Today I am pleased to publish an interview I have conducted with Mike Alkin, whom I got to know through this presentation, entitled Uranium: A New Bull Market is Dawning. As a result of this and other sources (for instance, Spanish fund managers of azValor Asset Management), I became interested in the investment thesis of this raw material.
Alkin has extensive experience in the hedge fund industry, which he talks about in the interview. He is currently the founder and Chief Investment Officer of Sachem Cove Special Opportunities Fund, LP, a recently created vehicle to exploit what he considers is the best investment opportunity of his 20-plus year career.
In addition, he runs Moneyflow Trader, a newsletter focused on options strategies to capitalize on bearish ideas and was the founder of another newsletter, The Stock Catalyst Report, which no longer accepts new subscriptions. Finally, he hosts a very interesting podcast that I recommend to follow and from which I have learned many things and discovered fascinating analysts and investors.
We do not only talk about the uranium market and the uranium mining space, but he also offers some of the valuable lessons he has learned throughout his career from major players in the industry, his vision of Tesla and the reasons why he believes we should be cautious in today's market.
Q: Please, tell us a bit about your experience in professional investing so that we can know you better. What are the main lessons you have learnt over the years?
MA: I’ve been in the hedge fund business over 20 years. I started at a small hedge fund that had two strategies, one was a long-short fund and the other a short only fund. The majority of my time was spent working on short ideas. A great learning experience. I worked for some guys who were savvy short sellers with years of experience. From them, I learned that short selling was as much an art as a science.
Among my other experience, I worked for a few multibillion-dollar funds where I focused on short-selling, deep value longs, and special situations. One of my bosses was Joe Dimenna at Zweig-Dimenna. Some of your readers may know the name Zweig, as in Marty Zweig. Marty was a constant presence on Louis Rukeyser’s Wall Street Week TV show for many years in the 1980s. Marty was an economist who was probably best known for calling the 1987 crash. Marty and his team focused on adding macroeconomic insights to Joe. Joe ran the fund. And he is one of the best to ever do it.
Joe taught me so much about investing. Probably one of the key takeaways from my experience with Joe was I learned about the importance of having a completely open mind about any position I had. Never fall in love with a company or your thesis. Facts change and you have to have the flexibility in your thinking to constantly reassess your thesis to avoid thesis creep - that’s when facts cause your original thesis to change. When that happens, it is very important to consider exiting a position. That’s just one of many things I am grateful to have learned from Joe.
I also worked for a very talented couple of guys, Stacy Smith and Reid Walker at Walker Smith Capital. They started their hedge fund with a few million dollars and grew the assets over many years to more than a billion. I spent my time there working on shorts and special situations. Reid Walker was a huge influence on shaping my investment philosophy. Reid is a great value investor, especially in small-cap stocks. Reid would constantly challenge my thesis on short ideas and push to highlight every aspect of what a bull could be thinking. He was constantly trying to poke holes in my thesis. That is so important. He taught me that there are so many ways people on the other side of the trade could be thinking about what a stock is worth and why - and it was my job to constantly be assessing my work and what others could be thinking.
For many years, I worked for David Knott at Knott Partners, a multibillion-dollar hedge fund. I was a partner at the firm. I worked on both long and short ideas. David, like Joe and Reid, was a deep value investor and great short seller. He had a fund with a long and distinguished track record. David taught me how important it is to avoid the day-to-day noise that is so prevalent. He has the ability to rise above the fray and have patience to let a thesis play out and to stay focused on the underlying fundamentals and the value that is inherent in an investment.
Q: How would you define yourself as an investor? Has it changed over the years?
MA: I am inherently a contrarian. I have always gravitated to companies that have been out of favor on the long side and overly popular when looking at shorts. That fits my natural being - I am a skeptic and typically not one to join crowd-thinking.
I have always been contrarian, but over the years, and from the lessons learned from those great investors, I learned that being contrarian for the sake of being contrarian is not a sound investment philosophy. Often times consensus is right and stocks are priced about right. It requires peeling the onion back many layers to determine if consensus is right or wrong. Finding either real value on the long side or a compelling short idea is not easy.
I also learned that a deep-value long can stay cheap for a long time and that you must identify catalysts to unlock that value. Same on the short side. Never short a stock because you think it is expensive. Stocks can stay expensive for a long time. I should not be so bold to think I can determine what someone else would be willing to pay for a stock. It’s important to identify the catalyst that would cause a bull to want to exit the position.
Q: One of these deep value opportunities you have been very bullish on is Uranium. There seems to be a compelling case to be made on higher uranium prices given supply-demand imbalances, particularly a supply crunch coming after years of very low prices. But there is a topic you have put a lot of attention to that affects US uranium mining: the section 232 petition. Why is this important?
MA: On July 18th, the US Department of Commerce (“DOC”) confirmed that it would initiate a Section 232 trade investigation into uranium imports into the United States. Section 232 of the Trade Expansion Act of 1962 is designed to protect industries, on the grounds of national security, that are under threat from imports.
The investigation is the result of a petition filed with DOC in January 2018 by Energy Fuels (NYSEMKT:UUUU) and Ur-Energy (NYSEMKT:URG), the two biggest US uranium producers currently in production. The petitioners are seeking a mandated requirement that US utilities purchase a minimum 25% of their requirements from US producers. US utilities currently purchase only a few percent now.
Imports of uranium from state-owned and state-subsidized enterprises in Russia, Kazakhstan, and Uzbekistan now fulfill nearly 40% of US demand. Increasing levels of nuclear fuel are expected to be imported from Russia and China in the coming years, which will compete directly with US uranium production.
In 2017, US uranium production fell to near historic low levels due in large part to uranium and nuclear fuel imported from state-subsidized foreign entities. 2018 domestic production will be even lower. The petitioners argue that a healthy uranium mining industry is vital to US national security because it supplies fuel for nuclear power plants that are a key component of the nation’s critical energy infrastructure and essential defense needs. I have been public for over a year now hypothesizing that the uranium market would be at the center of future geopolitical strife.
Q: It now seems clear that supply discipline is on the rise. The largest mine in the world has just been put on care and maintenance and the biggest producer in the world (Kazakhstan) is interested in higher prices given the expected Kazatomprom IPO later this year. The supply picture is clear. What about the demand side. People fret about another nuclear meltdown like Fukushima. Others see a declining industry. What’s your take on these fears?
MA: Three Mile Island, Chernobyl and Fukushima are the three nuclear power accidents we all are familiar with. And some fear another one is always on the horizon. Frankly, no one can predict if another Fukushima is going to happen. However, post-Fukushima, reactors around the world have undergone extensive safety checks. And new reactors being built have the latest safety built in. While one can never say it won’t happen again, the nuclear power industry and bodies overseeing it have done so much to seek to avoid it happening again.
As for the demand side, it is a growth industry, plain and simple. That is contrary to what many people intuitively think because of the stigma of nuclear power. The reality is it is a very clean and safe form of baseload electricity generation. That’s not my opinion, those are the facts.
The nuclear power world can be broken into two parts, the developed world and the developing world. The growth comes from the developing world and China while there is shrinkage in the developed world. From that set of facts, the narrative has evolved into nuclear power is shrinking. You will very likely see far more mainstream press attention when a country has decided to reduce dependency on nuclear power than you will for those who are increasing their commitment to it.
Narratives develop over time and can be stunningly wrong sometimes - like in the case of nuclear power. My models assume aggressive closures in some countries and have not factored in many of the planned and proposed reactors over next several years. With all of that, there is still growth. Should I decide to add some of the hundreds of planned and proposed reactors, growth can be much greater.
Q: You are putting your money where your mouth is with the launch of Sachem Cove Special Opportunities Fund. Could you please tell us about this product you launched?
MA: Sachem Cove Partners is an investment company whose strategies are focused on investing in the uranium mining and nuclear power fuel cycle. It is a private partnership only available to accredited investors. We seek to capitalize on the disconnect we believe exists between price and value in the sector. A valuation disconnect that I believe offers the best risk-reward I have seen in my investing career.
Q: Investors have doubts about how best to exploit the uranium thesis: miners or physical uranium through quoted vehicles (such as Yellow Cake (OTCPK:YLLXF) in the UK or Uranium Participation (OTCPK:URPTF) in Canada)?
MA: I don’t give investing advice, but I will say that the equities of certain miners could have more leverage to a rising uranium price. In other words, some of the miners stock prices could rise more than the underlying physical commodity on a percentage basis as the market assigns multiples to either the value of the uranium in the ground, the cash flows of existing or future projects etc... and those multiple investors are willing to pay can expand as the cycle expands. Also, those miners who are producing see strong operating leverage as they increase the amount of tons of uranium they mine and process. A rising uranium price can in certain cases for certain companies lead to a dramatic rise in profits.
Q: You have recently been public that you hold Ur-Energy. Can you walk us through the key factors you look for when investing in uranium miners?
MA: I believe for any of the uranium mining equities to work, the cycle must turn. Without that, I think many of them are at risk of languishing, declining, or in some cases, ceasing to exist. So, getting the macro uranium right is very important.
I think quality of management is important. I think it is important to have a management team that understands the uranium market specifically. It is a beast unto itself. It is so complicated and opaque that having folks who have done it, at the management and board level, is very important. So quality of management matters a lot.
Geopolitics enter into it for sure, as we are seeing with the section 232 petition I discussed earlier. I hold the view that Russia and its sphere of influence, (Kazakhstan and Uzbekistan) have a strong hold on the uranium market and that is something any uranium investor needs to take strongly into account when doing their analysis.
I am not of the view that one should only own high-grade uranium companies. Of course, high grade is good to have. It can make for very compelling economics. But that’s obvious. As I said earlier, the cycle needs to turn for the uranium mining company stock prices to work. Not all will, and not all will rise at the same rate.
I think some of the high-grade uranium projects have great potential. And I think the market has figured that out too. While one could argue they too are undervalued, and I subscribe to that view, during this grueling 7-year bear market in the uranium mining equities, I think a lot of those companies with higher grade uranium have seen their stock prices hold up better than others. Not in all cases, but generally. So, on a relative basis, the market has sorted that out. Again, I think some of those companies are cheap and mispriced, but I think some great value exists in other uranium junior mining equities as well.
There are some very attractively priced lower grade projects that have their own dynamics occurring. In a bear market like the last seven years in uranium, that can easily be overlooked. So whether it be scarcity of assets, by-product production potential, geopolitical considerations, future projects being overlooked, or other reasons, some real tremendous value exists in some junior uranium mining companies.
In a bear market like this one, the market discards to the junk pile so many of the other companies. I think some of those have been left for dead and some real value exists.
Again, it goes back to my view that the cycle needs to turn for any of these uranium stocks to work. My view is the cycle has turned, and the market will soon catch up to that. If I am right, I want to own the companies that have massive upside and have been overlooked.
Q: Apart from Uranium, you have been focused on Tesla (NASDAQ:TSLA). Can you summarize your thesis about the company?
MA: Tesla is one of the most interesting stock stories I have followed in years. I am amazed that Musk has been able to pull off convincing investors that he and Tesla are saving the world with its EVs and that Tesla will become a $100 billion-plus company, or whatever the latest dream bull case is for the starry-eyed, Musk-worshiping followers.
The whole cult-like worship thing around Musk is a mystery to me. He is lauded as a brilliant visionary genius. I have no idea what his IQ is, but to me, he is genius at one thing, convincing investors to fork over their money to pay for his incredibly lofty ambitions. I applaud people with visions to change things, to advance humankind and all of that stuff. But I just don’t see Musk as anything other than a great salesman. A lot of folks have visions for the extraordinary, getting investors to pile in is a whole other skill. He has mastered it.
He’s convinced people he will send people to Mars, build rapid speed trains to change transit as we know it, has a solar business to change the world and other lofty projects... all which require massive massive amounts of capital. And best I can tell, have not yet made money. But hey, if folks want to fund those ventures, so be it.
With regard to Tesla, I just don’t get it. It has been around fifteen years and it has burned over $10 billion in cash. It’s a money pit. And I think it gets worse.
Heretofore, he has been selling really expensive cars to a tiny percentage of people in the world who could afford high-priced cars. Wealthy early adopters. Kudos to musk for filling that need. Cool cars, fast as heck, and well-made. I’m talking the Model X and Model S. I think he should have stopped there. Instead, his ambition took over. He wanted to use the profits from the X and S and expand on that to build a $35k car for the masses - the Model 3. Well, the problem is profitability has been elusive and to get to where it wants to be, it has consumed a massive amount of OPM - other people’s money - in the form of huge debt and equity raises. But hey, if investors are willing to fund it, so be it.
Building the car for the masses has proven to be a challenge, both in terms of timeline - constant delays - and profits. The company is hemorrhaging cash. The Model 3 finally met Musk’s weekly production goal of 5k Model 3s per week, in the last week of the last quarter. But to do so, they had to move heaven and earth. I don’t think it is sustainable. And oh, by the way, the company can’t sell the $35k Model 3 version anytime soon as the losses would be staggering. The average price is for the Model 3 is mid-$50k. That’s not a moderately priced car for the masses. I think Tesla will have a demand problem, more than a production problem.
It gets harder for them from here. Jaguar (NYSE:TTM), Audi (OTCPK:AUDVF), Mercedes (OTCPK:DMLRY), Porsche (VLKAY), etc., are all building competitive cars to launch in the next year or two. I think that competition will cut into Tesla’s future sales. And it gets even more challenging as in the US the Federal $7,500 tax credit begins to go away in January of 2019 as Tesla will have crossed over the 200k cars sold threshold. That’s the amount of cars a manufacturer can sell for its customers to qualify for the full credit. Half the tax credit goes away in January and six months later it gets halved and so on. The competition will have that full tax credit to offer investors.
The company maintains this quarter is where it turns profitable. Musk maintains he won’t need to raise capital to fund the business. I don’t see how that happens.
Musk recently Tweeted he was going to take the company private at $420 per share. He claimed to have “funding secured.” The stock soared on the tweet. Last night Musk issued a statement saying the company would stay public. It is reported the SEC is investigating the “funding secured” tweet.
Tesla is a drama I haven’t seen the likes of play out in the public market in years. Feverishly loyal bulls willing to keep funding massive losses in the hopes of changing the world and saving the planet with the EVs Tesla builds. I’m all for saving the planet too. I like EVs. I think the big established car manufacturers will do a lot better job of it. And as a result, I think Tesla’s stock will be much lower if it survives at all.
Q: What do you think about the overall current market environment?
MA: It has been a great 9-year bull market. I am cautious. I think it has run its course. I’m not calling for a crash, but a big correction seems reasonable. Earnings have come in quite strong lately. That will be a big hurdle going forward. Stocks move on rate of change of earnings - more or less. The 24% earnings growth we’ve just witnessed was big. And stocks traded up into it. That type of growth is hard to replicate and I think the rate of change of earnings growth will slow and so too will stock prices. Add a steady diet of trade wars and rising rates and global market turmoil like we have seen in Greece and potentially in Italy. It’s time for caution.
Q: Regarding this cautiousness, what's your take on the US economy? Is there any weakness that worries you behind the façade of strength that we are currently seeing with strong GDP figures?
MA: Unemployment is at record lows, wages are increasing, good times are here, so they say. Yet there are some signs that auto loans, especially to sub-prime customers, which make up nearly a third of car purchases, are experiencing high losses. That doesn’t square with what I just said about wages and jobs. Student loan debt in the US is staggering, at about $1.3 trillion. And losses are high. I’m also keeping an eye on inflation. I noticed some companies mentioning inputs are increasing and they have had to raise prices to consumers. Many companies have been reluctant to take too much pricing. But that could be changing so I am watching that.
Disclosure: I am/we are long UUUU, UEC, YLLXF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Given that the article is an interview, I don't know whether it's relevant to state what stocks I do own... But anyway, here they are.
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