EXCLUSIVE TO SIGHTLINE U3O8: Last month we pointed out a strange anomaly. For the first time in over a decade, the share price of uranium equities had begun to fall while the Spot price of uranium continued to rise. Despite sharing a common movement pattern over the prior 18 months, it appeared that equities were heading in a contrary direction. (see Uranium Equity Uncouple article here.)
Now, to make matters worse, December 2018 has not only continued the widening of that gap but did so at an accelerated pace. Uranium prices remained rather flat during the month with the spot price falling a mere $0.13 and the Long Term price rising only $0.50. As seen below however, uranium equities continued to nosedive.
We amended the analysis of our portfolio of 14 uranium equities (7 producers/developers & 7 explorers1) tracking their share price movement against the Spot price movement over those same time period.
How do you explain a 21% drop in uranium equities during Q4 2018 while uranium prices increased by 5%?
Tax Loss Selling?
December is notorious for investors shedding stocks carrying unrealized losses in order to offset taxable gains earned over the year. This does not appear to be the case here.
First, the last 18 months have been delivering gains in uranium stocks. An analysis of the trading of uranium equities indicates that there are not enough book losses out there to justify a wholesale sell off such as this. In fact, we indicated last month that the October/November selling might have been profit taking.
Further, uranium investors are primarily relying on a pending jump in the long-term price of the commodity. It seems unlikely that such a large segment of investors would abandon that belief, as all indications of continued price improvements remain.
Global X Uranium ETF
Last May we discussed the Q1 2018 uranium equity price drops and general volatility in our article The Global X Uranium ETF Resets Their Expectations. Here, we discussed the expansion of the Global X portfolio from the uranium mining and exploration industry to include “Nuclear Components”. These new investments included construction and engineering firms as well as resource companies that had a broader portfolio beyond merely uranium (e.g. Barrick Gold & Rio Tinto).
As a result, Global X had to rebalance the portfolio and sell of large positions in the uranium space to make room for the new inclusions.
This EFT, however, is not a culprit or explanation of the more recent price drop.
First, Global X’s rebalancing was completed by the summer of 2018. More importantly though, all trading in the ongoing operation of this ETF is a direct reflection of investor sentiment and the buying and selling of the ETF. The ETF has done nothing out of the ordinary to cause an anomaly in the equity prices.
The Bigger Picture
The answer, in fact, may be the result of activities outside of our nuclear space. Consider this:
- In Q4 2018, our seven uranium development companies saw their stock prices reduced by 18%, however the TSX only lost 11% in value;
- Over the full year 2018, however, the TSX lost approximately 12% in value while the stock prices of our seven uranium developers remained absolutely flat (despite some up’s and down’s during the year);
- In Q4 2018, our seven uranium exploration companies saw their stock prices reduced by 13%, while the TSX Venture lost 21% in value; and
- Over the course of 2018, our seven uranium exploration companies saw their stock prices reduced by 25%, while the TSX Venture lost 35% in value.
During 2018, it would appear that uranium equities outperformed the markets in general. Throughout 2018, uranium equities were rising despite the markets ongoing downturn.
During the last quarter, this divergence was rationalized, but the result was still an outperform.
The Entry Point Just Got Cheaper
As pointed out last month, 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%.
This value proposition remains intact!
It appears that macro market conditions have caused the appearance of an uncoupling of equities from the commodity price. The underlying reality, however, is that uranium equities have outperformed the general market and (as also pointed out last month) the spot price of uranium is outperforming most other commodities. For diehard uranium bugs, the price of admission just got cheaper.
- 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.