EPISODE 22
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[00:00:39] SJ: Hello and welcome to episode 22 of Stocks Neat. Today, we’re talking about the topic of the spring in Australia. Fall if you’re in the northern hemisphere, which is uranium. I’m joined by portfolio manager on our international fund, Harvey Migotti. How are you, Harvey?
[00:00:59] HM: Hi. I’m good thanks and yourself?
[00:01:01] SJ: Not too bad. Thanks. Not too bad. Not easy out there on markets at the moment.
[00:01:05] HM: No. It’s been a tricky few months, obviously. I read an interesting stat the other day. Yes. It’s only 27% of stocks that outperformed the S&P 500 this year. This is US stocks. As you can imagine, that number is usually around 50. Half the stocks tend to outperform the index. Half underperformed and then you get that average, and that’s the index. This is the lowest number in over 30 years. So unless you’ve kind of been sitting there in the FAANGs and Nvidia, you’ve kind of been left behind, just because the weighting of some of those mega-cap names that swing the market.
[00:01:40] SJ: Yes. It’s been interesting, and we’re both – yes. We talked a lot about small caps last time we had you on the podcast, actually, and there’s been a decent period of performance in the first half of the year. But just the last couple of months, again, a bit of a reversion to what we’ve seen a lot of over the past –
[00:01:54] HM: Yes, yes. Still sitting there at a big historical discount relative – sorry, a big discount relative to history versus the larger cap names. At some point, that reverses. Let’s see one.
[00:02:07] SJ: Yes, great. Well, thanks for coming on today. I ran Sydney marathon on Sunday, feeling a bit sore and sorry for myself. It was a terribly hot day out. That was actually the hottest marathon I’ve ever run in my life. My little hospital stint that we talked about last podcast set me back on the training program. So it was nice to get to the start but a really hot day out there. We’re not drinking whiskey again today, so this has become the worst whiskey-tasting podcast that’s ever been held. Have you had anything to drink recently for the alcoholics out there that you would recommend?
[00:02:42] HM: Yes. So for our listeners who remember JT who used to work at Forager, he –
[00:02:47] SJ: Jeffrey Tse.
[00:02:48] HM: Jeffrey Tse, JT. He got married recently, so I was up in the Hunter. I stopped by a nice little winery on the way back called Petersons, and I think they’re just amazing, amazing reds. I love their tabs. There are some good entry-level wines for, let’s say, 32 Aussie dollars that you can pick up there and some reserve and other higher quality ones as well for people that are so inclined. But highly recommended. You can order from them online. I just actually ordered a few more myself. So, yes, those are fabulous. If anyone sees one in a store, I’d recommend picking one up.
[00:03:23] SJ: Well, hopefully, sometime sooner a little bit less busy and can actually enjoy a drink while we record this podcast as well. One quick recommendation for me, it’s not on the whiskey front either, but my wife was out to dinner with her work recently. A person she was out to dinner with recommended. She loves a Chardonnay and a Californian Chardonnay called La Crema, which she took home.
[00:03:43] HM: Oh, yes. I know La Crema.
[00:03:44] SJ: We bought a couple of bottles of that. That’s a really, really, really nice Chardonnay if you’re into that. Again, it’s not cheap, but it’s not stupidly expensive either, 35 or 40 bucks a bottle, something like that. Look, talking of hot on marathon day, I haven’t seen uranium in the headlines this much for many a year. Prices up more than 30% in 2023, so that’s the reason Harvey Yellow Cake Migotti is on the podcast today to explain what’s going on.
For background, we have had an investment in our international fund in physical uranium for the past two years, and you’ve been banging the drum on this one for quite some time. So tell us what’s going on.
[00:04:25] HM: Yes. Back in 2021, we saw a very interesting setup here for numerous reasons. It’s a space that I first got exposure to back in 2007, 2008 when I was working metals and mining M&A in and Morgan Stanley. So I won’t name any names, but you can imagine that uranium back then was pretty hot.
Yes. Since then, it’s almost done a 180, I guess, from a period where you were investing a lot in high prices. You went through a period where there’s been no new mine supply and prices at all rock bottoms. It’s been tough years, but everything seems to be changing at the moment. It’s been a big move in the uranium price. Obviously, whenever something like this happens, and I see with the likes of Wall Street Journal front page articles about uranium price and nuclear energy and so forth, I do start to get a bit nervous.
There are more and more investors talking about it and writing about it. That always makes one question. You’re, obviously, not alone in the room thinking the same way. But we really do like the story here, even now, even post the move. There’s a nice kind of setup here.
[00:05:34] SJ: Yes, a little bit like the gold bugs that are out in force on Twitter every time the gold price is up 10 or 15 percent, telling us how many swimming pools of gold there are in the world. It’s a pretty vociferous crowd of people that are positive about uranium, and there’s a couple of different, I guess, narratives going on here.
One really big one is the role that uranium could play in the energy piece as we transition to a less carbon-intensive source of electricity. There are lots and lots of problems that are widely discussed with the intermittent nature of renewable energy, and uranium is seen as an answer to that. What are your thoughts on that argument, and how important is it here to the case for uranium itself?
[00:06:18] HM: Yes. I mean, for me, and I’ve been shouting this from the rooftops for the past 10 years, but this clearly to me is the solution to reducing greenhouse gas emissions and a cleaner, safer form of energy. It always has been, I think. I don’t want to get into politics too much, but the politics and the political will to do it was moving the other direction, actually. People are talking about shutting down reactors, and Fukushima always didn’t help sentiments.
Now, the people, the politicians are doing a bit of a 180. So both Europe and US last year started classifying nuclear energy as a green clean “energy source.” So they are – I think the politicians are realizing that this is such a crucial piece of the puzzle to get to some sort of carbon neutrality or reduced emissions over the next couple of decades. So that’s great to see because particularly in parts of Europe, they were almost fighting against it for many, many years. So that’s been a positive change.
Just as an aside for people, so one gummy bear-sized uranium pellet produces the equivalent amount of energy that’s burning one ton of coal or consuming three barrels of oil. Obviously, we know that gas emissions from this are extremely low. More importantly, it’s super reliable. So all these problems that you’ve seen across Europe like Germany, where there’s not enough wind blowing that day, and all of a sudden, oops, I need to burn a bunch of coal or import some power from France and whatever else who, by the way, still has a lot of nuclear. It’s very highly reliable energy source.
[00:07:52] SJ: Yes. For those who remember their high school physics, we were all taught that formula, Einstein’s formula of E=mc2. But you just mentioning that gummy bear just made me think about the consequences. C in that formula is the speed of light, and the formula set energy is equivalent to the mass of an object. It has the energy equivalent of mass times the speed of light squared, which is an enormous huge number.
But, obviously, getting the energy out of mass is not a straightforward thing, but it is an amazing concept in terms of the world’s energy problems that I think if you found it today, and someone came out and said, “We’ve got this new energy source that can produce this much energy from this much material,” we’d be dancing in the streets and talking about –
[00:08:41] HM: No, that’s right. Forget about putting room turbines up. Everyone doing that, except they could.
[00:08:47] SJ: But, look, I think particularly in this political world that we live in at the moment, if you were basing your investment decisions around rational and logic, you’d be waiting a very long time for some of your investments to come good. It doesn’t always work like that, and I feel like this is one of those things that it’s easy to talk about how transformational it could be.
I think politically it is still very, very difficult. I think you’re right. It’s getting less difficult. You’re seeing more and more people talking about it as a potential solution. I think you’re seeing polls show that society is getting more accepting about it as a potential solution. I would still say this could be a very, very long time before it’s becoming a genuine part in the west that people are willing to invest.
[00:09:35] HM: No, no, 100%. This isn’t really a story about the west. This is actually a story about emerging markets and what’s happening there. So for almost 20 years, we’ve had no new nuclear reactors built anywhere. There’s been some taken offline, a couple of built, but the net’s been zero. Look at the next few years. You have 40 set to be completed between 2024 and 2027. This is relative to just over 400 that are currently operating today globally. So it’s a huge number, and you’re adding more than 10% to the amount of reactors out there.
This is largely driven by India and China, where nuclear power has become a core to the government’s emissions reduction and pollution control strategies, so huge drive there for them. Looking further out past 2027, you’ve got an additional 19 reactors being built, and 425 new reactors planned or proposed across 31 countries. So that’s doubling the amount of reactors that we currently have in operation today.
[00:10:37] SJ: That is mostly in developing world, in China as well. Middle income might be a better description of some of those countries now. But is that mostly there or – I know that Hinkley Point in the UK, there’s, I think, a couple of new ones coming on and fast.
[00:10:49] HM: Yes. No. There’s definitely some in the west. But, yes, I mean, China and India are driving over the near term the large majority of these. We already have a problem, and that is that we’re not producing the same amount as we’re consuming. People have been – utilities and others have been drawing down on inventories. Obviously, nuclear disarmament programs have helped over the past two decades. But you can only draw down on so much inventory, and you need that production to step up. We’re in a significant shortfall. Especially as these new reactors come online, that’s set to kind of get worse.
Now, we’re in a world where the sector has been so hated and capital-starved for so many years. You combine that with the fact that just generally, especially in the west, getting approval to open a new mine is more and more tough. It’s getting tougher and tougher by the year, environmental regulations. No one wants something in their backyard, especially if you’re going to say you’re going to mind uranium.
But that is not to say that it’s not an abundant material. It is. It’s actually very abundant. Getting it out of the ground safely and at a reasonable price is the more challenging part of the equation.
Stay tuned. We’ll be back in just a sec. Are you a long-term investor with a passion for unloved bargains? So are we. Forager Funds is a contemporary value fund manager with the proven track record for finding opportunities in unlikely places. Through our Australian and international shares funds, investors have access to small and mid-sized investments not accessible to many fund managers in businesses that many investors likely haven’t heard of. We have serious skin in the game too, meaning we invest right alongside our investors. For more information about our investments, visit foragerfunds.com. If you like what you’re hearing and what we’re drinking, please like, subscribe, and pass it on. Thanks for tuning in. Now, back to the chat.
[00:12:44] SJ: Just back on the consumption side of things, I mean, and this doesn’t surprise me that this market from my understanding and a little bit of, I guess, interesting side story here. When we started talking about this podcast and just writing our recent monthly report, I remembered that we’d written up something. I was thinking back to I’ve heard this whole story before. It’s been doing the rounds for quite some time, and we had actually written up an idea. I went and found the note on our file system here on an Aussie company called Silex Systems, which was trading at a discount to net cash back in 2014. We’ve made the case then for it to grow.
But back then, it was really a long-term contracted market. There wasn’t – the spot market for uranium didn’t really exist, and I think some of your number –
[00:13:38] HM: It’s still small. It’s still like 10 to 20 percent, depending on the year, sometimes less.
[00:13:43] SJ: But the generators have gone from having five years of inventory to having one. Why have they let that happen? Like why have they become as exposed or soon-to-be exposed to the spot market?
[00:13:54] HM: It’s a good question. I guess for 13 years, it’s – you haven’t had a problem getting supply. Prices were low, and it’s a small portion of their overall expense. So it doesn’t sound like it’s a focus. I mean, I’ll give you a little anecdotal point that I heard from someone who attended the Energy Association Conference, which was, I believe, last weekend. He said that he felt that a lot of these utilities and buyers just had a significant amount of complacency.
I mean, I kind of find that hard to believe. They live and breathe this. It sounds weird, but maybe that’s just the case. It’s a small portion of your overall expense, and it’s been so cheap for so long that you kind of haven’t bothered.
[00:14:36] SJ: Yes. You’ve been on the wrong side, I guess. The spot price has been lower than what you’ve been paying for a very long period of time.
[00:14:40] HM: Yes. That’s right.
[00:14:41] SJ: Some people are probably sitting there thinking, “I wouldn’t mind a bit more spot exposure than what I’ve got at the moment.” Sorry, just back on the supply side of things then. Yes. There’s an Aussie company called Boss Energy, I think, that’s just restarting a uranium mine in South Australia. That was in production back in the early part of the 2010s. I think there’s another mine in Canada somewhere that’s restarting as well. I mean, how much mothball production is there that can come back online pretty quickly before you start worrying about developing new mines?
[00:15:15] HM: Yes. Well, I mean, at a uranium price of 60 to 70 per pound, it’s no longer uneconomical for some of these miners to operate. So you could get a chunk of that, and it does bridge the gap a bit. But you still have a shortfall when it comes to the amount we’re consuming, and that is today. Obviously, that consumption is set to go up quite a lot over the next couple of years as these new reactors come online.
[00:15:39] SJ: Yes. If you’ve seen an estimate anywhere of what – if someone was thinking about an undeveloped mine at the moment, what sort of price is the price that’s going to make you go, “This makes sense for me to deploy a whole heap of capital and take all in a whole heap of risk in this market.”?
[00:15:55] HM: Well, I mean, when you think about existing mines coming back online where you’ve already spend a lot of the CapEx, that number is generally between 50 and 75. It just depends where you are. That’s dollars per pound. I mean, you’d imagine that you’d need something closer to 100 for you to actually go out and spend the money on a new mine, right?
[00:16:15] SJ: Yes, yes, absolutely. I guess Boss restarting now that the uranium price is above 60. I think they’re talking about $25 a pound all in sustaining cost, which from my experience in the mining space probably means it’s at least $10 more than that in terms of the real cost. Yes. You can see this production starting to come online, which is just this is the marginal price that works for an established asset. It’s got to be higher than this for someone to go out and risk a whole heap of capital in.
[00:16:45] HM: Yes.
[00:16:46] SJ: I guess the thesis here and I think the upside hope for us is that in the interim, the spot price could be substantially higher than what that incentive price is, just because there’s not enough of it.
[00:17:02] HM: Definitely. Something interesting that’s happened, this is a recent phenomenon over the last two years, but we have Sprott Physical Uranium Trust. You’ve got Yellow Cake plc, ANU Energy. These are investment trusts that have launched over the last couple of years that are buying physical uranium. So just to give you data points, over the last two years, Sprott has purchased 62 million pounds of uranium. By contrast, total annual global demand is approximately 175 million, so significant, significant pressure on the spot price from that to some extent.
Obviously, that can work both ways. If people start selling these or trying at redeeming, then they’re just starting to sell that on the market, and it cuts both ways. But it’s another new source of demand that was not there two, three years ago.
[00:17:56] SJ: Yes. That’s actually the investment that we’ve made in our international shares fund a couple of years ago was in the Sprott Physical Uranium Trust. Obviously, if you think the uranium price is going up, there are quite a number of listed options for people. That Silex that I talked about, that Australian-listed company, the share price has gone from 50 or 60 cents to three dollars as the uranium prices has run up.
Why own physical uranium versus uranium miner versus – I mean, Silex is not even a uranium miner. It has third derivative exposure to the processing of uranium. Very, very interesting business, by the way. That’s a CSIRO technology for converting Yellow Cake into actual usable uranium using lasers, rather than centrifugal.
[00:18:48] HM: Yes.
[00:18:48] SJ: Processes and that technology is a potential solution to some very big problems out there, particularly in the west, because a lot of this is getting done in Russia at the moment. They basically just get a share of the profits that come from doing that into the future. So it’s a very, very interesting piece of technology and an interesting business but at the moment not generating any revenue.
Sorry, going around in circles a bit there. But back to my question why physical uranium versus the other things that are exposed to it here.
[00:19:16] HM: Yes. Look, we had this view on the supply and demand dynamics on uranium when this price was just under $30 a couple years back. This felt like a good way to express that view. It’s a liquid asset. We could invest in decent size. Whenever it comes to these small junior miners, especially ones that aren’t actually producing anything, which is one of the ways to invest here, obviously, there’s Kazatomprom and Cameco that do produce. But we’re not getting into all the issues that you get by buying an asset in Kazakhstan.
Cameco has – it’s not just a pure play uranium producer either. So you look at some of these smaller names and companies, and what you will find, and we’ve seen this every single cycle and across commodities, some will do well. Some will have cash cost overruns, mine problems, all sorts of issues. You’ll lose money in those investments, even though the underlying commodity price goes up. So in this instance, we just really wanted to keep it simple, and that’s what we did with Sprott. Sprott is as simple as it gets, I would say, when it comes to uranium price.
[00:20:24] SJ: Well, actually, many years ago, I didn’t own the stock personally. But at Intelligent Investor, we had recommended a stock called Croesus Mining. This is back pre-GFC times on the basis that the gold price was going to go up, and that this company would make a lot of money. The gold price promptly doubled, and Croesus went bust from a hedge book, where it had production troubles. It didn’t produce enough gold to meet its hedge book. It had to go and buy gold on the spot market at twice the price they were selling for. The thing went into bankruptcy.
So someone said to me, “Read our report in the newsletter,” and said, “So you think this is the best way of going about it.” I don’t think that’s necessarily true. I think there are people that have expertise in looking at mining stocks that might be able to work out well.
[00:21:10] HM: Oh, definitely.
[00:21:10] SJ: If you’re making more money than just the simple way that we’re going about it. I think it’s the best way for us and our skill set at the moment. We have had a pretty good look at some other options as well. I certainly wouldn’t rule out other options here. But it’s a really nice simple way that if we’re right, we’re going to make money. If the price were to go back to 50 or 40 dollars, where you’ve got a lot of these marginal players that are not making money anymore, you haven’t lost too much by actually owning the physical asset yourself.
[00:21:39] HM: Exactly, exactly.
[00:21:41] SJ: I actually think if you like gold as an inflation hedge, it’s a lot simpler just to own gold than it is to own a gold miner. The correlation over longer periods of time is actually not being that strong. It’s typically quite strong over the short term but –
[00:21:57] HM: At least in gold, I’d say you have some really top-tier assets out there in the world, Barrick, et cetera, right? You don’t necessarily have that in the uranium space. They’re just – they aren’t there, right? It’s too small, and lots of companies went bust and so forth. So you don’t even have that option to some extent. You’re going for the juniors, the explorers. It’s an option. It can make you a lot of money, and it can also lose you a bunch of money, so.
[00:22:21] SJ: Yes. I even think there in gold, it’s the thing that you’re trying to protect yourself against is also a problem for the miners. So if you do get lots of inflation, you tend to have inflation in your cost bases. But as the gold price is going up, you don’t necessarily get the benefit that you thought you’re going to get.
So it’s been a very interesting little exploration of a small part of our portfolio. Harvey, what’s coming up for you over the next couple of months with the other 97.5% of our portfolio?
[00:22:52] HM: We’re actually over three percent in Sprott, so.
[00:22:54] SJ: Okay. I take that back, 96 point something percent.
[00:22:56] HM: Yes. So it’s an interesting period where, obviously, it’s coming towards the end of the quarter, so generally quiet, at least especially in the US. But number of investors is coming up over the next few weeks, and we’ve been using this time to look at some new ideas, which we’ve been discussing, as you know, over the past few weeks. So some of them will make it in the portfolio.
In November, obviously, we have a trip to Chicago, where we’re seeing a number of companies over a period of one week. That should be really good. Some great meetings lined up there. I think some underground diligence as well in terms of stores and seeing how demand’s holding up for various end markets that we’re exposed to through our investments.
[00:23:38] SJ: Yes. Quite a few stocks already in the portfolio that we’re able to meet with over there, which will be great to have some management catch-ups. Then pretty long list over the week of interesting prospective companies as well. It’s the flip side of what you mentioned earlier around the bifurcated nature of this market that we’re in is that there is actually still – we’ve got a pretty long list of potential new ideas at the moment that we’re juggling priorities and thinking about where we want to spend our time.
But there’s lots of things trading near their lows and multi-year lows in terms of multiples of earnings and things. So it’s good to have a nice quiet period. It’s going to be great to meet with a bunch of those companies as well and get some new stocks into the portfolio.
[00:24:25] HM: No. It’s going to be a good trip. I’m excited.
[00:24:28] SJ: Looking forward to it as well. You’re flying Qantas.
[00:24:30] HM: Yes, yes. That’s right. Yes.
[00:24:33] SJ: Poor old Qantas.
[00:24:35] HM: Here we are.
[00:24:35] SJ: It’s a pile-on, isn’t it? It’s a pile-on. Thank you for tuning in. It’s been another episode of Stocks Neat. Don’t forget, if you’re not already signed up to register your email address if you want to get a copy of those monthly reports and hear more of our thoughts on topics like the one we’ve been discussing today, the case for uranium. Just go to our website, foragerfunds.com, and put your email address in there. Thanks for tuning in, and we’ll see you next time.
[00:25:05] HM: Thank you.
