Uranium - A Place to Hide
A.J. Liebling, the famed New Yorker writer, once wrote about how boxers frequently “rediscover” old truths about boxing. An innovation, though seemingly new, may instead have first seen the prize ring through the fists of some 19th-century pug. “These rediscoveries are common among philosophers,” Liebling wrote. “The human mind moves in a circle around its eternal problems.”
So too does the investor’s mind grapple with ancient problems. One of his eternal problems is figuring out when to buy what commodities. Every generation spins its own new version of old truths on the matter. Robert Mitchell, a general partner at Portal Capital, gives us the 21st-century version of some timeless investing advice.
“In the world of commodities, demand is rarely the compelling reason to get long,” Mitchell begins. “Instead, you want to own a commodity where supply is incapable of responding to even a small bump in bids.” In other words, buy the commodities where it is most difficult to produce more. Though hardly a new insight, it’s one that investors sometimes forget. One commodity that aces this simple test is uranium.
Sometimes it’s hard to tell, because the data in the uranium world are unreliable. Trying to grab facts can be like trying to catch butterflies without a net. The market is surprisingly elusive. There are a lot of facts and figures, but the quality of this information is pretty bad.
As a for instance, Mitchell points to Ux and Tradetech. These are two big pricing publications based in North America. TradeTech says 38 million pounds of uranium traded on the spot market last year. Ux says it was 50 million pounds. That’s a big difference! The true number is a mystery.
It’s almost like you have to see the mines and piece together your own story. When you do start digging into these micro stories – Kazakhstan, Niger, Namibia – you start to doubt the world’s ability to meet uranium demand at current prices.
Mitchell recently visited Namibia, which is the fourth largest producer of uranium in the world. Mitchell reported his findings to readers of Marc Faber’s excellent Gloom Boom & Doom Report. His notes shed some light on this opaque market. And he also adds to a pile of evidence that will warm the hearts of all investors in this sector.
Let’s start with Namibia, which seems a difficult place to be. “Unemployment approximates 36%, and 15% of citizens have HIV,” Mitchell writes. Yet is it mining friendly, so far. Mining makes up 13% of the economy.
Namibia has two uranium mines. One is a biggie – Rio Tinto’s Rossing Mine, which kicks in 8% of the world’s uranium production all by itself. This is an old mine. It’s been producing for 34 years. As with dog years, that’s a lot older than it seems. It’s getting tougher to massage the ore out of the Earth’s crust. Labor costs are rising. Water and electricity are also getting expensive. And the geology of the mine itself is changing – worsening as it goes deeper.
“The Rossing Mine is clearly strained,” Mitchell writes, “approaching the current pit’s end of life and marginally profitable at today’s term prices and highly unprofitable if dependent upon today’s spot.” The spot price, meaning the price for immediate delivery, is about $42 a pound. Term prices are the longer-term prices and hover around $60. Mitchell estimates all-in costs for Rossing are north of $50 per pound. Meaning it’s barely profitable as is. And those costs have doubled in the last five years.
(That spot market, by the way, is artificially held down by foolish sellers, he argues. The Uzbeks sell 6.5 million pounds a year into the spot market because the term market is closed to them. They didn’t honor their contracts a few years ago and no one has forgotten it. The market for spot uranium is thin. And he argues that buyers are holding producers hostage by referring to this spot price. Sooner or later, uranium producers will realize the folly of selling uranium in the spot market.)
Namibia is also supposed to be an important source of new supply with a number of new projects. Yet these suffer from the same issues. Electricity is costly and unreliable. “Electricity demand in sub-Saharan Africa has doubled during the last 20 years while the capacity has grown 10%,” Mitchell notes. Water is hard to find. No surprise there, as most of Namibia is a desert. Then there is the matter of the quality of the deposits. Grades are low, meaning you have to chomp through an increasing amount of ore to get the uranium out. That means high costs.
“In summary,” Mitchell concludes, “Namibia’s current uranium mine production has unfavorable economic metrics…” It is barely profitable at best, or not profitable at worst. We’ll need to see a lot higher price to make these projects a go.
Kazakhstan – the No. 2 producer – has problems too. Kazakhstan is one we talked about before, but Mitchell confirms what we found. Most industry observers were surprised Kazakhstan produced as much uranium as it did in 2009 – about 13,900 metric tons. But as Mitchell points out, the Kazakhs’ “own analysis suggests their marginal cost of production rises to well above $55 per pound once 12,000 metric tons of total production is breached to the upside.”
Again, like Namibia, Kazakhstan is a big current producer – it is No. 2. And it is also a large source of potential supply, with one-sixth of global reserves. Yet here again we find that it is not economic to produce more uranium at current prices.
So in summary, lots of issues on the supply side make responding to increased demand difficult – even with a big boost in prices. These are fine conditions for investors in low-cost uranium mines to make a lot of money.
Let us consider one final reason. For years, the mines have produced uranium well short of demand. The difference has been made up by existing inventories – those old Cold War stockpiles. Most of these are from Russia. Mitchell makes a good case that these stockpiles are about gone. “It is likely that the Russians don’t have much usable material left, which is why they have the right to purchase 6,000 metric tons of uranium per annum from the Kazakhs. Further suggestive of their poor ore position, they have purchased 20% of Uranium One so as to access additional material.”
The US has a stockpile, too. Mitchell points out that this is less than it seems. The US has about 59,000 metric tons, but mostly made of tails (or spent fuel). The usable quantity is only 16,538 metric tons. And much of the tails are “held in a variety of cylinders, many of which can’t be moved because they no longer comply with DOT. The DOE doesn’t even know what the assays are for most of their tails – they guess.”
My guess is the stockpiles run out sooner than expected, leaving a yawning gap for the industry to make up. And the industry will only do that if prices rise to make these marginal projects in Namibia and elsewhere economic.
As Mitchell sums up: “Uranium is well below cost of production, with a superb demand curve.” We’ve made the demand case before, too, and we won’t rehash it here. Suffice it to say that a slate of new nuclear plants means a robust demand for uranium for years to come. There are few commodities positioned as well for the next several years.