Uranium Strategy Spotlight

Summary

  • Buy Uranium (or a company with Uranium exposure) at $16.67 for value
  • Hold Uranium while it trades above its 3-month moving average to capture crisis alpha if a production shortage transpires over the next 5 years

Potential Alpha

Without a price forecast or model to go with, our only potential alpha is applying the correct execution strategy and technical analysis to ongoing market developments.

Qualitative notes

  • Almost entire global Uranium demand is used for nuclear power generation (previously 50% for military use)
  • Cost of Uranium fuel over a reactor’s entire lifetime is negligible compared to the cost of constructing the reactor which means:
    • Uranium demand is relatively price inelastic and significant lag time can exist before demand imbalances are corrected
  • ~90% of current global Uranium demand is satisfied by mining
  • Uranium was typically supplied in 5-year fixed-price contracts. Given a declining market for the past 6-years, its likely that production starts to rebalance
  • The AVERAGE cost of Uranium production is $31/pound (futures currently trade at ~$20)
  • 2015 & 2016 saw the largest increase in global nuclear power production capacity in the past 25 years.
  • Forecasted growth in nuclear demand is predominantly from China
  • Japan started approving reactors for restart (there are 54 dormant reactors in Japan out of approx 450 total reactors globally)
  • Kazakhstan cut production by 10% in Feb 2017 which caused a temporary price rally

Value Strategy

Buying at a price of $10/pound gives us a 2:1 payoff if Uranium were to revert to its cost of production of approx $30/pound. Assuming $10 is therefore a hard price boundary, a slightly smarter trader might buy at $16.67, risking $6.67 to make $13.33 and retain the 2:1 payoff.

Momentum Strategy

Medium to long term trend following will be a profitable strategy if there’s a possibility of a Uranium shortage in the future. This could happen but the timeframe is uncertain (could take up to 5 years).

Sources

 

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