Back in Istanbul I caught up with Scott Osheroff. He has been living, working, and investing in Asia for a decade. We used this opportunity to discuss some of the themes we are currently invested in, or are considering investing in.
We also touched base on what I believe will be one of the key realities of the 2020’s, which is the bifurcation of the world.
Expect to hear about uranium, coal, energy policy, and cannabis.
A great Telegram channel
Scott runs a Telegram channel which I really enjoy, in which he shares his thoughts, interesting articles, and some of his moves in the markets. Sign up to “Yurta” here.
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The Wandering Investor
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Full transcript of “Uranium, Coal, Cold War, Cannabis – Investing in the 2020’s”
LADISLAS MAURICE: Hello, everyone. So today, we’re going to have a very interesting discussion with Scott. So I met Scott approximately two and a half years ago. And since then we’ve been touching base on a very regular basis, discussing the world economy, geopolitics, and how to translate this into investing. So Scott has a Telegram channel in which he discusses and shares some of his views and some interesting articles. There’s a link below to that Telegram channel. So Scott, how are you?
SCOTT OSHEROFF: Doing well. Thanks for having me.
Investing in Uranium
LADISLAS MAURICE: Great. So if you’re new to this channel, I’m Ladislas Maurice. I’m a full-time investor and traveler, and you’re welcome to follow me as I travel around the world, looking at unique investments and immigration opportunities. So Scott initially introduced me to the uranium thesis approximately two and a half years ago. I remember we were in Tashkent, in Uzbekistan, we were having tea. One of those rare occasions I drink tea. And your eyes just lit up when you were discussing uranium. I had never heard of that thesis. And you talked about it for half an hour straight, so don’t worry, he’s not going to talk about it for half an hour straight now. But afterwards, I was very intrigued. And I did my own due diligence, as you’re always supposed to do after having listened to someone. And the investment thesis was extremely compelling. And I went big on uranium.
And it’s a good thing that I caught you that moment in time, because it was essentially the bottom, I caught the bottom, took part in private placements, etc. So it’s been very good, so I owe you a case of beer for that. We’re going to be discussing a few topics. We’ll be discussing uranium, energy in general, food, also the bifurcation of the world, potentially, as well. We’ll touch base on cannabis and a few other topics. So can you just give us a little bit of an overview in terms of the uranium thesis? And then, because there’s some people on Twitter saying that it’s like prices have run too far ahead of themselves, the thesis is good, but the equity prices are too far ahead. What’s your view on this? What do you think?
SCOTT OSHEROFF: Sure. Well, I’ve been watching the uranium market for the better part of a decade, waiting for the right moment, watching one catastrophe after another happen, whether it was Fukushima or Kazatomprom ramping up production, there was no end in sight, if you will. And started looking at the market much closer in 2018, and beginning to deploy some capital. And the big issue is that nuclear utilities were still tied into long-term contracts, and retail investors don’t buy uranium. Retail investors, or small companies might buy grains, or oil, or whatnot, but no one buys uranium unless you’re licensed, and that is only nuclear utilities, or very large financial investors.
So until their contracts came to the end of their life, it didn’t make sense to begin investing. And I sort of saw the light at the end of the tunnel in 2018, as you looked out and said over the next two, three, four years, they would be rolling off. And I like buying things that everyone else despises, whether it’s a frontier market like Uzbekistan a few years ago, or uranium. And no one was paying attention to the sector. So you were able to get companies with what were in the last cycle billion-dollar assets for tens or a few hundred million dollars. And what’s finally beginning to happen is you’re seeing financial investors come into the market now who are eating up above ground supply. No one’s investing in new production until prices go much higher, and they’re incentivized to do so. And at the same time, your European and North American reactor fleets are seeing their contracts roll off. And they’ve worked through their what’s typically roughly two years’ worth of inventory, and are now beginning to sign contracts or at least aggressively pursue signing contracts.
And I don’t think that much has really happened in the space that, again, the easy money by being early has been made, but I think that this is a multiyear trend. And right now I believe we’re in a situation where there’s not enough uranium being mined to supply the existing reactors that need to sign new long-term contracts to secure their future fuel demands. But if you look at the quasi nuclear renaissance happening all around the world, whether it’s Kyrgyzstan, or Kazakhstan, or the US, or all around Europe, and South America, the Emirates–
LADISLAS MAURICE: China.
SCOTT OSHEROFF: Exactly. Africa, China, of course, the future is very bright for the space. Now, of course, a lot of those reactors are not going to be completed, let alone started by the time the uranium price peaks and more supplies come online, but I still think that we’re, I don’t want to say in the very early innings, I think we’re probably halfway through the cycle waiting for things to get really fun and frothy. But there’s still plenty of upside, I believe.
Investing in Coal
LADISLAS MAURICE: And that’s an interesting thesis because it’s also very much ESG driven. But on the other hand, you invest heavily in anti-ESG themes. So on this channel, I’ve been discussing energy for over a year now. I had some guests discussing energy. Last summer, I went heavy into energy. And I know you were even earlier on you went heavy into coal, into oil. But the general narrative when you watch CNN, or BBC, or even the Economist, etc., is that oil, coal are dead, fossil fuels are the past, the future is renewables, etc., increasingly, uranium, we’re starting to see this. So why are you making the bet that investing in oil and coal equities is a smart move at this point in time?
SCOTT OSHEROFF: Because I like my quality of life, and anyone that likes the quality of life they have enjoys it solely because of cheap energy. I know that’s not what you’re asking, but it’s true. So the severe underinvestment in the entire space in the past decade, partially due to the shale boom, which made countries that have conventional oil production not invest, because why invest ten, twenty billion dollars into a new oil field when someone could bring on more shale production and push prices back down, which really happened several times, I believe, two or three times in the teens, 2010s. So there was no incentive for new investment. But if you look at the developing world, demand is growing for oil, gas, coal.
And then you saw, as you mentioned, the ESG movement, which has forced banks to decrease or, in some cases, eliminate financing for the hydrocarbon space. You’re seeing pension funds move away from it. I believe it’s the Norwegian Pension Fund, if I’m not mistaken, that sold a big chunk of oil and gas equities a few years ago. And no one wants to invest into the space. And what I learned a long time ago is to be counterintuitive. And if you see what’s been promoted in the mainstream media over the past decade, it’s been, we’re going green. The problem is that solar and wind and tidal all require huge amounts of metals and they’re not as efficient as burning something like coal or gas, which of course, both are dirty, or even nuclear, which is clean.
But we’re moving in a direction of increasing, I believe, inefficiency with the desire to only measure the metrics of outputs of CO2, not the CO2 that goes into the production of these power projects. And, for example, coal, no one likes coal but India is importing huge amounts of coal. They’re increasing the buildout of power plants. China’s doing the same. I believe Germany is consuming more coal than it ever has before, because they’re in the process of shutting down their final nuclear power plants, which is phenomenally counterintuitive. And I like situations where you don’t see the potential, at least in the near term, for new supply to come online. And again, who’s going to finance, in the West, especially, a half-a-billion, billion-dollar coal project when there’s a risk that, in five years, they get shut down due to compliance reasons.
It’s a Goldilocks type scenario to be investing in the space at the same time when not many institutions are because the space has been utterly hated. I mean, it’s been a great place to lose money the past decade. And now these companies are moving towards profitability, certainly becoming free cash flow positive, and I believe the next few quarters, you’re going to see a lot of companies which have already started with Q1, announcing share buybacks, increasing dividends, and the whole sector sort of become the equivalent of the cigarette industry in the 1990s.
LADISLAS MAURICE: The numbers on these coal-producing companies are absolutely phenomenal. And what you said about the green transition is very true, because the very same people who are pushing for green transition, and we all want clean air, for sure, are the same people who are also against mining. But there is no green transition without massive investments in lithium, and nickel, etc., etc. But these same people are against all the mining projects. So how we’re going to come up with all of these solar panels, and these wind turbines, and all that without any mining, I don’t know. So in the meantime, what we need is just the most conventional sources of energy.
So one of my main worries with this thesis, and I mean I’m heavily invested, still, is that, and I actually see it with some people I’ve had discussions with in the past were very green, very transition, etc. And last year, I was telling them, “Look, I’m doing the exact opposite. I’m going into coal, I’m going into oil.” And they were furious at me. They’re like, “You’re part of the problem, blah, blah, bah. You don’t understand, it’s the end, the way forward is green.” And so I invested the way I said I’d invest, they invested their own way. And I did very well. They’re not doing well at all. And I can see a lot of resentment. And one of my worries is that a lot of these people and politicians that are similar to these people are going to get upset and jealous and they’re going to want to tax the companies that we invested in very heavily to fund their transition.
Investing in the New Cold War
SCOTT OSHEROFF: That’s not a surprise. I believe that– Well, I guess let’s take a step back and not specifically target that because mentioning anything about windfall taxes and whatnot, which you’re hearing some chatter about, I believe it’s really just sort of speculation at this point. But what I will tell you is that I came to Asia 10 years ago this month, right after university, because I had an idea, I didn’t expect it, of course, to pan out on this fashion, but you never do. But I figured the future was the East. And I’m not saying that it’s going to be more free, but I’m saying in terms of opportunity, I believe the future is in the East and I believe that the world is bifurcating. And I noticed this a few years ago, well before COVID, that the world appeared to be splitting between or bifurcating between East and West.
And you look at what happened during COVID, and, of course, different countries have different responses. But I believe that the West is becoming more authoritarian and more socialist, and the East is becoming more authoritarian but it’s maintaining its capitalist mindset. And if you look at demographics, if you look at the debt on a relative basis, if you look at natural resources, and, again, where you want to be positioned over the next handful of years, I very much prefer Asia, and Africa to a degree. So I definitely think that things such as windfall, profit taxes, and whatnot could happen, but there’s no real way to protect against them. I guess, if you’re making money hand over fist owning equities in the hydrocarbon space, then it’s, unfortunately, that’s the world that we’re heading into. So you’ll just sort of have to grin and bear it, much to our disappointments.
LADISLAS MAURICE: (laughing) And I think your point on energy in developing countries is very important, because we’re discussing, earlier, that in a world where energy is probably going to be expensive for an extended period of time because of the lack of investment, the countries that are going to do the best are not only net exporters of energy, obviously, but also countries that are pragmatic enough to reform their energy policies to really make sure that they have access to the most competitive types of energy. So in Europe, for example, Europe has been a complete catastrophe. And it even came out, though this has not been well publicized at all, that the Russians were actually sponsoring a bunch of the green lobbies in Europe that were fighting against nuclear energy, the direct result of which was that we were, in Europe, increasing our dependence on Russian gas. So when you see countries like this, that collectively have completely idiotic energy policies, that’s going to put a massive cap on future growth and productivity.
SCOTT OSHEROFF: I guess, in addition to that, I’d say it pays to then be looking at countries that not only have a semblance of control over their energy future, but also, as you mentioned, are not just net exporters, but can actually turn it into products which they’re going to need to survive, and the world is going to need to survive. If you look at the energy crisis that unfolded last summer in Asia, but equally so in Europe, and you look at the amount of ammonia factories and petrochemical plants that shut down because the price of natural gas was prohibitively expensive for them to be able to produce a product and sell it at profit means that, well, you look at fertilizer prices, they’ve rocketed along with natural gas. And that worries me from a food standpoint, of course.
And this sort of leads me into, if you will, the benefit I think of is we enter a world where globalization has certainly peaked, moderate protectionism among countries is probably a good thing, to be able to make sure that you have enough of the necessary goods to be able to satisfy domestic demand. And countries that can’t are going to be in big trouble. And you look at what’s happened, just in the past six months, with the increase in talk about nationalistic tendencies, such as Mexico now nationalizing the lithium industry, and you’ll have Malaysia came out recently and mentioned that they were going to ban the export of chicken, you have a slew of countries that have banned grain exports, the focus is going to be on protecting our country and our citizens rather than worrying about global trade.
And of course, that presents a whole host of supply chain bottlenecks and issues because we live in such a globalized world. But the beneficiaries of this, I think, are going to be the countries that have cheap energy, can process it at home to produce plastics, fertilizers, and, as a result, food and, of course, petrol, in the most basic sense.
LADISLAS MAURICE: So looking at a map of the world, if we were to classify countries and look at significant countries that are net exporters of energy and that can also refine the energy, that can then use it, that are net exporters of food, and that have some protectionist policies, there aren’t that many countries that are investable, if that’s going to be the thesis. I mean, I can think of Brazil, I can think of, potentially though it’s got its own whole set of problems, Argentina, the US, to a certain extent, should do better than other countries as well.
SCOTT OSHEROFF: 100%.
LADISLAS MAURICE: This leaves Europe mostly in complete disarray. Russia should do very well as well.
SCOTT OSHEROFF: Iran, Uzbekistan should do well. There aren’t that many countries.
LADISLAS MAURICE: So Scott, listening to you, we’re left with investing in commodities, investing in not even emerging markets, but almost frontier markets, in many cases, and the US where valuations are already extremely high and interest rates keep going up, so I’m not even sure that’s really the play for now in terms of buying equities. This is very limited.
Investing in Cannabis
SCOTT OSHEROFF: Well, I guess you say in the United States, in terms of limited opportunity, an industry that I’m very interested in is the cannabis space. Going back to what we’ve talked about, whether it’s uranium, coal, gas, oil, the opportunity to be in an industry where you have restrictions, which result in a company being cheap, but also lead the industry to potentially not being cheap into the future is something I enjoy looking for. And the cannabis space is right there. Right now, since cannabis is illegal in the United States, at the federal level, many institutions can’t invest into cannabis companies.
The cannabis companies cannot bank properly. Their cost of capital is in the teens relative to companies in other industries that are borrowing in the mid-single digits. And this is probably one of the bigger growth stories in the United States over the next 5 or 10 years. It’s roughly a $25 billion industry right now. And the potential for it to double or triple is you see cannabis or cannabis-related products, not necessarily the psychotropic aspects of it, but the cannabinoids and whatnot for health purposes, to permeate industries from healthcare, to food and beverage, etc., and of course, medicine are significant.
And right now, most of these companies are listed in Canada, then they’re dual-listed on the Pink Sheets in the United States. What we need at some point is legislation in the United States that will allow for these companies to no longer be sort of breaking the law, to a degree, be able to bank properly, and be able to uplist to proper exchanges, whether it’s the New York Stock Exchange or the NASDAQ, which will enable institutions to be able to purchase these companies. Because you have companies that are growing thirty, forty-plus percent that are trading at fractions, EBITDA multiples of three or four times which–
LADISLAS MAURICE: Sounds like Uzbekistan.
SCOTT OSHEROFF: It sounds like Uzbekistan in the first world markets, which is very exciting. And you don’t get such opportunities that often. So it’s an area that I’m watching very closely, because I think that over the next 5 or 10 years, as more states legalize it first for medical, and then in due course for recreational, and I presume at some point down the road as the US legalizes it and eliminates it as a Schedule I drug, it opens a huge amount of possibility.
And at the same time, the longer it takes for that to happen, you have a few big multi-state operators who are cash flow positive, and increasingly buying up brands in different verticals, which allows them to sort of become called the Pepsi and Coca Cola, a few of them, who will own the vast majority of brands in the industry with different verticals, which ultimately creates conglomerates. And I think if you look out 5 or 10 years, some of these companies will become multinational enterprises, which, again, is a very unique opportunity nowadays.
LADISLAS MAURICE: I hear you, because the play here is not investing in a cannabis plantation, because that essentially is pretty much a commodity. Where it can be, what you want to invest in is the marketing, the branding, the distribution, etc. So you want to invest in Coca Cola, you don’t want to invest in the sugar producer.
SCOTT OSHEROFF: Exactly.
LADISLAS MAURICE: So a lot of people would counter what you’re saying by stating that most likely the Republicans are going to come back in power in the midterms, and that’s a massive headwind. What do you have to say to this? How would this impact your thesis?
SCOTT OSHEROFF: I think in response to the midterms, it’s really a nonevent. At some point, regulation is likely to be approved to make it easier for these companies to do business and become more investable. Whether that happens next year, or I guess later this year, or next year, or the year after doesn’t matter. The longer it takes for this legislation to be passed, it actually allows these companies to become even bigger and more profitable. You might not necessarily see the equity prices rerate accordingly, but if you’re able to buy companies that are fast-growing, profitable businesses at phenomenally cheap valuations, I don’t see anything wrong with that, and looking out 5 or 10 years.
LADISLAS MAURICE: I see your point, especially the lack of financing, because these companies don’t even have access to bank accounts in the US, they have to transact entirely in cash. They don’t have access to credit, or when they do is from private funds, etc., and they’re paying interest rates of 8%, 10% instead of cheap financing. So just this would be a massive catalyst and would completely change the game. And also the reality is that now, most Americans don’t care anymore about weed. It’s not really a deciding factor for swing voters. Like no swing voter is not going to vote for a party because that party is saying that they’re going to legalize it.
SCOTT OSHEROFF: We’ll go a step further, when states realize how much tax revenue they can collect, and that they’ll be able to deploy it back into the states, that also will have an increasingly influential factor, I believe, in the decision for voters to legalize it, because more money in your community is not a bad thing.
LADISLAS MAURICE: And when you’re a state and you’re in government, and you see the state nearby that just legalized it, and you see all of the money that that state is now making from sin taxes, you want to push that through. At some point, you’re going to want to do it. So like you say, it’s just a matter of time. Right. Fantastic. So Scott is interested in energy, uranium, oil, coal, gas, cannabis, some emerging markets, Uzbekistan, etc. So I really enjoy his Telegram channel. Again, the link is below, and there’s also his Twitter handle. So Scott, thanks a lot for coming through to Istanbul. It was very good bumping into you here.
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