By Ivan Y.
Last summer, I wrote an article highlighting the long-term investment prospects of uranium and suggested an investment in Uranium Participation Corp (OTCPK:URPTF), which is a pure-play on the price of uranium. Back then, URPTF was trading a little under $5 and the spot price of uranium was about $34.50 per pound. On Friday, URPTF settled at $4.74, while the price of uranium was $28.50 per pound according to UxC.
Why is Uranium Cheap?
My thesis for being bullish on the price of uranium was based in large part due to the fact that the price was significantly below the cost of production. Even though uranium is below $30, many analysts believe that in order for a mine to be economical these days, uranium needs to be above at least $70.
"In a detailed analysis of 20 potential uranium mines by JPMorgan, uranium prices must be around $83 per pound for those projects to become profitable." Matthew Weinschenk
"We need prices to get to at least $70 or $75 to incentivize new mines to be constructed." David Sadowski (Raymond James)
"In the uranium business now, industry costs including cost of capital is about $70, so you produce for $70 and sell it for $30 and lose $40." Rick Rule (Sprott)
Put simply, with a $28 uranium price, the mining companies are not making money. In the long-run, the price of uranium must double or supply will fall. For example, because of low uranium prices, Areva delayed construction of their Trekkopje mine in Namibia. And Russian company Rosatom decided last year to mothball their Honeymoon mine in Australia until it becomes economically viable.
For 2014, mine supply is still expected to be a surplus (about 10 million lbs. according to David Sadowski), but it's a certainty that will turn to a deficit in the coming years if low uranium prices persist.
"Mines are currently being taken offline, deferred or cancelled altogether. But long-term fundamentals underpin our belief that a uranium supply deficit starting in 2016 will likely increase by 2020, at which time we think we'll see a deficit of about 16 Mlb." David Talbot (Dundee Securities)
The odds are very good, if not overwhelmingly in favor, of higher uranium prices in the longer-term. The only risk is that another black swan event similar to Fukushima occurs. All bets are off if that should happen.
Why is Uranium Participation Corp Not Cheap?
While uranium is cheap, URPTF is not. For those of you not familiar with URPTF, it is a company that invests in two forms of uranium, U3O8 and UF6. The company has no operating business. They simply acquire and store the two forms of uranium at a facility in Canada. The underlying value of the company is thus directly correlated to the price of uranium, and the stock can trade on any given day at a premium or discount to the company's net asset value.
Historical Premium/Discount to NAV
The company's net asset value is reported at the beginning of every month. The last reported net asset value was on June 30, when Uranium Participation traded at a 20% premium above net asset value.
Considering that uranium prices barely moved in July and that URPTF went a little higher, I estimate that the premium has grown to about 24% as of Friday's close. Expect a press release from URPTF sometime early next week that will update the net asset value per share for the end of July. Using that number, we can then figure out the exact premium.
Is a 24% premium too high? Historically, it is. Since the beginning of 2008, the shares have on average traded at a small discount to net asset value, but the range has been very wide. The shares traded at high premiums from February to June in 2008, and then after Fukushima at double-digit discounts from September 2011 to October 2012. Please note that the premiums and discounts listed below are calculated based on the Uranium Participation that trades on the Toronto Stock Exchange (U).
- 28.9% premium (February 2008)
- 27.3% premium (May 2008)
- 25.8% premium (June 2008)
- 20.9% discount (September 2011)
- 24.6% discount (May 2012)
- 18.1% discount (June 2012)
- 13.0% discount (October 2012)
The 20%-plus premium we see today is still lower than the highs of 2008, but keep in mind the three months in 2008 which I listed above were the only three months in the last six years in which the premium was over 20% until recently. The odds thus favor the premium to shrink going forward.
Though the price of uranium is currently too low to be sustainable for many uranium producers, and, in addition, future demand is set to increase due to more and more nuclear reactors being constructed and put online by China, India, Vietnam, Saudi Arabia, and a host of other countries, it takes a lot of conviction about the long-term prospects of uranium for someone to buy URPTF today when it is trading at such a high premium to its net asset value.
There is no doubt that URPTF deserves to trade at some kind of a premium to net asset value due to the fact that it is the only pure-play investment that one can make in uranium. For other commodities like gold and oil, there are multiple ETF options that investors can consider, but for uranium there is no other option besides Uranium Participation Corp. For other commodities you can also buy futures contracts. There are no futures for uranium. Investors need to decide for themselves how much of a premium they are willing to pay in order to have a pure-play uranium investment in their portfolio, but a premium of over 20% is too high in my opinion.
Disclosure: The author is long URPTF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. I have a long-term position in URPTF and I also have trading positions which I am in and out of.
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