Michael Alkin’s Perspective on the Future of Uranium
«In my entire 20-plus year career as an analyst, this is the best risk/reward ratio on the long-side I’ve ever seen.»
The following audio excerpt is from episode #529 of Frank Curzio’s podcast «Wall Street Unplugged» titled «The Art of Short Selling» featuring Michael Alkin. Michael is a former hedge fund analyst, portfolio manager and is currently the Editor & Founder of The Stock Catalyst Report. Michael brings up the uranium sector which he’s going “all-in” on and goes as far as saying “In my entire 20-plus year career as an analyst, this is the best risk/reward ratio on the long-side I’ve ever seen.” continuing on to suggest it could potentially become the hottest commodity story of the next decade.
Original podcast: http://www.frankcurzio.com/michael-alkin/
Frank Curzio: Yeah, that’s great stuff. Okay. So, let’s transition here because we got about five minutes left, because there’s one sector that you loved that’s completely out of favor and a sector that I’ve mentioned in the past. You have a couple of catalysts that I haven’t heard of, which I’d love for you to discuss, but talk about the sector and talk about the catalyst and why you think now, today, because we’ve heard this thesis over the past three years from some of the smartest people in the resource industry.
Michael Alkin: Absolutely.
Frank Curzio: Why today do you like this particular sector?
Michael Alkin: Sure. Uranium. So, Frank, I will say in my 20 years, it is bar none the best risk reward on the long side I’ve ever seen. You’re a generalist. I’m a generalist, but you know unless it’s biotech and you’re trying to figure out drug discovery, which I pass on because I can’t do that or some bank’s balance sheets, which are too opaque. Anything else, when you apply laws of supply and demand and fundamental analysis and just knowing how to do this, you can look at pretty much any industry and see whether what the drivers are, right? Over the years I’ve focused a lot on cyclical industries and I’ve been in and out of the natural resource space, familiar with uranium.
Back in the fall of last year, I started really getting excited as I started reading more and more. I started looking … What I do, Frank, on a long, as I try and disprove the bear case … I try and prove the bear case actually is what I … So, I went out and I look at the bear case. That’s pretty easy. It’s a pretty easy narrative, right? We’ve know that after Fukushima in 2011, that the miners were getting killed. We’ve gone from 500 uranium miners down to 40. We know nuclear power … The narrative is declining. It’s not, but that’s the narrative that Japan, which went offline with 13% of world demand was still offline and it was terrible. There’s too much inventory, all that stuff. I went out and I went one by one by one and I applied by short selling approach to it and I couldn’t prove the bear case.
So, I said, “Okay, we might have something here.” As I start to dig into it, I started to … Really the people I know that are really spectacular natural resource investors, and even for them they were 2014, 2015, 2016 were calling the turn hasn’t happened. I started to see those, the brilliant investors, who’ve made so much money in this space, even they have started to get a little shy on it. That actually excited me because I … Sometimes you just say, “Okay. I’ve had enough. I’ve been wrong on this for a period of time. I’m gonna move, hedge myself a little bit.” Here’s what’s going on in uranium. The world has too much secondary supply.
There’s 180 million pound in natural demand. There’s a 160 million pounds in production. So, there’s a natural short fall, but after a Fukushima in March of 2011, the Japanese came offline. Those reactors, 54 of them came offline. It was 13% of world demand. That set off a cascade effect. The cascading effect has really just led to just decimation in this space that the uranium price is down 85%, and like I said, the number of miners has declined. What gets lost in that though is what I said earlier is that there’s a natural supply shortage from a primary perspective. There’s not enough mine supply to meet natural demand.
So, there’s secondary supply, and what is that? Secondary supply is you have some Japanese inventories. They were still taking some ores and some of that would wind up in the spot market. Then you had something called underfeeding, which was happening at the enrichment facilities, in the fuel cycle it goes from out of the ground to a converter to an enricher. People have heard the word enrichment with all the … It’s always in the news. What would happen there, at the enrichment facility, they have a little too much access capacity. They have about 58 million units of capacity. Right now, there’s about 48 million units of demand.
What they’re able to do is when they get those ores coming in the door, they spin them through centrifuges at really high speeds. They’re able to ring out a little bit more uranium from each ore. They’re able to have that excess. That excess is theirs. What wound up happening is that excess that happens to be theirs, they were able to sell at nuclear power plants because they didn’t care about the miners. They could care less about their economics. They care about their own economics. What’s the effect of that? It was putting a tremendous amount of supply into the market. We call that secondary supply.
Now everyone has a break-even cost. For the enrichers, it’s probably in the mid 40s per unit, they called SWU, S-W-U. I won’t get into details on that. Back in the 2010 time period, 2011, 2012 even, they were selling SWU at 150 bucks a unit. Even as early part of 2016, they were selling it for 90 bucks a unit. Well, with the price decline of uranium so to came the price decline of SWU and they’re now at about their break-even point. You started to see at the end of the last year, some of the enrichers not replace centrifuges that retired and also to slow down on their underfeeding. That will have a big impact on the secondary market. You also had a Department of Energy directive where the U.S. was selling some excess uranium into the market, that was really flooding the market.
Secretary Perry who’s familiar with uranium from his time as a Texas governor, where Texas has a big uranium belt, he’s overturned some rules. I won’t get into the details. I’m happy to send anyone the note on it, but that’s caused some supply to come off the market. Those are two parts of the bull case that you didn’t see talk a lot about. It was just basically folks on Japan. What I think when you think about Gretzky and where the puck is going that we have to talk about Astana, Kazakhstan. That’s where I’m not seeing a lot of people focusing on. Kazakhstan is the number one producer of uranium in the world at over 40%. Kazatomprom, the state owned uranium miner well over 30% share is the number one producer of uranium.
They’ve come from a very single digit percent 10, 12 years ago to now well north of 30% share in the market. The country’s over 40% share in the market. They cut production back in January. They had a 10% production cut. That’s a big deal. It would be like if Saudi Arabia cut production 10% and their 12% of oil supply, then the oil would go parabolic. So, you saw a little spike in the price of uranium, but there’s a bigger story here. This is where I’m not seeing people pay attention and I don’t understand it. Kazatomprom, they’re going public in 2018. They just recently selected their bankers. So, you have the number one global supplier of uranium who had been flooding the market with uranium over the last decade or so.
They were flooding it not just because they said, “Let’s go beat up all the other miners,” but there was an interesting twist in where they do business. In Kazakhstan there are transfer laws. Those transfer laws say that any time you pull something out of the ground in the mining capacity, you have to sell it into a market that has a verifiable public price. Well, that’s the spot market, right? Well, in the world of uranium, the spot market is a very, very small portion of what is actually transacted. Most of these deals are done in long-term contracts of seven to 10 years. It’s a very little transaction in the spot market. However, when Kazakhstan’s pulling it out of the ground, they have to sell it into the spot market.
So, therefore, when there’s excess supply in the market, you have the biggest producer in the world selling it into that market, it’s going to pound pricing. What’s happened? Well, they’re going public in 2018. Frank, you know when companies want to go public, what happens? They need their numbers to look good. Well, in the case of Kazakhstan and about a year and a half ago, they brought in McKinsey, a consulting firm. They brought in … I think it was an army of 40 people. They said, “Okay, we’re an Eastern Bloc type country. We want to go public. How do we make ourselves look better and be more western?” Well, one of their solutions has been to set up a marketing and trading arm.
So, what does that mean? That means that it’s an arm that allows to have like other uranium companies have, like Cameco has one called Nukem, where they can trade uranium. Not only can they trade it but this will allow them … They’re setting it up in Switzerland. So, they’re setting up this subsidiary in Switzerland, which now allows them to pull uranium out of the ground and sell it in the spot, but to their own subsidiary. That subsidiary now is able, because they’re outside of Kazakhstan, pull that inventory. They can stockpile it. They don’t have to sell it into the spot market. Now, what does that mean? That means the number one supplier who has been pressuring prices because the only place they could sell it is the spot market now doesn’t have to do that.
Now they could sell it to themselves and hold it. That means they become a swing seller. That means they can’t have more control over pricing. Now why did they want more control over pricing? Because they’re going public and they want the best valuation they can get. So, I don’t think it’s a coincidence that they cut production in January of 10%. It actually came in at 12 at the end of the first quarter. My guess is we’ll see another production cut from them. Why? Because, not to get too technical, the type of mining they do has a very high decline curve. It’s called ISR. They basically cut their decline curve. So, my guess is, and based on our work is they’re going to have to cut again, while demand for uranium is coming back online.
You’ve got the Japanese restarting reactors, not at an accelerated pace, but it’s starting to move. You’ve got underfeeding slowing down. The DOE is reducing the supplies and the number one supplier in the world now just became a swing seller and that’s supposed to open the end of the second or the third quarter. I think that’s enormous. I think so few people are paying attention to it. I talked about it at a talk I gave at a resource conference in Vancouver just recently. The second thing, Frank, is the geopolitical risk. I know Marin Katusa, a good friend of yours, and I’ve not had the chance to meet Marin, but I’m a big fan of his work.
Marin Katusa talked about this in his book. I think it was the Newer Cold War. I forget the exact name. Forgive me for getting it wrong, but he laid this out maybe a year or two ago. The more work you do on it, the more you realize how valid it is, is the Russians and those under Russian influence control about close to 60% of the uranium market globally. The United States produces 2.9 million pounds of uranium and consumes 50 million pounds for our nuclear reactors. So, what does that mean? Next barbecue you have, Frank, ask the people, “What percentage of the U.S. utility grid is nuclear?” And they’re probably going to say … If they’re like my friends who aren’t in the business, they’re going to say, “2%, 3%.” It’s 20.
So, one of out every five moves in the U.S. is powered by nuclear power. We manufacture … We produce, not manufacture. We produce 2.9 million pounds out of the ground and consume 50. That means we import 95% of that. Over half of those imports come from Russia and/or Russia influence countries like Kazakhstan and others, Uzbekistan. Now where we are … And Marin makes this point and I couldn’t agree more. Where we are in terms of the tensions with the Cold War, right? With what’s going on at D.C. with all the … It’s almost like McCarthy-esque type feel to it. We’re a sanction away from uranium not coming into this country and that can have huge ramifications on the U.S. energy grid.
There’s not enough supply. We can’t go to Canada or Australia because they’re tied up in long-term contracts. So, you have nuclear-friendly administration in there. The U.S. mining industry has been absolutely decimated. They’re on their knees, but I think there’s relief in sight. You start to see it with Secretary Perry’s overturning of how much uranium’s getting sold into the market. I think you’re going to see other things that can make the U.S. uranium mining industry come back in a very positive way. So, we’re very positive on certain select U.S. uranium miners. We think for the whole uranium market, we think Kazakhstan’s marketing arm is a tremendous catalyst that’s just getting overlooked.
Frank Curzio: Michael, in normal circumstances I would say we had five minutes left, but that was so interesting and so detailed. I know there’s so many … Because I’ve been very high in uranium too. Saying listen, buy a couple of stocks here, close your eyes, open them up in like three years later. Trust me, you’ll be happy, but great catalyst. Those are the things that we haven’t heard from even some of the top analysts that come on here, especially like Kazakhstan. We all know that it’s large producer, but the whole going public and their trading exchange moves that’s pretty incredible. So, we covered a lot here today, I think, right?