The Price Has to Rise or the Lights Go Out

Written by Gerardo Del Real
Posted October 2, 2018

Publisher's Note: I was recently in Colorado with fellow Outsider Club editor Gerardo Del Real for the Beaver Creek Precious Metals Summit. Gerardo and I had plenty to talk about, but the uranium industry stood out.

Several factors are causing uranium prices — along with uranium stock prices — to rise, and all signs point to what we've seen so far just being the start.

Join in on our conversation about what's happening, where it goes from here, and how we can profit.

To your wealth,

Nick Hodge Signature

Nick Hodge
Publisher, Outsider Club

Gerardo Del Real: This is Gerardo Del Real with The Outsider Club. Joining me today is Outsider Club founder, colleague, and friend, Mr. Nick Hodge. Nick, how are you today?

Nick Hodge: I'm doing well, Gerardo. We're in beautiful Colorado here in the fall season for the Beaver Creek Summit. I've never been. The weather is nice, companies are good, the market not so good. But it'll turn.

Gerardo Del Real: You know, an exception to the market not being good is the uranium space. You called the bottom in 2018. What led to the call? I mean, the spot price is up over 35% from the 2018 low, and a lot of companies are starting to tick up.

Nick Hodge: When you've been calling the bottom for the past three years, sometimes you get lucky. I think the market just finally decided to turn. And there were some catalysts that led to that. I call myself a blind squirrel sometimes, and I say I find a few nuts here and there. And that call in January, I guess, was one of them.

But we had seen the Kazakhs say that they were going to begin to cut supply. That's the largest producing nation of uranium in the world, some 40% of supply. Cameco (NYSE: CCJ)(TSX: CCO), the world's largest publicly-traded producer, then announced they were going to make major cuts from some of the largest mines in the world. McArthur River, for example.

And so that was a catalyst, really, for the market to wake up and say, "Hey, there's something very real going on with uranium here." The market wasn't making the price go up, because remember, the spot price at the time was around $20 a pound. No one makes money on uranium at $20 a pound.

And so it was like looking at a train. Who's going to blink? Is the market going to do it itself? And obviously that didn't materialize. And so the biggest producers were just like, "You know what? Hey, we're going to exercise our force majeure here, and we're not going to produce." And so we've seen the uranium price come up from $20 a pound to $27 a pound. That's the highest it's been in about three years.

We've seen some of the equities follow suit, especially some of the more entrenched names and some of the more well-known names, especially here in the United States, for reasons I'm sure we'll discuss in a second. Names like Energy Fuels (NYSE: UUUU)(TSX: EFR), for example.

And so, you know, we're still nowhere near the prices that we need for producers to be able to supply. I think people forget that it's 20% of clean baseload electricity here in the United States. And, look, at some point you can't bring minerals out of the ground at a loss forever, or at all. So the price has to rise, or as everybody quotes Rick Rule, "The lights go out."

Gerardo Del Real: You mentioned the mine closures. Those mines that were closed, and the production cuts, came from the highest-margin, lowest-cost producers in the space. What companies do you see benefiting disproportionately from the current uranium space, and why?

Nick Hodge: Well, I like U.S. companies right now. We can talk about the Section 232 petition that's working through the Commerce Department. They initiated that a couple of weeks ago, and they have 90 days, I believe it is, to make a report to the President. And then he has to make a decision on whether or not to impose some sort of structure to help incentivize U.S. domestic uranium production. Because right now, it's at historic lows. We produce only 3% of the uranium we need to supply our largest nuclear utility fleet in the world, some 99 reactors. As I said, 20% baseload power.

And so with or without the Commerce Department, the United States needs to produce more uranium, just as they needed to produce more oil five, eight years ago. And we saw what happened with the shale boom, when we had the technology to bring it out. But we have the technology here for uranium as well. We have great in-situ assets in Texas, and Wyoming, and South Dakota. Some companies that are unhedged like Uranium Energy Corp. (NYSE: UEC), for example, that's just blatantly said for the last couple of years, "We're not producing. We're not selling it to this market." Entirely unhedged, and so when the price goes up, they're able to flick their switch because their processing plant is fully constructed.

And so what that means is they have complete leverage to the price of uranium. Once the price of uranium starts to go up, the equity can soon follow suit. And I'm a young guy, I didn't get to witness the first uranium run in 2007. I had just started in the market. And so if people will remember, they'll remember that uranium went to over $140 a pound. And as a result, related equities went up by tens of thousands of percent. I think we're staring at that again. And I point back to the U.S. companies for the reasons I mentioned.

Gerardo Del Real: What do you think is the biggest misconception in the uranium space right now, specifically in the U.S.?

Nick Hodge: Well it's that it's not safe. And if you point to Three Mile Island, or Chernobyl, or Fukushima, those are high-profile, high-impact examples that grab the attention and it's easy to take control of an argument when you have events like that. But at the end of the day, per kilowatt-hour generated, as I like to say, nuclear energy is the safest form of electricity generation the human race has ever seen. The fewest deaths, or injuries, or calamities per kilowatt hour of electricity generated over history.

And so it's extremely safe. Also, there's the misconception that it's dirty. Well it's not. It's clean. It's the only form of clean baseload power, in fact, that exists today. We can point to California, who just passed a law that says they have to go 100% carbon-free electricity, I don't know the date, it's in the next decade or something like that. And renewable proponents are clapping their hands. And they should, of course. We need more solar and we need more wind. But at the end of the day, solar and wind are not baseload. They can't produce when the sun is not shining, they can't produce when the wind is not blowing. And so they either need batteries, which are still very expensive, or they need a backbone of baseload power that can blend out the intermittency of the renewable sources. And that's what nuclear does in a clean and safe capacity. That's why California's new law calls for “carbon-free” electricity, not “renewable energy.” Because they know they need nuclear.

And I think another misconception is they just don't know how much it produces. One in five lights are on because of nuclear reactors.

Gerardo Del Real: What do you see as the biggest catalyst for 2019?

Nick Hodge: We need to see utilities come into the market. We've been saying that for two years, and we still haven't seen it. And the reason is, one, it doesn't take a lot of uranium to run a nuclear reactor. The fuel cycle is long. Two is they don't care what the price is. So it's not like, “Oh, the spot price went from $20 to $27, let's get in there and write contracts.” They don't care, because it could go to $50 or $60, and it's still such a small proportion of the cost of building and permitting and operating a nuclear plant that it's minimal to the utilities.

And so that's the biggest catalyst. They are going to be lemmings, right? One's going to come in, and then they're all going to come in, and as we already covered in this interview, nobody can meet contracts at these prices. So prices, by necessity, have to rise.

Gerardo Del Real: You mentioned the input cost for utilities being so small, the uranium aspect of it. Is that why we get those violent moves to the upside, and downside, and down-markets, right?

Nick Hodge: Well it's part of it. It's also herd mentality. I mean, just think back eight months to crypto. We had Bitcoin go from a couple thousand bucks to...

Gerardo Del Real: It seems like so long ago.

Nick Hodge: It seems like so long ago, because now we're in a new bubble with pot stocks. But we saw Bitcoin go to $20,000 like that. Just this week, and we're dating this interview, but just this week, Tilray's market cap went from $150 million to $300 million in a single day. And so-

Gerardo Del Real: And that was a round-trip ticket.

Nick Hodge: That's exactly correct. And so with uranium, it's the same thing. Yes, to your point, it's because the utilities don't care about the elasticity of the price. But it's also herd mentality of investors. It's also that there's only a dozen uranium producers in the entire world. So there's not a lot of equities to chase after once the money starts coming in.

And it's also that these companies are just leveraged to the price of the underlying commodity. Right? So when the uranium price goes up by X, the stocks go up by X-squared.

Gerardo Del Real: You've been at this for a while. What should speculators and investors that maybe are newer to the space, that are seeing these 20% and 30% moves in the uranium equities and the uranium spot price, what should be on their checklist for due diligence?

Nick Hodge: As I said earlier in the year, first of all, you're not too late. A 30% rise in uranium equities still means they're down 80% over the past 10 years. So they still have plenty of room to run.

Second, I like to buy assets and management teams and not necessarily stocks. So look for assets that are proven, that have some sort of economic metrics tied to them either through a preliminary economic assessment or an early-stage feasibility study, that are economic in lowest quartile prices, that have high internal rates of return, that have high net present values, that are run by good management teams, that have been good stewards of shareholder capital over the downturn. Those assets aren't going anywhere.

Gerardo Del Real: Excellent. Is there anything else you'd like to add?

Nick Hodge: Oh gosh, it's going to be fun when they start to turn. I mean, look, I recommended Energy Fuels just in January and I think we've nearly doubled our money already. And so that speaks to how fast these can run. And doubling your money in that amount of time is fun, but it ain't nothing compared to a 10-bagger.

I truly think a uranium bull market is coming. And on that note, we have some new picks out in the uranium space to benefit from that.

Readers can click here to see our latest uranium stock research.

Gerardo Del Real: Excellent. Nick Hodge, founder of the Outsider Club.

Nick Hodge: Thanks Gerardo.

Gerardo Del Real: Thank you.

For the past decade, Gerardo Del Real has worked behind the scenes providing research, due diligence, and advice to large institutional players, fund managers, newsletter writers, and some of the most active high-net-worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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