With the publication of my stock idea to play the uranium bull market in late-2022, I purposefully went against the groupthink. Instead of picking a uranium miner for my members – whether actively in production or just restarting / developing a mine, my choice was a very defensive one. Instead of just looking at the potential for multi-bagger returns in a one-sided, biased way, I saw many more risks in this sector. Today, I am taking a look back, discussing some performance numbers and what happened at a retail investors’ darling from Australia.

Summary and key takeaways from today’s Weekly
– The common “wisdom” is investing in commodity miners offers a leveraged bet to benefit disproportionately from higher resource prices.
– However, this often does not work out and only applies to companies with prime execution and strong business results.
– My boring bet on uranium has shown to be a very good pick. I discuss why one of the biggest uranium miners saw its stock crashing and discuss uranium mining risks in more detail.

I was one of just a few lonely wolves in 2021 calling out a coming bull market in uranium. Today, there is now no doubt anymore about this formerly controversial statement. Back then the yellow metal was around 30 USD per pound. Most uranium miners had idled their operations to reduce cash burn and to enforce higher metals prices which were simply unsustainably low.

Today, uranium is trading around 80 USD after earlier in 2024 it has even breached the 100 USD mark temporarily.

(see here my interview with Börsenradio in German language from early-2022 – after I brought up this idea in the fund management team I was working at that time many months before).

As especially retail investors who usually come late to every investment party are more than aware by now that uranium demand is soaring, many uranium miners have seen a strong appreciation of their share prices over the last years.

The common “knowledge” is that mining stocks, whether uranium, gold or any other commodity, come with leverage to the underlying resource. The assumption is that they massively outperform the resource due to margin and valuation multiple expansion in a bull market with higher commodity prices.

My longer-time readers know that this is by no means a foregone conclusion.

In a Weekly about silver (see here) I laid out that back then a silver mining ETF had gone sideways for five years while the spot price of silver had massively outperformed.

There’s more to it than just seeing higher metals prices.

Mining stocks are not just a guaranteed levered bet, but first and foremost mining companies that come with their own set of individual operating and execution risks.

Case in point, one of the biggest and best known uranium miners, Paladin Energy (ISIN: AU000000PDN8, Ticker: PDN) saw its stock crashing 15% earlier this week after the release of their quarterly update. Since it’s high in May, the stock is down more than 40%. Last Monday and Tuesday, the stock was hammered down by 20%.

And no, the price of uranium didn’t move.

This event triggered me to have another look at uranium. I am sharing my thoughts today with this Weekly.

Below are the covers of my two latest research reports:

• to the left, my short squeeze idea
• to the right, my “Trump Trade” (no, not his media company)

I reiterate what I have been writing over the last weeks.

Some ideas take longer to play out. My ideas have a much lower risk on the valuation front as I am not dealing with high-momentum and mainstream ideas. With my line-up, I feel much better than would be the case with tech, chips and the likes which are extremely cyclical sectors.

Join me and my members on our journey to beat the markets!

^{both as per 30 October 2024 market close – since August 2022}

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I was right to play defense in this sector

The bull thesis to justify the current bull market in uranium is well-known: the rising demand for the yellow metal from nearly all over the world, supply having issues to keep up with demand and also what looks like a temporary pause in the trend, especially for the longer-term.

That’s common knowledge at the moment. A forgone conclusion. Usually, what is common, is seldom profitable, at least not above-average, because it lacks the surprise momentum.

Just for a big-picture overview, after a hot run up uranium has entered its correction from above 100 USD to now around 80 USD where the metal has been sitting for quite a while now (a few months, not even really noticeable in the long-term chart).

20% is typically a small correction that occurs from time to time. If I am not mistaken, we have already seen three or even four such corrections since the uranium bull market began. It is only painful for those pundits who joined at 100 USD.

Give or take, since I published my report about Yellow Cake (ISIN: JE00BF50RG45, Ticker: YCA), the price of uranium has risen by 60% until today. Temporarily, it had doubled. I had discussed the case of Yellow Cake of course in my research report (you can download it by clicking here for free), but also on various occasions in interviews which I had linked in my newsletters in the past.

My thesis was as straightforward as simple:

Yellow Cake buys physical uranium and lets it being stored in Canada and France. With this, it reduces available supply and benefits from a higher commodity price as its assets revalue higher. No kidding, this was my entire investment thesis to participate in the uranium bull market.

As Yellow Cake has practically no leverage with this strategy it is mainly a tracker or proxy of uranium, as it closely follows its price. It was my defensive pick for this sector.

Speaking of price, there are two prices of uranium.

There are reasons why I decided to go the defensive way and not via a uranium miner. I am going to explain.

Mining in general already is a tough adventure.

In the case of uranium you have opaqueness regarding the price of the commodity (due to having a spot price and a long-term or contracting price). Spot is what you know from other commodities, while long-term is a price that represents a level on which the negotiating parties, a miner and a customer (a utility in most cases) agree upon to close a longer-term supply contract.

However, the spot market can be really illiquid due to not many trades happening. That’s the current environment. Last month, Kuppy had written a good overview about this topic (see here). For those who are more interested in the mechanics, I recommend to read it.

Usually, both prices fluctuate around each other with the long-term price being more slow-moving. Currently, both are around 80 USD.

As especially the long-term contracting price has been rising steadily (up c. +20% YTD) and it caught up with the spot price at 80 USD, there’s a good chance this could be the bottom for the price of uranium. It is pretty unlikely that anybody would sell on the sport market below the contracting value.

What I wanted to say, this is a complex and intransparent mechanism, hence you can’t just enter uranium investing like you’d do with any other commodity.

Further, uranium though not being a scarce mineral per se (the same like rare earths are not rare), only shows up in little quantities per mined rock.

Or in other words, the grade as it is called in jargon, is low.

With silver for example you can have a few up to many hundred grams per ton of mined rock at the best mines (like was the case with my former silver mining stock idea, see here). Even with gold we are still talking about a few single-digit grams at the better mines.

With uranium, we are not talking about grams per ton, but parts per million (ppm) which is less than a single gram – per ton of rock! This increases complexity of the digging activities and disappointments weigh heavier on costs and results.

With this, we’re coming back to Paladin Energy, one of the best-known stocks, especially among retail investors.

Paladin is an Australian miner with its flagship asset being the Langer Heinrich Mine (LHM) in Namibia. It also owns other assets, but LHM is the only active one and what counts in the short- to medium-term. LHM is one of the biggest mines with a targeted capacity of 6 mn. pounds per year when fully ramped up. This is ~5% of the current uranium supply (~3% of expected for next year).

So far during the current bull market, Paladin has done well. Its stock has been more than a tenbagger over the last five years, coming from extremely depressed levels.

That’s a better performance than uranium as a commodity has shown, referring to the spot price which rose from ~20 USD to now 80 USD, or 4x.

For reference, we are at a stage where production is only being ramped up at the time where the bull market has been enduring for several years. Miners like Paladin have been waiting until uranium prices reached a substantially higher level which is expected to remain sustainable, incentivizing to restart previously idled mines.

Very slow-moving in nature, but when the ball rolls, there’s no halt until the cycle tilts and the business becomes unprofitable again at some point.

This means the massive appreciation of the previous five years was pure anticipation and not based on business results in the form of hard numbers as there were none. The depressed level was also somewhat justified as Paladin was first loss-making and then had no revenues until it decided to restart LHM in 2022 (see here). 2022 was only the decision, not the factual shovel in the ground!

From now on, the underlying business results and the valuation start to matter again, respectively the future expectations.

Earlier this week, Paladin published its quarterly update to which the stock reacted with a massive drop of 15%. On the following day, another almost 5% down occurred.

Market participants were not pleased with the announcement.

We are not talking about a small fish here. Paladin is one of the industry’s heavy-weights and the Langer Heinrich mine at full production is one of the world’s biggest.

Being down 20% in just two days is a word. What has happened?

Due to operational challenges during the ongoing ramp up of the mine which had been idled during the tough years with prices below the cost of production, production costs increased massively. Plus, It seems that the ramp up is happening slower than expected, despite the mine having been active in the past.

This is one of the things I referred to when I wrote about operational challenges in my report about Yellow Cake. This doesn’t happen to a company which only holds the stuff physically. Even more, it could benefit due to supply shortages while an affected mine or operator suffers.

Paladin as one of few only disclosed production costs. They came in at almost 42 USD per pound which is clearly a negative surprise. Expectations were closer to 30 USD.

While one could argue that this is just the ramp up phase with known hiccups and delays that should smooth out with time once full production is reached, this misses a crucial point. Many miners, this applies to Paladin, either, don’t sell their entire production on the spot market for the then current prices.

Through long-term contracting, they agree on volumes, delivery dates and certain price ranges. The problem is now that a situation can occur where future supply has been contracted to be delivered by a miner, but due to production issues, the delivery from own stock becomes impossible. What happens then is that a miner gets forced to find the shortfall in the spot market.

As written above, the spot market can be really illiquid. Hence, there’s a substantial risk that a miner maneuvers itself into a position where due to sudden buying pressure the spot price rises. Not only does this push the cost of delivery higher, but it could also result in higher costs than following sales.

Bull market or not.

I read that ~4 mn. pounds are sold forward for the current fiscal year by Paladin. With Q1 behind and only 0.64 mn. pounds produced during Q1 until end of September (plus a planned maintenance in November), not many issues are acceptable for the rest of the fiscal year until end of June 2025.

The problem is, the industry is intransparent. I cannot say how their order book looks like. Despite claims to realize as much as possible at spot prices, I cannot know what portion this relates to.

This is too much complexity and uncertainty.

All the above together with an already high valuation likely led to the hot air being left out of the balloon. Not to mention high retail participation, as on Twitter many are writing about buying the dip. High valuation, because Paladin after massively outperforming the price of uranium per last count had seen a market cap of almost 4 bn. AUD or 2.6 bn. USD before the recent crash.

Is this much or little for one of the biggest uranium miners?

My method to assess that is to do a simple back-the-envelope estimate.

The estimated volume at full production (target for end of calendar year 2025, maybe even only by 2026) is 6 mn. pounds. Being generous and assuming realized sales of 80 USD per pound which is rather unlikely due to the contracting before at lower prices, potential sales would be 480 mn. USD or 730 mn. AUD.

That was a factor of more than 5x before the crash and still is 4x – on sales.

Profitability is hard to guess. Assuming a net margin of 20%, which is likely also more on the optimistic side due to ongoing investment requirements into LHM but also their other development projects (see here), results in a rich earnings multiple of 20–25x.

To make it clear, this assumes no accidents, a smooth production ramp up, no need to go shopping on the spot market and decent enough realized prices, good cost control as well as strong margins which could come in much lower due to the capital intensity of the business.

Many variables I do not need to pay attention to when going via Yellow Cake.

One could say that the much higher risk is rewarded with a significantly higher return. Is this really the case? Let’s look at the performance since I published my report about Yellow Cake.

Starting with Yellow Cake. Numbers per last Tuesday, 29 October 2024, as of writing.

In British Pounds a performance of +60%. Converted to USD (as I do to evaluate the performance of all my ideas), a currency gain of 6.5% comes on top for a total return of 66%.

For sure, Paladin as a miner with leverage to the resource must have massively outperformed, right?

After the crash +39% and a currency gain of +2.5%, let’s say +43% in USD terms. Even before the recent crash, Paladin was only a smidgen ahead.

Yellow Cake outperformed by more than 20 percentage points. Despite being the seemingly boring stock without any leverage to the underlying commodity. Despite seeing one or the other swing itself, Yellow Cake is far less volatile and it doesn’t crash by itself when uranium is stable.

Even if one says that this is just an overreaction and Paladin will catch up quickly after the dust settles: If you look closer above, you’ll notice that even at the peak, Paladin didn’t outperform that massively, just slightly. Only by percentage points, but clearly not by factors.

However, with all the execution risks coming for free!

As I am a believer in prudent risk management being a key component of investing in stocks, this is a prime example for keeping things simple and not ignoring risks.

Does this mean I will never pick a uranium miner?

I will definitely not say never. I am even researching to find a suitable one, but at the moment, I haven’t found a candidate for a report. Most miners are immensely overpriced in the sense that full and successful production ramp-ups are already baked into the respective stocks and / or much higher uranium prices are assumed to be guaranteed. What if not?

Further, many don’t disclose production costs, making it hard to make more accurate valuations. I see it this way: if production costs were very favorable and low, they wouldn’t hide these figures. Jurisdiction is another risk, as I do not want to bet on markets like Mali or Niger.

Sticking with Yellow Cake was a simple and easy way, leaving hardly anything to complain about, not even on the performance side. However, yesterday, I sent to all my members an update that I closed the case of Yellow Cake. You can download my update here to read why I have decided to do so.

Conclusion

The common “wisdom” is investing in commodity miners offers a leveraged bet to benefit disproportionately from higher resource prices.

However, this often does not work out and only applies to companies with prime execution and strong business results.

My boring bet on uranium has shown to be a very good pick. I discuss why one of the biggest uranium miners saw its stock crashing and discuss uranium mining risks in more detail.

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