Portfolio Update: Adding to My Uranium Position (September 26, 2016)

energy-fuels

Well, at this point in time, I think it’s pretty safe to say that uranium (and uranium stocks) are deeply entrenched in a most brutal bear market. As I mentioned in a previous article, this downturn in uranium quite possibly could be the worst storm that I have ever witnessed so far in my investing career.

Quite simply, uranium is absolutely hated by most everyone right now…

Just check out the current spot price.

iuspnm_chart

Uranium is currently selling for $25.94/lb on the open market… Not too long ago, we were sitting at over $130/lb… When it comes to commodities (uranium in particular), it’s incredible how quickly the story can change…

In the uranium world, about 15% of sales are executed at the spot price, while the remaining 85% of sales comes from long-term contracts, which typically trade above the spot price.

Anyway, the following chart shows the 5 year performance of some uranium stocks.

iuspnm_efr-to_ura_ccj_uec_urg_chart

  • Energy Fuels (listed as EFR.TO on TSX market) is down -81.9%
  • Global X Uranium ETF (URA) is down -73.8%
  • Cameco (CCJ) is down -52.8%
  • Uranium Energy Corporation (UEC) is down -63.7%

So, yes, as should be quite evident to everyone, the uranium sector is currently in deep liquidation.

Or as I always like to say, we are operating in the Depths of Despair.

Which sets us up nicely for Deep Value Investing.

 

My favorite environment in which to operate in as an investor…

 

With all that said, I guess it should then come as no surprise to readers that just recently, I initiated a position in uranium, adding my first tranche of shares. I purchased 7,900 shares of Energy Fuels (listed as UUUU on US market) @ $1.61/share.

This is not my first foray into uranium stocks and UUUU; I had owned shares before in the past, and luckily for me, I sold out earlier this year and booked some decent profits.

As I highlighted recently, UUUU recently completed a financing deal at terms well below market expectations; the financing was completed down at $1.80/share (basically at 52-week lows), and investors were “gifted” 1/2 warrants for each share purchased, good for a whopping 5 full years, allowing for the purchase of shares at an exercise price of $2.45/share!

From Energy Fuels.

energy-fuels-terms

In a commodities environment that has seen the price of precious metals and their stocks surging, the above terms must have felt like a huge slap in the face for existing shareholders of Energy Fuels!

Not surprisingly, shares of UUUU sold off the following morning after the announcement. Although the sell-off was to be expected, I gotta admit that when I saw the stock crater by over -20% the following day, even I was left speechless…

You can easily figure out what I did next…

I added shares of UUUU to my stock watchlist…

Shortly after, the CEO of Energy Fuels, Stephen Anthony, issued out a letter to all shareholders, giving further insights into the most recent financing.

From Energy Fuels.

letter-shareholders

letter-shareholders-2

And so on…

Anyway, you get the idea…

“The terms of the financing were a reflection of the difficult state of the equity market for uranium, and I can assure you that this financing was carefully considered.”

Times are most bleak right now… Which is what you need if you’re an investor who wants to implement Deep Value Investing

After consolidating for a few days, I decided that I was comfortable enough with the risk vs. reward curve to add some shares of UUUU.

Once upon a time, EFR.TO was trading at over C$230/share… Today, it’s trading at C$2.08/share

efr-to_chart

In the US market, here are where things stand as of market closing on September 26, 2016.

screen-shot-2016-09-27-at-9-00-25-am

Please note, just because I decided now was an opportune time to purchase a small tranche of shares in uranium stocks, by no means should it imply that I think that the sector is on the cusp of a rebound.

Hardly.

Quite frankly, nobody has a crystal ball so it’s anyone’s guess on where things might go from here…

If I had to speculate a wild guess, my gut instinct tells me that things will get even more nasty in the uranium space… Until Japan really ramps up its re-start program, I really can’t see the spot price of uranium and these stocks improving anytime soon…

The events of Fukushima created a “perfect storm” for this low-price environment that we currently operate in… When you take 54 nuclear reactors OFFLINE all at once (and then have Germany proceed to follow in your footsteps), you simply cannot drain any excess capacity/inventory overnight… So far, it’s been over 5 years, but who really knows, it might take another 5 years (or more) before supply and demand in the marketplace can reach an equilibrium…

Until then, the world has more supply of uranium than demand… It’s that simple.

And when you look at things from that perspective, it’s easy to understand why an investor would be reluctant to jump into the uranium space right now… Who likes catching falling knives? But also keep in mind, when an entire sector is indeed operating in the Depths of Despair, sentiment will ALWAYS be increasingly negative.

Does anyone not recall what things were like last year in the precious metals space? Last year, everyone and their dog was a market timing expert, routinely calling for sub $1,000/oz gold and sub $10/oz silver… It’s far too easy to kick a sector when it’s already down and out…

Where are all those “experts” now?

Look, I’m just a retail investor who really doesn’t know jack shit, so I think it would be incredibly foolish of me to presume that I know everything that’s going on… The market has a way of humbling even the most arrogant investor.

All I know is that I like to buy up assets at times when I practically have ZERO competition… Right now in the uranium space, all you hear are crickets and even they are about to check out soon…

The only real “fear” that I have with this trade is that I might end up with trapped capital for a good number of years… Which is why at this point in time, I haven’t made up my mind if I’m going to try and trade in and out of these shares, or if I’ll sell parcels every now and then to reduce the cost basis, or if I’ll simply just tuck things away inside a drawer and lock it up for a few years…

I have no clue… But again, from a risk vs. reward angle, there’s no denying that shares of UUUU look cheap right now! Any concerns with further dilution should be off the table until at least 2018, considering the fact that the company has now raised over $27 million this year!

No doubt, it has been a devastatingly painful ride for shareholders of UUUU (and other uranium stocks) over the past few years, but I don’t think uranium is going obsolete anytime soon (bearing another catastrophic meltdown event, of course), so I have no fears that these shares will go to ZERO

But of course, anytime you are ensnared in the clutches of a brutal bear market, all anyone can ever imagine is a scenario in which the shares fall ever lower each and everyday until they ultimately self-destruct…

Confirmation bias.

So, what are investors getting when they buy into the Energy Fuels story?

From Energy Fuels.

screen-shot-2016-09-27-at-9-28-39-am

  • 950,000 lbs. of expected production in 2016.
  • Licensed capacity to produce 11.5 million lbs. of uranium per year (can realistically ramp up to 4-6 million lbs. per year in a recovering market).
  • Conventional + ISR Production (1 of 3 public companies globally with both types of production).
  • 3 distinct production centers: 2 ISR + 1 Conventional (in the safe operating jurisdiction of the good ol’ USA)
  • Etc.

Oh, and leverage… Of course, leverage (18 million lbs. of reserves and 152 million lbs. of total resource)… After all, that’s the fundamental reason why we even consider buying mining stocks at market bottoms!

From Energy Fuels.

screen-shot-2016-09-27-at-9-32-32-am

In terms of valuation? Well, at a market cap now sitting at sub $100 million, and with an additional $15 million in fresh cash just raised, I’d say the company looks pretty darn cheap! If you compare apples-to-bananas, Energy Fuels (a proven producer) trades at a valuation more inline with that of an early-stage exploration company in the gold/silver space (that perhaps has just a crude resource defined, or PEA).

To put things in perspective, consider the fact that Energy Fuels paid ~$150 million to acquire Uranerz Energy back in June 2015 (not that long ago).

From Wyoming Mining Association.

screen-shot-2016-09-27-at-9-42-29-am

So, there you go… Today, on a relative basis, investors get to buy shares of UUUU to acquire the same Nichols Ranch processing facility (and additional ISR assets that came with the Uranerz deal) at an even cheaper price, and in addition, receive all the other assets in Energy Fuels’ portfolio for free…

From Energy Fuels.

screen-shot-2016-09-27-at-9-47-45-am

Within the portfolio of assets, this includes the White Mesa Mill, “the only conventional uranium mill operating in the U.S”, which has a licensed capacity of 8 million lbs. per year.

From Energy Fuels.

white-mesa-mill

Free is usually a good thing…

Anyway, long story short, there ain’t nobody who knows when the uranium sector will turn… But unless uranium goes the way of the dodo bird, prices will inevitably have to rise a lot higher, or more and more mines will be shutdown and put on care and maintenance… Almost nobody out there is turning a profit at today’s currently depressed spot price…

As Rick Rule likes to famously say, “The cure for low prices is low prices.

With his track record of making many millions speculating on uranium stocks, I’m sure Mr. Rule is beyond elated to be able to buy up shares of these uranium companies at firesale prices yet again…

Lots of wisdom in this video! Start at 5:55 mark (in regards to buying into a sector in deep liquidation) and 8:00 mark for insights into the uranium market.

4-5 years too early… Talk about patience! But when history shows that a uranium stock can rise from $0.01/share to $10/share, yeah, you could say it does force me to pay much closer attention to the sector (a most illiquid and microscopic one, at that)!

If you think silver stocks are volatile…

I’m not “backing up the truck” at this particular time, but I feel pretty good about adding just a small tranche of some uranium stock. No, I am nowhere near as bullish on the future of uranium as I am on precious metals (gold/silver) and lithium…  But that doesn’t mean I don’t want to play, either!

 

As ALWAYS, please do your own research and due diligence before making any kind of financial decision!

 

The Depths of Despair, my favorite time to load up!

 

Fight On!

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Mining Stocks – My Current Favorite Ideas (October 11, 2016)SFtraderTapioRudy SMTFI Fighter Recent comment authors
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Alex
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Alex

Have this on my watch list and what about these gains in brimiam we have lately not mad about it

Bob
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Bob

Hey FI Fighter, new reader here.

Looking to get into investing in the coming months when I start full-time employment in the tech industry (currently in grad school). Had a few questions.

1. Are there any ETFs or Mutual Funds for Uranium and other commodities for those of us who aren’t interested in tracking individual companies? For example there is GDX and GDXJ for gold. Are there similar ones for Uranium, Lithium, etc? Like I said I’m new to all this.

2. Do you think I’ve already missed the boat on gold/silver? I plan to start investing early 2017 once I have the capital, and am wondering where the best value is (also aiming for early FI). Gold is no longer in a bear market, but it still may have some ways to go. However it’s hard to ignore the cheap prices on Uranium. If you were starting fresh in 2017, what market would you target the most? Like you, I am looking to maximize value by buying extremely undervalued assets. I am young (24) and willing to take on some risk, hitting a few home runs early in my investment timeline will help me achieve FI much faster.

I’ve enjoyed reading your blog the last few days, keep up the regular updates and congrats on your success.

Also I really enjoyed the Rick Rule interview!

Alex
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Alex

as far as gold and silver i believe he said if it were a baseball game we are in the 3rd innings are far as gold and silver goes !

Ian L
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Ian L

Hey FF Fighter,

I’m going to start building my Uranium position over the next few months and wanted to see if you have any other good Uranium equity recommendations? I’m looking for unhedged juniors, don’t care about volatility or long term hold horizon, I’ve done my due diligence and barring a nuclear disaster I’m supremely confident on long term fundamentals?
Thanks for all you do and any advice on uranium picks you can offer!

Raymond
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Raymond

Hi FI fighter,

Thank you for an informative post. Uranium miners look very attractive at these prices. I am just starting to read up on this industry myself.

Here are my thoughts…

supply and demand. According to EFR’s investor presentation, the demand this year is 201 million lbs, but production is only at 168 million. There must be a sizeable supply glut out there, but just how big is the excess inventory? uranium prices won’t recover until the excess is all used up. If the inventory is huge, it might be too early to invest, and prices can still fall from here.

Production costs. Who are the lowest cost producers in the industry? When uranium prices rebound, the lowest cost producers will be able to ramp up production quickly and make a profit, while the other higher cost producers are still losing money. Will we find the biggest returns in low cost producers?

I really need to do much more research on this subject. I did come across the global-x etf URA. It appears to hold a large basket of uranium miners. this might be a good alternative for us noobs that don’t feel very confident about picking out the good uranium stocks.

Rudy SMT
Guest

Hi Jay, thanks for taking the time to write this article, excellent. The easiest to read so far.

I made a calculation but seem too good to be true so that I would love your opinion.

FACT; UUUU has 95M Pounds of verified deposit. Today price per pound of uranium is about $25 per Pound. Let’s use $15 per pound considering a Spain mine is going in production in 2 years forecasting such cost (safety of margin).

So, $15 X 91M of reserve= $1.425B

The market cap is $134M, basically 1/10 of proved reserves.

Is it correct?

Rudy SMT
Guest

Thanks, Jay, I really appreciate your time to explain this.

Tapio
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Tapio

Hey,

Very informative read (as always!), thanks Jay!

You obviously like lithium but what do you think about other “energy elements” such as cobalt or graphite? I also see the revolution in electricity and the battery is currently the only thing that’s lagging behind and restricting most tehcnical applications from developing at an exponential rate, but I think that’s starting to change.
Specifically I’d like to hear your thoughts on graphite. I read that current lithium-ion batteries use up twice the amount of graphite compared to lithium, and only very high quality large/jumbo-flake graphite can be used for this.
I’ve come across a very interesting graphite producer with an astonishingly low valuation, and reading into it, my interest in graphite quadrupled.

SFtrader
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SFtrader

Hey FI, great pick with Energy Fuels.

Just curious, have you taken a look at Western Uranium? New US uranium producer currently being built by ex Energy Fuels CEO George Glasier. Apparently they have +100M lbs of Uranium in the ground, a license to build a mill, and new mining technology that would upgrade the ore at the mine site, which would greatly reduce the transportation and milling costs. It’s extremely thinly traded on OTC and the market cap is around $21M, but may be interesting spec if they can make it into production.

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