A Quick Note On Uranium
It's time to re-allocate
If you’ve been following and investing in the uranium thesis over the last couple of years, you should be sitting on some pretty nice gains after the recent run up. My top picks (Sprott Physical Uranium Trust (SPUT), NexGen, Denison, EnCore) are up between 37-43% YTD as uranium spot price has risen from ~$50 / lb to start the year to the high-$60s now. The two big uranium ETFs, URA and URNM, are up 32% and 38%, respectively.
While I believe that uranium is in a multi-year bull market, and that uranium prices are eventually going to triple digits, I also have a trader’s mindset and like to take short-term profits when the charts and technical indicators suggest doing so. The uranium equities in particular look quite stretched, with RSI and MACD readings firmly in over-bought territory. In order for the current run-up to continue, fresh capital will need to come to the sector and that might take some more time given limited liquidity, and therefore dearth of institutional interest.
On a fundamental basis as well, valuations of some developers and miners are now running ahead of spot, implying close to ~$70 / lb spot price. It’s also important to remember that the developers are not generating any cash flow at the moment and will need to raise equity and debt capital to develop their mines and become sustainable businesses. As equity prices rise, so do the prospects of fresh equity capital raises. EnCore in particular is likely to take advantage of its ATM facility soon given its accelerated timeline to production. NexGen and Denison don’t need funds imminently, but may also decide to be opportunistic if they feel their stock price represents a decent valuation.
All of this is to say that I think right now is a good time to reduce overall exposure and the beta in your uranium holdings. Over the last couple of days I’ve reduced my exposure to individual names and reallocated to cash, physical (SPUT) and the ETFs (URNM and URNJ). This will allow me to take advantage of potential equity raises from individual companies that I may want to invest in for the longer-term, and improve the overall risk and liquidity characteristics of the portfolio (which I have been running leveraged long (130 - 150%) in anticipation of the current break-out in spot prices).
Of course, this doesn’t mean that an imminent crash is guaranteed for uranium stocks. In investing and trading, we deal in probabilities, not certainties. It is certainly possible that financial flows / retail euphoria drive up the stocks even further, which is why I’m not recommending completely unwinding the positions but rather, as Howard Marks call it, ‘recalibrating’.
There are some near-term bullish catalysts: SPUT has been raising capital as it trades at a premium to NAV, currently sitting on $50mm of cash, which could buy ~700K+ lbs at the current spot price of $68. It is rumored that Zuri Invest has been raising funds as well. Finally, there is a new physical uranium fund based out of Singapore being setup by PYFN, looking to raise $500mm to buy uranium.
Based on recent commentary from physical uranium traders, the current upward move in spot prices has been mostly driven by commercials / utility buying, which suggests that there is more upside to come as financial interest increases. Both the Wall Street Journal and the Financial Times recently picked up the story as more investors are starting to pay attention.
Despite the recent reallocation of funds, uranium remains my largest position.
