I’m writing to you from Zurich, after attending the World Nuclear Association (WNA) meeting a few days ago in London. Last year, the meeting took place in the context of a high $50s (per pound) spot uranium price while this year’s meeting took place with a spot price closer to $80. Normally, a positive return like this would leave investors ebullient, and optimistic for the future. Instead, as I scroll social media, and field questions from friends, I notice a genuine sense of frustration, bordering on fatalism. To me, this seems rather out of place when compared with reality, and the increasingly bullish sentiment from fuel buyers—hence the reason that I’ve chosen to type out this quick missive.
To start with, I find that investors increasingly act like goldfish—fixated on the most recent datapoint, incapable of holding a thought for more than a few seconds. With spot prices having peaked out at over $100 earlier in the year, investors suddenly seem obsessed with the recent soft pullback, while ignoring how we got here. Furthermore, this is all amplified by a general misunderstanding of the uranium market itself.
To start with, the spot price is a price—it isn’t THE PRICE. It’s a derivative of many factors, mainly emanating from the term market. In many ways, it’s a Schrodinger metric—it’s quoted by everyone, but also effectively irrelevant.
So, what is the spot market?? Broadly speaking, the spot market is a place where rogue pounds trade. It’s where some miners choose to sell their pounds, or purchase pounds when they cannot meet contractual obligations. It’s a market where enrichers dump excess pounds from underfeeding, or where utilities go to grab excess pounds when the tails assay steps up. It’s where utilities trade pounds amongst each other and do location swaps. It’s a market where pounds from off-take agreements get re-sold by trading houses. It’s a market where momentum-based hedge funds go to express a view on the future price of uranium, frequently trying to front-run the publicly traded uranium trusts. It’s a market where carry-traders purchase pounds, or dispose of pounds as those financing trades are unwound. It’s a market that’s frequently referenced in terms of pricing term contracts, and as a result, spot pricing tends to get gamed with aggressive buying or selling in the final minutes before a contract prices. It’s a unique market, but when you strip out all the noise, the spot market provides approximately 10% of annual net pounds to the utility industry, which is rather inconsequential. In summary, the spot market is a strange market to focus on. However, since it’s a whole lot more liquid than the term market, the goldfish within us gravitates there for our daily dopamine hits.
So, what is the term market?? This is the market that most utilities use to make long-term purchase commitments. These commitments often take the form of multi-year contracts with expected periodic deliveries. These periodic deliveries are frequently priced in reference to the spot price, on a certain day in the future. To complicate things further, many term contracts have contractual floor and ceiling prices. For example, if a contract says the miner will supply a certain annual amount of uranium for “5 years, with an $85 floor and a $135 ceiling, along with 5% escalation,” it would imply that in year one, the lowest the price can be is $85, and the highest it can be is $135, with any price between those goal-posts set by the spot market on whatever the pricing date is. On year 2, the floor would escalate by 5% to $89.25 and the ceiling would rise to $141.75. This would then continue each year throughout the contract. Naturally, given how illiquid the spot market is, nebulous ‘dark forces’ can often move the spot price by a few dollars, on very few pounds—while profusely denying that it is them. Offsetting this, there are traders who add liquidity, and take advantage of these games, while also arbitraging the spot market against the term market—ensuring that spot never gets too far out of line.
If the vast majority of the total transaction volume takes place in the term market, then it seems odd that so many investors use the most recent spot trade to guide their sentiment. Instead, they should be focused on the term market. Unfortunately, there are a number of problems with using the term market as a benchmark. To start with, each transaction is somewhat bespoke and unique to the parties, therefore it’s hard to treat them on a uniform basis. Additionally, many of these transactions are confidential and not widely reported. Finally, there simply haven’t been many transactions lately.
My main takeaway from WNA was that utilities are increasingly hungry, to contract for uranium. Meanwhile, mining companies sense this change in sentiment and have been raising pricing. The data is somewhat anecdotal, but I’ve heard that miners are now quoting $85 floors and $135 ceilings.
Assuming that utilities agree to these terms, and the escalations are roughly in-line with financing and storage costs, an astute carry-trader can buy spot at around $80, sell term contracts to utilities, and create a rather attractive net-credit call option, using almost no net equity capital. We all know that effectively risk-free arbitrage only sticks around for brief moments in time. So, why haven’t traders lifted the spot price into the middle of the offered range and arbed this out??
The issue is that utilities have been unwilling to transact at these elevated prices. For the past year, they’ve been submitting RFPs to mining companies, yet the miners are not responding to demand at prior pricing levels. It’s become something of a standoff, and carry traders are not sure where the new pricing level will normalize.
At first, I thought the lack of transaction volume was driven by a gulf between pricing expectations amongst the buyers and sellers. After having spent time at WNA, I increasingly believe that the lack of transaction volume is also tied to a dearth of miners with uncontracted near-term production. You cannot sell what you do not have, and the handful of miners with potential supply are demanding a complete re-set of the pricing deck, with a midpoint at $110, before they part with their last few pounds. Until this is resolved, in one direction or another, the market has effectively frozen. When it is resolved, the spot market, the market that most equity investors care about, should also re-price.
With annual uranium deficits in in the tens of millions of pounds per year, and likely accelerating. With the largest producer having trouble meeting guidance, and potentially failing to meet further reduced guidance. With many players still functionally short, and inventories well below historic levels. It seems to be a seller’s market, and until pricing for the term market crystallizes, utilities will burn their inventory and further tighten the market, while punters will play games in the spot market. With many utilities rumored to be submitting term market RFPs over the next few weeks, I wouldn’t be surprised if they’re leaning heavy against the spot market for their own purposes—it wouldn’t be the first or last time that this happened.
I believe strongly that most investors expect the spot uranium market to be efficient, then are annoyed when it doesn’t react to a catalyst—like when the world’s largest producer dramatically cuts production guidance. This just isn’t how things work in the uranium market. The uranium market moves at a glacial pace—they’re utilities after all. Meanwhile, the spot market is a derivative of the term market, and the term market has gone rather illiquid lately. Unless someone steps up in the term market, the spot market can only do so much.
Last winter, the spot market got well ahead of where the term market justified it trading. Term material came into the spot market and capped it. Now, the term market seems to be leading spot, and I believe that will drive spot market material to re-enter the term market. This is a healthy state of affairs. Focus on the term market—it’s the real market, and it appears to be leading things higher.
Last year, most conference participants were convinced that the price of uranium couldn’t go much higher (click here for our 2023 WNA interview with Mike Alkin). This year, they’re convinced that the price will be triple digits far into the future. The sentiment change in the industry is notable. Meanwhile, equity bros seem morose. They should have attended WNA, instead of wasting their time sobbing on social media platforms. As far as I’m concerned, the trend remains higher.
Disclosure: Funds that I control are long various uranium trusts.
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