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A 5x potential trade in the uranium ETF, URA

Topic: holding on to longs in uranium exposure through the ETF "URA"

Summary: Technicals seem to reflect strong demand, which is supported by long term fundamentals

Potential: Once uranium markets reach balance and beyond, URA has the potential to rise by a multiple of the price rise for the underlying metal. It is not unrealistic to envision a 200% uranium price rise from 20 to 60, and a 400% increase for URA from 14 USD to 70 USD. Trying to time a market that has fallen heavily (-85%) for 10 years, however, is tantamount to catching a falling knife, so size adequately.

I'm buying

Earlier this year I finally started buying into the uranium market through the industry ETF "URA". This post deals with my reasons for holding off for so long, as well as why I'm finally testing the uranium waters. Fair disclosure: Since a little more than a year back I'm long the Swedish nuclear consultancy stock Studsvik.

Investing 101

I typically want fundamentals, technicals, sentiment and structural matters/macro on my side in an investment. Other considerations regard geographical location and choice of asset class, not to mention overarching themes such as demographics, climate change, energy production, AI and automation.

Let'start with the technicals because it's the fall in prices over ten years that piqued my interest, not least as stock markets have surged for most of the same period.

Technicals and sentiment

On a multiple-year chart, I see a tendency to URA "wanting" to bottom at 11.30 USD. More importantly of course, there has been a huge glut of uranium stock putting downward pressure on the price for uranium for many years, but there seems to be a limit to how low the uranium price can actually go before it makes sense to stockpile it in some way, fashion or form. That is reflected in the portfolio of uranium companies that make up the holdings of URA.

The pattern of three to four higher lows for the price of URA makes me think there is more real demand for uranium and uranium related companies between 11 and 12 USD for URA than supply coming out from uranium stockpiles. I don't think URA is significantly affected by technical trading, which is actually why I pay any attention at all to these patterns. To be clear, I think the pattern reflects real fundamentals, not other people's lines in charts.

Zooming in on the two bottoms over the last 7-8 months or so, you might identify a very slight false break downward for URA in June of 2017, which was nontheless immediately followed by relentless buying. This only goes to emphasize the significance of the fundamental bottom around 12 USD in URA. I think the demand for URA's constituents reflect actual nuclear facility demand for uranium at the current prices around 20 USD and upward.

Looking very short term, this 3-month chart of URA shows a brutal downward break right before summer from the same levels URA is trading at now. That makes me both wary and hopeful.

Either, there are just as strong fundamental reasons to sell at 14.50 as there are to buy at 11.50, or sellers might have exhausted themselves. There are other possibilities of course, but the way I see it, if we break above 14.70 it's a strong signal of real underlying demand for the physical product. If that happens, I think the price of uranium is ready to start reflecting actual cost of production and demand (which I and many others estimate at at least twice today's prices, i.e., the levels prevailing in 2014). That should help propel the URA upward as well. Interestingly, for those who like really old school technical analysis in instruments not yet ruined by algorithmical trading, there is actually a triple bottom in URA at this shorter time perspective too, with the false downward breakout toward the end of June being the third and final bottom (intraday low of 12.26 USD)

I increased my holdings of URA some six weeks, and almost a dollar, early (before the most recent bottom), in the beginning of May. I'm still slightly underwater on my URA holdings though.

Fundamentals and macro

Given current plans for nuclear plant newbuilds and current production capacity, as well as the time to production for new plants, many industry experts think a long term price for U3O8 would be around 60 USD, or around 200% above the current price of 20.50 USD (July 24, 2017 // Please note that there aren't any formal exchanges or official uranium prices. The 20.50 USD estimate is based on research by UxC and is proprietary to UxC).

Direct link to price chart

Industry experts estimate that at a price of around 60 USD (+/-10 USD), there would be enough uranium mines in operation to create balance in the market. The peak of 137 USD in mid-2007 was a function of high demand and the very long investment cycles in the uranium industry. The price crash that followed was due to surplus production in the wake of overinvestment in mines.

Between 1988 and 2005 the price fluctuated between 10 and 20 USD, with peaks in 1988, 1996 and 2005 before spiking incredulously during the BRICS bubble in 2007. The main problem for the uranium industry is the large stockpiles of uranium. That is simultaneously the great opportunity, since the artificially low price makes sure there is very little investment in new mines as well as maintaining production at existing mines.

The uranium futures market is of no real help at the moment with a slight contango of 2.5% over the coming year, 5% over the year after that, then 7% and 3% respectively. "Contango" means today's spot price is lower than future futures prices since there is a reluctance to take delivery today, and costly to store uranium that is not put to immediate use for electricity production.

If you are interested in doing some research yourself I recommend starting att UxC with their delayed publications of charts, old weekly letters, old annual reports, as well as estimates of demand, and marginal production costs depending on production volume.

Is a 5x return something you might be interested in?

To summarize, there are plans for large build outs of nuclear power facilities, but until those are actually in or close to starting production of electricity, there is too low demand for uranium relative the supply from old stockpiles. However, the price chart of uranium and of the ETF URA  both indicate real demand for the physical substance uranium as well as for uranium mining stocks.

It takes a long time to get a mine online, meaning that once the market runs out of uranium the resulting imbalance could propel prices toward levels of 60 or more. In that scenario I expect the ETF URA to appreciate by at least the same percentage -- probably a lot more. When the spot price fell from 40 to 20, the URA ETF more or less fell from 40 to 10 (March 2014 to January 2016). That dynamic works both ways; in much the same way as for gold and gold mines.

As an added extra, the uranium companies that are still operational should be more streamlined than ever at this point, hence the operational leverage could be larger than usual once the market normalizes.

I don't think it should be ruled out that uranium prices triple and URA rises to 5x the current price.

Nota bene, as of today I have only approximately 1% of my net worth in URA and 1% in Studsvik.

Continue reading about my views of macro, finance and investments here by the headline "INVESTMENTS", e.g., this post about my holdings. Don't miss my future musings on life, finance, health and happiness by subscribing to my free weekly newsletter -- you'll get my book on investing for free as well (we'll see how long I'll keep that up now that I've given away way over 10k pdf copies.

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