This chart should pique the interest of any contrarian investor:
This chart tells an important story. Many people have had some direct or indirect exposure to uranium during some part of the last 20 years. What part of the cycle they experienced influences their view on the commodity today. Some people only remember that a lot of investors lost money buying near the top of the 2007 price bubble. This bubble burst right along with the financial crisis. Others only remember the Fukushima accident. Few realize that the only deaths in that incident were from drowning- no one died from radiation. There is a small group of people who remained invested from 2003-2007, earning career making returns.. This group of veterans is actively investing now in anticipation of the next bull market.
Uranium Price Bubble 2007
After a couple decades of trading flat, uranium started trending upward in 2003. The McArthur River mine flooded, even as countries were building new nuclear power plants. Some hedge funds started buying as early as 2003-2004. According to most analysts, the 2006 flood of the Cigar Lake mine in Saskatchewan was the catalyst that turned a general price uptrend into exponential price growth. The price of uranium went nearly straight up for a year after that.
However it all came crashing down in in 2008.
The Long Bear Market
Uranium has been in a bear market for over twelve years. . There was a brief respite in 2010 as the Chines started buying supplies, but after the Fukushima accident, prices crashed even lower. Clearly 2007 was excessive on the bullish side, but it has now swung in the opposite direction. Over the past few years the price of uranium stocks has become further and further disconnected from reality. The market cap of uranium mining stocks is down over 90%. As the price of physical uranium has creeped higher, the stocks have failed to respond. Even closed end funds with just physical uranium are trading at steep discounts to the spot price.
Emerging markets are rapidly adding nuclear power. However, most market participants think nuclear is dead. We don’t know when this will reverse, but we do know that when it does the upside will be extreme.
Why Uranium price swings are so extreme
Commodities tend to be cyclical, but uranium has more extreme cycles than other commodities. C The cost of uranium is a small fraction of the cost structure for a nuclear power plant. However, the consequences of not having uranium and therefore being forced to shut down are extremely high. Therefore, nuclear utilities that are low on uranium become price insensitive buyers. This dynamic is part of what makes investing in uranium so attractive, especially after a decade long bear market.
Additionally, the market is relatively opaque and illiquid. A lot of buying is done via long term contracts, so the spot price can be deceptive. To paraphrase Rick Rule, when a surge of investors wants to buy commodities, its normally like forcing the contents of the hoover dam through a garden hose. In the case of uranium stocks, its more like a soda straw.