A CHEAP VALUE PLAY WITH A CATALYST?
Uranium Participation Corp might be the place to hide
The stock market scares me. I'll make no bones about it. The speed of this ascent and the nature of the stocks going up sends shivers down my spine. I wish I could grab hold and buy TSLA (Tesla), SPCE (Virgin Galactic) and BYND (Beyond Meat) with all the other foaming-at-the-mouth bulls, but I can't.
So where is a fellow to hide?
Well, you could go to cash. That's what wise investors such as Warren Buffett are doing.
Now before you write and tell me that our favourite cherry-coke-loving octogenarian isn't selling any stocks - he is simply not deploying the cash accruing in his company, I say "same difference." He could invest in the S&P 500 index. In fact, he has often advocated that approach, yet that's not what Warren is doing with his money.
Nope, Warren is letting his cash build up because his most-often-cited indicator, is flashing red.
(note, GDP numbers are released quarterly, so this chart is as of September 2019. Since then the market has screamed higher so it's most likely blown out to new highs)
Instead of going to cash, I am trying to find places to hide. True value plays that aren't traps.
One of my favourite of these types of investments is Uranium Participation Corporation. It trades on the Toronto Stock Exchange under the symbol U (URPTF in the United States). It is a closed end fund that holds uranium. Nothing more, nothing less.
Uranium spot trades well below the price of forward contracts. In fact, it trades way below the cost of extracting uranium from the ground. That's why producers such as Cameco have been shutting down mines.
When a commodity trades below the cost of the production, you know that can't continue forever. Unless you think uranium won't be used in the future, this situation has to fix itself with higher prices.
I was going to write up a bullish uranium thesis, but I have done that before, so I didn't want to rehash an old post. And not only that, Uranium Participation Corp just uploaded a great presentation to their website, so I decided to cherry pick the best slides and lay them out for you.
Let's review. Uranium trades below the cost of production, which is also below the cost of forwards. This bargain is then compounded because U, the closed end fund, trades at a discount to NAV. To say U is cheap is an understatement.
However, this argument could have been said anytime over the past few quarters (and in fact was often cited by uranium bulls).
Why is anything going to change?
Well, to some extent, I don't need a catalyst. Remember, I am just looking for something that won't hurt me if (hopefully when) the stock market correction comes.
At this point you might be saying, "uranium is not the future - renewables like solar and wind is what you want to be buying." Yeah, sure. My suspicion is that the obsession with renewables is part of the reason nuclear has been abandoned by investors.
The ironic part about nuclear's fall from grace? As one of my readers noted recently:
If 10 yrs ago you knew how conscious everyone would become of carbon... you would have thought uranium is an absolute slam dunk.
Yeah, go figure. But before you dismiss nuclear as yesterday's solution, take the time to listen to these TEDx talks from Michael Shellenberger. It might change your mind.
Back to shorter term trading. U is down and out. Over 20% has been lumped off during the past year.
We have hit a point of Don Coxe's maxim of "those who know it best, love it least, because they have been burned the worst." It is a hated, forgotten, abandoned investment story.
But I subscribe to the Jim Grant school of thought when it comes from catalysts:
"What's the catalyst? I don't need one. Good things tend to happen to cheap assets."
Yet if you were to force me to come up with a potential trigger, let me share with you a conversation I recently had with a uranium expert:
Where I've been completely wrong has been how the sector has been paralyzed due to Section 232 which started in June 2018, this study by government has kept utilities from doing any sort of contracting, then when Section 232 failed, they set up the Nuclear Fuel Working Group which again has kept contracting on hold. With that said, I started my career/internship in 2001 calling auto manufacturers asking them whether they were using platinum or palladium for their catalytic converters.
1. I find this palladium move very reminiscent of when Ford took a $1bn+ loss panic buying Pd, because Russia strong armed the supply chain, 2. Russia has been making noise again, but more specifically there is a 1/31/2020 nuclear reactor waiver for Iran that needs to be extended, that Russia is working on. The US extended this on 10/31/19 and the world was a different place when it came to US/Iran relations.
It was very odd that on MLK day, Russia came out with this news as if they think US won't extend the waiver for another 3 months, which if they don't, the entire supply chain is at risk.
Moscow accuses Washington of misinforming the international community about Irans right to enrich uranium, the Russian Foreign Ministry said on Monday.Last Friday, US Special Representative for Iran Brian Hook told journalists about an alleged UN resolution passed in 2006 or 2007 prohibiting Tehran …
The republican congress, namely Ted Cruz and Graham have been adamant prior to the 10/31/19 extension of not doing another extension, I believe those voices are going louder to not extend on 1/31/20.
that's the "oh shit" thesis, you're very familiar with the long term thesis already, so I don't need to point that out...
This concern is even outlined in the Uranium Participation Corporation's recent report:
"In 2015, the US entered into the Joint Comprehensive Plan of Action with Iran , commonly known as the Iran Nuclear Deal. As part of the Iran Nuclear Deal, the US Administration issued waivers to certain of Iran's trading partners, allowing certain foreign companies, including Russian entities, to work with Iran on its civilian nuclear programs. In 2018, the US withdrew from the Iran Nuclear Deal, but the US Administration continued to renew these waivers until recently, when one of the waivers, related to work being conducted by foreign companies at Iran's Fordow Fuel Enrichment Plant, was terminated effective December 15, 2019 . This decision has raised concern among market participants that the remaining waivers may also be revoked if tensions continue to escalate between the US and Iran . One of the waivers relates to the Bushehr Nuclear Power Plant, which is being developed with Russia's involvement. If further waivers are withdrawn and Russia continues its work in Iran , Russia could face sanctions in the US, which could have an impact on deliveries of Russian nuclear fuel to US utilities – an outcome that could have a considerable impact to the supply side of the uranium market. The uncertainty caused by the potential revocation of the waivers represented a significant supply-side development during the quarter, and is believed to have caused various nuclear fuel cycle participants to enter the market looking to mitigate this risk by entering into nuclear fuel purchases that could provide back-up if any issues arise with Russian nuclear fuel supply."
In full disclosure, I have been buying U all month long as I have gotten more nervous about the stock market. I was trying to write this piece at the lows so that I could bring it to your attention at an attractive price.
However, in the last half an hour of trading yesterday, someone took the U and bid it.
In the grand scheme of things, it's not that big of a move. Yet with the deadline approaching, I wonder why someone needed to own it so badly.
Let's see what today's trading brings. Maybe people are looking at the calendar and realizing January 31st is fast approaching.
Thanks for reading,
PS: Well, not sure if this was the catalyst for the move, but last night Senator Cruz tweeted the following:
Maybe that was the reason for the spike at the end of the day. Don't forget - it's not illegal for government officials to insider trade. Why else do you think Mnuchkin stays in the job? :)