I’ve been talking about how to invest Uranium on this blog and channel since early 2021. Uranium equities have done very well since then, albeit with a lot of volatility. I continue to believe that uranium is still one of the most alluring investments out there.
I had the great pleasure to interview Scott Osheroff, a fund manager based in Asia, who first introduced me to this thesis almost 3 years ago.
In this interview he elaborated on the whole thesis from A to Z. If you were ever curious about Uranium, this is something you definitely want to bookmark and take time to listen to.
- The rebirth of Nuclear energy
- Why invest in Uranium rather than nuclear energy companies?
- Uranium contracting and pricing explained
- Massive, structural supply deficit of Uranium
- Price inelasticity of Uranium
- Impact of potential sanctions on Russian Uranium enrichment facilities
- Japanese nuclear fleet restarts
- Many catalysts for the uranium market
- Main risks of investing in Uranium
- Massive volatility in the Uranium market
- How to invest in Uranium
- Cost overruns at Uranium mining companies
- Uranium mining companies are down 30-40% in the past few months
If you want to discuss your internationalization and diversification plans, book a consulting session* or send me an email.
*a consulting session is a discussion about your portfolio and objectives. It does not constitute legal, financial, tax or investment advice.
full transcript of “How to invest in Uranium – one of my favourite investments right now”
LADISLAS MAURICE: Hello, everyone, Ladislas Maurice from thewanderinginvestor.com. So today, I’m with Scott Osheroff, who is a fund manager based out of Asia. And we’ll be discussing why invest in uranium, and then the whole uranium investment thesis and how the uranium market works. Scott, how are you?
SCOTT OSHEROFF: Doing well, Ladislas. Yourself?
LADISLAS MAURICE: Good. Good, good. So Scott, we were having a conversation and approximately half of your portfolio is invested in uranium. So you’ll obviously be talking your book, I’m very long uranium as well. So could you explain to us why uranium and why now?
SCOTT OSHEROFF: Sure. Well, first, I guess if we can talk a bit about nuclear, or should we do that after?
LADISLAS MAURICE: Nuclear is perfect, let’s start there.
SCOTT OSHEROFF: Okay. So what interests me about nuclear energy is that, well, if you will, I’m an environmentalist. I look the way the world is heading and what we’ve seen over the past decade, and I remember the last uranium boom, which was very exciting, but I was too young to participate in. So that got me interested in the sector, if you will. And looking at what’s been going on in the world the past decade and what seems to be the plan going forward is an emphasis on “renewables”, which is largely centered around a bit of hydro, but really, it’s wind and solar. And the problem with wind and solar is, one, if you look at the whole lifecycle of wind and solar, they’re actually highly polluting when you think that there’s a huge amount of steel, concrete, poly-silicon that goes into the manufacturing of these energy sources, if you will, and then you can’t really recycle them that easy.
A lot of the polysilicon solar panels that have been built over the past 20 years are, over the next few years, going to be in the process of being scraps. Prices for the materials that could be recycled from them are not economic to do at current prices, so they’re all going to be land-filled. And I imagine a lot of them will be shipped off to places like Africa and burn for small amounts of silver and whatnot. Meanwhile, I’m sure that you’ve seen, over the past few years, in like Wyoming and whatnot, you’re seeing wind-farm graveyards, they’re chopping up the composite windmill blades and just burying them. So that’s not so environmentally friendly. So that’s something that turned me off to renewables a long time ago. But then also, you have the fact that neither of them are baseload. When I turn on my lights, or when I flip my light switch, I like to have the electricity come on, the lights come on. It’s nice. I’ve lived in plenty of countries where that’s not the case, where you have five or six or seven hours a day of power outages. It’s not fun, especially when it’s 40 degrees plus with humidity.
So nuclear is really interesting, because it’s the only form of effectively carbon-free baseload electricity, that power plants can operate for 40, 50, 60 years. You’re in the process of seeing older nuclear plants get approved life extensions from 40 years initially to 60 and, in some cases, up to 80. And you’re also seeing a nuclear renaissance globally, not just in the developing world, but the developed world as people realize that if you want to decrease carbon emissions and you want to still have the efficiency that you have in our modern day, where, again, when you flip the light switch, the light comes on, nuclear is really the only option, certainly the most clean, environmentally friendly. So that’s what was interesting to me about the sector.
And then, again, as I mentioned, I was actually sitting at a dinner with a fund manager from Firebird Capital, and then actually Harris Kupperman, back in 2012, in Mongolia, and I remember them talking about uranium, and about the last cycle and whatnot. And I had already paid attention to it a bit beforehand. But it piqued my interest, discussing some of the gains that they were experiencing and whatnot. And really from there, I kept that on my radar. But it was far too early to get involved. And I believe I pulled the trigger in 2018 to begin investing in the uranium space, seeing that we were on the cusp, over the next few years in a new contracting cycle. And of course, uranium or nuclear had become very hated in the West with a lot of Western utilities and governments shutting down or preparing to shut down their nuclear reactors as a result of the tsunami in Japan in 2011, which of course caused the Fukushima meltdown.
But at the same time, you saw that China, India, places like the UAE, certain African countries were keen on adopting nuclear power because a lot of these countries are big importers of energy. And if you’re importing huge amounts of coal, gas, oil, you’re competing with other countries, but also, the amount of energy that can be harvested from small amount of uranium is immense on a relative basis.
LADISLAS MAURICE: So thank you, Scott. So I remember, you’re actually the one who introduced me to this thesis approximately three years ago, and that’s when I started investing in it. And back then one of my questions to you was, you keep talking about, you know, nuclear, so why not invest in nuclear rather than uranium.
SCOTT OSHEROFF: Nuclear power plants are typically part of larger utilities. And it is, we both know, power plants typically cannot sell electricity at market prices, the government sets it, they’re very regulated. Power plants are expensive to build, there’s a lot of debt there. And really, there’s not a whole lot of leverage. The utilities typically have a huge amount of debt on their books. So because there’s relatively guaranteed cash flow, so they can typically pay a decent level dividend, but nothing that is terribly exciting from an asymmetric standpoints. Uranium, on the other hand, very much so since it’s a commodity, and it goes through very large boom and bust cycles, which, if you catch it at the wrong time, it can be very ugly, it can also be very good if you catch it at the right time.
Uranium spot price vs contracting price
LADISLAS MAURICE: So when you look here, at this chart of the uranium price, it can be quite misleading in the sense that actually, the market is not necessarily set by the spot price, but rather by the contracting price. So can you, please, elaborate on the difference between the two, because that’s a core element to understand when investing in uranium?
SCOTT OSHEROFF: Sure. The spot price is really sort of an access disposal market for traders or for producers. For example, I’m in Uzbekistan right now, and Uzbekistan has partnerships with Japanese uranium traders, who then typically go into sell it onto the spot market. So for example, the Uzbeks might not care about securing the best price and guaranteed buyers for an extended period of time. So Uzbekistan is the type of country that would utilize the spot market to dump supply on the market, get cash, and then allocate it towards other purposes in the country. But most, pretty much all nuclear power plants require guaranteed supply, for if you don’t have guaranteed supply and you run out of uranium, you’d have a several billion-dollar piece of equipment that is doing nothing. And that’s a problem.
So nuclear power plants typically sign multiyear long-term contracts, and this is where the real price of uranium is in the contracted market. And contracts are typically six years plus. So that’s a much more important indicator. The problem is that you will very rarely get much clarity on what price contracts are set at because there’s typically a blended price in the contract. Part of it is based on spot, part of it is fixed. So this is typically done behind closed doors. So there’s not a lot of price discovery in the long-term contracting market, just in terms of the current contracting cycle, which is just really beginning, is I mentioned before, it’s a sector of booms and busts. And the peak contracting cycle for the last cycle was in 2010, when utilities contracted 140% of annual consumption. So they were accumulating net inventory.
In 2013, that fell to a low of less than 20%. And it’s moved up a bit from there, but it’s really stagnated until this year. And this year, you’ve seen over 70 million pounds contracted, which is roughly 35% of annual demand. But of course, we’re only halfway through the year. So the contracting cycle is now resetting and things are getting exciting again.
Uranium structural supply deficit
LADISLAS MAURICE: So Scott, at the core of the uranium investment thesis is the fact that there is a massive structural supply deficit. Can you elaborate on some of the numbers?
SCOTT OSHEROFF: Sure. So right now, you’re looking at global annual production of uranium in the 130, 135-million-pound area, and then demand around 170 million pounds. And this gap is being filled by some secondary supply and then draw down of existing inventories at nuclear power plants, which at some point they’re going to have to replenish, which is the theory behind this cunning contract cycle, because the process of going from mined uranium to a finished fabricated fuel rod to be put into a nuclear reactor was, if you will, roughly two years. And I say was because it is two years, but with the invasion of Ukraine by Russia, and Russia being responsible for a huge amount of the value add processing of uranium as it gets closer to being converted into fuel rods or fabricated into fuel rods, is likely to extend that process. So you have that deficit.
And then if you look out over the coming years, unless the price of uranium rises, there’s not going to be enough uranium to meet annual demand for the existing reactors, but also the new nuclear reactors, which are coming online and being built, of course. So if you look out to about 2035, you see the potential for up to 250 million pounds of deficit in the uranium space, which potentially might be the case even sooner. So you have huge and growing deficit potential, while supply remains constant, and demand continues to grow.
Price inelasticity of Uranium
LADISLAS MAURICE: And then what’s also interesting about uranium is that essentially, for utilities, they’re pretty price inelastic when it comes to uranium.
SCOTT OSHEROFF: Correct. I think on the high side, it can become maybe 5% of the operating costs of reactor, which is peanuts on a relative basis.
Potential sanctions on Russian uranium and impact of overfeeding
LADISLAS MAURICE: You mentioned that Russia does a lot of the processing of uranium. And if that processing, these processing facilities were to fall under sanctions, isn’t that a negative for raw uranium in the sense that, you know, kind of like what happens in the US when there’s a gas terminal that explodes, then it’s actually negative for the price of gas, because there’s too much gas available, because the processing can’t happen.
SCOTT OSHEROFF: So I guess to briefly explain the steps involved in the process of taking mined uranium, or yellowcake and converting it to a fabricated fuel rod, you have mining, conversion, enrichments, de-conversion, and then fabrication. So Russia is responsible for about 14% of global uranium production. The conversion process, it’s about 30%. And enrichment, it’s about 40%. So they dominate the market downstream. Now, assuming Russia is sanctioned in the uranium space, specifically, nuclear power plants are going to be forced to find alternative supply of conversion and enrichment.
Well, there’s a finite supply of conversion enrichment outside of, say, the former Soviet bloc, if you will. And that means that the price for the services are going to skyrocket. And they actually already are. I believe the price of conversion is up 130% since the invasion of Ukraine. And they continue to go up. So what you’re seeing is utilities book conversion and enrichment capacity. And then, in due course, once they’ve secured those downstream areas where they’ve got their needs, they’re then going to begin securing supply of uranium. So you can sort of see the fish swimming upstream, pushing prices of different services up. And I imagine, in the next 6 to 12 months, you see them come for uranium in a very big way.
LADISLAS MAURICE: But doesn’t this mean that, if there are sanctions, there’s essentially a cap on the amount of uranium that can actually be enriched, which would be negative for the price of uranium, even if there’s a lot of demand– essentially, there’s demand for enriched uranium, not the raw uranium being produced by miners? So if they can’t enrich it, because it’s capped, because 40% of the enrichment is out of commission, essentially, won’t this be an issue?
SCOTT OSHEROFF: Not necessarily, because what you’ll see is the process of enriching uranium, not that I’m an expert, I’m certainly a generalist, but if you imagine, say, making apple juice or whatnot, if you press an apple, you get a certain amount of juice. Well, if you keep pressing that apple, you’re going to get a little bit more, a little bit more. That’s the process of underfeeding. That’s where some of the excess supply in the market is coming from right now. That typically happens when you don’t have a lot of demand for your enrichment services.
When you have a lot of demand for your enrichment services, again, let’s go back to the apple example, you have an apple stand, and there’s no one there, you’re going to be as economical as possible and keep squeezing that apple to get as much juice out as you can. Once you have a line of 50 people, it doesn’t make economic sense for you to take that long to get everyone a cup of apple juice, you’re going to do it much quicker, which means you’re going to press it quickly and leave the scraps for someone else to worry about. That’s what we’re in the process of seeing, and that’s called overfeeding, where you go through more apples to get sort of the high grade the apple juice that’s in the apple.
And then, of course, there’s a bit more juice left, but you don’t have the time to get it out. And that’s what we’re in the process of seeing, which is where you’re going to see both demand for uranium, at least in the short term until this is worked out and there’s more downstream services built in the West. So you’re going to see more near-term demand for uranium but also you’re going to see that historical underfeeding disappear as overfeeding commences. So some of the secondary supply is going to disappear, which could be in the tune of 30 to 40 million pounds, and then you’re going to see overfeeding. So you’re going to see shrinking supply and growing demand, which is net bullish for the uranium thesis.
LADISLAS MAURICE: Okay, so essentially, sanctions against Russia would be positive for the price of uranium in this case. All right. So it would be a potential catalyst. And then another catalyst was the fact that the Japanese had stopped all of their nuclear reactors after Fukushima and now they’re talking of gradually putting them, switching them back on?
Nuclear restarts and life extensions as a catalyst
SCOTT OSHEROFF: Now what you’ve done by seeing them want to turn on a handful of reactors into the winter, because post-Fukushima, they started importing huge amounts of liquefied natural gas, which, depending on the benchmark, is up several hundred percent over the past two or three years. So their trade deficit has become very negative as of late. And what turning on these nuclear reactors that were idle for the better part of a decade will do is that it will ensure that the existing fuel that they have in inventory will continue to get consumed again, but that they will potentially start contracting for more, because, again, they’ve had inventory on hand.
I’m not aware of how much they have on hand but let’s assume that it’s a few years’ worth, they might, therefore, go into the market and say, “Well, we want to start putting uranium through the process of converting it into fuel rods, because it’s going to take two or three years.” And that could provide additional contract demand to the market, which, otherwise, wouldn’t have been there only a few weeks ago, actually.
LADISLAS MAURICE: Okay, because there are just so many catalysts. Even in Europe, politicians in Germany are increasingly talking about switching the nuclear power plants back on. If this happens, this would be a major catalyst. And it would appear that every other week, when I read the news, I follow the uranium market, there is a new government, there is a new power plant that gets its shelf life extended by a few more years. There are actually very few nuclear power plants that are going offline right now, pretty much all of them are being extended, and which is all incremental–
SCOTT OSHEROFF: That’s amazing.
LADISLAS MAURICE: –it’s all incremental demand.
SCOTT OSHEROFF: It’s amazing what high hydrocarbon prices will do and the lack of efficiency that intermittent renewables can cause. So yeah, because two, three, four years ago, the Western world was in the process of shutting down its nuclear fleet. Now, as you said, life extensions, building more, you have the UK coming out, I think, yesterday or the day prior announcing they’re going to build some new reactors. Some very exciting, very, very positive catalysts in the West, which weren’t there just a short while ago.
LADISLAS MAURICE: And this is us talking as Westerners, but the reality is most of the future demand is going to come from Asia, from the Middle East. We’re seeing Egypt building a bunch of nuclear reactors as well using Russia. So in spite of all the sanctions, everything, the Egyptians are cutting huge deals with Rosatom, the Russian nuclear power plant company, and just building reactors all over Egypt.
SCOTT OSHEROFF: Yeah, all very exciting. But we also do need to remember that every new reactor that’s being announced that they say, for example, broken ground today, even a year ago, is not going to be done for five, six, seven, eight years, which means that I presume the uranium thesis for what you and I have a vested interest in will have played out by then. But nonetheless, it’s exciting to see that incremental future demand continues to rise at, seemingly, accelerated pace.
The risks of investing in Uranium
LADISLAS MAURICE: So what’s the main risk related to this thesis? Because I can, when I look around, I just see bullish news. I see a lot of volatility in the market, in the uranium market, but that’s another topic, we can discuss this. My biggest fear is waking up one day and there was some earthquake somewhere, you know, in Turkey or wherever, and some nuclear reactor, just because of an earthquake, because of the tsunami. Apart from this, what are the risks?
SCOTT OSHEROFF: I haven’t been able to think of any, because you say that and I agree with you that that is certainly a risk. Let’s say that there was a nuclear meltdown tomorrow, it’s a nuclear power plant. Well, if it was in the West, you might see Western countries try and backtrack depending on the extremity of the backlash in that part of the world. But I still think the developing world because, again, you look at South Asia, it’s hot, people want air conditioners, people want TVs, people want dishwashers. Well, coal is phenomenally polluting but it’s cheap. Natural gas is much cleaner but it’s expensive.
SCOTT OSHEROFF: So I think that you’re still going to see reactor buildouts in the developing world. And probably, to a degree, you’d still see it in the Western world. And again, you still have the uranium shortage, that’s not going to change. But I don’t know if there– it would have to be a very, very bad nuclear incident to unravel the thesis. Not to say that if there wasn’t one that uranium stocks couldn’t fall 50%, 60%, 70%. The question at that point would be upon assessing the situation is, do you buy as much as you can, or is the uranium thesis going to be put to sleep for a while? That would have to be determined at that time.
LADISLAS MAURICE: So essentially, Scott, I agree with you, the thesis is extremely alluring and risk objectively is very limited, because risk is limited to a nuclear meltdown somewhere. But actually, the cost of investing in uranium is actually the volatility of it.
SCOTT OSHEROFF: 100%. It pays to position size accordingly. But that’s the case in so many investments, is position sizing due to volatility, specifically in the commodities industry. If you look at what has happened, I guess, really, since the beginning of June until the first or so week of July, the entire commodities complex, not to mention the broader market, seemingly fell off a cliff. But you have so many commodity producers that were down 20%, 30%, 40% in a very short order, which is stomach-churning. So that is one of the challenges, or I wouldn’t say risks, one of the challenges of staying on the horse in the uranium space is dealing with significant drawdowns, which, again, comes back to the need for position sizing, which is different according to every individual investor.
LADISLAS MAURICE: And another risk I would tend to say in line with this is don’t overstay your welcome. Because it’s sure, it’s a long-term play but at some point, you want to get off the ship. Because when it tanks, it’s going to tank heavily.
SCOTT OSHEROFF: What I find really interesting about the commodity space is that the slightest shortage can cause prices to soar, or fear of the slightest shortage, being that as investors we try and predict the future or look into the future. Prices can soar, but the moment that the market catches wind of the potential for balanced supply and demand, which in this case is probably not going to happen for some long time, or near-term oversupply, even if it’s moderate can cause prices to collapse. Though what I think will happen in the uranium space is you won’t necessarily– I think the trade will be well over before you get balanced supply and demand.
I think what’s more likely to happen is that, in due course, as prices begin to go vertical, is you see the clamoring of the salmon, otherwise known as the utilities move upstream towards uranium, and they push it probably north of 100 per pound. We’ll see when we get there. But you’re probably going to have speculative mania off the back of that, which pushes stock prices to phenomenally overpriced levels, which is clearly the time to get out if not beforehand. But by the time that happens, I still don’t think you will have anything that resembles balanced supply and demand premises.
How to invest in Uranium
LADISLAS MAURICE: So Scott, how do you play the market?
SCOTT OSHEROFF: I guess it depends to the each their own, according to their risk profile. You have some great ETFs out there. I prefer to have some exposure to physical through the Sprott Physical Uranium Trusts. And then I have a modest portfolio of miners. And the way that I’ve structured it is that I want to have exposure, and the majority of my exposure is focused on companies that either have mines on care and maintenance or that are going to come into production this cycle, or that have a very high probability of coming into production cycle.
And then I have a few younger, if you will, exploration companies. Still not moose pasture, Greenfield exploration place, but exploration place where there’s known uranium, there’s been significant drilling done before and, in some cases, that there’s been an operating mine before, as is the case with one company that has an old mothballed mine in the Western US. But the core of the portfolio, my portfolio is in companies that have a mine that’s signed on care and maintenance or that should come into production this cycle. I think that’s where the lowest risk but highest opportunity, from a leverage standpoint, comes about.
LADISLAS MAURICE: I get playing the uranium physical trust, you know, you’re buying actual physical uranium, so that’s a very direct play on the commodity. So you mentioned the miners as well, full disclosure, I’m very long uranium mining companies, including Paladin, the one I’m going to mention now. They recently I mean, this week, they announced that they will start production again in 2024. And as they were announcing this, they mentioned that the cost to bring back the mine into production was now 35% to 40% above their previous estimates, which are just from two years ago.
So there’s massive inflation from a Capex point of view. And I’m running with the assumption that also from an OPEX point of view, once they start producing, that their cost of production is going to be up substantially. So aren’t we running the risk that, by buying into mines, we’re actually going to be buying into businesses that will not have the sort of margins we were hoping for?
SCOTT OSHEROFF: Well, you and I have talked about this before offline, and we both agree that mining, in its truest form, is a terrible business. You’re a hostage to labor strikes, floods, rising fuel prices. But nonetheless, if you operate within the right part of the cycle, you have a potential to make a lot of money. And of course, what has not gone up in price in the past two or three years? And I think I mentioned this in my Yurta telegram channel, when this Paladin news came out, is any company that has a feasibility study which is more than six months old, you have to assume it’s wrong, because the price of everything is going up. And I have my own opinion on where the price of oil and gas will go later this year, but it’s certainly not down to $50 a barrel. And that’s going to certainly impact margins.
So the price of production is rising, margins will be squeezed. But that just also means that, same for the uranium space, any company that had estimated their, say, for example, all-in costs of production per pound of uranium at $65, $70 a pound might now need to reassess and say, okay, well, to 85, 90 a pound. So the incentive price for production to be profitable is now moving up. So I don’t think it’s necessarily bad that, I’d say it’s expected that Paladin was going to see their costs increase because, again, the cost of everything has increased. But that just means that uranium, which now is about $46 a pound, needs to go much higher to incentivize mines on care and maintenance to come online and then new production to come online, new mines to come online.
It also gives companies like Paladin the ability to refrain from signing long-term contracts in the market today around spot price because, one, it’s too low, and they’re not necessarily in a rush to do so. So they have the ability to withhold, from the market, their uranium, which will be contracted at some point. And that will, hopefully, see or accelerate the squeeze in prices higher.
LADISLAS MAURICE: Fantastic. Thank you very much, Scott. And yeah, all these uranium stocks right now are on sale. They’re down, what, 30%, 40% in the past few months. So right now is a lot more interesting to buy than a few months ago, even though the thesis has become even more interesting with all the latest issues happening in the world.
SCOTT OSHEROFF: I actually think that with what has transpired in the uranium market over the past three, four years, where we are today and the significant pullback that we saw in the market over the past two or three months in the uranium space, even though a lot of uranium companies might be up 5, 10x from where they were in the deep dark depths of the COVID sell-off in 2020, we’re in a much better environment today in the uranium market and general nuclear industry, where I’d say that you still have significant upside, I believe, in a lot of these stocks, but the risk has been mitigated because the stars are truly aligning.
And this pullback, I’m looking at it as a gift, truly, because I didn’t expect that something like Paladin would be, six months or whatnot ago, around $1.10 Australian. I think it bottomed recently earlier this month around 55, 56 cents. That was very impressive considering the dynamics, the underlying dynamics of the market which are stronger than ever.
LADISLAS MAURICE: Yeah, so really people who get involved in the space need to have a strong stomach, because the volatility is absolutely insane. And generally speaking, if you don’t mind investing in volatile sectors, I really recommend that you follow, that you join Scott’s Telegram channel, Yurta. There’s the link below in the description. It’s a really, really good channel. He discusses a lot of his personal investments, what he’s doing, his thoughts in the market, he shares interesting articles. It’s very insightful whenever, Scott, you post anything, I’m always probably one of the first to read your thoughts. So Scott, thank you very much. So again, the channel is below, and have a lovely day.
SCOTT OSHEROFF: You, too. Speak soon.