Uranium - my #1 investment pick

As many of you will be aware, I am the Chief Investment Officer (CIO) of a London-based investment management company called Absolute Return Partners. As the CIO, my main job is to paint the big picture, and I spend most of my time doing that, capably supported by a research team who put most of my ideas into action, although they also shoot me down every now and then.

Now to what this is all about. I am often asked where to invest, and I have decided to write a series of articles about the big picture. I plan to publish a new article every month for the next year or so, which makes it manageable – both for me and for my readers. I happen to work in an industry that is heavily regulated, meaning that I will stay away – at least in this forum – from making specific stock recommendations. That said, should any of the ideas that I bring to your attention over the next year be of interest, you know where to find me.

Now to the topic of this article – uranium. Uranium means nuclear power, and that probably means that I have already lost half my readers, but that is precisely why you should continue. Nuclear was so much out of favour for so many years that it became almost toxic (in more than one sense). I have heard of people losing their job in the investment management industry because they dared to invest in uranium.

We can probably all agree that the implementation of wind and solar energy, in principle, should address the climate problems we currently have to deal with. The problem is – you cannot build a modern-day economy on energy sources as unreliable as wind and solar. Even when large and very powerful grid batteries are introduced (which is still many years away), we could still encounter weeks without much wind or sun. What are you going to do then? Stop driving your fancy new EV? Accept that your taps can only deliver cold water the next few days? And what about all the operations in hospitals all over the country that will have to be cancelled? Do you get my point? You cannot build a modern-day economy on unreliable energy sources. We need for our electricity supplies to be both green and reliable and, in that context, there is only one answer – nuclear power.

Nuclear went out of favour earlier this century after a couple of nasty accidents – first Chernobyl (Ukraine) and then Fukushima (Japan). I shall not bother you with too many details about those two accidents, but it is worth noting that both Chernobyl and Fukushima were early reactor designs – before construction rules were tightened. It is also worth noting that the world has not endured a single accident from reactor designs introduced in the last 30 years.??

However, because of those (and other) accidents, the world turned cold on nuclear. In the most extreme cases – Germany and Japan – they even began to wind down existing nuclear power stations. The uranium mining industry responded by discontinuing exploration projects, which has resulted in no meaningful new supplies coming to the market since Fukushima (March 2011).

That would not have caused any problems if the nuclear utility industry were to continue its winddown, but that is no longer the case. There are approx. 440 nuclear reactors in operation worldwide. About 60 reactors are currently under construction with at least 120 in various planning stages. In other words, the industry is facing significant growth at a time where no meaningful new supplies can be expected anytime soon. It takes at least 6-7 years for that to happen (from decision to execution).

Even ‘worse’, because most of the construction activity is in China, western utility companies have been fast asleep and have allowed inventories to be run down in expectations of lower spot prices. All this means that many western utilities hold record-low inventories of uranium at a time where the uranium price is on a run.

The ongoing bull market in uranium started in earnest in the aftermath of the declaration made by the EU Commission in early 2022 that nuclear power should be treated as a green energy form. More recently, the bull market gained momentum, as it became clear that nuclear energy was to become a hot topic at COP28 in Dubai a few months ago (and it was indeed). Fast forward to January of this year, and uranium investors could walk on water. Prices continued to spike with no end in sight (Exhibit 1).

Then, suddenly, the party was over – at least for now. February has proven a much more difficult month with losses in excess of 20% on many uranium stocks. So, what has changed? I have spent hours on this question and can explain it with one word: SENTIMENT.

Nothing fundamentally has changed but, as commodity investors will be aware, it is impossible to escape these periodical sentiment changes and, right now, the uranium sentiment indicator is pointing downwards. For a while, huge profits were made, and that attracted plenty of ‘tourists’ who entered the game for a quick profit. As the commodity price took a break (down about 10% from recent highs), many of those tourists cashed out, which has resulted in much bigger losses on most uranium stocks than on the underlying commodity.

When the tourists have been washed out, the bull market will return. In my opinion, we are still in the early stages of a multi-year bull market which will see the commodity price go much higher. Having said that, I am not a short-term investor and refuse to provide any advice over the next few months; however, if you, like me, focus on the longer-term outlook, now seems like the best buying opportunity we have had in a long time. The combination of low inventories in the utility industry and an upcoming supply/demand misbalance can only lead to higher prices, I believe.

Niels