Exclusive to SightlineU3O8: Something odd began to occur in September of this year. For the first time in over a decade, the share price of uranium equities began to fall while the Spot price of uranium continued to rise. The last time this happened, the Spot price was running up over US$100/lb and the equity market retreated, recognizing the hype. This time, however, there is something very different going on.
Over the past 18 months, we have seen mine closures, production cuts and product stock piling all focused on moving uranium prices back to a profitable range. We assembled a portfolio of 14 uranium equities (7 producers/developers & 7 explorers1) and looked at their share price movement against the Spot price movement over those same 18 months. As expected, we witnessed a strong similarity between movements in the Spot price and general movements in corresponding equities.
As we see below, beginning in April 2018, the Spot price enjoyed a consistent and smooth rise of nearly 40%. As expected, equities followed in a dutiful fashion until September when for some reason they uncoupled from the commodity and began a new trajectory south. What changed in investor’s minds?
Commodity Prices
For the last year and a half, the Long Term price of uranium has not ventured beyond the range of US$30-32.00 / lb. – a money-losing price for most producers. Long Term prices initiating a serious move towards profitable levels is expected to signal a significant and much needed correction in the uranium industry.
Ironically, while we seem to be waiting for the recovery to begin, it may already be upon us. Investors carefully track the Spot price as a leading indicator of the uranium market; a fact demonstrated in the rising equity prices.
It may surprise many to hear that the uranium Spot price has been performing better than most, rising almost 45% over the last 18 months and, until recently, taking equities with them. Precious metals on the other hand have been falling (flat at best) with only marginal improvements in nickel, copper and cobalt.
A Deeper Look
If we take a look at the movement of explorers, independent of producers and explorers, another dimension appears.
Both groups move in harmony with the Spot price, however the explorers move in a much more exaggerated manner (harsh up’s and down’s). Alternatively, the share prices of larger producers and developers hug quite close to the Spot price.
In addition, it appears that the explorers uncoupled in early August while the producers/developers did not begin their downward trend until the end of September.
One explanation for the uncoupling could be profit-taking. The last three months of 2017 saw a 50% jump in equity prices before it fell back down. In 2018, returns of 30% and 40% returns were awarded before the uncoupling occurred. In the absence of a move in Long Term prices, it would certainly be reasonable for investors to take some of those gains off the table.
One more Pressure Point
The timing of an anticipated “spring” in Long Term uranium prices will be driven by the depletion of excess uranium inventory.
Long-term demand is represented primarily by utilities’ “uncovered” or “uncontracted” requirements. In recent years, many expired contracts have not been renewed in favor of cheaper spot purchases. A rising Spot price, however, is certainly indicative of inventory reduction and as the Spot price reaches and exceeds the current Long Term price pressure to sign contracts is renewed.
It is felt that there is a pending tipping point at which time the Long Term price of uranium will quickly move up by anywhere from 30% to 100%.
For equity investors the current uncoupling may result in an added bonus:
- Historically, uranium equities rise faster and fall faster than uranium prices;
- The fact that uranium equities are falling while uranium prices are rising is an aberration;
- If uranium equities “re-couple” and return to their traditional levels (ahead of uranium prices) they will quickly improve by anywhere from 17% – 23%
The cause of the current uncoupling of equities from the commodity price is not immediately evident. The downstream affects, however, remain compelling and may represent an interesting entry point.
1. Month end share prices were tracked from the following companies: Developers/Producers– Cameco Corp, NexGen Energy Ltd., Fission Uranium Corp, Denison Mines Corp, Energy Fuels Inc, Ur-Energy Inc and Uranium Energy Corp | Explorers– Canalaska Uranium Ltd, Blue Sky Uranium Corp, Fission 3.0 Corp, Plateau Energy Metals Inc., Purepoint Uranium Group Inc., Skyharbour Resources Ltd and UEX Corp.
