Welcome back, me! I’ve been vacationing for a week or so, and I’m ready to dive back into the teaser swamps to see what little morsels we might find to discuss.
This one was an easy pick for the Thinkolator’s first project of the week: Nick Hodge is pitching one of his newsletters, Wall Street’s Underground Profits, by holding out the promise of an “emission free oil” — so what’s the story?
Well, as he does indicate once you get a bit further along in his presentation, he’s talking about uranium — which is, of course, not an “emission free oil”… but it’s a catchy turn of phrase for their ad, and nuclear power is certainly the most promising large-scale base load power source that doesn’t generate carbon emissions or air pollution.
So… what is the investment he’s pitching for this “clean energy breakthrough”…. and what’s the company that he thinks could turn a $10,000 investment in to $1,165,000? Let’s check the clues and get you some answers… from the ad:
“Right now, a technology revolution is brewing in the most neglected corner of the energy industry. Insiders are calling it Fracking 2.0.
“Thanks to this once-in-a-lifetime breakthrough, a tiny company you’ve never heard of is now sitting on 4.1 billion barrels of “emission free” oil.
“That’s equal to half the oil reserves of Mexico. It’s nearly as much as Norway — and more than Vietnam, Egypt, Malaysia, Indonesia, and Yemen.
“With this fuel, you could generate 2.3 billion megawatt-hours of electricity.
“Enough to power a city the size of New York for 14.5 years.”
And then on to the specific investment he’s hinting at…
“The energy windfall I’m talking about isn’t locked in the ground overseas. It doesn’t belong to Russia or Syria or Iran. The entire resource is safe and secure in South Texas….
“… this clean-burning wonder fuel was pumped out of the ground very near the legendary Eagle Ford shale formation.
“But it’s much more powerful than oil or natural gas.
“By weight, it has 10,000 times the energy potential of petroleum.
“It has 14,000 times the potential of coal.
“Now — thanks to Fracking 2.0…
“One company can suck it out of the ground for 50 cents on the dollar!”
And apparently this company, thanks to “Fracking 2.0”, is ready to jump on the next (inevitable, they claim) super-cycle surge in uranium prices, because they can get their operations online for only $10 million (not hundreds of millions for building a mine). He describes that “Fracking 2.0” here:
“The process is called In Situ Recovery, or ISR for short.
“Instead of open-pit or underground mining, they pump a special water-based solution into the sandstone formation that contains the uranium with an injection well.
“It then circulates through the formation, oxidizing and dissolving the uranium, and gets pumped back up to a production well.
“The water is then pumped to an on-site facility where the solution is introduced to tanks containing tiny resin pellets. The uranium bonds to the resin via ion exchange.
“The pellets are then put on a truck and driven to a processing facility. There the uranium is stripped off the pellets, precipitated into a sort of uranium slurry. It’s washed… then dried… and the final product is the same as if it had come from a giant uranium pit.”
And apparently this is much cheaper than mining…
“… this company boasts production costs in the lowest quartile industry-wide — with a mere $21.77 cash cost of sale per pound….
“This company already has a fully licensed and permitted production facility with a 2-million-pound annual capacity. At $75 uranium — that’s $150 million per year in revenue.
“That’s several times what the entire company is trading for right now!”
So what’s the stock? Thinkolator sez that this is the oft-teased Uranium Energy Corp (UEC), which has seemingly been the darling of lots of newsletter folks over the years, from Marin Katusa to Kent Moors to Frank Curzio.
UEC is run by Amir Adnani, a very promotional guy who also heads GoldMining (GOLD.V, the former Brazil Resources), and it is indeed an in-situ recovery company set up specifically to bide its time and wait for the next uranium supercycle. And the photos in the ad show a barrel of yellowcake between Nick Hodge and someone who looks unmistakably like Amir… so all of the clues match the company perfectly, including the 2 million pound capacity of their production facility and the $21.77 cash cost per pound…
…though, I should note, $150 million (the revenue number Hodge pulls out as an example) is NOT “several times what the entire company is trading for right now.” UEC’s current market cap is about $240 million, and has been above $150 million essentially since the election… though it was down as low as about $70 million in early 2016. So perhaps the ad is just using old text, I don’t know.
UEC has been pitched as a natural beneficiary of the next uranium supercycle several times over the years — really, since things started to normalize a little bit after the Fukushima disaster (if that name doesn’t ring a bell, that was the Japanese nuclear power plant that was destroyed in an Earthquake/Tsunami-fueled disaster in March, 2011, with massive fallout and the abrupt shutdown of essentially all of Japan’s nuclear fleet). The most vociferous proponent of this has probably been Dr. Kent Moors, who aggressively pitched UEC in 2014 and 2015… though he switched to a different uranium company last year when he again pitched the inevitability of a surge in uranium prices.
All of those arguments about the resurgence of nuclear power and the need for higher uranium prices make good sense — and they’re all roughly the same, whether it’s Nick Hodge or Rick Rule or Kent Moors who’s making the argument… here’s how I sum it up:
- We need nuclear power, it’s the only way to generate baseload electrical power on the required scale without emissions.
- Lots of new power plants are planned or under construction, particularly in India and China
- Japan is restarting its nuclear fleet, slowly but surely.
- Other opponents of nuclear power are generally coming to accept that it’s required — even environmental activists, who realize this is the best solution for emissions and pollution protection.
- Uranium prices are not high enough to justify building or expanding mines, so there has been little exploration or development, so when demand increases there will be insufficient supply to meet it (that’s the meaning of the “low prices are the cure for low prices” saying often used for commodities)
- The US is dependent on foreign sources of uranium, chiefly from Canada and Kazakhstan (which is essentially the “Saudi Arabia of uranium”), which is strategically unpalatable.
To that list we could have added the end of nuclear warhead recycling, which is a major secondary source of uranium — but that was the catalyst that was supposed to drive uranium prices higher back in 2011, when the “megatonnes to megawatts” deal with Russia was expiring, and the shutdown of German and Japanese reactors in the years after that deal expired were enough of a “demand negative” that the “supply positive” of no more Russian recycled warheads failed to offer much support to uranium prices.
And we should also add to the list, on the negative side, that many more US nuclear power plants are likely to be decommissioned than built over the next decade, as the first generation plants of the 1960s and 70s reach the end of their useful lives and as other aging plants face costly repairs that aren’t worth the capital in this era of very low-cost natural gas and relatively low electricity prices (Vermont Yankee, up the river from me here in the Pioneer Valley of Massachusetts, finally cooled its last rod about 2-1/2 years ago, despite the fact that it provided more than 2/3 of Vermont’s electricity for decades).
So the bull argument for uranium is quite compelling and very logical and well-supported by charts and projections and facts, and every uranium miner or explorer will have very similar big picture arguments about uranium prices being destined to head higher as part of their investor presentations. And I believe most of it, frankly.
But the timing, unfortunately, is a bit of a challenge. It has been very obvious that uranium prices must go higher for about eight years… with the brief interlude of 2011 and 2012, post-Fukushima, when there were so many negatives that the long-term attractiveness of the sector couldn’t overcome the Fukushima fallout stories. But from 2009-March of 2011, and then from probably early 2013 to today, it has been “inevitable” and logical and perfectly argued that uranium prices must rise.
It was logical that uranium prices must remain above $50 in 2009, it was logical that uranium prices must go to $60 in 2013, it was logical that $40 was too low in 2014, and that $30 was ridiculous in 2014, and that $18 was crazy last Summer, and today it’s obvious that the current price of $20 per pound on the spot market is completely unsustainable, since no miner can make a profit at that price (the long-term contract price is now down to $32, also near a decade low — almost all uranium is sold to power plant operators on long-term contracts).
So “uranium must go higher again someday” seems to be a fair argument — but “uranium is going to go up in some particular six-month period” has so far been a failed argument from the many experts who have trotted it out. Does that make Uranium Energy Corp a reasonable bet?
Well, a lot of that depends on whether there really is another huge spike in uranium prices — if uranium does go back to $70, or $110, or to the all-time highs of $140, then I’m pretty sure UEC will surge dramatically higher… but so will all other small uranium companies, and the big players (mostly Cameco, CCJ, which is as as close as we get to having a uranium “blue chip” company) will almost certainly also rise sharply. I can’t tell you which little uranium speculation will go up highest or fastest, but likely no one will be complaining about holding pretty much any uranium stock IF we get that kind of a price surge.
So… is another surge coming? That mostly depends on whether demand grows frantic enough that nuclear plants — or state actors, when it comes to Chinese and Indian utilities — begin placing orders at higher prices and competing with each other for what they perceive to be an increasingly scarce resource.
And that can happen, for sure, but it has only happened twice in the past thirty years, and I have no way of predicting if or how or when it might come again. I expected prices to rise in 2013 and 2014 and 2015 and 2016, and instead they fell in each of those years… so clearly listening to me on this is not going to provide a clear glimpse into the future. I do have a personal position in CCJ call options (the Leaps, January 2019), because Cameco is the one company I’m pretty comfortable with in the space, with the most reliable high-grade reserves and established production profile and the best leverage for making long-term contracts with customers. I expect it to be the recipient of lots of mainstream institutional investor money if uranium prices surge, and I hope that options will give me the kind of leveraged exposure that you’d otherwise get from a junior explorer or producer (like UEC, for example), but I don’t have a huge amount of confidence that this position will be a profitable one.
So sure, I agree, uranium should rise. It only makes sense. But I wouldn’t bet the farm on it happening within any particular timeframe — or, indeed, happening at all if there’s some further disaster in the nuclear power business. Having logical arguments fail to lead to profit for four years in a row is a sign that there’s probably another thumb on the scale that we don’t fully appreciate — whether that’s just inventory from German and Japanese surpluses that will be worked off, or politically driven increases in production capacity in Kazakhstan, or less demand than conventional wisdom would indicate, or simply that everyone’s limping along because the long-term contracts are still profitable and they have hopes of better prices by the time those contracts from five and ten years ago really expire en masse… well, I don’t know. You can make your own call on that.
Uranium Energy Corp. isn’t really an operating company at this point — they haven’t generated any revenue in the past year, and haven’t ever really had a meaningful amount of revenue (with the possible exception of 2012). They’re a company in waiting — they promote themselves and sell shares to keep their exploration and development budget stocked and to keep building up their potential reserves with a mind to having lots of uranium available to produce when it becomes economically worthwhile to start commercial production. I don’t know how attractive their in situ recovery operations are, but the production capacity is relatively small and, as far as I can tell, not really proven at a long-term operating scale, so they might not have the leverage to sign attractive long-term deals with power companies — if they did have that capacity, it would have made sense, in retrospect, to sell all they could when long-term prices were in the $40s and a profit on their stated $20 cash cost would have been all but certain.
My suspicion is that they need a sharply higher price to make meaningful profits, particularly given the $200 million or so they’ve likely invested in acquiring and developing properties over the years, and that they’d like to be able to use their relatively nimble production profile to ride a volatile spot price if and when the market goes into a real supply deficiency (they can probably start production within six months of the “go” signal, where a hard rock miner would require a year or two to reach commercial production for a shuttered mine), but that’s just my opinion after checking in on this company every now and then for several years.
Your opinion and perspective might vary, of course, and it could easily be that I’m a little too jaded after hearing the “uranium must rise” argument perennially trotted out (and, specific to this case, seeing the overly promotional promises of riches for UEC shareholders for several years). If you’ve got a take on Uranium Energy Corp, or on nuclear power or uranium prices in general, please let us know with a comment below — I’m quite sure that there are many in the great Gumshoe Universe with better crystal balls than mine when it comes to commodity prices.