next tier, being juniors, must be called upon, and the lead times are not being comprehended.
Fusion has a long way to go to prove commercial feasibility, then actual commercial deployment, and then is ramped up to a replacement rate that impacts the current fission fleet. The problem with uranium is that there is a limited amount of expertise to successfully pull it from the ground, process it, drum it, and get it delivered to the conversion facility. There is no shortage of uranium in geological terms, only a lack of expertise, capital, economics, and infrastructure to lift it from ground to cake in a can.
The uranium sector is very small in terms of listed equity capitalization, being around US$40 billion in aggregate, consisting of majors, a few mid-tiers, juniors, listed funds, ETFs, and some service providers. This covers explorers, developers, producers, fuel cycle service providers, and some special situations. Our data today suggests about 119 companies are in the sector, up from probably 50 when we first started.
To be clear, we are not discussing the broader commercial nuclear industry in this, only the uranium segment. Such a tiny beat-up sector provides a critical service to the highest density and highest quality energy source invented so far in human history, harnessing nuclear fission and putting a steam turbine with it. Look, it is best that I spare you the broader commercial nuclear energy thesis, as everyone beats that drum, and I am just not interested in repeating myself on that front. We've done that and have moved on.
Primary supply cannot respond as fast as demand is improving. That is the reality. Stronger prices for longer must occur to start to solve the supply problems. Layer on the fact that the sector doesn't have many competent people. This isn't the gold or copper sector as an example; it is the uranium sector. This is a low-level radioactive material with additional care and specifications required.
Mining gets harder at every turn. Building new mines is harder than it was ever before on price, talent, specifications, requirements, timelines, and regulatory red tape such as permitting. Then there is reclamation and mine closure — so many things to keep track of. Incentives must eventually be satisfied for the sector to become healthy again. Prices drive that incentive. On the production front, many will fall short of their stated goals. So many of these promises, economics, fancy slide decks, and hopeful production are swimming naked. Cost escalated, and they are in further trouble. Many companies trying to reach production will fail.
We like everything that Cameco is doing in this market, and they are supporting better pricing and a healthier market going forward. Cameco is a great choice for safer money that needs capable hands.
Our work leads us to the conclusion that the marginal producer will set the uranium price for this cycle. Why? Because the marginal producer is the one that can start backfilling demand due to special circumstances like lead time and because they are in a position, in a development sense, that brings on meaningful production, filling a big bite of demand.
Much is still needed to get to this point, but the marginal producer and developer, if successful, is needed to satisfy utilities. Based on our data, we expect that marginal producer incentive figure to be about US$85 per pound on a global average, cost escalation adjusted, plus or minus a few bucks. Increasing costs seem to stick around longer than anyone thinks, and often they don't go away.
A few years ago, that number was lower. Then the price has to stay there for a notable period of time. Nothing meaningful gets done on a spike. The upcycle we are in was facilitated by supply discipline in the latter years, layered on with a decade of poor pricing that cleansed the sector. Add during that time a period of slower growth for the commercial nuclear industry, supply flood from secondary supply in the form of excess capacity, and demand cuts arising out of Japan taking reactors offline post-Fukishima.
You have consistent 430-odd reactors in operation today. Yes, there are a few more, but some are in temporary outages or permanent shutdowns. More are coming online each year, whether new builds or restarts. This is firm and dependable. Let's call uranium demand about 200 million pounds per year, fuel cycle bottleneck, and assay adjusted, with a conservative margin. Add that capacity in the fuel cycle is very constrained. Layer in a price-supportive event with the Russian invasion of Ukraine because Russia-influenced and controlled suppliers are so important to the smooth functioning of the fuel cycle, not to mention uranium production from those sources. The West is looking to marginalize Russia as punishment for its actions. It will take many years to transition away from Russian fuel cycle services because the West lacks the infrastructure to do so.
We see demand rising notably over the next few years, falling in line with a contracting cycle that is both replacement rate plus additional inventory add to backstop the uncertainties occurring on the supply side, add geopolitical motivations.
The Supply Side
Katherine: Thank you. That is a lot of information here for our readers to digest. What about the supply side at this point?
Andrew: Yeah, good question. Let's move into that. The fuel cycle leads the uranium market in terms of up and to the right. Because capacity is maxed out in the fuel cycle, prices are rising, and the line out the door is down the street and around the block. Capacity expansion will, again, take years and will need capital commitments demonstrated through long-term service contracts at attractive prices to justify capacity expansion.
In the meantime, secondary supply, which is a result of the underutilization of capacity, has essentially been eliminated from this current market. Secondary supply will return in the future, but not in the time frame we care about. Because capacity is full, to speed up meeting client demands and specifications, efficiencies reduce uranium utilization when performing enrichment, meaning more uranium is now used because there is less focus on minimizing manufacturing losses.
This is part of tails assay adjustments, a mix of specifications with inputs based on underlying prices of the fuel cycle parts such as UF6 or uranium hexafluoride, SWU or separative work unit, and with the end result being EUP or enriched uranium product. Fuel cycle prices lead the uranium price in an upcycle. It is important to provide this context, and I am leaving out some more complex details, but nothing that is negative to the thesis, for time and simplicity. I'll give your readers homework to go back and look at the price improvements in the fuel cycle since 2016 to help paint the picture that capacities are constrained with no immediate solution.
Now, the supply side now stands at about 127 million pounds in production. We expect a slight increase this year to that number as some restart operations in U.S. ISR and at Cameco's McArthur River make progress. 200 and 127 million pounds respectively, demand-supply, you do the math, means that the sector is in deficit.
Everyone knows that, or should know that, by now. The solutions to that deficit are where the struggles are manifested. Nothing gets solved on a light switch flip.
In fact, so far from it, you'll need binoculars to see it because it is far off. The deficit has been with us for a couple of years. The deficit will stay for a number of years on a go-forward basis. Price, time, and lack of many things tell us enough. It only gets closed with new build mine production. Existing uranium production capacity cannot support closing the deficit by itself.
To get new builds back to the marginal producer, higher prices are required. Let's not forget to mention the depletion of good mines that will come to pass by the late decade. Those pounds need to be replaced, but it will take years to do so with capital and price being in line. Nothing in the immediate term fixes the supply problems.
We know term contracting is here to stay for a number of years ahead of us. Term contracting volumes so far this year are on pace to set a record for this cycle, we figure at least 150 million pounds will be transacted this year conservatively, and we have years of the same still to go.
Where does the supply come from?
It won't come in the way that you would expect. It will be delayed and challenged throughout the entire time. Projects will fail, transportation will be difficult, and permitting and environmental will slow things or stop them. Operatorship is in decline, and mining opponents are on the increase. Quality people are getting older, and they are not being replaced.
Deep Yellow has one of the best opportunities to get into production against its peers, of which many won't get into production or will have severe challenges along the way.
Without the marginal producer and potential new producer being incentivized, which means a suitable price point for a suitable period of time with suitable contracts to backstop capital expenditure, bank financing, etc., there won't be enough production centers online to meet the demands of global utilities.
To repeat ourselves, this is a problem of price; this is a problem of capable expertise to successfully put cake in a can and deliver it under commercial terms to the conversion facility. As I said, there is no shortage of uranium in the world being in the ground; there is a shortage of viable projects with capable people and capital to deliver into that demand.
Just recently, the junior equities have been, on average, about 60% off their October 2021 highs. The underlying uranium price has remained robust while the equities drown, some for good reason, mind you. This is an allocation point. To wrap this up for you and your audience, Katherine, and we've left out some other important areas of discussion for the sake of time, I'll say the following. We are in a term contracting cycle that will demand more pounds than can be supplied.
The uranium price will move higher to incentivize new project development. The majors alone don't have the ability to fill this market. The next tier, being juniors, must be called upon, and the lead times are not being comprehended. We covered a lot of the important areas, let's stop there, and I think we've demonstrated the broken nature of this market.
Uranium Exposure Methods and Mentions
Katherine: What about the investment side? How are you getting exposure?
Andrew: For us specifically, only the junior equities make sense to us. Not the majors, not ETFs, not physical funds. We understand the junior sector, and as a result, we are very comfortable there and don't need the normal risk reduction that the other vehicles provide. We evaluate individual equities, so we don't need the ETFs. Individual junior equities packaged into a concentrated and well-constructed portfolio, such as a mix of key jurisdictions and various stage companies, result in the best leverage and performance by far. We don't bother ourselves with any other type of exposure as it is most likely inferior to the route we've positioned with.
Katherine: Any specific companies that you can share with our readers?
Andrew: Well, I need to be careful here, respecting the work provided to our members at SmithWeekly, that also I do not know the specifics of your readership demographic, and because we've been in the sector from the lows, our cost basis is likely lower than yours. I can mention a few that interest me with the understanding that your readers must do their own work. I need to add further context and caution your readers further on a few other points to set the stage with the right view.
To your readers, they need to understand the dynamics of the junior market, which I don't have time to discuss nor provide education on today, but very important that you understand the junior markets, cyclicality, high-risk nature, and all of the components associated with that are needed to navigate the junior sector. We're also not at the start.
This cycle has been in progress since we entered the equities back in 2017, one year after our research started, with the underlying uranium price already on the move, from about US$18 per pound back then to around US$55 today.
Meanwhile, the junior equities are at their third major low point for the cycle, the first being 2016-2017, early 2020, and now again this year, as of a few months ago. Higher highs and higher lows are clearly in place over this period. We are likely at the last point of entry from an allocator's perspective, and eventually, the value proposition will stop.
I'll give you some company ideas throughout the entire risk and stage spectrum. That means lowest risk to highest risk, producer to explorer stage. I'll be brief for the sake of time, and that all require work from your readers. Let's start first with the blue-chip of the sector, uranium mining and fuel services provider
Streetwise Company Fact Sheet 2023/6/16 11:59:13
(CCO:TSX - CCJ:NYSE)
Analyst coverage
| CIBC World Markets — Bryce Adams |
| TD Newcrest — Greg Barnes |
| Cantor Fitzgerald — Mike Kozak |
| Canaccord Genuity — Katie Lachapelle |
| Raymond James — Brian MacArthur |
| BMO Capital Markets — Alexander Pearce |
| Eight Capital — Ralph Profiti |
| Morningstar Equity Research — Daniel Rohr |
| RBC Capital Markets — Andrew Wong |
| Scotia Capital Inc. — Orest Wowkodaw |
Newsletter coverage
Streetwise Reports Articles
Analysts, Newsletter Writers & More
Cameco Corp. (CCO:TSX; CCJ:NYSE), which is the largest publicly traded nuclear fuel services provider that covers the uranium mining side through the fuel cycle.
Through its proven Tier 1 assets, Cameco has the reputation of being the preferred supplier for nuclear utilities globally. Cameco is down streaming its business, through the partial acquisition of Westinghouse, to take advantage of challenges in the fuel cycle plus the bifurcation that is developing in the market as a result of the war in Europe.
We like everything that Cameco is doing in this market, and they are supporting better pricing and a healthier market going forward. Cameco is a great choice for safer money that needs capable hands. Led by Tim Gitzel and Grant Isaac, these are two of the most competent leaders in the business. They are very intelligent guys, and your readers should take note to hear often from them.