Previous Cycles Have Returned Over 100,000% Gains...
Uranium prices are ripe for a re-rating to the upside.
They have been for years now. But the impact of COVID-19 on the industry, coupled with a renewed acceptance of nuclear as “clean”, has kicked off events that have already seen the uranium spot price and related equities begin to inch higher.
Currently, the price of uranium is right at $30 per pound.
Over the next ten years, the world will need ~200 million pounds of uranium annually. But there is only about 140 million pounds per year globally with an all-in sustaining costs (AISC) below US$50 per pound — and 20% or more of that is offline because of COVID.
At today’s spot price, only about 100 million pounds of supply per year is economic. Or only about half what the world needs.
A price of well over $50 per pound will be needed — and is expected — over the next few years.
This would trigger a new bull market in uranium stocks.
A Flood of Gains
Uranium’s last bull market kicked off in 2006 when Cameco’s Cigar Lake flooded while it was being built, prompting a run on uranium that sent the spot price up to US$137 per pound.
It sent uranium stocks significantly higher in percentage terms, with some like UEX Energy, Energy Fuels, Laramide Resources, and International Enexco delivering a few thousand to +100,000% returns.
The commodities sector is known for the stocks within it offering leverage to the underlying price of the commodity. The uranium sub-sector epitomizes this.
Cigar Lake provides ~7% of the world’s annual supply of uranium.
It has once again been taken offline. And while the idling in 2020/2021 was due to the virus and not a flood, it may yet again cause a flood of gains.
The fundamentals have long been in place for a uranium bull market. COVID may have kicked it off.
Small World, Big Leverage
The uranium market is tiny.
Kazakhstan alone produces ~40% of global supply. It does this through Kazatomprom, its national uranium company, which listed 25% of its shares on the London Stock Exchange in 2018. Those shares had a market capitalization of US$4.75 billion in early 2021.
The next largest public pure play is Cameco, which produces ~10% of annual global supply and had a market capitalization of US$5.1 billion in early 2021
In other words, half of the world’s uranium production is represented by less than US$25 billion in market cap.
From there the pure plays get small very quickly. The “largest” uranium producer in the U.S., for example, is Energy Fuels. Largest is in quotes given it only produced around 200,000 pounds in the last year. Its market cap is around a half billion dollars, but has mostly been below that for years.
Yet, if you were to look up the top holdings of the Global X Uranium ETF (NYSE: URA), you would see that these three companies make up three of the top five holdings.
The other two are Nexgen Energy, with its world-class but undeveloped Arrow project in Saskatchewan and Denison, with its large but also undeveloped Wheeler River project on the other side of the basin as well as the McClean Lake Mill, which toll process ore from Cigar Lake.
Those five companies make up over 50% of the sector ETF.
So the uranium world is very small. Which is why even small new inflows into the sector create such stark leverage reflected in the equities.
Over a Barrel
Unlike precious metals and platinum group elements (PGEs), you can’t buy and store uranium to benefit from its price appreciation.
Not only is it highly regulated as a radioactive material, but the market for it is also very opaque. Much buying and selling is done via long-term contracts, and the spot market is closely guarded, making getting pricing info tough.
The way investors typically “got access” to physical uranium was through Uranium Participation Corp. Its stated objective is “to provide investors with ‘pure’ leverage to the uranium price without taking on mining or resource risk” and “to let investors speculate on future changes in the uranium price by way of trading the shares of UPC.”
It owned 16.1 million pounds of U3O8 and 0.4 million KgU of UF6 at the end of Q3 2020 with a fair market value of C$698 (US$550) million.
Shares of Uranium Participation performed incredibly well in the last bull market. However, there are new entrants into the uranium storage and uranium royalty game since 2007 that give investors and funds a way into uranium.
In precious metals, it is the royalty group of stocks that outperformed in the last bull market for all the reasons that are now becoming common knowledge:
Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the president & CEO of Uranium Royalty Corp. (TSX-V: URC)(OTC: URCCF), Mr. Scott Melbye. Scott, how are you this morning?
Blair Way: I'm great, Gerardo! Thank you. It's great to be on your program.
GDR: Thank you for the accurate pronunciation of my name. Not very many get that and even less get the spelling correct.
GDR: Listen, URC is positioned as the first and only pure play uranium royalty company. And any time I look at a potential investment or a speculation and I see the words “first and only,” and then I combine that with what I believe is going to be a red hot uranium bull market — it gets my attention!
And so I want to get into the business model and I want to get into the differentiators and that first-mover advantage that URC has. But before I do that, I would love for you to provide a brief overview of your background because the experience is pretty impressive.
SM: Well, thanks, Gerardo. Yeah, I'm absolutely excited about the launch of Uranium Royalty Corp. This is something that I'm really excited about in my career. I've been in the uranium industry and the nuclear energy industry now for 36 years… so every aspect of uranium; trading, brokerage.
I worked for a utility company, the Palo Verde Nuclear Station, down in Arizona buying uranium for the power plant. But most of my career has been on the mining side with three of the four largest uranium mining companies in the world… managing their global marketing activities.
And so I'm kind of more in an entrepreneurial phase of my career at this stage as an executive vice president of Uranium Energy Corp. and taking on the CEO role at URC, which was founded by UEC and helped with the launch of this new company.
So it's kind of taking everything I've learned and the experience I've gained over these 36 years and putting them into what's a very exciting business model.
GDR: Let's talk about that business model. I think that – for speculators out there – if they look at the precious metals space and they look at a 20, 30, 40-year chart and they look at performance, as far as equities go in the gold space, if you look at royalty companies, you can see that they clearly have outperformed the market, right, especially the last decade or so.
It's exciting to me to have an opportunity like URC, because, again — you are the first company to apply that business model to the uranium space. For those not familiar with the model, can you explain it to everyone?
SM: Well, sure. And this isn't a new idea, as you've mentioned. In base and precious metals, the royalty and streaming industry has become a $40 billion industry and was really pioneered by companies like Franco-Nevada, Wheaton Precious Metals, and Royal Gold.
But basically, royalties have been around as long as there's been mining. These business models are built around companies that purely invest in these royalty and stream interests in developing developers and mines and putting them together into a package that allows investors to participate in those royalties and streams.
So we as a royalty company in the uranium space… it's quite unique. It's become a big deal in base and precious metals, but we're the first mover in uranium.
And it's not a bad time to be doing that because the uranium industry has gone through, and does go through, these prolonged cycles and deep bear markets where investment in new mines really cuts back on that new investment.
But we're now in a stage where we need significant new mine production in the next 5 to 10 years. And there's going to be a lot of investment needed and it's going to take all forms.
There's going to be a lot of equity raised, debt financing. But royalties and streams are another way in which a developer can finance getting their project into production. And it's basically granting a financial interest on future production streams of that mine in taking the cash today. And the investor gets the benefit of the revenue; either product streams in physical uranium or a portion of the revenue streams from that mine when it produces.
Some of the advantages – and you really see it in companies like Franco-Nevada, Wheaton Precious – there's some of the highest gross profits per employee of any business in the world today because you don't have to own the mine. You don't have to staff them. You don't have large G&A overhead.
You're basically investing in other companies' operations. They have all those challenges. So you could have a company that has four or five employees that's generating $100 million in revenue and it's quite scalable as well. As the company grows, the G&A does not need to grow that much with it.
So we're at a very early stage. As I said, we launched with the IPO in December of 2019. So we're very much in the early stages but very excited to be off and running and kind of fully in position now as this next cycle of capital investment begins in the uranium industry.
GDR: We talked a bit about your background. But if you're really going to be able to get that leverage to the uranium recovery and the bull market that I think a lot of us see coming – and if you're going to be able to invest across the cost curve effectively – you need a team with the experience.
You mentioned your background. You mentioned the revenue generated per employee. Can you walk me through the team a bit? Because again, it's a pretty impressive one.
SM: Yeah. So it is a very lean but very qualified and experienced team. My 36 years with companies like Cameco, Uranium One, Kazatomprom… we've also drawn other ex-Cameco people that we're quite excited to have.
Darcy Hirsekorn is our chief technical officer. Due diligence is so important where… just as an investor looks at investing in a potential miner or developer in the resource space… we've got to do our homework and really evaluate the universe of opportunities and say, "Okay, these are the companies we want to partner with in their future success." So Darcy, with 20 years at Cameco in their global exploration group, is a real key team member.
On our board we have Dave Neuburger, who was VP of Mining for Cameco. So he helped develop and operate the world's highest grade mines in Saskatchewan, Canada. And so he's a very important sounding board on mining, engineering, diligence on the potential counterparties.
Amir Adnani is our chairman… obviously the entrepreneurial energy behind UEC and URC — and also GoldMining and soon to be launched Gold Royalty Corp. on that side.
On the capital markets side, we've got two board members out of London; Vina Patel and Neil Gregson. Neil was head of J.P. Morgan's Global Equities team focused on resources.
It's a very small team but very capable in terms of building this portfolio in that the model is very much a growth strategy. We've launched with an impressive sort of inaugural portfolio.
But that's really just the newborn baby. Where we're really excited is adding to that. And we're quite active in the space globally in terms of adding new counterparties to our portfolio.
GDR: You have 71.8 million shares outstanding; I believe just shy of 100 million fully diluted.
GDR: The team, the experience, and the model has attracted some of the most influential capital in the space. Can you share some of the influential shareholders you have… I mean, amongst them are Sprott and Rick Rule and several others. Can we get into that a bit?
SM: Yeah. So the company was founded by a couple of, sort of, corporate shareholders that – Uranium Energy, being the largest with about a 20% share of the company – it vended in assets, as did Mega Uranium, vended in the Langer Heinrich royalty that we have on that mine in Namibia.
Altius, a well-known sort of diversified royalty company, vended in a royalty on its Michelin project in Newfoundland, Labrador. Beyond that – and these companies were really instrumental in getting the company launched – we've sort of supplied not only assets but capital and sweat equity in terms of management support to get the company off the ground and get it IPO’d over a year ago.
But we do have strong support from Rick Rule, Marin Katusa, and the Sprott folks. So we've got the right people backing us. We've got the right people on the team and just excited about where the uranium industry is headed.
GDR: I have to believe, obviously, you came out of the gate very strong. You have a 9.6% stake in Yellow Cake. And I have to believe that the strong balance sheet is going to be pretty important this year and next year in capitalizing on accretive opportunities, right
SM: Exactly. So as we stand today, we have roughly $38 million in cash and securities; those securities being our 9% share of Yellow Cake out of London.
I think 2020, needless to say, was not a normal year. As we launched into the year, I would have said we would have concluded one or two sizable deals. It wasn't that we weren't active. We pretty much engaged with every miner-developer in the world over the last 12 months.
It’s just there weren't a lot of companies… with all the global financial market uncertainties and the uranium price still in recovery but slow to kind of increase over the $30 a pound level… it wasn't a year where a lot of developers and miners were looking at advancing into production.
And that's what we really want to finance and be engaged in… sort of the projects that will be near-term production, near-term cash flow, or we'll see their business models really advance in this cycle that we're in now.
We've come out of the bear market in uranium with production peaking in 2016. And when it really just took uranium supplies to be rationalized over the last three years to really rebalance things back to where we can begin now to see prices… we're up at the $30 a pound level but looking to move towards $40 as utilities return back to the market.
So our war chest is intact. I would say we were – just as developers were more cautious – we were also probably more cautious in 2020 as a result of uncertainty in the financial markets. But we believe that 2021, with vaccines and everything else, we believe that markets are going to stabilize.
Certainly the development cycle for uranium should be kicking in here. So we'll look to deploy in projects that'll meet those objectives of near-term production and cash flow.
GDR: The market is always forward-looking and we've seen decent price appreciation in the uranium equities. What we haven't seen yet is that kind of hockey stick move in the spot price that we know tends to happen when the utilities get off the sidelines and start contracting at much higher prices.
Rick Rule has that often quoted line, "Either the price goes up or the lights go out,” right?
SM: Well, that is true. And we've seen all the right things in terms of the fundamentals of supply with production cutbacks. We're now at a point where, globally, we produce 60 million pounds a year less than what we consume in global reactors. That's a big draw on the secondary supply and it was needed.
With Fukushima and the impacts of those events, we needed to draw down and rebalance the market. Well, that's been happening in earnest now since 2017.
Demand is really exciting. I mean, we've clawed our way back to move beyond where we were pre-Fukushima in terms of global nuclear generation.
So the market for our uranium is robust and growing. And we've added over 50 units to the grid in the last eight years. There's another 50-some under construction today and many more planned.
We also are benefiting from just the focus on a lower carbon future and carbon-free energy, which is very hard to come by. And there's limits to how much renewables of wind and solar you can put on a grid to where you start to get some diminishing returns. And we've seen that in places like California, in South Australia; Germany, obviously, being a good example.
So nuclear clearly plays a role in this lower carbon energy future. What's been more important, we've always known that in the industry… but we're seeing policy makers, environmentalists, and the general public warming towards nuclear's role.
And it helps that we have exciting new, small modular reactors and advanced reactors that are being backed by Bill Gates, Peter Thiel — very bright people that have done the math and science on renewables and realized that nuclear…
I mean, if you go green but you don't embrace nuclear… it's just going to result in a lot more fossil fueled electricity generation as the backup because you’re going to need something to back up the renewables. Nuclear is a much better clean fit. And so that's wonderful from a demand perspective.
And then the next kind of shoe to drop is the utility procurement cycle. And it has been slow. It was kind of complicated by some of the trade actions in the United States and the Trump administration kind of looking at tariffs and quotas on foreign uranium and looking to restrict Russian supplies into the US.
That caused utilities to kind of back away from the market until they saw what the rules of the game would be. COVID also impacted their activities a bit. But like Rick Rule said, their plants are running 24/7, consuming uranium, and they need to come to the market — and that time is upon us now.
And we've been witnessing below normal utility procurement levels for probably the last seven or eight years. So at some point that has to catch up. And we believe now, in 2021, we're starting to see utilities think more strategically… engage with producers on long-term contract discussions.
The long-term prices are still not where they need to be. But the fact that this interaction between the buyers and sellers is beginning to occur in a more normal fashion is very encouraging for the uranium price in 2021.
GDR: You touched on the royalties and the streams. Before I let you go, Scott, I think it's important for everyone to realize that an investment in Uranium Royalty Corp. is also a direct investment in physical ownership of uranium.
And you have, through your investment in Yellow Cake, a pretty significant deal in place that allows you the option to acquire physical uranium. Can you walk us through that briefly?
SM: Yeah. So as a royalty and streaming company, we really do want to focus on royalties and streams because that's the magic sauce in the recipe… is being able to acquire these royalties and streams at a discount to net asset value (NAV) and royalty companies trade at generally a premium to NAV.
So your cost of money is very attractive to go out and acquire these. But until we get to a point where we have steady streams of revenue coming in… I mean, we're very much a newborn baby at this stage… but we wanted to give early investors exposure to what's been historically a very low uranium price.
So we engaged in the IPO process with Yellow Cake. We were a foundational shareholder in their IPO launch over two years ago. And that's where we built the 9% shareholding in Yellow Cake. And it's really exposed our current shareholders to uranium at about $20, $21 a pound and we're now in a $30 market.
And if the uranium price recovers further, they'll see capital appreciation of those shares. But that's just something that we can do in these early stages until we start getting, I would say, to a steady state where we start to have cash flow coming in from other royalties and streams.
But very attractive; it allows us to participate in Yellow Cake's options with the state-owned national atomic company, Kazatomprom, in Kazakhstan. It allows us to purchase up to $31 million worth of physical uranium under a billion dollar supply arrangement that Yellow Cake has with Kazatomprom. So that ability to purchase physical, in addition to having Yellow Cake shares, is very attractive. And we're very happy to be in that relationship with Yellow Cake.
But yeah, as we mentioned though, the real focus now is to look globally to the whole universe of potential developers and miners – whether it's in Australia, Africa, Canada, the United States – and deploy capital into those projects to build the portfolio. So we're really excited about the new year and the new company and we're off and running.
GDR: You have the team. You have the experience. You have the balance sheet. I have to believe 2021 is going to be a busy, busy year for you, Scott.
SM: Excellent. Well, thank you, Gerardo. It was great speaking with you and your listeners today about Uranium Royalty Corp. (TSX-V: URC)(OTC: URCCF).
GDR: An absolute pleasure. Thank you for the insight, Scott.
Uranium Royalty Corp. is the only company out there offering investors exposure to uranium royalties as well as the physical material.
So far, URC’s strategy has been primarily focused on acquiring existing royalties, with the next wave of acquisitions anticipated to focus on new royalties, streams of physical uranium, and other uranium interests.
Learn more about its current royalties and future plans by checking out its website here.
— Resource Stock Digest Research