Investing In Owners Of Physical Uranium Can Be Good For Portfolio Diversification

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About: Yellow Cake plc (YLLXF), URPTF, Includes: CCJ, UEC, URG, UUUU
by: Aleksei Burkov
Summary

The current price has made many of mines unprofitable around the world, and this fact is a sizeable challenge.

A decision relates to «Section 232» may be a turning point for market motion The current situation can be a suitable time to open long positions.

Uranium as a commodity will grow up because of the new macroeconomic trends in nuclear engineering.

Investment Thesis

An uptrend is achievable due to cutting production down and increase demand simultaneously. Uranium seems to be an undervalued commodity in existing macroeconomic conditions. An US-quota will more likely support stocks of domestic producers, and inversely the US-quota can worsen chances of global uranium's growth. Owners of physical metal have no mining risks, and the main risk is the spot price volatility only.

Uranium Industry Overview

Uranium is a specific commodity since at the beginning of its actively using. It doesn't trade at free markets like other commodities, because uranium has unique nature and characteristics. Uranium is closer with alternative investments (fine wines, stamps, automobiles, antique things, cryptocurrencies, etc.) than traditional investments, like fixed income, equities. Governments of uranium-producing countries have to interfere actively in the cycle of producing and trading uranium. Nuclear engineering isn't a part of the private sector of the economy in most countries. In other words, the uranium market is driven by not only supply and demand forces.

The Fukushima Daiichi nuclear disaster was the main event after the uranium price started to decline steadily. The new trends can reverse this situation today.

New Trends

The first trend is China and India. Both countries demonstrated strong growth of plants and currently have a high-level emission of carbon acid. The Chinese government is going to leave coal engineering for nuclear engineering. Nuclear power production will grow by about 46% by 2040 and more than 90 percent of the net increase will come from China and India, with the announcement of the International Energy Agency. The increase in the price is in direct proportion to the launch of nuclear reactors. The number of nuclear reactors will increase more than 2.2 times after realization of Chinese plans by 2021. Although China has had about 5% of the world's uranium reserves, it is a shortage. China National Uranium Corporation acquired a stake in Namibia uranium mine, which estimated about 3% of the world's production in 2Q 2019. Namibia, Niger, and South Africa have about 16% of the world reserves. Chinese companies have involved in M&A processes in uranium since the early 1990s. The Chinese government intends to continue expansion in Africa, and investors should observe stocks of African producers more carefully. India plans to increase number reactors by 30%, and Indian officials had reported recently about 12 new reactors.

SOURCE: Yellow cake plc, Expected growth in energy demands

SOURCE: Yellow cake plc, Investor Presentation

The second trend is the «Section 232» probe. If the American administration refuses demands of the two American producers - Energy Fuels (UUUU) and Ur-Energy (URG), the uranium market will have good chances going up. These companies urged the American administration in their complaint – requiring that domestic uranium supply 25% of the U.S. market and a requirement for U.S. federal utilities and agencies to buy American-produced uranium - about 12 m. pounds per year. If the American government accepts and implement this quota, this decision will stimulate US-domestic uranium market, and abovementioned companies will be more valuable for investors. In my opinion, it won't be a driver for long-term performance for all American companies. Ur-Energy, Cameco (OTCPK: CCJ), Uranium Energy (NYSE: UEC) afford to produce and sell very rapidly. Kazakhstan and Russia are significant suppliers in the USA and, probably they will have to sell their surplus on the world market. It will work versus the bull scenario on a world scale or will make the world market oversupplied rapidly. However, nuclear plants consume approximately 10% more uranium than is produced at present. Two months ago, Ms. President postponed a similar decision regarding tariffs on auto imports by 180 days, and I think the uranium market will continue to be at the same level approximately in this case.

The third trend concerns the top producers. Kazatomprom (LSE: KAP) and Cameco put extraction down mining significantly in 2019. Current price (July 04, 2019 ) is $ 24.30/lb., which makes about many of mines profitless, most of all mines are in care-and-maintenance. Producers suffer from this undoubtedly, but on another hand, small firms shut down and leave the market, or they can be taken over by larger competitors. Suitable price for big market participants is 40/45 per lb. or above, however, the sharp rise in the price can relaunch unprofitable mines repeatedly, and the market will come in oversupply in a result.

Where to Invest apart from uranium producers?

Investors can invest in ETF, stocks of uranium producers/explorers or funds for investing in uranium ores. The given article touches investments in the physical metal. Yellow Cake plc (LSE: YLLXF) and Uranium Participation Corporation (Toronto: URPTF) have advantages in comparison with uranium producers.

SOURCE: YAHOO.

These companies have no risks associated with information about proven reserves or technological and mining risks because of their non-producer status. They act as intermediaries generally. YLLXF is a uranium trader in common sense and has had a commercial relationship with Kazatomprom through a long-term agreement with the option to purchase and repurchase uranium. Additionally, YLLXF can also receive a gain from royalty, commodity streaming, or other uranium-related activities. URPTF invests most of the proceeds of its equity offerings in uranium. The main strategy can be characterized as obtaining benefits from uranium's appreciation without speculating or trading. Sometimes, YLLXF sells or loans to nuclear plants its pieces of inventory. URPTF doesn't use royalties, streaming commodities in its operations, and if the uranium spot price goes up, the company's value per share will go up respectively. Eventually, investments in YLLXF and URPTF can be attractive to investors which await uranium growth in the worldwide but avoid political/mining/extracting/jurisdiction or other operating risks.

In conclusion, the middle of July is the time of the answer from the president's administration about imposing 25% quota. YLLXF and URPTF might have a positive outcome in both scenarios. Owners of physical metal have no mining risks, and the main risk is the spot price volatility only. The market makes attempts to grow, but the price is still low at present, and investors might enter the long. I would recommend considering abovementioned companies as opposed to uranium producers.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.