Uranium investors are a very passionate crowd but they sometimes focus too much on outcomes and not the fundamentals. You have to understand the Demand and Supply side for Uranium. And how price discovery and price elasticity is controlling market behaviour. Mike Alkin of Sachem Cove Partners explains all in our latest interview.
For those new to Uranium, Mike delves into the commodities backstory and how the fundamentals have got better. If you hold Uranium stocks this is a very comforting conversation.
We also discuss whether Energy Fuels and Ur-Energy should have submitted the Section 232 Petition. Would ‘price discovery’ have occurred? Where would the Uranium market be now without it? He tells us about his discussions with the US Department of Commerce. We ask him where he sits on the issue of subsidies for US nuclear reactors. Will there be relief? What is going to happen with the Presidential 90 Day Working Group? Are the utilities conflicted and are there too many issues to resolve in such a short space of time? The Uranium price needs to go to $70 but can it go higher? Sure. Does it need to? No. So what are the Fuel buyers thinking?
We discuss these topics and more:
- Section 232: What Happened and was it Necessary?
- US Reactors, Regulations, Costs when compared to other Energy Sources
- 90 Day Working Group
- Investment Hacks and What Should you Look for in Companies?
- The Growing Gap of Supply and Demand
- Inelastic Nature of Price & Possible Catalyst Moments
- Investor psyche
- Cameco’s recent Conference Call
Click here to watch the interview.
Matthew Gordon: You’ve got me into this world of Uranium and we’ve been on a journey of discovery and learning, talking to lots of influencers, lots of CEOs. Very exciting times right now.
Mike Alkin: There’s a lot to learn.
Matthew Gordon: It’s way more complicated than any other commodity. It just doesn’t work the same way. I think the mining component does, but the rules around it don’t work the same way.
Mike Alkin: Yeah, and the product, nuclear power, is complicated, it’s controversial and so you really have to drill down into the many different layers of supply and demand.
Matthew Gordon: That’s why we want to spend a bit of time with you today, because it seems to us, our analysis is that this is a supply demand story. Some things have happened since we last spoke. Obviously we were waiting for the Section 232 Petition announcement. It’s happened. Now we’ve got a Presidential memorandum. So let’s talk about that. So the Section Petition 232. Expectation is that the US equities, uranium companies, would benefit from some kind of quota. I think they nearly got there, but not quite. So why don’t you just tell people about what happened there?
Mike Alkin: Yes. So if you listen to my podcast or whenever I’ve spoken I also say Section 232 is noise. So what was Section 232? The US at one point, during the cold Cold War was producing nearly all of its Uranium consumption. And fast forward to today and the US produces less than 1Mlbs of the 50Mlbs a year – ballpark numbers – it consumes.
And nuclear power in the US is 20% of the electric grid, so it’s a very meaningful component. US is the largest consumer of Uranium, the largest provider of nuclear power in the world and the thought was Section 232 is something that they were able to file a petition with the Department of Commerce hoping that they would make recommendations to the President that on the grounds of national security, he would instil quotas – quotas is what they asked for – essentially saying their view was the Russians, the Kazakhs and the Uzbeks, former Soviet States, and Russia, controlled a reasonable amount of Uranium coming into the US, and we know how the Russians have, and do, use energy as a geopolitical weapon. And so their view was please import quotas. We want 25% of all Uranium bought from nuclear power plants in the US to come from US miners to save the industry. That was the view.
Our view, as an American, ‘Do I want to be dependent on them?” No. “Can I see the argument?” Yes. But what we’ve long maintained is it doesn’t matter because if the miners would have held back and not filed the petition and looked at the big macro story, we think there’s a deficit and we think that’s only growing, and the price they need to go into production to incentivise new product as their contracts expired, the waterfall accelerates, they would have gotten their price.
So over the last 18 months, they filed it in January of ’18, the Department of Commerce picked it up in July, I think it was, of 2018 and in April the Department of Commerce recommended quotas. Went to the President. The President said, “Yeah, I’m not sure it’s a national security risk.” He then instituted a 90 Day Working Group. He said, “But we do have issues with the nuclear fuel cycle, the front end. Let’s take a look at what we can do.”
So the market focused exclusively over the last 18 months on Section 232. I learned early on that a) you don’t want to rely on the government for something and b) when the government says, “I’m here to help,” you’re like, “Oh, my God.” And also, as you can see the growing groundswell of “Well, it’s a no-brainer,” and you saw that in the US stocks being put up. You see something that’s so certain, it starts to already get priced in.
Now, in October, November of 2017, what you hadn’t had in this market since really Fukushima, was price discovery in the long-term market. And in the world of Uranium, most of the transactions that are meaningful – the vast majority occur in the long-term market, five, seven, ten years type of contracting. And spot has always been just a surplus disposal market or just a clearing mechanism.
And because the miners during the last peak signed long term contracts with the utilities at $80-$120, much higher prices for long-term, they were covered by those contracts. But those contracts were spurring them all off, so for years post-Fukushima you did not have significant price discovery, and that’s what markets need. You had contracting taking place but not the sizeable contracting taking place. That started to occur in the back half of 2017 and we saw that with some request proposals coming out from some of the bigger nuclear plants.
And then Section 232 was filed in January of ’18 and everything stopped. And the reason it stopped is the US is the major buyer of Uranium. They didn’t know from whom they were going to be mandated or required to buy their Uranium from, so it put a pause on, and price discovery – now you did see contracting taking place with other utilities around the world, but when the biggest one stops, most of them slow down and that’s what you saw. So the big meaningful chunks of contracting you haven’t seen, if it were for Section 232, the fact that we think there’s a deficit in the market would have come to the fore because miners can’t sell Uranium at $25 or $35. A few can. 100Mlbs a year roughly, 110Mlbs, 105Mlbs, that can be sold. That didn’t solve your +200Mlbs of demand and growing, 1.5% a year. And secondary supply can’t fill that gap.
So price discovery occurs when two people are sitting on either side of the table negotiating a price and at a much higher price. And that was on course for 18 months.
Matthew Gordon: Obviously the two companies, which were Energy Fuels and UR Energy. Do you think it was a tactical commercial decision for themselves, looking after themselves – and there’s nothing wrong with that- Or do you think that they were actually trying to do something for the benefit of all the US Uranium businesses? Forget the argument of security or whatever, you’re either for it or against it. It doesn’t matter. It never mattered really, but do you think it was a smart move? The shares have been hit, they’ve paid the price. Is it something that they should have done or could they have done it another way?
Mike Alkin: It’s interesting. They’re bright guys. I think that you saw an industry that’s been pretty much brought to its knees in the US, and if you look at the data, almost all of the purchases – over 95% – come from outside the US. As their contracts start to roll off, they start to get nervous because that’s been a trend that’s been continuing. So I think they were trying to – and the pricing is higher in some of the rest of the world. Not all, but I think they were getting nervous, and I think they said “As a matter of survival, we need to get some assistance here. We need to get some help. If the utilities don’t view 35%-50% depending on the year, Russian, Kazakh and Uzbek Uranium as a threat to their security, let’s force their hand.”
I do think had they stepped out of that, not filed the Section 232, that price discovery would have occurred, and where they need to be, contracts would be signed. But it took on a life of its own, but all the while inventories were being drawn down, purchasing was being delayed and here we are.
So now the market says, “Oh, my God,” because it was a matter of their survival, but shoot them all, the US names. Some of these were down 30%-50%, and at the end of the day our view is that there is a meaningful supply deficit that the rest of the market doesn’t really appreciate, and that’s fine. That’s what makes markets. In the next round of price discovery or this round of price discovery, a contracting cycle, as unfilled requirements keep accelerating, that will come to the fore. And those who can produce in a reasonable period of time, that have been a reliable supplier or can bring production online, and provide utilities with security of supply, will be okay.
Matthew Gordon: We’ve had a lot of people say, “Well, 232 isn’t dead.” A lot of people say it is. Where do you sit on that?
Mike Alkin: So they have a Working Group, a 90 day working group and it’s a lot of the cabinet members. Will the cabinet members themselves be included in this and involved? Who knows?
What I can say is I think from our time – we were a resource in part for the Department of Commerce while they were doing their investigation, just educating basic stuff and having no idea which way they were leaning one way or the other. They reached out to us on a few occasions and we were happy to share our insights in the nuclear market, in the Uranium market.
Matthew Gordon: When was that precisely? I know there was an initiative from June 2017. I don’t know what was happening there, but when were you involved?
Mike Alkin: 2019. Just entering, just questions on the general Uranium and nuclear power market. Just filling in blanks and stuff like that. But no idea which way they were leaning one way or the other.
So the recommendations came. The point is they were thoughtful and working hard to understand the market and they had nine months to do that. It was certainly watching a government entity really pull the onion back, said, “Okay, they’re trying to get their head around this.” Where that goes, who knows? You’ve got to remember a nuclear power lobby is significantly greater than the Uranium mining lobby, which has 400 jobs versus hundreds of thousands of jobs.
Matthew Gordon: We looked at the spend of the nuclear lobbyists versus Uranium lobbyists. There is a phenomenal difference. Easily X20.
Mike Alkin: Interestingly, and I have always contended, and I will continue to contend, that if you look at the feed stock cost, Uranium, as a percentage of the operating cost of a nuclear power plant, it is diminimous versus the other choices, such as coal and natural gas. For instance, if we look at 2018 in the United States at $32, $31, $32, per megawatt hour to operate one of these plants, a little less than six than fuel. But that fuel is Uranium conversion enrichment for the fuel cycle. So a much smaller portion of that – less than half of that – is Uranium versus 75%-85% of the feed stock to operate the coal or power plant.
Matthew Gordon: When you’re building a reactor, there’s a lot more regulation, control, safety concerns than a regular power station. Say coal, for instance, because you feed the coal and you burn it. It’s a much simpler process. Clearly a Nuclear reactor is more complicated. It’s going to cost more. So there’s a lot of variables around these percentages, but where do you sit in this argument as to uranium being a diminimus amount, but as a percentage of US reactors’ margins, it’s significant. Some of the reactors of them are getting subsidies and a lot more will need subsidies to continue to exist. So where do you sit in this argument: it is diminimus or doubling the price is going to have an impact.
Mike Alkin: So you have reactors in the US that don’t make money. You have merchant markets, you have regulated markets where one gets a rate increase by going to a public utility commission, one is in the open market. It’s about half and half, the reactor counts. So there’s low natural gas with them? Yes. Do subsidised wind and solar hurt them? Yes. And actually it’s something – and I don’t know – I have no idea, but as part of this Working Group, I would think that policy can be on the table with respect to subsidised wind and solar. That wouldn’t surprise me, but don’t forget in the US, it’s doom and gloom is convention. But we’ve seen Illinois just a few weeks ago, Ohio, New Jersey, Connecticut, New York all giving relief. So these numbers that are out there for the number of reactors are really indescribable. Yes, are some struggling? Absolutely. But the States are coming in and recognising nuclear’s role in this because what do you have to replace it?
We think the doom and gloom scenario, people attached to this recency bias – what’s happening is constant support. You’re seeing now in the last couple of days, there was bi-partisan legislation introduced to extend licences. And there’s a growing groundswell of support from nuclear power around the world, but also in the US – which is the largest consumer of nuclear power, but an industry that really over the bear market is very easy to say, “Oh, it’s dying.” There’s relief along the way.
Matthew Gordon: So the Working Group has been put together. The Presidential memo is quite vague to some people, whilst others seem to be able to read a lot into it. But what is clear is that it is focused around ‘nuclear fuel protection’. The nuclear cycle clear requires Uranium. It also involves utilities who have other vested interests, which may be gas, may be coal, renewables, wind, solar, etc. So there’s a lot of moving parts. In 90 days, what’s going to happen?
Mike Alkin: I just want to continue on a thought talking about challenges for the nuclear plants. In the lead up to Section 232, we went through six quarters, 50 or 60 conference call transcripts. Earnings calls of electric Utilities. Now if your electric utility’s at great risk of the material cost of this Uranium, you would think that it would be a paramount question that would be asked on a conference call and brought up a lot by the electric utilities. This is if regulation is going to make it more challenging for you, a CEO of a public company is going to say, “It may not be my fault. That’s kind of how that works.” We couldn’t find conference call where an analyst asked the question about Section 232.
And then you go through the public filings and you saw one company mention Section 232 in a couple of sentences. The day that the ruling came out that there are no quotas, the stocks of electric utilities didn’t budge. So how critical is it? Are there reactors? Yes. Is it part of a grander scheme of a portfolio of assets that they have? Yes. Are they going to jump up and down and absolutely say, “It’s critical that this doesn’t happen?” That’s their job. Yes.
Matthew Gordon: Which analysts?
Mike Alkin: They’re not retail junior mining investors. They’re investors who focus on cash flow and they’re professional investors.
Matthew Gordon: You have, I think on many occasions, and I think it’s been accepted in the market there’s not a lot of analyst coverage with regards to Uranium. Well, probably not even nuclear in a way because it’s not a very big market. Uranium’s a small market. What, $10Bn?
Mike Alkin: Publicly traded market that is $10Bn. $8Bn of which is two companies.
Matthew Gordon: What do you think 90 days is going to spit out? Speculative fun, what do we think?
Mike Alkin: As Mike Young said, “Good and good-er.”
Matthew Gordon: Yes, he did.
Mike Alkin: I don’t disagree. I can’t see a scenario where… So what happens? Nothing happens. They do nothing. Okay, well, it is where it is and it’s back to business, no price increases. Price discovery occurs and if our work is right and we think there’s a deficit, there we go.
There is some relief because they’re supposedly looking at the whole front end of the fuel cycle and if they’re looking at the front end of the fuel cycle what you will see is that there’s conversion and enrichment. US doesn’t own its own enrichment to commercially enrich. Is that a sure fly cure right away for Uranium mines to happen? Not really. But it’s probably my guess is there’s probably this has raised awareness as to the importance of nuclear power and how can we help the nuclear power plants? And if you help the nuclear power plants, you’re probably by extension going to help the global Uranium industry because you see less reactors closing.
And by the way, part of the thing about this – because you mentioned it’s a very small industry, very small market cap, not a lot of people looking at it – so the lines of happening is people look and took a mosaic of information. “Oh, the US is in a tough nuclear power situation.” That populates their thinking. Well, if you’re modelling this out, you’d better take a number of those reactors out. So you have to come to a number. It’s part of the mosaic, and you see this all the time in this sector because there’s so few institutional light bulbs on it, and the sell side with the exception of a couple – maybe a few, but I’ll say a couple – are modelling industry organisational numbers and forecasters out there, which we don’t put much weight on.
Matthew Gordon: I want to talk about some investment hacks. What do you look for generally when you’re investing? What should you be looking for? I don’t want to talk about specific companies. There’s money involved and money creates emotion and it’s ‘your money?’ And as a retail investor, you come at it very emotionally compared to institutions such as yourself, where it’s slightly colder, more rational analysis of a situation. We’ve had scenarios where we provide information and people look at it and depending if you’ve invested in that stock, you’ll interpret it one way, and someone who’s not in that stock and may be in another stock, they interpret exactly the same information in an entirely different way. So the same data, two different outcomes and it’s interesting to see that coming through every single day. I don’t know if you’ve seen that or observed that.
Mike Alkin: I observe it. I’ve been doing this a long time. I realised throughout the years that the maths usually doesn’t lie. The maths is not more complicated than 4th grade maths. There may be a drop of algebra, you plug a number in here and there, but maths is the maths. And what tends to happen is people are headline driven and price action driven. I just don‘t care about short term price action, and short term doesn’t mean today – For us, for me, for Sachem Cove, it’s about risk reward. What’s my potential upside versus my potential downside? And to do that you can’t calculate that unless you look at it on a company by company basis. In this case a macro Uranium, and you have to understand primary supply, secondary supply, inventory levels, unfulfilled contract needs. If you don’t have that, I can understand why it’s easy to be scared because it’s headlines.
I always say this – and I hate even hearing myself say it because I sound repetitive – but recency bias is an enormous driver of people’s actions when it comes to investing. And it’s also when it comes to sell side analysts. Sell side analysts they’re writing research. There’s comfort in crowds, and when the market is down, people attach themselves to the most recent environment because if you go outside of that, now you’re alone. You’re on an island and a lot of people aren’t comfortable there.
Matthew Gordon: Some companies are better than others. I’m not going to talk about specific companies. Just in generalities, because I imagine Sachem Cove hasn’t just placed an equal dollar bet on each and every single Uranium company out there. You don’t think like that. No one should. So, let’s come back to the micro. The fundamentals of mining don’t change, but what are the sorts of things that you look for in companies? Are you a management guy? An asset guy? Jurisdiction? What are the things that you look for?
Mike Alkin: I’m a short seller by nature. That’s my vocation for many years and I still think like a short seller. I’m a bullshit guy. I look for bullshit. I look for blow-hard management teams and I look for bullshit management teams. We do our work. We do our analysis. On the macro we do our analysis on a company and then we speak to companies. We speak to them and we’re good note takers. Then we speak to them again and we ask them the same questions. If you’re a management team and you’re on the other side of a call with us, you’d think, “Didn’t these guys hear me last time?” And then we talk to you again and we’re going to ask you the same question. We want to see if you remembered how you answered it. That’s important to us.
From a project standpoint we talk to consultants, we talk to engineers, we talk to geologists, we’re going to be above. So it’s art, right? There’s a bullshit detector. The mining industry, I have on my computer desk – I’m not in that room right now, but I have on my desk ‘a mine is a hole in the ground with a liar standing next to it.’ Mark Twain. And I always remember that. They’re in the business of raising capital to explore, develop and do whatever. Are all of them full of shit? Absolutely not. Are many? Probably. So you have to determine that. I don‘t say who I think it is. That‘s not my place to say that. Do companies go out and acquire during a bear market? What do they need to do to survive? There’s no revenue. What do they do? They need to raise capital. So what do they do? They need to make those glossy presentations, make us look as good as they can. So what do they do? The lower the cost a little bit, talk about the pounds that they have and then what else do they do? They acquire companies by issuing stock and they play the pound in the ground game. Look how many pounds we have? The enterprise value divided by pound makes us look cheap. And they delude shareholders.
Now, it doesn’t always mean – and you can’t take a broad brush. Every company’s different. You have to know what you’re looking for. So the management’s important, very much so, especially in the mining space. Geography yes. Some people have rules of thumb for how they think geographically. We think geographically. Obviously the jurisdiction has to be good. It has to be a very good mining jurisdiction. The rule of law apply – but what role does Uranium mining play to the economics of that government is also an important question to ask. What’s the history been ? How long have they been mining there? Has there been any interruptions? It requires questions and reading and then you need to think about where does the cycle play out?
So for the last 18 months, since Section 232, it’s become a US focused Uranium mining store in the global landscape. Why? The US is insignificant in the terms of a global landscape, so you have to ask yourself how does this cycle play out? Who are the buyers of these assets? I can think of the Russians, I can think of the Chinese. Why? Because they’re both building like crazy. The Russians are building reactors around the world. The Chinese are not only building them like gangbusters internally, but they have plans to build along a built-in road initiative for others. Who else is dependent now? Who’s growing nuclear power? India. Who else is growing it? The Middle East. Well, what do all those have in common? Where can they probably not come in and buy a majority owned stake of a company? Why not the US? Can they buy minority stakes in Canadian companies? We’ve seen that. But where do they get big pounds fast? Africa’s not a bad place. And have they been mining Uranium there for decades? Yes So you have to look about what parts of Africa, what the project is. So we don’t take that broad brush approach, but the other thing we don’t do is we don’t deck the ranch on one or two stocks.
And so you asked about investment hacks, right? We’re going to that building site, right? Whether we’re right or not, who knows. If we have a huge feeling about something, really comfortable with it. Is it going to be a 15% position? Yeah. Could it be 20%? Now, if the cycle works and it grows, then its portfolio management in how to manage that size position but do we go out and put 50% in one position? Absolutely not. Now from what I gather on Twitter just from reading stuff, some people got really hurt in the US in this past downturn. I feel terrible for people if that happened to them but they need to understand … You have compassion for people, but you don’t put the ranch on something. There are different geographies, there’s different stages because you have production, near term production, exploration and development. Who’s going to go, ‘what’s the market going to pay for? Are they going to pay for pounds they can produce right away and at what stage will the market pay for that?” That’s an important thing.
People ask me all the time. ‘How come you’re a short seller? How can you short anything in Uranium?” Sometimes in the cycle, some of the shittiest companies are going to rip your face off because people are going to dream a dream that they’re not dreaming in a bear market. So I think people need to have a little bit of a diversification, and they have to understand what stage and what type of company they want…
Matthew Gordon: I think a lot of the rules of general investing and investing in mining still apply. A blended approach and you’ve got to understand what you’re getting into. The things that stood out for me there though were you talk to the management team and then talk to the management team and then talk to them again. Smart ! I think that’s really, really smart. And then the final piece to that was where does that company sit in the Uranium market? Where can they operate successfully?
Mike Alkin: In mining companies, you know in these big cycles, the good ones get taken out. And who’s the buyer of that asset? You’ve seen over the years, about 40 or 50 years, the utilities were involved, trying to vertically integrate at one point. Then it was oil and gas companies. When you look at libraries in the 70s, and 80s, they had a ton of them, and then that kind of gave way.
Now roll in the big mining companies you have right now. Do they have an appetite for Uranium? Not really. Now it’s a leper and it’s so small for them, so who are the buyers of these assets? And people then tend to look at projects and say, “Well, that’s a third quartile producer and they’ll never get in.” A buyer of an asset that needs Uranium and can’t buy elsewhere and it might be a state owned entity, doesn’t care what they’re pitting to produce that. The Husab mine in Namibia is a great example, owned by the Chinese, and produces nowhere near a name play capacity. Costs range anywhere 50 to 75+ dollars a pound. They don’t care. They need the Uranium.
Matthew Gordon: You’ve been an Uranium guy for what? Two and a half, three years? Something like that?
Mike Alkin: I think April of ’17 I said, “I see a bull market emerging.” That was pre-Section 232 and at the time what I was saying was production cuts have to come. There was an issue out there with Russia. You’ve got to look at that. The US has to figure something out and a host of things. 232 came. You need price discovery and production cuts and that’s what we’re saying. Nothing’s changed since then except you have price discovery put on the shelf. Well, Section 232 came eight months later.
Matthew Gordon: I think a lot has happened for you since then.
Mike Alkin: Well, a lot has changed. It’s much further supported than it was.
Matthew Gordon: You’re much further down the line, as it were. Your thesis still holds true.
Mike Alkin: Unquestionably. It’s stronger than I would have thought when we modelled it.
Matthew Gordon: We’ll start with demand because demand is a nice easy one. It’s obvious. There’s billions of dollars being spent building reactors all around the world by lots of countries. So those countries are buyers of nuclear, as a solution. It’s a question of how much, not if. It’s how much Uranium is going to be required? Is that fair to say?
Mike Alkin: Yeah, and it cycles peaks and troughs. In 2004-ish when the cycle went from 10 bucks to 137, or by 2007, and I don’t believe it gets back there – but again that’s human emotion that drove it there. People always ask me where it goes. I don’t care where it goes. I know where it needs to go. Where it needs to go to into production right, is 55Mlbs, 60Mlbs. The rest is gravy, and that’s where everyone all of a sudden at 50Mlbs is sitting out, and you’re sitting in the pub having a pint and everyone’s saying, “We’ve been doing work on nuclear power and Uranium,” and they’ve already had a 5 x move, or a 4 x or 3 x, but back then there were 24 reactors under construction. At that time, 24Mlbs. Today’s there’s 54Mlbs. And you’re breaking ground on new ones.
Matthew Gordon: I keep asking people whether or not there are controls in the market. I don’t mean geopolitical, Kazakhs versus Cameco, or Russia versus US. I just mean we learnt a lot in the last cycle. It went up and it shot down. Black swan event admittedly was the cause of that, but do you think…?
Mike Alkin: I think the price of the Uranium cycle because it peaked at $137.
Matthew Gordon: Well, there’s a question. Do you think $137 is a fair reflection of the market back then?
Mike Alkin: No. You’ve got to remember back then what you started to see was – again it’s a very tight physical market and you had 02 is 10.95. Actually, good piece to see, UXC one of the industry consultants, on their website has some free information that they put out. Samples of prior work. And in 2007, I think it was their April ’16 piece, they put out a piece. I have it somewhere. There! It was free. We’re a subscriber to their services and pay a lot of money for it.
Matthew Gordon: Is that free?
Mike Alkin: Well, this was a sample of their free work. April 16th 2007. And they went back and did a survey at the time. They talked in their April piece of 2007, that in 2003 the price of Uranium was about $10.50, $10.95, and there were some unfulfilled contract requirements on the part of the US utilities borrowed in 2006. So three years forward. And they went around and they asked and I think I’ll read it to you.
It says, “In June of 03” – and again it’s free – I’m not breaching any copyrights. It’s on their website… “ We were alarmed by the fact that uncovered requirements on the part of US utilities were so large in ’06, just three years away. There seemed to be an impasse or perhaps a disinterest in contracting, was translated in this large uncovered position.”
Now that was about three years forward. Three years forward it was about 30Mlbs of uncovered, unfilled..A little bit below that. And no, I’m not giving this out to anyone on analysis. But it’s a few million pounds less. But the point, they did a survey, a mid year price survey, and the survey showed that most of the respondents believed that the spot Uranium price would be in the $11, $11.50 range at the end of 03, and between $13 and $16 by ’08. The vast majority of buyers bid for 2006 purchase three years forward. $11.50 to $12 in that price survey. That was $100 below where it finished. It was over $110 in ’06.
So you look at today, you say “Well, the unfilled requirements are similar.” People will say, “Well, you know what? There was less inventory back then.” In 03 -04 time period you had 55Mlbs or 60Mlbs, in US I’m talking 60Mlbs. Then you counted the suppliers and you add the suppliers in, all about 95-ish, 96Mlbs. Today if you counted the utilities, at the end of 2018 they had 111Mlbs and they’re working off throughout the year with a half a year through, but the suppliers have a lot less. So all in, the suppliers and utilities have about 130Mlbs versus 95Mlbs, 96Mlbs back then. Now that’s less than a year.
If you look at what the utilities have, at 111Mlbs, it’s a little over two years of Uranium in the US right now, which is right in historically where they’ll buy. But there’s a very big difference. So back in 2003, for the time frame, you had 24 reactors under construction. Today, 55Mlbs, 56Mlbs. Why does that matter? On a new fuel world, a reactor, when they initially load it, consumes three times the amount of Uranium.
Back in the last cycle, from 1993 to 2013, there was a programme known as Megatonnes to Megawatts. Where the Americans were concerned after the Wall fell that the Russians would be deweaponising nuclear weapons, or not even deweaponising, just selling them out to the black market because they were broke. So they incentivised them to down blend thousands of intercontinental ballistic missiles, nuclear missiles, and take that highly enriched Uranium and it would be consumed in the US. That was as much as 20Mlbs a year. That doesn’t exist right now.
There was also a fuel buyer in ‘03 would look forward and see that Sagar Lake was coming online in the ’07 time period. 18 million pounds a year. So they looked forward and at the time they had a never ending supply of HEU to LEU at 20Mlbs a year. You had a big mammoth mine coming online. You had much less reactors and you still were in a pretty reasonable surplus. And they were forecasting deficits in ’06 – 07.
Today, you’ve had a 20% cut to supply. Demand is accelerating very rapidly because of these new reactor constructions starts. Since the last forecasting period of let’s say the World Nuclear Association or others… You’ve seen the French come out and say “You know what? We’re not taking those 14 reactors offline in 2025. It’s a 2035 thing.” It is accelerating. China’s accelerating. The US has had relief, but yet the unfilled requirements that were concerning people back in ’03, are back here now and even for levels not wash – meaning it’s deminimist. That’s the set up you have. And it’s maths.
Matthew Gordon: I absolutely agree with that. I think the timing for demand is more obvious. It’s easier to see. You look at how many reactors there are, how many are being built, how many are going to be built and the general mood in the marketplace allows you to put a number on that, right? The supply side way more complicated. The timing is not obvious. I think some people are saying, “Well, this thing could go on another 12 months. This uncertainty could go on another 12 months because someone’s got to blink first. Someone’s got to go on this price. “ And the issues being – as I understand them – is you’ve got production which has stopped. If you want to restart it, it takes a while to get things back up but no one’s going to do that unless it’s at the right price. And even then it’s a question of we’ll pick that price. It’s not just a question of we can cover our costs. You need to make some margin. In which case, how much margin? Then you’ve got existing explorers, developers who are at various stages of development who therefore are anywhere between five and ten years out from being able to produce. And then you’ve got any new entrants into the market who may come along. That’s a potential ten year cycle there. So the supply side may not be able to catch up with the demand side. Is that again fair to say?
Mike Alkin: That’s our bet. I mean for now.
Matthew Gordon: There’s the maths conundrum, right?
Mike Alkin: Yeah, I mean again we don’t give out our full numbers, if you want to talk in generalities… what you see a lot in this market is that pieces of a mosaic become the entire narrative. We talked earlier about the US. One of the things I hear often is “Well, the Kazakhs can sell all they want at $35, at $30 and $25.” Because Kazaks 41% of the… Kazakhstan and Kazatamprom is half of that, but you have to put everything into a mathematical context. At the all in sustaining cost (AISC) of below $20. And people look only at the all in sustaining cost (AISC). You have to understand how that sausage is made because other people report it all over the place, but then you have to just say, “Okay, now let’s go beyond the mine all in sustaining cost.” What is the GNA to support that mine at the corporate level? What is the interest expense to support that debt that they have? Are there any obligations that they need from a dividend perspective? I’m talking in general. How much of that project requires further exploration cost? And so what people do is they look at a cost and say, “Okay, that’s the cost. Well, a little bit of margin on there and that’s it.” That’s not how it works. There are other costs associated with it that increase that cost, but even if you assume that’s how it worked, put it in buckets, what’s below $20 per pound all in sustaining cost? Last year was about 66Mlbs produced. They can produce about 85Mlbs. Let’s go in your 20Mlbs, 30Mlbs bucket. Now you’re getting into the 20Mlbs-ish 25Mlbs million pounds ballpark. But now that’s not incentive price. That’s all in sustaining cost, that doesn’t include G&A, doesn’t include interest expense. It doesn’t include all the other expenses associated with it. Where can that get sold? It’s sold in the $28, $30 range. Okay, so now what? You have 110Mlbs – 120Mlbs. You’ve got demand of over 200Mlbs and growing every year.
Now you have secondary supplies. Then you get into what’s in the $30 dollar cost, +$30 – $40 cost? Now you start to get into some of the bigger mines, but then in that category you have other mines that are expiring. You have other mines that are aged. You have further exploration costs to get done. So you start to look at that, and people could do the work. We’re not going to lay it out for them, but now you start to get into that, are you starting to get into the 150 range, 140 range? But that’s the cost. So when we look at this, we say, “Okay, well, the spot price of $25 and the long term contracting price were simply unsustainable. That long term contracting price is not where deals are being struck today. There’s a methodology to that by a reporting organisation that if deals are being struck with a four handle, but there’s a potential bid out there with a three handle, that’s where it stays.
Cameco didn’t add 25Mlbs in the first quarter and a little bit more in the second quarter to their order book at long term prices. That’s not why they shut MacArthur River. And those are off market. Those aren’t requests for proposals. Those are off market negotiations, meaning utility calls supplier. Supplier, they go back and forth.
Matthew Gordon: So this is why it’s complicated for retail investors and perhaps why they need to listen to people like yourselves who have done the work because it’s hard to get information. You can get that information, you can pay for the reports, you can construct models…
Mike Alkin: We construct our own models and use the reports we buy to benchmark. It’s the assumptions that go into reports. A lot of the sell side reports are just replications of those models because there are very few Uranium mining analysts on the sell side. They’re covering other things.
Matthew Gordon: This interview is for people who perhaps aren’t so sophisticated in terms of investing, who are knowledgeable about Uranium specifically. This is to paint a big picture as to what’s been going on and project out and say what does the world look like? So that’s why it’s important to understand the demand side is a big tick as far as funds like yourself are concerned. On the supply side it’s a question of timing. It’s not a question of if.
Mike Alkin: It’s a question of price discovery.
Matthew Gordon: If you don’t mind, Mike, can we just spend a little bit of time just talking about the price… Well, the inelastic nature of price in this commodity, because it’s unlike any other that I’ve seen.
Mike Alkin: Utility buyers will pay what they need to pay when they need Uranium. A fuel buyer will not get fired if he pays $10 or $50 or $80 or $100. He will get fired – or she, I don’t mean to be gender specific, but he or she will get fired if they don’t have fabricated fuel rods ready to go into those reactors.
Now, the incentives of fuel buyers are not to be heroes. They are to pay what their peers are paying and so a fuel buyer doesn’t get fired because he paid $80. He does get fired if he doesn’t have fuel. And so that security of supply, there is no substitute. There’s nothing to substitute that, and when you start to get into issues now where there’s a demand picture and a supply picture and supply has been cut dramatically, and the projects that are on care or maintenance require much higher pricing to come online, and even it doesn’t fill the gap. That means new projects need to come online.
New projects, many of them, have been put on the shelf. Many of them require prices, most of them – almost all of them – with a five handle. The bigger ones that are out there that have many big pounds, that could come with let’s say – there’s only a couple of them at lower pounds, those are years in the future. It’s a 2yrs fuel cycle. By the time you order to the time you’re going to get it, it’s a couple of years. So now people say, “Wow, Oh my God, there’s inventories out there.” And there’s numbers between 1.4 to 1.8. We’re in the middle, middle towards the lower-end of that range.
But what you see is when you do those inventories, there’s government stockpiles, there’s many types of inventories, and you have to look at how much can I access when I really need it? We think that’s somewhere 50Mlbs, 60Mlbs, maybe a little bit more. I saw a try backer recently said, 75Mlbs. We’re talking a quarter of the year of supply and the utilities globally, when you back out China from those equations, have two and a quarter years. You’re all at historical levels. So now where does that new production that’s required come? Where does that production come from? It comes from the mines and they need… Some of them are over a billion dollars. In a bear market nobody is financing those mines to get built, so you need prices to go higher.
Matthew Gordon: What’s going to start it? I know there’s a need, but there’s got to be a moment…
Mike Alkin: If I give you with some prospective investors, I’ll show them a screenshot. I’ll show my model. It goes on forever. Now it’s got 22 tabs and it’s got everything you could possibly think of. You can have that discussion and at the end sometimes somebody will say – and you’ll show them the deficits that we have, and a couple of my friends who are other fund managers that I’m comfortable with sharing some work. They’ll say, “So what starts it?” Price discovery starts it. Section 232 was not made up. It caused the largest pool of fuel buyers in the world to step aside. It caused a cascading effect from then. There was some contracting being done and people will look and say, “Well, somebody’s selling pricing at $32. So what? Who cares? Now you do need more of those to get done off market with a four handle, so the price reporters can’t point to that $32 and say, “Well, some got done at $32.” You need more of those, and if you’re in the fuel cycle, you know those discussions are occurring. When that changes overnight, the psyche changes overnight. But during 232 those discussions by the people that matter, weren’t happening because if I’m a fuel buyer…
People think 232 came on whatever day it was, on a Monday officially, I think. On Tuesday we’re going to see the spot price of Uranium go parabolic. That’s so nonsensical and so not how it works and so unrealistic.
Matthew Gordon: Human psyche does come into it. There were people just looking… It comes back to that emotional investment psyche where you need something to be true. You want it to be true, but you need it to be true to justify your decision making. There’s been a lot of catalyst moments put up. 232 is one. I think some people putting the Working Group up as a catalyst moment.
Mike Alkin: But the 232 came two weeks ago. It cleared. On God’s green earth is no one going in at a utility in July and August…We’re talking electric utilities. We’re not talking large tech companies who’s motto is ‘Move fast and break things.’ We’re talking electric utilities where they’ve had 18 months of uncertainty. They now have to digest what it is. They now have to step back and say, “Okay, let’s plan now what we now.” And by the way, a contract negotiation takes month. No back and forth. So to the investor that’s freaked out because it didn‘t move right away, I’m sorry to say they’ve got to get more in the weeds done.
Matthew Gordon: Absolutely, but you could say the same with the Working Group. People sitting back and expecting something miraculous with the Uranium industry from the Working Group…
Mike Alkin: Well, you shouldn’t expect miracles when you’re investing. I can’t hold people’s hands. What are you hoping for? If you understand, like we believe, and again, we could be wrong. That’s what makes markets, but we believe when price discovery in mass occurs and our signs are telling us – Cameco’s not signing contracts with a three handle. It’s a four handle. Other discussions are taking place. Eventually the long term price on a reported basis will move up. Then from that point you’re fine. If you anticipated that 232 is going to come and something’s going to happen like that overnight, it doesn’t work that way.
Matthew Gordon: I think we’re in violent agreement. The macro story is good, the fundamentals of the maths is there in terms of that macro picture, supply demand picture. There’s been a few events which we’ve discussed today – 232, the Working Group. My opinion of the Working Group is a whatever moment.
Mike Alkin: What are they going to do? They’re not going to go back and say, “Oh, by the way…” The Working Group has no… What can they do? We’re going to make it tougher for the…Their astute miners, they respect the global landscape.
Matthew Gordon: There’s lots of things that will come out of that which probably will affect Uranium positively internationally. We’ll see what it does nationally.
Mike Alkin: Whatever it does, doesn’t change the amount of supply, primary and secondary, or demand.
Matthew Gordon: What’s your big message to investors in Uranium? Some people have got hurt recently. Stay with it?
Mike Alkin: From the time of inception of the fund, from the time of inception of analysing it, the fundamentals for us have never been better. You pinch yourself. What we ask ourselves is – this is really important and it doesn’t mean anyone has to subscribe to this. This is how we subscribe to it. It’s risk reward. So if it means we’re sitting on down money or up a little bit for a period of time… Now nobody anticipated 232, but what you don’t know with 232 was, was it going to be nine months or six months? You don’t know how long it was going to take, so you had to be in it to be there.
I come at this thesis, we come at this thesis at Sachem Cove, from a ‘how does Uranium go lower from here?’ That’s how we think about the world, and what gets it lower? If we take care of our down side, the up side takes care of itself. We don’t come at it saying, “Uranium‘s going to the moon. It’s going to $130.” I have no idea. Where I think we believe that Uranium has to go is $55 – $65, in that range. Could it get to $80? But what happens, Matt, and you know this from being around markets, people also assume as soon as it gets to $40, contracts are signed like crazy. If I just saw – and I’m a producer – and the price of Uranium just moved 40% to get to that cost that I need it to be, I’m going to step out of the market. I’d sign a little bit but I’m not going to fill up my entire mine order book. Psychology, right? Now it becomes a seller’s market. Now I’m the seller and I want to be able to get my price. And then the fear takes over.
The other thing you saw last cycle – and this is important for people to understand. From end of ’02 pricing went from ten bucks to 137. Who knows? I have no idea. What I do know is what started to move it much higher was, as you started getting into the $50- $70s, you saw the hedge funds come in and buy a lot. And they started storing the physical Uranium. And then a global financial crisis came in ’08 and people’s funds melted down. Now if I’m a hedge fund that’s not a Uranium specialist – and most weren’t – and you’re owning physical Uranium and you’re getting withdrawals of you fund – because good funds had withdrawals across the board – if that’s what’s happening, get me out of this. What is this? Call the analyst in and say “Go out my Uranium.” And then that brings it down, and then it settled around Fukushima about $73 a pound.
Now, by the way, if the physical price of a commodity moves from $25 to $75 and doubles or triples, just a gearing in the equities, they’re going to go up multiples of that. That’s our view. So if we subscribe a hundred timers that are out there, I see on Twitter, is 50 bagger or a hundred bagger? Come on.
Matthew Gordon: Do you think Cameco’s call last week and the subsequent press release – you’re talking about the psyche here – was that a little bit of gamesmanship?
Mike Alkin: I like the guys there like Tim, like Grant. They’re professional, they’re sharp guys. You see a lot of criticism on Twitter or in different places about the projects and whatever it might be. We’ve gone back and looked at conference calls years and years and years. There are times when we get a little frustrated with them because we think that they can exert more leverage than they do and we think they’re very polite, really professional. Some countries say, “Guys, shape the trend in utilities because this is a big deal.” They’re very balanced, but this call was the most forceful I think they’ve seen them. Now the market – again, not a lot of people dive deep into this fuel cycle. When they’re talking about surplus disposal in the spot market, they’re calling out a couple of producers, but again what does that mean? That doesn’t mean surplus in the market. They’re saying in the spot market, which is a thinly traded market, that is prone to people playing games with. When they’re calling out financial people, games are played in that end of the market.
Matthew Gordon: Obviously there’s some coded messages there for different people in the market. Kazatomprom may have interpreted it one way. I think traders, as you say, are in a very thinly trading space. They have the ability to affect pricing in the spot market because they have a different model from anyone else, right?
Mike Alkin: Sure, but there’s the physical traders and then there’s hedge funds. The market is so thin and so small. If you don’t see the forest for the trees and you’re thinking now a physical trader is going to… Cameco needs to come into the market. Let me go buy some pounds. Cameco said we need to buy pounds. I’m going to go buy some pounds and then I’m going to go to them and say, “If you don’t buy from us, we’re going to sell it.” Cameco’s view is ‘Screw you. You’re not going to dictate what I’m going to do. We’ll buy them when we need to buy them, but not on your schedule.” And so message sent there. What happens you see the price of Uranium go from $23, $24. It goes up to $29. Cameco’s got to come in and buy. It’s a Japanese year end and if people are familiar with the Uranium trading market, there are Japanese traders that are big in this market, and it’s a year end. They don’t want to be stuck with inventory on the balance sheet at year end, and they can easily go to Cameco and say “We’re out, if you don’t buy from us.” Cameco will be like, “So what?” Cameco’s not making business for tomorrow and they’re not going to be held hostage by people, so message sent.
They’re looking out a few years. They’re looking out. They have their own supply demand numbers. In fact, they have to. They’re not looking at industry experts, consultants where the market is. They’re messaging other bigger producers and they’re not going to give their strategy on a conference call that helps them in planning strategy sessions. So they have different constituents they’re talking to.
Matthew Gordon: And investors?
Mike Alkin: Of course, investors. It’s an earning call, so it’s a very tough balancing act. But from our perspective, it was the best call and I actually sent them an email and I said, “Listen, from my perspective… and we do own a little bit of Cameco… And I always say this, “If you think we own something, it could be a 1 per cent position or 10 – I don’t’ say that – I always say, “Don’t buy because we own it. I sent an email saying, “You know, I thought you guys were very forceful on the call. At least from this investor’s perspective I think I understood what you guys were saying.”
If you don’t live in the nuclear fuel market and you can hear that, you might think, Oh, my gosh, there’s excess. It’s flooded.” It couldn’t be from our view, and again we could be wrong. Couldn’t be further from the truth.
Matthew Gordon: Different people read different things into it. I’m looking forward to the next six months.
Mike Alkin: In this industry I think more than any I’ve ever seen, and I’ve analysed a lot of industries, growing bear markets and growing bull markets, but growing bear markets all these management teams do is beat up each other’s projects. All they do is talk shit about everyone else’s projects. And if they spent more time focusing on the macro Uranium than they do whose project is better. Why? Because they’re all looking to raise capital or position themselves to. And most of them are going to wake up one day and go, “Oh, we didn’t need to do that.”
Matthew Gordon: That’s fascinating because we’ve spoken to a bunch of different companies on video, off video, and some of them are struggling a little bit for cash and they’re having to raise money and it’s expensive money right now because their shares are where they are and the market is on hold. And then there’s some companies who are quite close to doing everything that they can do. They’ve spent their money and they just need to hang on in there till the market turns. So they’ve all got slightly different drivers. What I thought was interesting was that the companies which are quite close to putting the numbers together, they’re going to have to work out at what point do they try and enter the market? At what point do you come in, do you take that cash? You can go to the banks and take the cash today if you can find someone to give you the mostly debt. Or you wait a little bit and you wait for that price discovery to determine is now the moment because it’s best for my shareholders?
Mike Alkin: A good number are headline readers too when it comes to the macro Uranium. They don’t themselves now. That for me and team has been one of the biggest eye openers. Some do. Some really endeavour to understand the macro market, but many are just reading headline stuff and what consensus stuff is, and making decisions off of that. That goes into our calculus of whether or not we want to be a part of something like that.
We do it much less now, but early on did we finance a few through some pipes. Private investment, public equities, you get a 5yrs warrant and we give a little bit of cash for a project we thought was okay. Maybe not great, but we thought had potential. It’s a sliver of our fund and so, yeah, okay because if the warrants work, it’s okay. But it’s a very, very small portion of what we do.
But the more you spend time here, the more you realise you need to be very selective and understand what these management teams know about not only their projects, but when they need to go to market.
Matthew Gordon: This is what I was getting at with these investment hacks. What are the buttons they need to press that get you to go, “Yes.” If someone’s willing to take a pipe investment, I’m slightly nervous about the project. They’ve got limited options or less options. The ones that you’re willing to invest in says a lot about the company to me, for sure.
Mike Alkin: We’ll do a little and you get a warrant. You build a little bit of a warrant bank. If the work is right and the cycle turns, some of these things have good returns. You say, “Okay,” but that’s a very small portion.
Matthew Gordon: But from your side it’s absolutely worth it, but like I say from the company’s perspective that’s a different story.
Mike Alkin: The one thing that you know, you said you’d do this for the retail investor. I don’t. I see a lot of commentary on Twitter and a lot of people are very passionate. I speak to a couple of them offline, but you get the sense that it’s the ranch mentality on things and this happens overnight and to the moon. These are long cycles. You have ups and downs and people get impatient and, like you said, it’s personal, it’s their money. But spread it out a little. We don’t spread it out too much, but one or two companies… I always say this, I half joke – “even if you love the greatest in the world and I think it had 10 bag potential, is it going to be half my fund?” No. Why? Because I don’t know if the CEO is with the secretary and you’re going to wake up one day and the stock’s down 50% and shit like that happens.
Matthew Gordon: I know, it does.
Mike Alkin: You do the best you can, but you don’t know what goes on behind closed doors. So you’ve got to put some risk management in there.
Matthew Gordon: Totally agree with that. Mike, great place to end. Thank you for your time.
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