Collusion, national security, Russia, crack cocaine, Nuclear power games, geopolitics, pollution, Section 232, uncovered demand, the Uranium thesis, 700lbs gorillas, the US Navy, investing strategies, spot prices, fundamentals, …. NO, not a Tom Clancy novel, just a chat with one of the world’s leading Uranium experts and gurus, Mike Alkin.
There is something for all levels of investor, as we take a walk around the world of Uranium. Breathtakingly simple when you listen to the guy who cracked the code….
Click here to watch the interview.
Matthew Gordon: Hello Mike, how are you?
Mike Alkin: Hello Matt, I’m good. How are you?
Matthew Gordon: Good to be speaking to you today. Where are you, New York?
Mike Alkin: I’m in New York, Long Island.
Matthew Gordon: Fantastic. Okay. Well we’re going to talk about all things Uranium today. You’re going teach me a thing or two.
Mike Alkin: I’ll see what I can come up with.
Matthew Gordon: So we’re catering for all audiences today. There’s some very passionate, sophisticated Uranium followers, that been engaging with us on Twitter. Some very.. people who really care about this space. There is also some people new to this space. So excuse some of the question which is going to be quite basic in places. But I think there’s going be enough meat on the bones for a lot of people have been looking out for this conversation.
Mike Alkin: Great.
Matthew Gordon: You made a bit of a life choice a few years ago…. you’re an ex-Hedge Fund Manager. You made a bit of a life choice there. You decided that Uranium was the way forward. Do you want to tell us a little bit about how that started.
Mike Alkin: Yeah
I was in the Hedge Fund business, Long / Short analyst, became a Partner over
the years at a few different funds. Last one was a multi-billion dollar fund.
And in 2015, my daughter became very very ill and we almost lost her.
Matthew Gordon: Sorry to hear that.
Mike Alkin: And
so that was after a long career and a lot of travel and being a weekend dad.
That kind of changed my view of things. And so I decided at that time that I,
thank God she survived, and she was in the hospital for for quite some time.
And she’s, I’m very happy to say today she’s still has a condition but she’s
Matthew Gordon: Fantastic.
Mike Alkin: But
we didn’t know at the time so I just thought I would kind of be dad. And after
several months, it was clear that she was turning the corner and she was, and I
was home, and I was taking the kids to school. When she went back to school and
I was trying to make dinner and help out around the house and my wife said time
out. The reason we’ve had a great +20yr marriage, is you’re always on the road,
or you’re always working and it works out perfect.
Matthew Gordon: I know the feeling.
Mike Alkin: Stop
encroaching on my territory here. So I did decide what I wanted to do wasn’t to
go back and work at that grind and in the big firm I was at had morphed into a
family office, or was morphing into a family office. And there were changes
taking place there. I didn’t want to start a Long / Short. Hedge Fund. Because
it’s a… the capital raising environment is difficult. And it’s I believe,
it’s really hard to generate Alpha. Average returns when you’re a couple of
guys and a Bloomberg terminal. Call it two guys and a Bloomberg. I feel as
though that portion of the business is on the back nine if you will. The bigger
funds have more assets and more resources, and everything else at their
disposal. So I really was just home managing my own money. Picking my own
stocks. And throughout my career, my first half of my career, I was a dedicated
Short Seller. I dug deep in the weeds from a forensic standpoint, both in the
field through the financial statements. And I would just look for for companies
that were either just I thought overvalued, but had a catalyst to get there
value realized that I thought it was worth. Or just bad companies bad guys,
frauds but that was the first half of my career. So obviously as a short
seller, you have a contrarian bent. And on the Long side, the firms I were at
where deep value oriented, in the middle to latter part of my career, with
great exposure to Natural Resources, oil and gas. I had exposure to that. So
with time on my hands, one of the things is when you’re at a Fund, if you have
a portfolio a segment of the portfolio you may have 20-30 investments. And
you’re always in different industries, when you’re a generalist you’re always
chasing your tail, working a lot, but you don’t really… you focus in on those
top names, but you don’t have the time…
you understand as somebody who’s.
Matthew Gordon: Been there.
Mike Alkin: …Speaking
to the choir right. Now for the first time in my life I have I had time. And so
I was able to choose …and no performance pressures to perform day to day or
week to week or month to month. So it was… what is interesting to me, and
along the way, and somewhere along the way Uranium crossed my desk. I’m
screening for new ideas. What’s been beaten up? What’s excessively priced? If I
was looking for shorts. And I know myself, and Uranium crossed my desk. And I
said..we looked at that in 2007. We looked at it in 2011 but at that we looked
at it very, very briefly. We had a lot going on. In 2007, it had hit.. the
price Uranium had gone from $9lbs a few years earlier to $137lbs. And we just
had a lot of investments at the time. So we didn’t spend too much time, maybe
less than a week. Concluded that it was complicated. The industry was very
complicated so we moved on. 2011, after Fukushima the accident there, we did
the same thing. And just said ‘you know what we can’t draw a conclusion’. So I
had very, very faint familiarity with it. But what attracted me in the latter
part of 2015, was this was an industry whose market cap at one time was
exceeded $150Bn. The number of companies that were in the Uranium, or had the
name attached to it, was over 500. And when I was looking at it, the market
cap, when I started to look at the whole industry was some $5Bn. And the price
of the commodity was down over 90% and the number of participants from an
institutional standpoint were virtually non-existent. And so I thought well
that’s that’s interesting. So that’s what piqued my curiosity. And then I
started reaching out to people I know on the sell side, and I asked for models.
Let me see what the industry looks like. And I started getting really dated
models. And I thought huh. I’ve been doing this a long time now, a few decades
and I can’t recall the time where I saw an industry that, looked like it was
left for dead. That had declined this much. What I didn’t have was that
knowledge of the growth drivers of Nuclear power. And that’s one of the things
as a Westerner, living in the States or living, if you’re living in North
America, or Western Europe. Nuclear Power is a four letter word. And so might
my awareness of it was ‘it’s dying. It’s decreasing.’ I had more awareness of
wind and solar because somewhere along the way as a Short Seller, I was looking
at a component makers and other stuff. So I said ‘let me come at this through
the eyes of a short seller. Let me prove the bear case.’ And the first thing I
did was try and understand the growth drivers. And I wanted to understand the
role of renewables, wind and solar.
Matthew Gordon: So, can I ask Mike. Had you been involved in energy, in any way as part of your previous portfolios.
Mike Alkin: So,
randomly. But the firms I was at, two firms, both had dedicated Oil and Gas,
energy. So as a partner I was always around it. So knowing what the drivers
were. And then other Resources as well. But no, no expertise whatsoever. I
still don’t. I’m not I laugh when people say the Uranium expert. I mean I
Matthew Gordon: And they do!
Mike Alkin: I
think the greatest asset an investor can have is to be a generalist. Especially
when you’re looking at deeply cyclical businesses. I’ll give you an example
Matt. I won’t look at biotechnology companies for instance for me. There is no
amount of knowledge I could learn that would make me able to understand what’s
going on. Deep financial… companies that are big money center banks. They’re
so opaque. Forget it. But in most other things, if you’re a reasonably bright
person and you bring a clean slate to it. And you know what to look for. The
drivers of supply and demand. It’s not that complicated. Now I will say that
the Nuclear Fuel Cycle, by orders of magnitude, once I started diving into it
was the most complicated industry I’d ever looked at it.
Matthew Gordon: But we’re going to get into that for sure.
Mike Alkin: Thankfully
I didn’t need to be a Nuclear scientist because I would have bailed out right.
Matthew Gordon: So you’ve made the conscious decision, it’s a life changing event, for your… a life changing decision, you said right, ‘Uranium seems to be an opportunity for us, for whatever reason no one else is paying attention to it.’ So do you feel you kind of you got in the right time, you got in a bit early.
Mike Alkin: Yes
so I started that the Sachem Cove Partners in June of 2018. Late 2015 is when I
started peeling the onion back. And that was literally modeling out every
Nuclear reactor on the planet. Because I felt the data was dated. And it was
looking at every reactor. When it was built. When the license expired. When was
a renewal in place. Was it going to happen. And I went country by country. And
I looked at every country where Nuclear power is derived. And what is the
political atmosphere. What is the atmosphere for growing it, shrinking it, or
staying neutral. And what I what I did as I was trying to understand demand by
building it from the ground up, was to go draconian. So if there was a country
that was talking about closing, shutting it down or reducing dependency. That
went into my numbers. And I did that and I looked at planned and future
reactors. And it took only a very small portion of those because you don’t know
what the future is going to hold. And then those reactors under construction.
And I wanted to understand the role of Nuclear v Wind & Power. And when the
power is growing, people tend to turn into a zero sum game. But I don’t believe
it is. So when I did all of that, and that that took several, several months.
Reactors under construction, existing reactors, a small portion of those
planning & proposed by country, and closed down a lot of them. I concluded
what this is actually a growth business. It’s a. It’s a 1%, 1.25%, 1.5%. And if
I want to get a little goofy and bring in some of those other reactors, I could
get 2.5%, 3%. When I did that, I said wait a second this is an industry, that’s
come from market capitalization of over $150Bn to less than $5Bn. It’s 11-12%
of the global electricity grid. It’s growing. There’s a disconnect here and
there was only there was only really one major company that was Cameco, of any
substance of market cap. And then I realized that this was the big thing for
me. I have never in my career seen an industry that is critical to the
infrastructure of certain countries in the world from an electricity
standpoint, that basically had been left for dead by institutions. And that’s
when I said let me really dive into the supply side. And as I dove in there.
That’s when I start… this now where it was this was 2016. All of 2016, the
latter part of 2015, is when I really devoted time to this. Never speaking
publicly about it. And then the first time I ever spoke publicly, was in March
or April of 2017. I’m on Real Vision TV.
Matthew Gordon: And what was the reaction?
Mike Alkin: It
was it was good. It was it was well received. It was ‘oh Uranium’. Forgot about
that. Yeah. And then I was asked to speak in another investment conference in
the summer. And I kind of, I started to really would start, I think validate in
my mind that there was something to the thesis, is here’s a guy who a year and
a half ago couldn’t tell you anything
about Uranium. I’m not a mining engineer I’m not a geologist. I know that I
know what to avoid in terms, and I know where to go find help for that stuff.
But here I was I presented a thesis that was a little different. And they’re up
on YouTube. People could look at them. And explain the industry and the fuel
cycle. And you would have thought I reinvented the wheel. And I had Uranium
companies reaching out to me. Asking me my view on the global macro of Uranium.
I thought something is not right here. And so that was really then and now.
What determines, it’s interesting that earlier question. I don’t think about it
in terms of, especially as a private investor will now with a fund with a with
my investors knowing that there is a longer term time horizon. I’d look at risk
reward. You know the way I view this all Matt is. There are, I like to take a
fewer swings at the ball the better, and so in this particular case, it’s all
all I measure is a risk / reward. What is the amount of upside I have v the
amount of downside? And if I take care of my downside, and that’s how I was
taught in this business and that’s how I lived this business. If you focus on
the downside, and where you could be wrong, and where you’re going to go if
it’s wrong. If the fundamental work is right, the upside will take care of
itself. So normally I’d look for 3 to 1, 4 to 1. I like that 3, 4 times up. So
if something’s 10% down, you have 40% up. Right. For simple math for those who
are just learning what that is. When I started looking at Uranium. It was
orders of magnitude different. And I started looking at the downside, and I
said ‘OK well I don’t think I have a brother I can. I think I can get my head
around the downside. I’m very comfortable with what that downside is. I don’t
care if it takes 1yr, 2yrs, 3 yrs because I can’t get that upside anywhere
else’. And so that’s kind of how I think about it. Now at that time the price
of Uranium was in the mid 20s probably, low to mid 20s. Today here we go,
couple of years later it sits in the low mid 20s. The equities have had a
little bit of a fit and start. So from a risk reward standpoint. I’m sitting
thinking my goodness. And there have been a couple of things that have caused a
little bit of a push out from the price realization standpoint.
Matthew Gordon: Well let me let me just come on to that. But here’s the bit where the followers and watchers of this video might… well the experts might feel this isn’t for them, but let’s do this for the people new to Uranium. Okay so let’s start with the basic. I want to look, as the way that you and I have done in our careers, you break down all the variables. You try and work out with each of those and then you come back together. So can we are really basic. What is Uranium. What types of Uranium is there? And what are the uses. Just just helicopter view stuff.
Mike Alkin: Yes.
So Uranium is abundant in the earth getting it out of the Earth economically is
different. So it comes out either one of two ways. 1.Conventional mining, which
is open pit or underground. Or what’s called ISR, In-Situ Recovery. Some refer
to is as ISL mining. And basically we all know what an open pit or underground
mine looks like. If you think about ISR, it’s basically think about, what you
would say when you see an oil or gas well being drilled. So you drill down. You
put injection wells and you put a solution in, you separate the Uranium from
the rock. You bring it up through pumps that are bringing it up. You process
it. And those are the two methods. The ISR mining method is less upfront
capital expense. But a relatively high on-going expense to maintain it. And you
also have typically have decline rates that are fairly high. So that that’s the
math. Now once it comes out of the ground, it gets processed and dry and dried
into drums. And you’ll hear the term yellowcake. And it gets put into drums and
it looks yellow. From there it then gets sent to a conversion facility where
it’s turned into UF6, it’s a gas. From there it gets sent on to an enrichment
facility. Where, for Nuclear power, when it comes out of the ground the energy
content is 0.7%. To power a Nuclear power plant, it needs to be enriched to
between 3% and 5%, and for a Nuclear weapon over 90%. And it goes through an
enrichment plant. And then from there it gets sent off to a fabricator, where
that enriched Uranium product DUP, is turned into very small pellets the size
of my thumbnail, and if you stay with me that’s a pellet.
Matthew Gordon: Wow.
Mike Alkin: And
you put a lot of pellets into the fuel rods
Matthew Gordon: Right. Interesting. There you go.
Mike Alkin: So
from there it then gets sent to a Nuclear power plant, gets put into the
reactor. Now the length of time for that to occur. Is 18 to 24 months. That’s
right fuel cycle.
Matthew Gordon: So I say again just to take it to what people might understand of conventional mining terms. So they, in the sense that Gold comes out of the ground with different levels of grading for a lot of commodities or you find in different quantities here the same rules apply and I guess and then the enrichment process…
Mike Alkin: So.
So where were the great matters is the economics of the mining. So the higher
the grade the less rock got process.
Matthew Gordon: So the same rules apply. OK. Interesting.
Mike Alkin: And
we can talk later, or whenever you want about, the geographical differences and
grades and what not.
Matthew Gordon: When I think of Uranium I think of Kazakhstan, Canada, Australia. That’s the big ones. But you but you say it’s also everywhere but since the day the the three…
Mike Alkin: It’s
everywhere in the world, but where it is there’s plenty. It’s getting it out
economically that’s difficult.
Matthew Gordon: Right. Okay. So why don’t you tell us a little bit about the amount of Uranium there is in the world currently.
Mike Alkin: So I
mean from a demand perspective, and you asked earlier about the uses. Most of
the Uranium that comes out of the ground is in most of the demand comes from
the civilian Nuclear power.
Matthew Gordon: Nuclear reactors as the public would know them as. Okay. And you talked about… that you’ve identified how many Reactors there are on the world currently? How many being built? How many are in planning?
Mike Alkin: There’s
450, they call them operating reactors, but they’re not operating. From that
number there were 54 in Japan, that went off-line after Fukushima meltdown.
After you had the accident at Fukushima. 9 have since re-started. And then
you’ve had starts and stops but along the way. So in the 420 ish range, that’s
actually serving electricity to the grid. There are about today, there are
about 55, 56 reactors under construction. Around the world. And there are
hundreds of reactors in a planning and or a proposed stage.
Matthew Gordon: Okay. So that gives a sense of these numbers. And then you also mentioned earlier the fact that there used be a lot of Uranium companies that existed. And I guess with the peaks and troughs of the markets, and then the spot price coming in and out, and these black swan events of the Fukushima, Three Mile Island et cetera. These companies have increased and declined in equal measure. So today how many producers are there?
Mike Alkin: So if
you think about the nature of the Natural Resource industry, especially the
junior miners. When the price of Uranium went from $9 to $137, everyone wanted
to become a Uranium miner. And then the cycle turns and they’re caught they’re
stuck. So that’s a lot of those companies. So the kind of the way I think about
that, there is state owned production countries. State owned. And then there’s
private and public companies. So you have producers, near-term Producers and
Exploration Companies. From a production standpoint, as you look around the
world, 41% of all Uranium comes out of Kazakhstan. About half of that, from
Kazakhstan roughly, comes from the state owned entity called KazAtomProm.
KaxAtomProm, was if you go back to the mid 2000s, very early 2000s to mid
2000s, was a small player. And so was Kazakhstan. And they’ve expanded. They’ve
massively expanded their reach. To now they’re the number one player in the
world. Kazakhstan’s number one country in the world, KazAtomProm is also the
largest one. Now they just floated 15% of the company to the public. In
November, December of 2018. Then you get into your other producers. You would
get into Orano which is the state owned French Nuclear giant. And they have
production in various places. Niger is a big producing point for them. They
also have joint ventures in Kazakhstan as well. The next one you get to is
Cameco, in Canada, in Saskatoon Canada. Which has really been the leader in the
space from from technological standpoint, they own two of the biggest mines in
the world; McArthur River and Cigar Lake. And you know there are 20% producer.
And the fascinating thing about this is as you start getting KazAtomProm and
Cameco, just those two alone are over 40%. Kazakhstan, and the joint ventures
in Kazakhstan, and Cameco are over 60% of production. So you have a very
concentrated production base amongst your majors.
Matthew Gordon: Yeah. And I do want to talk about that in a minute in terms of their control in the market place and their influence in the market place, and we will come onto that when we get back into these sort of the meaty areas discussion. But just to continue this conversation with regards to understanding what the variables are. If you don’t mind. So there is the political, or geopolitical component to this, because it’s a very emotional, emotive subject. The psychology of it is definitely a key driver between the thinking of 10yrs, 20yrs, 30yrs ago and I do see that changing. Obviously influencers like Bill Gates, affecting people’s perception. And there’s a lot of work being done around that. So I mean if you don’t mind, can you give us your view on geo-political state of the market. You did touch on it with Cameco, KazAtomProm and Orano. How do you see that at the moment and how does it work?
Mike Alkin: So
you know for decades the United States was the leader in Nuclear Power. Nuclear
power and Nuclear weaponry. And it’s an important role to be at the table and a
leader in the fuel cycle is because through the various agencies, you can, and
technical and technology when you’re building reactors, you can play a role in
non-proliferation because you have a seat at the table, and you can help
dictate who gets what and where and so on and so forth. If you go back to the
80s, during the Cold War peak, the United States was consuming 45Mlbs, 50Mlbs a
year of Uranium and producing in the 40Mlbs range. You fast forward to today
the United States produces less 1Mlbs and consumes close to 50Mlbs.
Geopolitically, it’s been a sea change over the last 15-20yrs. And what you see
now is that the Russians and Chinese, and you have the Koreans, but the
Russians and Chinese are dominating the Nuclear fuel cycle. And you think about
Russia and energy and how they use their influence in natural gas let’s say on
Western Europe. What they’ve done in the Nuclear Power space for them they
should be commended because they’re using it to their advantage. You know the
Nuclear Power’s growth story is not a developed world story. It’s a developing
world story. And so in the West it might
be flat, it could slightly decline a little bit. You get a few come on the grid
but it’s neutral. In the developing world is where all the growth is coming.
And with the Russians and the Chinese have done is have vertically integrated
the fuel cycle. And so if you are RosAtom the (Russian) state owned entity, or
if you’re the Chinese, which has a couple of entities, they will go into these
developing countries and they will say we will we will, most of these countries
that are becoming more economically developed. They have to deal with coal and
pollution and pollution kills 7M people a year. So what they will though say
look we’ll bring you clean air will bring more people and scale onto the grid
with Nuclear power. So we increase standards of living. And we will finance the
reactor for you, we will build it for you, will provide the Uranium, the
conversion, the enrichment, the fabrication, we will help operate it for you,
will get you set up. Now they own you, in terms of that, on that regard. So
you’re dependent on them. The West has,
and when you’re in China or Russia and you’re building a reactor. If it’s five
or six years and it’s $6Bn, that’s what it is. A little bit here and there in
the West, it’s twice as long, twice as much.
Matthew Gordon: So I do appreciate it. I mean I kind of read about this. The way that the Chinese and Russians coming in and you know they… they pay for everything. And they’re also know bartering nations that they can be paid and other mineral resource as well. So I did quite like that and with countries like Africa, where the GDP isn’t huge and the available cash is not huge. And this is a very, very attractive proposition but it also means that relationships get built. Which is not necessarily what America wants to see.
Mike Alkin: Correct.
Matthew Gordon: The whole geopolitical components is very, very important especially with this recent Section 232, in the marketplace, here I think the proposition there is that it was on the basis of national security. But do you think it is?
Mike Alkin: I do,
purely as an American I do.
Matthew Gordon: Right. So talk about that because this is all intertwined, isn’t it.
Mike Alkin: Yeah
it is. So the Americans have lost their seat at the head of the Nuclear
industry. I do believe that. And in many ways. From building reactors, to
enriching Uranium. Enrichment is so critical. Without enriched Uranium the
reactors don’t work, unless it’s what’s called a Candy reactor up in Canada,
where there is certain reactors that don’t need enrichment. But for the most part,
it needs to be enriched. And in the United States there is no enrichment that
is owned by the US. There is a plant in New Mexico owned by an English Dutch
German conglomerate called Urenco. But the United States consumes 50Mlbs per
year and most of it in the Nuclear reactors. The Navy is known as the Nuclear
Navy. The Navy has been Nuclear powered submarines and carriers.
Matthew Gordon: It’s a huge number isn’t it?
Mike Alkin: Look
like it’s hundreds. And it’s it’s critical to the Navy and they have reactors
all over. They’re floating reactors. And then you know there’s other things
that Nuclear is used for medicine and whatnot but most of its Nuclear power.
But here’s a country who is 20% of its electric grid. So one out of five homes
or businesses are powered by Nuclear power. And yet it imports 99% of its
Uranium needs and and no substitute in a Nuclear power plant. You can’t
substitute something else. It’s Uranium that’s your feedstock. And so what you
see, what winds up happening is is the
production here is less than 1Mlbs, and they import the rest. Now we have our
friends the Australians and the Canadians who are… we’re friendly. They’re
our best best mates. But in any given year it could be from 30% to 40% to 50%
to a little bit more that will come from what one would argue could be the
Russian sphere of influence, Kazakhstan, Russia, Uzbekistan…
Matthew Gordon: Why is that problematic for you? Why is that not just open markets? What would it what is what does that what does American nervous of in that scenario?
Mike Alkin: So
the Russians will easily use natural gas as a geopolitical weapon into Western
Matthew Gordon: We see that Nordgas 2 coming into Northern Europe.
Mike Alkin: Yeah
exactly. And so you have something that’s so critical to your infrastructure
and to your military, that. The Navy is what enables America to be America. It
can be anywhere in the world. I believe that that the U.S. naval fleet is the
size of the 10 next biggest naval fleets.
Matthew Gordon: It’s something as crazy as that.
Mike Alkin: It is
something as crazy as that. And slow and it has become reliant upon it. Now
there are stock of it. But that’s not forever. That’s going into the middle of
the next decade.
Matthew Gordon: So you’re saying, even with the partners Australia, Canada with your Canadian friends. You’re saying that you don’t want to be beholden to them, or reliant on them, even…
Mike Alkin: It’s
a matter.. it goes beyond friendship. And so if we look at really what it is
and it’s you know the utilities will make the complaint that… and by the way
I should preface this, I don’t care as an investor which way 232 comes out. It
Matthew Gordon: Right
Mike Alkin: But
as an American I am inclined to want to see something happen. And here’s why.
If we think about the production that comes out of Australia, and it comes down
to economics. Australians have Olympic Dam. Which is Uranium is produced as a
byproduct of copper production. So Uranium will come in or out depending on
what Copper’s doing and how much they feel like investing in that. And then you
have Four Mile, another mine down there which is a few million pounds a year.
Now you move up to Canada, our great friends, a little bit to the north of us
and they have one producing mine. Cigar Lake.
Matthew Gordon: MacArthur has been closed down right.
Mike Alkin: McArthur
River is of 18Mlbs per year right. So what that’s saying is, and this is where
I think the disconnect, when we can we’ll go to as much like the depth as you
want to, is the economics of such are, well first off the the Canadians and the
Australians. Now BHP will be more of a spot seller. But Four Mile will be a
contract. Cameco has 150Mlbs of contracted future deliveries. Now they are
producing out of a joint venture in Kazakhstan called the Inkai JV. They’ll get
4Mlbs a year from that. They’ve got Cigar Lake producing. And you know you get
18Mlbs and their portion of it. But then as you start to… that’s not a lot of
pounds. And McArthur River is off-line because the economics are such where it
does make sense for them to produce, the highest-grade Uranium mine in the
world at prices that are or are not economically incentive. So yes we can say,
hey Canada, Australia, the Russians let’s say make it up. The Russians have…
and the Kazakhs are withholding Uranium. And by the way last year in the Duma
(Russian parliament) and the first version of it didn’t… it was unclear how
it’s come out, but the Duma gives gives the president the authority to on
certain critical minerals to say not sending it in. Do you want to be at
that….because what happens is the inventories will… the utilities will keep
a couple of years of inventory around. Now if you start to exhaust those
inventories, and all of a sudden it’s a two year fuel cycle, and the spot
market as as we just saw from Cameco announcing on a conference call they
couldn’t find 1Mlbs in the spot market. So now where do you go? Well well
you’ve got India with a voracious appetite for Uranium. You’ve got China with a
beyond a voracious appetite for Uranium. The world has a lot of people who want
Uranium. And so maybe their production isn’t there, which it’s not now. All
right you’ve got these two in Australia, and one in Canada. So we can’t just say,
‘oh we’ll trust them’, because the economics don’t make sense for them to be
able to meet the demand of 50Mlbs. That’s that’s a lot of demand. That it’s a
third of… that’s less more than a third but it’s a big amount.
Matthew Gordon: Yeah. So many questions, so many questions but…
Mike Alkin: This
is this national security manufacturing. It’s powering manufacturing
facilities. . If in time of need where you needed to ramp up manufacturing. Who
knows what the world will bring if you have a war and you have a 50 year grid
that’s in peril That could be national security.
Matthew Gordon: So the few things there which in conjunction with (Section) 232. You’ve got utilities with contracts. You’ve got producers with contracts, long term contracts. There’s a bit which is kind of confusing me here, in the sense of 232. It was brought by I think Energy Fuels and UR Energy, put forward by them, not quite sure of the detail, as to what is being asked for or indeed what will be found by President Trump and his team. But it seems to me that it’s kind of frozen the market. The utilities are waiting to see what’s going to happen. Like for you, you just said ‘I don’t care as investor’, the announcement. Doesn’t effect you right. But for these guys, it’s a big deal because they’re committing to forward contracts at one price…
Mike Alkin: You
see me you see me shaking my head right.
Matthew Gordon: Yeah right you feeling the same pain? Or same confusion as I say.
Mike Alkin: No,
no I’ll tell you why. I have it …can I step back for a second an answer to
Matthew Gordon: It’s a big it’s a big question.
Mike Alkin: So
one of the biggest surprises I have had in my journey in the last four years in
the world of Uranium, is the lack of diversification and analysis in the actual
Uranium market by all industry participants. There is a handful of industry
observers, that opine with numbers. And some are handcuffed by what they can
include in it. Others have their own reasons for putting out a high low and
base case that you can drive an ocean liner through, which allows you to morph
to wherever the market is. But one of the things that I think surprised me the
most was in speaking with, many and I won’t name names but many Uranium mining
companies was the reliance upon those entities for their numbers. And one of
the things when I started diving in here and peeling it back and spending a
year, year and a half in the light bulb went on. I went on and said these
numbers are not economically driven. They’re project driven. But not
economically driven. Some of these numbers on…
Matthew Gordon: What you mean by that? Tell me what you mean project….
Mike Alkin: Well
so if you’re one of the entities because there was a great Uranium cartel,
great book too called The Great Uranium Cartel in the 70s & 80s. It was
front page news around the world and people went to jail over it. Hence if you
if you go to one of these fuel conferences what you’ll see… a Uranium
industry conference, you’ll see on the registration thing you’ll see a sign
that says please do not talk commercial activities, do not talk terms. They’re
afraid of price collusion. And so as the sausage is made, in one of these
entities, the costs of these projects in the future, the cost, the commercial
cost, to maintain a project that’s in production is counted in future
production. And so but these companies outside of the State owned entities
are… most of them are public companies. And at some point, when the cost to
produce something is meaningfully below the cost that you can sell it, that is
meaningfully higher than the cost at which you can sell it, you have to halt
Matthew Gordon: Yeah, claiming revenue going forward is in other industries. Other industries do it and they could do get caught out. So why were they allowed to do that.
Mike Alkin: Well
it’s that it’s their method of forecasting because rather than wanting to be
included they don’t want to be forecasting price forecasting costs and they
rather not do that, because they don’t want to be perceived as colluding with
the industry. With either side of industry. So here here’s today what it is.
And then here all these projects that are on the drawing board. Let’s assume
some of those come in, and all of these projects that are in production right
now well they’re going to stay in production. Well that’s not the case. There’s
many reasons why they’re going to come out, and economics is the biggest
reason. And so as I started thinking about that, I started just working my way
into the fuel cycle and talking to fuel buyers, CEOs. People in the industry
who’ve been around for a long time are. Traders. Enrichers. What I realize is
everyone’s using the same set of numbers. It’s a closed loop.
Matthew Gordon: Right. But they but they’ve all got their own business model, but they’re using the same data. Is that what you’re saying?
Mike Alkin: That’s
what I’m telling you. I could count on one hand or guys that are doing their
own numbers. In terms of public companies. In terms of the utilities. I haven’t
Matthew Gordon: But I think this is my point. You know the industry, the utilities are frozen. They’re waiting for something to come out. They’re not in control of any aspect of this. I guess a slight segue way so I think it was a smart move to buy Energy Fuels or UR Energy.
Mike Alkin: Great
Matthew Gordon: It feels to me like a chess move.
Mike Alkin: I
never knew it 232 was before it was announced in the middle of January 2018.
Now in my presentation in June of 17, I talked about the US conundrum and how
the Russians have the US and checkmate. But I didn’t know what that answer was.
My view is very simple. So the US miners would tell you that the foreign
imports, specifically the Kazakhstans, going to see the Chinese coming in and
the Russians are all state subsidized and they don’t have the same mining
methodology and they don’t put the same environmental standards. And so their
costs are lower, but it doesn’t matter necessarily what the costs are, because
the state will subsidize. And as a result it’s hurting them right. Now. That
was never part of the thesis that I had, because my view is the world is in a
deficit now and that deficit will continue to increase, and in 2017 my thesis was, certain, project by
project, certain projects can’t stay online. They will come out of the mix and
that will lead to a deficit and that deficit will benefit all of the miners.
Well I shouldn’t say all because many of them…not those with bullshit
projects, because there are some of those in a junior mining world, that sell a
good story. But those that with real projects, will benefit. Now when you look
at the US my belief is if 232 came in the US government, if Trump said nothing,
you get nothing. I believe there is a deficit in the world of Uranium right now
that UR Energy and Energy Fuels. Will be fine.
Matthew Gordon: But undoubtedly, I know the Energy Fuels guy Mark because we spoke to him. They’re sitting on a lot of cash as well. That also helps with optionality. It gets the point I’m trying to get out just understand. Why they did it. Is it for for the good of US producers or is it for the good of those two companies only. As you say there’s a global deficit probably currently, and definitely coming. Everyone with cash, with a good asset will be fine. I get that, but do you think they specifically did this for their own benefit or for for US producers and developers.
Mike Alkin: So
yeah. So you know, they’re the only ones who can answer that question. I can’t
speak for them.
Matthew Gordon: I thought it was a great move. I thought it was a move that was very brave and very bold. I take my hat off for that but it has paralyzed the market.
Mike Alkin: It
has. And it’s interesting because if we say it’s 25% make it up that’s what
they say. Trump says sure. That’s 12Mlbs a year.
Matthew Gordon: You told me they produce one to two right now.
Mike Alkin: Less
than one. So it’s going to take a while right. Cameco can do 3-4Mlbs, Energy
Fuels but there will be others that would benefit from it. Now I also think…
when I say from an American standpoint. I don’t, I can’t help that America put
themselves in this position, on the whole Nuclear fuel cycle. Do I think that
there should be more production in the United States, so that there’s less
dependency on imports and those coming from those, who may not have the US best
interest. Yes. So when you asked me earlier from an American’s perspective, I’d
like to see us less dependent. But I do think the markets will get you there.
Because I think the fundamental issue right now is the price of Uranium is
simply too low. And when you go back to the start of the last cycle in 2003
when the price was $9 or $14 in today’s 2019 dollars. And it went up to $137 in
the spot market at a peak, not the average price average price was about
$88-$89 in 2007. That was driven by really Uncovered demand. Right. And if you
go back and look in 2003 and 2004. Right, because most, historically, most of
the industry has don… transactions are done through long-term contracts. It
was at one time in the early 1980s it was 85%, 90% in the early 2000s 85%, 90%.
Now it’s roughly 75% to 80% but those
are contracts that are 7yrs , 8yrs, 9yrs, 10yrs in length. And as utilities
start to bring their inventory levels down. And it takes them a couple of
years, and they start to have what’s called ‘Uncovered Demand’, not covered by
contracts, what they then start to do is they start to Forward Contract, a
couple of years ahead of time. Now if you look back at the last cycle, the similarities
to this cycle are are stunning. If you look back in 2004, you had teens % of
Uncovered Demand over the next year and then it went a little bit higher and
then a little bit higher and then 4yrs on it was 80% to 100% of Uncovered
Demand. Well you look here and you’re seeing the same trajectory where
Uncovered Demand close to 20% and then
it gets close to 30% and then close to 50% over the next 3yrs, 4yrs, 5yrs. The
utilities in the last cycle were contracting a few years before they had any
Uncovered Demand. Fuel buyers of very smart people there. You know I think
sometimes as an outsider in the industry sometimes, and I’m outspoken on it,
sometimes I Fuel buyers will say ‘well you know think we don’t know we’re
talking about’. On the contrary. The fuel buyers have played this cycle so
wonderfully. I’ve said this I spoke to a group of 150 of them at the Nuclear
Energy Institute in October. They played it beautifully and the miners did not.
Matthew Gordon: Well tell me about that. Why do you say they played it beautifully.
Mike Alkin: So
these contracts are 7yrs, 8yrs, 9yrs, 10yrs. If you look at where the price was
in 2003-2005, it starts going up people say, ‘What’s your price target on
Uranium’. Well if you go back when when people were signing…when the price of
Uranium was $137, they weren’t booking contracts at $137. A Uranium miner is,
if they’re prudent they’re going to have a mix of fixed contracts, first market
related contracts, maybe 40/60. 40 fixed, 60fixed. And as far as those prices
are going up, they start locking in prices so that the price you realize over
the long-term is is meaningfully lower, than what the actual spot prices. So
what you start seeing is with these prices, the prices will start to accelerate
ahead of time. Right, they start moving up ahead of time. And then what you see
is you start it starts to feed off itself, because there’s not a fuel buyer on
the planet that’s going to get fired for the price that he pays for Uranium.
The fuel buyer will get fired if he doesn’t secure the supply of the Uranium
for somewhere. And that is a very important distinction and I think history is
so important to look at with any of these cycles.
Matthew Gordon: So explain that. So what I think what you’re what you’re saying there is that the Uranium itself as a percentage of the cost of running an energy operation. Is is not de minimus but it’s insignificant. The cost of shutting down would be the real cost.
Mike Alkin: Think
about the a coal fired or natural gas fired power plant. The input, the fuel,
the feedstock, coal or gas is 80% to 90%. If you think about a Nuclear reactor.
What’s the biggest cost? Well it’s building a darn thing. And then and then
it’s operating. The regulatory burden is immense. And so you could say how much
of that regulatory burden is necessary. How much is really safety related
criticality from safety criticality standpoint v just paperwork. But they are
big expenses. When you start looking at the smallest expense at about 20%, is
that the ‘front end fuel cycle’. Now what does that include? That’s Uranium,
that’s conversion, that’s enrichment, that’s fabrication and that’s getting it
into your reactor. Of that price, so about 40% ish of that, is Uranium. That’s
what it is. So could it be 8%. And if Uranium is down in the toilet could it be
3%. 5% v 80% or 90% for the other. Now does it matter? Sure. In the US where it
is, there is merchant markets. It’s a competitive market. Natural gas prices
have been low. Wind and solar subsidized. Wind and solar have hurt it. But the
overall cost worldwide to these reactors is single digits, for Uranium. Now for
the front end to fuel cycle, it’s different, but that’s not the pound to pull
it out of the ground. But now where you really see that, is in the contracting
cycle. I’ll read you some numbers Matt. It’s quite stunning, when you were
looking in 2003, when you had Uranium at $15 a long-term price, average
long-term price of $11 and the spot price of $10. You saw 70Mlbs contracted. At
in 2004, the average spot price of $18.60, and the average long-term price of
$25, you had 90Mlbs. When it got up to $25. So now from from $10.20 to $20 up
to $25. So we’ve gone up 2.5 times. Next year you saw 240Mlbs. And then to 225
to 215, as the price kept going up. So they were buying a third of what they
were buying at the bottom, and loading the boat at the top. Why is that?
Because they were worried about the security of supply. Now when you go back to
the last cycle. There were 22 reactors under construction when it started. There
was new mines, significant new mines, supply coming online, upwards of 20% of
existing supply. And you fast forward to today. Those 55-56 reactors under
construction. And with the exception of a potential in Spain for a few million
pounds, the price of Uranium where it sits today, there is not a project on the
planet that will get financed to do that. And you’re seeing production coming
Matthew Gordon: No. I seen that. I think that it’s well document. You’ve been very good at explaining to some of some of your pieces previously. The price is nowhere near where it needs to be. It’s nowhere there. But you think as the market develops, we’re going to see a rapid increase. I mean what’s your sense of timing for all of this, because I put my investor hat on, I want to know should I be piling in now or should I wait for 12 months, invest in some other stuff, and come back and see Uranium at the end of this year beginning of next.
Mike Alkin: If
someone thinks that they that’s an individual decision. So what are they going
to do? What’s the opportunity cost of their capital being flat.
Matthew Gordon: Exactly.
Mike Alkin: And
what’s the upside if it works. And if it works. What’s…that goes all back to
risk reward. I worry about my downside. What gets Uranium back to $10. I don’t
know what it does. Another meltdown, God forbid, maybe! It’s $25 today just
from the reactors under construction, and they use 3x the amount of fuel on the
initial load. The demand is there. The supply isn’t there. In the primary
market, the secondary supply isn’t there, but my worry every day, is what gets
it back at $10, $12, $14, $15. So I got it knock the house down. Those are more
outside events outside of my control that would do that. None of it’s in my
control. But in terms of that, you can quantify. So now in terms of when does
it turn? If we go back to the fourth quarter of 2017, now the Uncovered Demand
a very important point I want to make here. I went back to saying 2003, 2004.
You had virtually no Uncovered Demand. Very small, over the next couple of
years by utilities but they started coming into the market and they’re
contracting when 55, 70, 90, to 240. In the fourth quarter, as you start to get
to 2020, you’re into the mid-ish high teens and then it gets into the $20s and
it rapidly starts to accelerate of Uncovered Demand. In the fourth quarter of
17, you saw reasonable size request for proposals from the utilities the US
utilities in the marketplace for Uranium. Now they have not really had sizable
‘price discovery’, for a while. And is it interesting thing that happened in
the market that hadn’t really existed. 2012-2017. And that’s something called
the carry trade that was introduced into the Uranium market.
Matthew Gordon: Tell me about that? What is that?
Mike Alkin: So if
we go back to 2004-2005, as they’re ramping, and 2006, ramping these big
contracts. What you start to see is those start to expire in 2013 and 2014 and
2015. Now in 2011 Fukushima had its accident, there was the accident there.
Some of the big investment banks who have commodity trading desks. Very smart.
They were working in an environment with 5000 year low interest rates. And they
went to the utilities and said ‘Listen, as your contracts are rolling off.
Don’t enter into long-term deals because we don’t know where the price Uranium
is going to be. We’re not sure’. Right it’s it’s at this time it’s in the $40s
and $50s and coming down. But we don’t know where it’s going to settle because
you guys don’t have really a lot of Uncovered Demand. Japan is not coming back
online like people had thought it would. The United States Department of Energy
is selling Uranium or bartering Uranium to pay for the cleanup of two old
gaseous diffusion plants. Let us use our balance sheet. We’ll charge you a fee
and we’ll ‘carry it’. That’s the term ‘carry trade’. We’ll carry it and we’ll
go out and buy it. So buy one two year deal with us. And we will hold it. And
deliver it to you in the future. And all of a sudden the Utility is saying wait
a second, we don’t have to lock into a 7yes, 8yrs, 10 yrs deal. We don’t have
to buy market escalated price. We don’t know where it’s going. We can really
reduce our risk. That became like ‘crack cocaine’ to utilities. Now the big
guys who started it the banks aren’t in the commodities trading business
anymore. But for many years, it was a very meaningful portion that created this
lack of price discovery. Now, there’s always there’s contracting taking place
but not… when you’re going from 70Mlbs to 200Mlbs that’s a difference in what
you’re going to see.
Matthew Gordon: That’s interesting so you’re saying that lack of price discovery has had a meaningful impact in the marketplace.
Mike Alkin: Now
there is price discovery, there’s always some long-term contracting taking. But
as you look at the volumes. Let me tell you the volumes in the long-term
volumes. You went from 240Mlbs in 2005 to 24Mlbs contracted in 2013, Nothing
compared to what it had been. So it was it had fallen off a cliff. And the US
you and the utilities are saying ‘well why should I, because I’ve got these
carry trades’. As rates start to be as they come off the bottoms and then you
start to see people trying to raise rates, there’s less of an appetite for
that. And that’s that’s been much more muted. And so you’re not seeing that
that occur as much.
Matthew Gordon: You have these kind of synthetic products out there affecting conventional behaviour, but what is that sort of come and gone in a very short space of time and so people don’t feel so strongly about those now. What’s happening now?
Mike Alkin: So now in the fourth quarter of 2017, you start to see some RFP’s. January 18th, I think it was 2018, maybe January 15th, I forget the exact date, you see that 232 petition filed. Well so what did that do? Now these contracts are not negotiated on a telephone call. They can take 3 months, 4 months, 7 months and they can take a long time. A lot of stuff that goes into it. Very smart people on both sides trying to figure out how to negotiate it. So now the US utilities are saying wait a second, ‘Let’s step back. We don’t know what’s going to happen’. Now the US leads the charge. They’re the biggest out there. We don’t know from whom and how much, we’re going to be told now. That’s January of 18. Nobody knows at that point if the Department of Commerce will even pick up the investigation in July of 18 they said they would and they had 270 days, nine months. And in July they said we’ll will investigate, in April they made their recommendations. Now what that has done is it has created paralysis because the utilities in the US simply don’t know what they’re gonna be told they have to do. So when I say real price discovery, it’s that utility that’s going in to buy 5Mlbs a year every year for you know for 7-8yrs years. What’s he going to pay for that?
Matthew Gordon: And what are the conditions under which they have to pay?
Mike Alkin: And
so what’s happening is spot market. And when you see that when you look at the
the bought to consume, you know when you look at 2005 to 2012. The utilities
were buying 136% of their needs. They were over buying. Over buying, over
buying. From 2013 to 2018, they were buying 72% of their needs. So where’s that
come from? Where’s the balance? Inventory draw down. And that’s where that’s come
from. So now you have is you have a spot market that is tightened. And if you
listen to the Cameco call, Cameco said, ‘we couldn’t find 1Mlbs’.
Matthew Gordon: Right now because they couldn’t find 1Mlbs or they couldn’t find 1Mlbs at the price they wanted?
Mike Alkin: They
would pay they couldn’t take delivery now.
Matthew Gordon: What does that mean, they couldn’t take delivery?
Mike Alkin: The
Uranium market is a big swaps market.
Matthew Gordon: Yes, paper everywhere.
Mike Alkin: It
paper right. And the swaps market is very, very very active. But now on the
swaps market has dried up and you need actually take physical delivery. It
becomes a different ballgame. It becomes harder to find. So they really they
were not able to fill 1Mlbs of demand. Now I said these utility buyers are very
smart people, and they played this cycle very, very well. And they really did.
Now why? They stayed out of the market. They did the ‘carry trade’. They came
into the market at the end of 2017. Some of them started request for proposals.
They didn’t know what they’re going to do, they pulled out of the market. Well
what’s been happening in the spot market? Average volumes over the last from
2001 40Mlbs a year. In 2018 it was 89Mlbs. Now there are those who would say ‘well
all these financial players’. I can promise you, I am at all of these major
Nuclear power conferences and I see the rosters, there’s three or four of us.
So who the financial players?
Yellowcake, they bought 8Mlbs last year. Yeah UPC buys a little bit. A
couple of family offices by a few hundred thousand pounds. These are people
entering the market some traders. There’s trader activity taking place, but the
spot market’s ramping up, because the utilities are bright people, and they
know that that inventories are tightening. They know that Uncovered Demand is
out there. And they need to start getting price discovery.
Matthew Gordon: So this is fascinating to me. I don’t know a lot of this. So it’s always interesting to listen to someone like you. But can we just talk about the impact of people like YellowCake and you could see in the marketplace, because again as an investor, I’ve got to make this call ,as to what I think the equities is doing. Should I be getting ETF, should I be buying physical?
Mike Alkin: Well
the Uranium ETF is a calamity. It has. The assets have been cut in the middle
of last year they decided to reconstitute ETF. And they went from 100% miners
to 40% miners. And the rest Nuclear power players. They have a Gold company.
They have Korean and Japanese … conglomerates in there it is nothing close to
being a pure play. Now when they first announced that they had to go from 100
down to 40, there was a lot of selling. Of those equities to do that, into a
market that junior miners don’t trade hardly. They’re very illiquid. So that
that for several months, you saw big pressure on the equities. What global ETF miscalculated was. Well a lot of people
are going to want to own this, because it’s not a pure play. So you’ve
literally seen the assets get cut in half, and every day we track that. And you
see they… they have a withdrawal they got to sell those stocks. And so it’s
been a very technical reason.
Matthew Gordon: But notice he didn’t discount the buying physical. Because the price moves, the price moves. You get an immediate reaction, immediate creation. So is that something that you guys look at with your fund?
Mike Alkin: Well
so we can. We can. How do you play this right. So there’s the physical players
and what you do when you own the physical, you take out the bullshit risk. Of
some of the junior miners.
Matthew Gordon: Exactly. There is a direct correlation to value creation.
Mike Alkin: Yeah.
And some of them not all, but but the junior mining business, I mean these
business not all, and again it’s up to people to do their own homework and
determine what’s what’s..,but some of them are in the business of raising
equity all the time. And so you know you have to determine what’s a good
project, what’s not. But so how do you play it? You can play it. I can. I can
go buy physical and store it with my fund. You can buy UPC or Yellowcake which
is a physical proxy. Now UPC will give you exposure to UF6, as well as you
U308. And then the ETF is not not great. And that’s seen massive withdrawals.
Now there is, I saw they’re putting together an index, of pure play miners. I
haven’t seen the ETF surrounding that but you can see that. And then you and
then you get into producers, near-term producers, and then exploration
companies. And right now comprises your 50 or so companies.
Matthew Gordon: Ok. So there is a bit I really want to get into. So as a investor, I’m looking at the Uranium space. If I’m buying your story I’m going…there is a huge deficit here. It’s a tsunami of demand waiting to happen. But as you say there are good companies and not so good companies. What are the things? What are the components that you look for, when you look to identify a good company versus a bad company because for me in conventional mining, I know what those signs are. Is it any different in the Uranium space? You know there are 50 companies, at the moment you split them up. I’m not quite sure how it breaks down in terms of the early stage explorers et cetera. How do you break them down?
Mike Alkin: Well
you know, it’s interesting. The market has helped do that, it’s culled out many
of these companies over the years. There’s still a fair amount that’s out there
right. So you start at the top, and especially in mining. Who’s done this
before. Have they done a good job. Do they have a history of doing well? What
did they do in the last cycle. Did they make money for shareholders? They’re
very important. What’s quality of that? For me, and and tell I read a few
hundred pages a day. For me there’s nothing like reading Annual Reports going
back to the beginning of the last cycle, and all the way through. I’ve read
every Cameco report you could think of. I’ve read all these juniors that are
out there as far back as they go. You read them. You watch their presentations.
YouTube is a fabulous tool. It marks what you’ve said. And so go back and look
at the interviews, go back and look at the at the annual reports and what
they’ve said in their management discussion and analysis. And just read it year
after year and see how much has changed. Did they did they promise X and X
never occurred, and now they’re promising Y and promising Z? You know the risk
you run investing in these junior companies is, they’re kind of like biotech
companies. Biotech serve as the outsourced R&D arm of pharma, if you will.
Big Pharma. And 1 or 2 of them is going to, 10 of them are going to come up
with something, but a lot don’. They’re really in the big business of issuing
equity to keep funding R&D. Some of these junior miners just keep issuing
equity diluting shareholders to keep drilling projects that are going nowhere.
Matthew Gordon: Right. So I mean at the moment it kind of sounds like Uranium just like any other commodity really, in the sense that you’re looking to the management to inform your decision making. And you,and I agree with you, you should look back over time and see if they keep their promises.
Mike Alkin: But
you can’t just look at the management because they’re all so fit they’re all
polished. They all tell a good story. You’ve got to look at their track record.
Matthew Gordon: Exactly. So it’s the same thing is that you look at the management team, you listen to what they say, have they delivered, have they delivered shareholder value before, have they deliver it a project like this, possibly even in this jurisdiction before? Is there anything kind of specific to Uranium, because you’ve not mentioned any technical component yet? But I suspect a lot of your diligence does involve looking at the company from the technical perspective.
Mike Alkin: So
there is a big school wide school various schools of thoughts on this right.
And I think you have to think about it in terms of second level thinking in
terms of how the cycle plays out. So let’s take a a trot around the Uranium
Matthew Gordon: Fantastic.
Mike Alkin: Geographically.
Let’s do a geographical trot around the globe right. So Kazakhstan is
Kazakhstan and they have JV’s and you’re not going to have direct access to
that. If you invest in Cameco you might. Right. But that’s through being a
shareholder Cameco. But as you think about the world. So Kazakhstan, lower
grade ISR our mining, pumping it out, quite a bit. As you get to the highest
grade Uranium in the world. By orders of magnitude. Is the Athabasca basin in
Canada, severe high-grade. You can get grades into the… you know the average
grade around the world is 0.1- 0.2 you can get grades up there is as 20%, 30%,
40% Uranium. So, meaningfully higher.
Now on paper that is very attractive, because the higher the grade, the better
the economics for the miner. Now so where’s that come into play? So the
Athabasca basin is a big basin. There’s the East side of the basin, and the
southwest side of the base. The newer discoveries have been in the Southwest
side of the basin with some really wonderful deposits. And the East side is
where you see the bigger more established ones, that are there, that have been
around the MacArthur Rivers. Now but one has to ask themselves, is what is the
market and when is the market going to pay up for those big juicy deposits that
can go into production. The market has to ask and people have to ask itself
when will they pay and who will pay. So to for someone to blindly say on any
any company ‘Oh they’re up there. Oh they have this grade and therefore I’m
going to buy the stock’, you can’t do that. Each company is different. Each
management team is different. Then you have Explorers that are up there that
haven’t found yet. I have access to geologists, mining engineers that that
because, I don’t know either, I’m not a geologist or mining engineer. I’m smart
enough to know people who do. And I can talk to, that can guide me and help me.
That don’t work for the company. Because that’s where you go off the rails. So
you have to ask yourself is, because what’s the goal of a junior miner? Most
don’t want to go into production. They want to be taken out right. That’s how
your going to see it. That’s the game. So when is the market going to pay? And
you have to ask yourself, is there infrastructure? What’s the cost of this
project going to be? What’s the appetite right now for large cost project? For
somebody to buy their shares today? It might be different in 12 months, 6
months, 18 months. It might be meaningfully different. When this when the green
shoots, that I see every day in the industry and start to pop through into the,
I’m talking in the fuel cycle I mean, I see when you see it through price
discovery that’s when psyche changes, sentiment changes, and then all of a
sudden ‘are people going to pay for that stuff?’. Yes. As I look in the US in
the US mining industry. Right there small companies. In the global landscape
they don’t mean that much. Now some of them are materially mispriced, based
upon who they are, and what they can produce. Now 232 is thrown a kink in that,
only because you don’t know which way it’s going to do. And to the extent that
the 232 petition did a disservice to some of the US companies. Because as you
and I spoke about earlier, there’s I think there’s a shortage now there’s gonna
be a shortage and they’ll get their fair share of it but it’s all good. But
when a decision comes out from Trump, it will be treated as a binary event.
Somebody is going to win, somebody’s gonna lose. But the grades in the US are low.
The size of the projects are small. And so you just have to look at the
individual companies, and look at it and now how do you get bagged? What people
tend to do is there’s by the pounds in the ground game. So many companies go
out and keep acquiring pounds. The market will look at it on an enterprise
value per pound basis right. So EV per pound. Well if I have more pounds in the
denominator. I’m going to bring down my valuation. So I look cheaper. The game
some companies play as they buy bullshit pounds. They buy uneconomical pounds.
And all of a sudden they trumpet how many pounds they have. So just to look at
it on an EV per pound basis, you’re doing yourself a disservice as an investor.
What you need to do is look at their core projects, and see what the cost to
build is going to be? See what the internal rate of return is going to be? What the cash flow from that’s going to be?
What is the net asset value per share based on that? What is the cash flow
multiple the market’s going to pay for that? Are there generating X, when they
go into production, you have to ask yourself, they go into production at what
price? You got to understand that. How much can they produce? And then you have
to ask yourself what’s that cash flow stream worth? But just doing it on EV per
pound of ground basis, you’re going to get run over because people are going to
a lot of companies have bullshit pounds.
Matthew Gordon: And I think I understand that and I think I think that’s probably very similar to a lot of mining businesses. You know, you’ve got to look at those things and you’re coming on an analytical point of view. Are there other things which are more … Are they fully committed to have the licenses or comfortable with jurisdiction.
Mike Alkin: I
mean yeah well so in Uranium… like many mines, like many mining industries
but you know it could take you 15 to 20 years from exploration to actually
having your mine there. And so it’s very important to understand and that’s a
good point Matt, because as you look at the world of Uranium and the
geo-political aspect that comes into play is very important. Because if we
think about what we said earlier China and Russia, are really leading the
Nuclear fuel cycle for the years to come. One of the things neither one of them
have is much Uranium, indigenous Uranium. They don’t have it. They have a
little, but not a lot. So they need to go out and acquire to be able to
vertically integrate, the Uranium is a critical portion of that. So they’re
need to go out and buy pounds. They need to buy projects. Now where can they
not buy. They the Russians aren’t going anywhere in the West. No one’s allowing
them to do that. You had the Uranium One deal years ago, but that’s done. And
the Chinese could take a minority stake, but nobody is going to grant them full
ownership of something. Just for geo-political purposes. So where can they go?
And buy meaningful pounds? They can go into Africa. They can go to Niger. They
can go to the Namibia. And they have and they buy. And people say.. investors
might look at it really, sharp investors, and say ‘yeah gosh the grades they’re
terrible, they’re low, there they’re expensive projects. It could be a few
hundred million, $300M this whatever $700M’ if we got to mention the motivation
of the buyer. The buyer needs pounds, the buyer being China, Russia, a Middle
East sovereign wealth fund. The Middle East is growing like crazy. India needs
a huge amount of pounds. And their State subsidized. So they don’t really
necessarily care what the cost are pull it out of the ground is. They might pay
to finance the mine, in return for an off-take agreement. So you got it. What’s
the second level of this stuff. Not just who has the best highest-grade
Uranium. It’s who is going to be the one that’s in play as this cycle unfolds.
And then, what are those valuations? And how did they compared to where they’re
trading now versus historically when they have been and what a reasonable buyer
would pay for?
Matthew Gordon: Thank you. Thank you for that. So if I was the first to sum up the from an investor’s point of view. Obviously there’s the financial ratios whichever you choose to apply to the company and the geopolitical component is clearly important. And we’re talking today about equities. We’ve talked a little bit about physical, know manly equities. People are going to be saying you know where should I be buying? Should I be buying U.S. stock now? Should I be buying the Australian guys? Should I be buying developers with pounds in the ground? Should I be buying producers? I mean even today nothing’s really moving. But if they were to buy something for the future, where would you be pointing them or would advocate a portfolio approach. So everything starts with macro Uranium you get the best Uranium project in the world you get the best management team in the world who’s made money before the price Uranium doesn’t move Doesn’t matter. So in that case. If you believe the fundamentals for sure?
Mike Alkin: If you believe the fundamentals. Then, and you want certainty, and not certainty there’s no certainty, but if the fundamentals are right and then it works, the physical will go up. So how do you express that? You by physical, you buy UPC, you buy Yellowcake. That that’s that’s how you express that view. If you say OK I want to take on some more risk and have more exposure. To the operating leverage in a mining business when the price of the commodity goes up, your choice is our producer, near-term producer, exploration company.
Matthew Gordon: But you would definitely think about it a producer? For Uranium it’s it’s something which would deliver value.
Mike Alkin: Absolutely.
I personally think the valuations and I don’t talk individual companies but
along producers, near term and exploration. The valuations have been decimated.
And there’s real value. Now it depends. So I see a lot of people ask me is,
where’s the price going $150 $200. I have no idea. The market will determine
that. And fear and greed will determine the price of Uranium, if history is any
indication, last cycle, it went from $9 to $137. And again this important point
I think, there are 22 reactors and new supply coming online. Now what curtailed
that new supply. You know 2003-2004 McArthur River flooded, in 2005-2006 and
2006-2007 Cigar Lake had two floods. But now you go back to no supply coming
online. Today you got to two and a quarter two and a half times. No reactors
coming online. And no new supply on the horizon unless the price gets to $50
plus. So you say OK I think the backdrop is better. I also think the fuel
buyers are smart people in 2017 they started to come into the market. Now
they’re not going to stand up there ever and say ‘yeah no we’re good we’re
going to price’. They’re going to fight tooth and nail for it. That’s their
job. But that’s why it’s so important for lay it out. Lay out every year, the
volumes, the spot prices, lay it out. What was the pounds bought, the draw
downs, the bought to consume, and they’ve got to do the work. When you do that
work what jumps out at you is saying history it doesn’t always repeat exactly,
but it rhymes. And what you’ll see is as the price starts moving, they’ll start
coming into the market so where. So for us internally, our projects, we go up
from $55-$70 is the price we use. So where does it get there? Now the question
is when does it start to get there? So 232 is going to come in theory by July
Matthew Gordon: Right.
Mike Alkin: And
one way or the other it’s gonna be perceived as binary. Some stocks will go up,
some will go down. Over time I think the market realize that there is a
deficit. Now when will they realize that is when is when you start to see price
discovery. So what happens. Because I’m on Twitter, I see sentiment and because
I’m a public voice of Uranium. It comes at me all day long. I keep it off most
of the day, and once in a while I’ll check in on it. But people are not
focusing on the number one thing that is the most important thing that most
people have the opportunity, is time arbitrage. Doesn’t matter if it’s this
quarter or next quarter. And what’s happened is 232 is going to come. And
people are going to say ‘holy cow today we didn’t see that contract come’ the
day after 232. We didn’t see that the next day after. Everyone has to sit back
and understand the utilities are going to say well what does this mean? How
does that how does this get implemented? Now what they are doing now with the
fuel buyers are doing now is they’re now talking to miners understanding what
production capabilities are? They want to know. Right so they’re smart people.
So over a period is it going to be a quarter, or two, you’re going to start to
see that come… all of that was that was pent up in fourth quarter 2017. Those
RFP’s come back and that’s when you start to see it over the next couple of
quarters. So people ask where do I expect the price to go. Predicting the price
of a commodity is a fool’s errand. Now in the price of Uranium, where do I know
it has to go for production to come online? Well Cameco is not going to bring
on mine unless they’ve lost their mind and I don’t think they have. You’re
going to need to be north at $45. Cameco says on the call and I have huge
respect for those guys they say on their conference call but don’t forget that
there’s Tier 1 and Tier 2 assets that could come back on line, and your
financial players who have it. Yes that could be at $45, $50, $55, $60… Now
if you’re a Cameco and you’ve seen a billion dollars in cash flow get cut by
two thirds over the downturn. Are you going to jump when you get the price to
$45? Are you going to say, ‘OK. Sold to you. We’ll take it all.’ No. It’s not a
market commercial behavior. You’re going to now have to make up for all that
capital that’s disappeared and all the shareholder value that hasn’t been accreted.
These aren’t unsophisticated players. Same thing with the Yellowcakes and the
UPC’s., They’re not selling Uranium I don’t think at $30 $35. Once the market
starts moving now it becomes a seller’s market, not a buyers market. And so
that’s where I think you start to see it move. So I think when we think about,
we sit around, my team and I think, it’s a ‘do you see at the end of the year.
Can you see into the mid mid 30s. Yes sure.’ And that’s I think healthy. What
do I use longer term? $55, $60, $70 Depending on the project, $70, Do I think
you could see a spike? Don’t forget it spiked to $137. Well it depends what the
market wants. You don’t need it to and that’s the thing about buying these
equities and when the physical price Uranium is in the mid 20s which is where I
started this journey.
Matthew Gordon: So you see just it just on only equities things, because I do want to get onto just one more topic, because it’s like there’s so much to cover here… we’ve said we will talk another day specifics. But just on the equities components. Do you think that there is still, even with this deficit coming up you know it should bode well for lots of people in the Uranium space, but do you think that there’s will still be some casualties in the equities space?
Mike Alkin: So
that’s a great question. So my DNA is a short seller. That’s how I made my
living for half my career and even the second half of my career, I was an
aggressive short seller. In my fund. I don’t short anything. The reason I don’t
is because when the cycle turns, what you typically see is the shittiest of the
lot will move up enormously.
Matthew Gordon: But given you can’t determine, or you’re unwilling to determine I think sensibly, unwilling to determine the timing on this. There are gonna be companies running out of cash. Even if they’re sitting on reasonable assets.
Mike Alkin: I
must say yeah but but if you get Uranium at $35 spot by year end.
Matthew Gordon: If they can make that long.
Mike Alkin: Well
yeah. But you ask me saying I’m not one to determine, sure if it’s a $35 which
I think it should be then or $34, $37 that will that sentiment change will will
Matthew Gordon: They could raise capital at that. It may be expensive capital, but they could raise it just to survive.
Mike Alkin: They’ve
been doing it for 7yrs, 8yrs. And unfortunately retail has financed these
Matthew Gordon: True.
Mike Alkin: They
finance stories when the price of Uranium was $17. They finance stories on the
price of Uranium was $19. What you don’t do in Australia and in the UK, they do
here is they give the warrants. So they’ll give 5yrs warrants. Now that’s up to
the individual shareholder determine. Now what I do see is a lot of people will
say ‘you know what these guys are gonna have to go into production and they’re
going to have to issue equity.’ Well they’re going to project finance these
things. It’s going to be 80% debt, 20% equity and in your math, you have to do
that math. And maybe it’s 70% /30%. Assume dilution and carry your numbers
Matthew Gordon: Yeah well I’d be interesting to see what happens from now on Christmas, I guess because I think we our analysis suggests that this is gonna get a bit hairy for a few between now and then.
Mike Alkin: Hairy
Matthew Gordon: For some of some of the juniors sitting on maybe with pounds on with pounds ground but with not a lot of cash, will they be able to make it through and will they be able to raise capital at the price that they…
Mike Alkin: Well
yeah I have no opinion on that.
Matthew Gordon: No I understand.
Mike Alkin: But don’t forget if you’re a Canadian they get flow through financing. It’ll keep them afloat. The thing you see this cycle is where it really becomes a problem is, when you got Debt versus, not all,but most don’t have debt. So it’s just a matter of issuing equity telling a story and finding people who are willing to finance that story. Where it becomes… where you see companies get in mass wiped out, is when they’ve got interest payments to make and it can’t make them.
Matthew Gordon: For sure. It’s the same for a lot of commodities over the past few years. So I guess we will sort of sit back and see and perhaps it conversation we can get in to a little bit deeper next time. But can I start a question with regards to Nuclear. You power the Nuclear industry, literally. Do you think Nuclear is a transitional energy source? Do you think people are going to try and become green? They’re moving away from fossil fuel. They want to go green. Nuclear has positioned itself is a green clean energy and I think is doing a really good job of that. You’re still going to have some naysayers talk about a toxic waste and all sorts of issues that need to be dealt with. And those those may be real and meaningful issues that do need to be discussed. But in the meantime, it’s we’re talking about zero carbon energy from Nuclear. It’s getting a great job promoting itself. But will it survive? You’re talking about a depleting asset potentially, in terms is there’s enough of this to go around, and at some point it’s going to run out. So you know if it is a transitional energy, how long will it be around and is the money to be made.
Mike Alkin: You know in the last what 15yrs, it’s gone from 16% down to 11% of electricity generation. Wind and solar is taking some. Natural gas especially. You know I think the question is people need to ask, don’t forget 99 reactors in the United States, now over 100Gw of electricity. And what’s what’s hurt that here in the US. Well I would argue. Low interest rates, Fed experimental policy of easy money has created the shale boom. Which is God taken natural gas which at any point in time traded $6, $7, $8 per mcf, even went higher, down to $2.50. And if you look at the the shale plays, two thirds of them don’t make a dime, regardless of the price. Depletion rates are enormous. The ongoing capital expenditures to stay ahead of the depletion rates, are staggering. They’ve have hundreds of billion dollars in debt coming due in the next few years. In the latter part of the year, early part of this year, you’re seeing investors starting to step back a little bit from wanting to finance that. So one of the constants and givens, at least in the United States with this shale energy independence is that natural gas is going to stay low forever. It can be $2.50 natural gas. At $5 turns the economics upside down for Nuclear power plant. So but the recency bias of what’s happened because of stupid cheap easy money. For anyone to finance these things for the shale plays which are most of them were economic. And you’re starting to see activist investors come in and starting to demand production cuts right. So does that happen tomorrow? I don’t know. But so in terms of longer term. I’m not so sure that, and I’m not a natural gas expert but I’m a commonsense guy, and I am a capital markets guy, and I know that for a decade these companies just piss money down the drain. So I think that that’s an environment. Around the rest of the world. I think when solar grows, I don’t think it displaces Nuclear, because it doesn’t have the storage capabilities. We’re going to hear everyone say ‘oh storage costs coming down storage coming down’. Look what’s happened in Germany since since they’ve gone green. Hundreds of billions of dollars spent. Carbon emissions are up. Cost of electricity is up. It’s a complete shit show for them. And their neighbor France 75% Nuclear power has half the cost left electricity and are meeting all of their climate goals. And the growth you’re seeing in the Middle East, the growth you’re seeing in the developing world, I think it has its role. Does it go to 10%, 12%, 9%, I don’t know. I know for the purpose of any forecast period I could look at over a decade, I think it’s gonna be a critical part of the electricity generation in the world.
Matthew Gordon: Again I think I’m pretty one for another another time because I think that’s a really big topic. There’s lots of people coming on both sides very passionate about their position and I’d love to talk to you a little bit more about that one. So I want to finished with one big question for you, which is, is anyone making money in the Uranium space at the moment and how?
Mike Alkin: Well
so Cameco is generating EBITDA. They’ve got some cash flow side from that. No
you’d be hard pressed to find the real profits in the Uranium space. I mean is
a lot of promise. But if you’re looking for profits, you’re in the wrong you
shouldn’t be investing in this, right now. If you’re if you’re looking at returns
on capital, if you’re looking at who’s generate profits at what is the, I think
the bear market ended, but this is not the cycle of the investing.
Matthew Gordon: Ok. OK. That’s fair comment. I’m going to let you sign off by explaining… I saw this saw this piece you did, kind of comparing the Uranium space to the ‘Big Short’. I really liked that. I really like that. You know you’re where you’re explaining how the ‘subprime loan’ space and the ‘subprime bond’ spaces had no correlation, although they should have. That what you’re kind of saying that that’s what we’re going through at the moment. People should see what’s coming down the line and be optimistic.
Mike Alkin: There
is a complete disconnect between the fundamentals that have dramatically
improved over the last couple of years. 20% plus of world supplies come
off-line. The secondary market which has been the 800lbs gorilla, of supply,
under feeding. Whether it is …conferences I speak at, they’re there and stand
up and say we are reducing the under feeding. So that has peaked and is coming
down. Supply is coming down Uncovered Demand. Is right in front of your nose.
And I went back and looked at a lot of bull cases in 2014 and 2013 and 2015.
YouTube is wonderful. Like I said, You’ve got a carry trade. No long term
Uncovered contracts and Uncovered demand. You’ve got the Japanese have not been
bringing reactors online. It was a bull story. That Uncovered Demand is what
drives this. Supplies inventories working down. 2013,2014,2015, they were
coming off buying years of 250Mlbs 40 30 million pounds of inventory. What
happens though is this is a closed loop world unlike anything I have ever seen.
It is an opaque market. It is not followed by institutional investors, and I’m
sorry to say retail investors while they’re very bright people, and whatever
they do they’re great. I see some really smart ones do the numbers. They’ve
they’ve kept many of these companies afloat by financing them. And but building
the numbers out, rolling them out, and putting it the numbers in this industry
are predicated, just kind of like a ratings agency, we make that correlation.
But the rating agency says everything’s fine, it’s triple-A tranches, in
Triple-A tranches. It’s all good right. It’s triple-A rated. The number makers
here. The consensus makers here, bright people. I think that they’re either
handcuffed in how they can forecast the numbers, or are so afraid to put their
neck on the line, that they they put numbers out there that you can drive an
ocean liner through, like I said. And which allows you to morph to wherever the
market is at any given time. And that’s fine if you’re in the business of doing
that. If you’re in the business of put your balls on the line and making money,
you better do your own analysis and you better be right. Those those kooks in
The Big Short. Those crazy guys who were trying to see what everyone else
wasn’t seeing. They didn’t care what the rating agency said. They did their own
work. And that’s kind of how we view it. I don’t care what consensus says.
We’ve got our own work and we believe strongly. Now outside influences come in
at 232. Comes in 232 is not part of our thesis. It still isn’t part of our
thesis. Well you know it was at the time. All it does is take a little time for
the pause in buying. Another thing I saw on Twitter somebody said ask me about
the Orano strike. This could be a big deal.
Matthew Gordon: Yes. That was one.
Mike Alkin: Ok
well. So what winds up happening is, people bring up ‘what’s the thesis on
Uranium’. Global oversupply, leads to uneconomic pricing, leads to production
cuts, leads to reduction in primary supply, secondary supply in a demand
environment where Uncovered Demand is accelerating and contracting cycles going
to start. That’s the thesis. Now 232 is noise. Somebody like I said. Whether
Orano could settle the strike, at at at their mill. It’s not a strike. In May
if they don’t. There could be a strike. Who knows? It doesn’t matter. Does it
mean if a strike comes that yes that is good, because you could see 18Mlbs come
off the market. That’s great. But what it sets up is this nobody knows how
those labor negotiations are going to go. It’s not fundamental to the thesis of
Uranium for it to move. What it does do is if the strike comes into… if there
is no strike, it sets people up for disappointment that was unnecessary. So if
it happens great, it’s a cherry on top. If it doesn’t. Who cares? That’s kind
of how I view that. So yeah it’s like that
Matthew Gordon: Mike, that’s been fantastic. The reason we wanted to speak to you is because you have this view on the marketplace. You are doing your own analysis, you are giving us insight which wasn’t there before. You’re deeply respected by a lot of people in the marketplace. Thank you for the work which you share with us. There’s a lot we’ve talked about on a very superficial level. I’d love to deep dive into some of that with you again real soon I know market loves hearing what you have to say. And so do we. So thanks again for your time Mike.
Mike Alkin: Yeah
Matt my pleasure.
Matthew Gordon: Thank you. Right. OK. We’ll speak to you again soon.
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