There's no denying it - uranium companies are off to a solid start in 2014. An equally weighted basket of uranium names I am tracking is up over 22% YTD easily outpacing the TSX and TSXV indices which are up 4.82% and 9.36% respectively. Consolidation continues apace with the most recent example being the proposed Denison Mines (DNN:NYSE, DML:TSX) take out of International Enexco (IEC:TSXV, IEXCF:OTCBB) for its share of the Mann Lake Deposit in the Athabasca Basin. Exploration success is also evident with Fission Uranium's (FCU:TSXV, FCUUF:OTCBB) continued impressive off scale results at its Patterson Lake South property.
For all the positives, the spot price of U3O8 still hasn't "turned". In fact, the price seems relatively directionless. I have written before that the reasons for the stalled uranium renaissance include the delay of the Japanese reactor re-starts as well as other lesser-known factors like the U.S. Department of Energy slowly releasing its stockpile of uranium into the US domestic market, keeping a lid on prices.
This lack of a turn has only been reinforced when you consider that the recent spot price of U3O8 has now fallen to $34.63 per pound well below the price necessary to incentivize further exploration or project expansion.
Though many disinflationary forces still predominate around the globe, more and more is being said about food inflation. We still believe in the primacy of food security as forces as disparate as the weather and urbanization coalesce to push the price of food upwards.
Some recent headlines reinforce this assertion:
- We first wrote about tin in September 2013. Since then the price of tin has strengthened markedly
- Tin remains in backwardation in the futures markets implying a need for more supply – now
- Factors such as falling grades in existing mines, increasing use of tin in technological applications, and increasing cost inflation are all coalescing to paint this rosy picture
- However, the main culprit for the supply squeeze and subsequent price spike is the Indonesian Government
- A looming supply crisis for tin is still very much a possibility out to 2015-2016
So Far, So Good
Late last year, I presented the investment case for tin as a metal to watch in 2014. Thus far, this has proven to be a prescient move and there appears to be little reason to shift focus. With the growth slowdown in Emerging Markets and renewed economic uncertainty in the developed world, one would think industrial metals such as tin would be trending solidly downwards. As the chart below from the LME shows, this has not been the case, with tin up over 3% year-to-date.
Despite numerous statements by market commentators (myself included) on the looming “nuclear renaissance”, the uranium market remains stuck in neutral:
- The real catalyst for higher uranium prices is the restart of a portion of the Japanese reactor fleet.
- Recent elections in Tokyo hint that the political ruling class is in favor of nuclear reactor restarts – but when?
- Cameco (CCJ:NYSE, CCO:TSX) held their quarterly and year end results conference call on Monday and announced a scrapping of their plan to produce 36M lbs of U3O8 by 2018.
- This is not positive news for the uranium sector in the intermediate-term and has us sticking to the belief that focusing on near-term in-situ production stories in reliable political jurisdictions is the most sensible “investment” over the long-term with high grade hard rock discoveries in the Athabasca Basin serving as a good “trade.”
Grinding The Gears
I want to start today’s Note out with a clear statement of whom or what the culprit is for uranium’s relative underperformance. This is the lack of Japanese reactor restarts (but by no means the only culprit). Many market commentators (me included) had anticipated at least some of the reactors coming back on line at this point. This was one of the mistakes I made in 2013.While it’s also clear that the ENTIRE Japanese fleet will never come back online, anywhere from 20 to 30 reactors are anticipated to restart in the coming years. The thinking here is that once some of the Japanese reactors come back on line, this will breathe life into the uranium price and, coupled with the emerging market embrace of nuclear power, push spot and term uranium prices higher, enticing more exploration and production.
- Recent volatility in emerging markets has many worried that this is the start of a global correction
- We do not necessarily agree and believe that new concerns about emerging markets are overblown
- The culprit may be the lax monetary policies of central bankers that have bred complacency
- The key to interpreting the potential for emerging markets mirrors our strategy for interpreting opportunities in the metals space – selectivity
- Several emerging market economies are in better shape with respect to fiscal and monetary policy than the “recovering” developed world economies
- Frontier Markets are the new game in town
The Luck Of The Draw
I’m always the first to admit how fortunate I’ve been in life. I’ve had numerous opportunities to travel to other countries throughout the world, talk to people in all walks of life, and see the world through a non-US prism. Viewing different (and mostly) lower standards of living sparked my interest in the emerging markets and the well known idea of convergence. See Nobel Laureate Michael Spence’s book titled “The Next Convergence”.
Economic growth in the developed world is slow and volatile, well below “escape velocity” for 62 months. The most recent example is sluggish jobs numbers in the US last Friday (only 113,000 jobs created).
The Institute of Supply Management released its January 2014 survey yesterday.
- While the survey still indicated growth in the US Manufacturing sector (at a reading of 51.3), the consensus estimate called for a reading of 56.
- This was a substantial “miss” and equity markets collapsed with the Dow falling 326 points, or over 2%.
- The ISM reading, coupled with increased volatility in emerging markets such as Argentina and Turkey, have many thinking that the long awaited correction and rebalancing of growth in financial markets is upon us.
- Two questions remain – First, have the Emerging Markets entered a crisis phase or is slowing growth in the developed world a bigger issue? Second, Can the Fed continue to taper asset purchases in the wake of this volatility and possible economic weakness in the US?
Significance of the ISM
Regular readers of Morning Notes will know of my preference for ISM and PMI data as a gauge of industrial demand. If industrial demand is increasing and economic expansion is occurring, this is ultimately bullish for the base and energy metals complexes.
Since last summer, the ISM numbers in the developed world (the US and Europe) have ticked up and lent credence to the idea of a slow, possibly sustainable, economic recovery.
