What a great week for the portfolio! We ended up the week 2.63% Vs. MSCI world index at 0.47%. Top contributors this week were $U.UN, oil futures and BTU 0.00%↑ . The detractors for the week were MDGL 0.00%↑ , FSLR 0.00%↑ call spreads and DVN 0.00%↑. This week I decided to mostly write about the uranium position. I’m toying with the idea of also publishing a week ahead letter that comes out Monday before open as well. Thing is there is a lot of those out there and don’t think I can do that better than anyone else. It’s also kind of a lot to publish all in the morning but maybe sometimes I won’t have a lot to write about with the portfolio update. Let me know if this is something you’d be interested in.
The only other position than uranium that I want to write about this week is MDGL 0.00%↑ since we got a couple developments this week. The first one was a CEO replacement. This likely means that any M&A hopes might be put off for a while. Why is this looking to be the case? Well recent developments in GLPs might be the reason. Pre-cirrhosis NASH is an indication that doesn’t have a visible manifestation to the patient, whereas obesity does. With limited CMS dollars, and with clear indication of patient demand for weight loss drugs, surely any would-be MDGL acquirer has to consider just how attractively Resmetirom could be positioned in the competitive marketplace when Wegovy/Ozempic, by reducing BMI, and potentially improving CVOT, could also turn the tide on the “liver fat insult” that leads to NASH injury. This means that they might have to prove what they have is commercially viable in order to entice buyers which could be the reason behind the decision. The strongest case for a NASH therapeutic has always been in the sickest patients. With Resmetirom’s NASH OUTCOMES study, in that sickest subset, still awaiting readout, it could be the case that any potential acquirer will wait it out to see the outcome of that before making a move. The good news is that MDGL did get it’s accelerated approval NDA with no plans for adcom. While I usually don’t like to allow thesis drift, I don’t think you need to rely on M&A to make money from here. Strong ex US partnership, approval and launch should be enough. M&A would be the cherry on top and something I think will still be on the table at a later time.
Now let’s dig into the meat of this weeks update. Uranium has been finally taking off and has started to get some attention for mass media. We can look at the chart to see both the spot price and miners have been moving in basically a straight up fashion!
So I wanna talk about this position in two parts: the spot price and the miners because our total uranium basket owns both with a much heavier allocation toward spot price using U.UN. I think it’s likely that we could see them behave differently now. Over the past month U.UN is up 26.5% while URNM is up 28%. Usually when there is price movement in straight lines it is only so sustainable for so long before selling off for a correction.
I think expecting a pullback in the spot price of uranium is the wrong move here. First let’s look back at the last uranium bull market.
Relentless upward price action with no corrections. When demand starts to outpace supply uranium can really start to move because a) its a small market so it doesn’t take that much money to sway it B) it takes a while for new supply to come online and c) there is no SPR, no hidden emergency supply to save it. Think of a pinhole at the bottom of the ship, there is so much water and pressure trying to get through that tiny hole that eventually it just breaks and floods. That’s what we’re likely to see in uranium. The old adage of when you hear you’re cab driver, barber etc. talking about uranium helps gauge sentiment for the sector but it does nothing to address the supply deficit.
Let’s now lay out the problem. Reactor demand bottomed in 2020 at 161 mm lbs of U3O8 and is expected to reach 188 mm lbs this year. Over the past decade we’ve had extremely cheap and abundant energy through oil and nat gas but the last 2 years have proven to countries that they need to rethink their energy security. As a result we’ve seen countries start to reverse course on decommissioning reactors. We’ve also seen financial vehicles like Sprott come to the market and started buying lots of pounds, between 25-30 million. All the while primary uranium production remained depressed through 2022 at 120 mm lbs with secondary supply averaging only 22 mm lbs. As a result, the uranium market experienced a deficit of nearly 180 mm lbs between 2020 and 2023. The deficit was met by materially depleting the commercial inventories that had accumulated following Fukushima. The last time inventories got this low, uranium spiked to $145. I think this is really likely now. Then let’s look forward. Looking only at nuclear power plants that are currently under construction, reactor demand is set to grow from 188 to 240 mm lbs by 2030. If every uranium-producing country gets back to its maximum output, primary production will only grow from 140 to 174 mm pounds by 2030. The cumulative deficit between 2023 and 2030 will likely exceed 250 mm lbs, completely depleting all commercial stockpiles. This all happened because of complacency post Fukishima and fuel buyers are now way behind the ball and at $60 it’s unlikely many deposits can be economically developed.
I really liked this interview that discusses some of these dynamics. We also need to be mindful of the duration of this spike when it comes time to sell everything. When spot gets over $100 I’ll sell some of U.UN at different milestones but miners are a different story.
So now we’ve discussed U.UN, lets go on to part 2 and discuss miners. Unlike U.UN, I do think there is going to be corrections. This is because often they are used for speculative instruments as a leveraged play to the uranium spot. This means it’s much more likely people will sell at various points to take profits. I think one of these corrections is soon as some of these miners will start to issue stock and dilute a bit in order to raise capital for discovery/production. Now I’m not going to talk individual names but if you believe in the miner this might also be the time to add on the corrections. Also unlike the spot, we don’t have to sell on just any spike. We need to see sustained prices above $80 for supply to be meaningfully invested. This is also going to take time so it might be years that uranium stays elevated meaning that some of these miners will make a lot of money until that new supply comes online. We’re probably expecting this entire bull market to be played out in waves. Those that remain patient and disciplined will be rewarded the most.
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