It's been a while since I last wrote anything, I've been busy selling the tech business I have run for the last ten years and focusing my remaining time on managing the CI portfolio during some interesting times. The portfolio has performed admirably, up 170.6% in 2020 and up 62% YTD for 2021. It is a mix of uranium, tin, silver, gold, coal and shipping. Along with a few 'special situations' like long dated puts on ARKK.
Anyway this post is about uranium. Let me start by prefacing all of this saying I have about 25% of my liquid net worth in uranium miners and I'm long and have been since 2018. It's been a great 12 months, with some names up more than 10x their March 2020 lows.
However there is a lot of hubris around at the moment, and I'm taking that as a sign things are overheated and it's time to take stock and see where we are in the new bull.
Firstly, when a market turns a corner, all equities perform well. A rising tide and all that. However, there is now clearly a disconnect in valuations, with some equities running well ahead of fundamentals and some equities lagging. I see on Twitter every day that FCU or GXU is lagging and they'll catch up. I shake my head. They're fair to highly priced right now relative to others.
My main method for valuing most uranium miners is looking at their primary project. Most only have one. For those projects with a PEA onwards, we can easily put some numbers to them at various values of U and see what the NPV looks like versus their current EV. Basic, and there is always more to it in mining than that, but it's a good starting place to gauge relative values.
There is plenty of commentary around now about where the downside is in uranium. I think many investors new to the space haven't done their maths. Looking at current share prices (as of 17th May 2021) many developers are already pricing in $40-45 U. With spot prices still lingering at or around $30 this seems slightly ahead of itself. Even the physical vehicles of YCA and UPC are trading at near all time high premiums, of 16% and 22% respectively. With spot at $31ish the fund implied price of U is somewhere between $35 and $37. Now only last week did YCA acquire $10m of U at sub $30 for near immediate delivery. I think people have got ahead of themselves with the upcoming transition of UPC to Sprott, which will effectively create a more real time price discovery mechanism than exists currently and a sustained bid will drive prices higher (caveat here is that the fund flows are positive, what happens on withdrawals?) Everybody is anticipating quoted spot prices rising quickly once it launches.
I'm not shorting YCA or UPC here, but I do think the premium will come down as we get closer to the new trust launching, and I do think spot prices will hold the low 30s for a while yet. It's a novel hedge I may take for the wider portfolio if premiums run higher but we're not there yet.
Nevertheless, the equities show me that things are a bit speculative right now. Take for example GLO and FSY. Both developers, both projects in Africa (so a supportive jurisdiction etc). GLO is very high grade and works at $35 U, FSY isn't and needs $60+ to be economic. GLO also has a profitable zinc business, which this year will produce a profit of c$20m for GLO. 2020 was a good year for the DASA deposit which is GLOs primary focus. May 2020 saw a new PEA with improved economics, and they received their mine permit in December, along with impressive metallurgy results. FSY did little during 2020, the project wasn't progressed at all, they are yet to find a full time CEO and they forgot to file their accounts on time (well they filed them late, and blamed covid). Both share prices have now run 8-10x. At present, based on their EV compared to the respective projects NPV, GLO is priced at a U equivalent of about $39 and FSY about $55. This is also ignoring the 80% of the resources at DASA that aren't included in their PEA.
I don't mean to pick on FSY, I have been a shareholder and think there is a role for their Norasa deposit longer term, and they're a possible early takeover, but I use it as an example of how valuations in the space have gotten out of kilter with reality.
What this means for the newcomer to uranium is that many equities are now pricing in what is generally deemed to be the sustainable long term price required for the supply demand imbalance to be corrected (most feel $60 U is about right). Sure, things may get hotter than that, and run a bit more, but thats speculation. I prefer to invest in the 'when's, not the 'if's.
There is still plenty further for this uranium bull to go, however institutions will drive the market from here and they will insist on paying fair value for their positions. I am not yet shorting any juniors, but I have been reducing some of the overvalued positions and redeploying the cash to the undervalued ones, as well as sitting on a bit, in case we see a little pullback ahead.
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