“It was the single most important financial event of my career.”
That’s what my friend Rick Rule, CEO of Sprott US Holdings, once told me of his experience in the uranium market.
At the end of the last uranium bear market, Doug Casey was, as far as I know, the first to alert investors to this enormous opportunity. Those who listened could have made a fortune.
And today—nearly 20 years later—uranium is right back at the same position in the cycle. We’re on the cusp of another uranium bull market that has the potential to unleash even more life changing wealth than the previous one.
It’s hard to think of two other people who have had more success in uranium than Doug and Rick. That’s exactly why I caught up with them at the Sprott Natural Resource Symposium in Vancouver recently.
Here’s what they told me…
Nick Giambruno: Doug, you wrote a pretty thorough article in your newsletter back in the late 1990s, recommending uranium. And it was hard to have better timing. Anyone who acted on that information probably made life-changing wealth.
Back then, the uranium market was in the middle of a bear market that had lasted almost 20 years. So what made you so confident about it? What did you see that others did not?
Doug Casey: I’ve always been a uranium bull because I’m kind of a boy scientist. Rick knew that, and Rick always felt the same way for the same reasons. So he called me up and he said, “Listen, we ought to be looking at this.” And I said, “That’s a great idea, I totally agree.”
So I wrote that 12-page article on uranium, and another four pages on nuclear power plants. And the timing was pretty good. It was a little before the bottom. But look, you had to like uranium for all the technical and scientific reasons, and you had to like it because nobody even knew or cared that it existed. You had to like it because there were only about five uranium mining companies in the world at that time. All the stars were aligned from my point of view, and Rick felt the same way. So it was a really excellent pick.
Nick Giambruno: That leads me to my question for you, Rick. You once mentioned that at the beginning of the previous uranium bull market, you were trying to figure out which juniors were the best. Not being able to decide among them, you decided to buy them all.
It kind of reminds me of the story of legendary contrarian John Templeton back in the late 1930s. At the time, there was an incredible amount of fear in the world.
Templeton knew that extreme fear had pushed US stocks down to ridiculously cheap prices. So he simply bought every US stock that was selling for less than $1. He was right, of course, and it was the start of his fortune.
And that story about you buying all the uranium juniors in the late 1990s reminded me of that.
Now, such an approach was practical then, when there were only around five uranium juniors. But today we have around 20. It doesn’t seem an optimal use of capital to buy them all this time around. What do you do to distinguish between them today?
Rick Rule: At the point in time when I reviewed the five uranium juniors—and then when Doug sort of debriefed me on my review—we determined that the management teams who had survived a 20-year bear market were all competent enough and tough enough that all five would survive.
It’s worth noting, if my memory serves me well, that the worst of those five went up 20 to 1 in the ensuing bull market.
Fast-forwarding to today, in the 20 or 25 companies that either are or allege to be in the uranium business, there is still an unusually-high proportion of good management teams relative to numbers of listings, at least if you compare it to the rest of the mining sector.
My suspicion is, out of the 20 or 25, there are 12 or 15 that are good bets to survive through the rest of this bear market to participate into the next bull market.
The limiting factor, however, is that I ask individual retail investors to limit the number of companies in their portfolio to the number of hours per month they are willing to spend on research and knowledge maintenance. So if you assume that a retail client is willing to spend five hours per month on uranium names, my only belief is that they should ration themselves to five positions. Certainly, it’s their money, not my money, so I can only suggest what they do rather than tell them what to do.
I suspect that if you buy the best five names—of course depending on how you do that allocation—that you would do quite well in the uranium space now.
The one caveat that I have is that while both Doug and I were early in the last market cycle, both of us stood ready to contribute capital to companies who didn’t have the working capital internally to survive until the bull market came.
And I would suggest to people who are interested in speculating in the space that they understand that it could easily be 18 to 24 months from here before the market turns. And investors who take a position now in companies should be ready to participate in subsequent private-placement offerings which might otherwise dilute them.
Nick Giambruno: Doug, you have an interesting saying that “when the wind blows even a turkey can fly.”
How does it relate to uranium?
Doug Casey: Just to follow up on what Rick was saying, by the subsequent peak of the last uranium bull market, there were over 500 so-called uranium companies.
That’s an unbelievable number, quite frankly. And it turned out that 95% of them—or more—were turkeys, but they were all able to fly because the wind was blowing.
When a bull market comes along, all these cats and dogs start howling. It’s going to happen again. I’m very confident of it because all the world’s governments have been creating trillions and trillions of currency units since the crisis started in 2007. That money has already created lots of bubbles. And plenty will flow into uranium, which isn’t a micro-cap or even a nano-cap market. It’s a pico-cap market.
Nick Giambruno: It sounds like a contrarian investor’s dream.
Speaking of which, Doug, I know you know the importance of accurately defining words. So what exactly is a contrarian?
Doug Casey: A contrarian is somebody who’s running against the crowd. But it’s easier to say than it is to do. Because we’re all psychologically wired to be herd animals. We can recognize it intellectually, but emotionally it’s hard to put the theory into practice, and now is one of those times. It looks like uranium is never going to come back, but it will for all kinds of reasons. So now is when you buy.
Rick Rule: Doug and I have laughed about this over various spirits and beverages for years. The first comment is that everybody wants to be a contrarian when it’s popular, which is sort of a hard thing to do.
Uranium was really the perfect contrarian material in the late 1990s. In the first sense, for 20 years it had been in a bear market, so there was no performance support for the narrative. You know rising price expectations usually support a narrative, and so that’s why people try to be contrarian when it’s popular.
What’s really amazing about uranium is after you got through the investment case, when people got done being bored, as a consequence of Hiroshima, Nagasaki, Three Mile Island, and Chernobyl, people were angry. So it wasn’t just they were bored with it, which is what you look for as a contrarian. They actively hated it, which is how I knew that I was pretty lonely in this thesis and therefore likely would be rewarded if I were right.
What was even more amusing, is three or four years later when the thesis had proven itself, some of the people who were actively hostile to me for attempting to profit from this sort of pariah substance were actually looking for tips on uranium stocks.
The other thing that goes to your contrarian point, Nick, is that when the price of uranium was $8 a pound and the cost to produce it was $20 a pound, the investment thesis was either the price goes up or the lights go out; those were the only two choices.
At that point in time, when something had to happen, there were only five public companies and nobody cared. In other words, when the upside was inevitable and absolutely had to happen, nobody cared. After the uranium price had risen to $130 and the cost of production had risen to $45 or $50, in other words once the industry began enjoying 50-60% operating margins and the price did not have to go up anymore, the number of public companies looking for uranium increased from five to 500.
And public participation when the price didn’t have to rise anymore was incredible. It’s particularly interesting to note that when there were 500 companies in the uranium space and everybody cared about uranium, there were probably still only 15 or 20 management teams that were really truly able to spell uranium.
And so, at the peak, the statistical probability that your company was run by a competent team was really a function of the equation of taking the number of competent teams, 15, and dividing that by the number of aspiring companies, 500, which is statistically really bad odds.
So when the deck was stacked in people’s favor, nobody cared. When the deck was stacked solidly against them but the price action verified the narrative, people were dying to get in.
Nick Giambruno: Those are some great examples of how the uranium market is so violently cyclical—not just in terms of the financial aspect but also the emotional aspect.
So, Doug, why is uranium so volatile, and of course, how do we take advantage of that?
Doug Casey: Well to start with, it’s perhaps the most political of all commodities, even more than gold. It’s a very emotional thing. Since nuclear power is a highly-regulated industry, it depends on what these governments do. After Fukushima, the Japanese practically closed down their entire nuclear industry. The Germans—idiotically quite frankly—are trying to go to solar, which makes no sense in northern Europe where the skies are often cloudy.
Then you have the “Greens” that hate nuclear, when in fact they ought to love nuclear. Because it’s by far the safest and the cleanest form of mass-power generation. So it’s an emotional and political thing. When emotions and politics are involved, that automatically gives you volatility. Volatility is actually a good thing because if your psychology is level enough, you can profit from it.
I’d also point out that volatility and risk are two different things, which are often confused. Not to say that uranium isn’t risky because of all these political problems around it, but I think it’s a distinction that’s got to be made and observed.
Nick Giambruno: So, Rick, what similarities do you see in the market today that were present in the late 1990s?
Rick Rule: Well it’s actually eerily similar. Today, the total cost of producing a pound of uranium is between $55 and $60. So the industry makes the stuff for let’s say $50, to make the math simple, and they sell it for $25, to make the math simple. They lose $25 a pound and do it 100 million times a year.
So we’re back to the same conundrum that we were at in the late 1990s. Either the price of uranium goes up or the lights go out. Despite the fact that we don’t like uranium, uranium is about 15% of US baseload power, and it’s about 65% of non-carbon-generating US baseload.
In Germany, which Doug referred to, although they’ve shut down their nuclear power plants, they’ve attempted to replace it with solar, which is kind of funny because the sun doesn’t shine there. In fact, they’re running the country on brown dirty coal and ironically imported uranium electricity from Poland and France.
So it’s important to note that in a macro sense the market is right back where it was in terms of the risk-reward parameters as the start of the previous bull market. The price of uranium has to go up, but we don’t know when.
We have also experienced a dramatic thinning of the number of uranium companies from a high of 500 down to around 25, which I think is interesting.
What’s changed, has changed for the better. That is in the speculator’s memory—at least the rich speculator’s memory—the last bull market in uranium is still strong.
The greed associated with a package of stocks where the worst of them went up 20-fold is strong, I think, among older speculators like Doug and me. That when the uranium move gets going this time, the response will be, pardon the pun, even more explosive in its early stages than it was the last time.
The last time, there hadn’t been a uranium bull market in probably 20 years, and the speculative landscape had changed to the extent that most of the people who had participated in the bull market in uranium in the ‘60s and early ‘70s no longer cared by 2001/2002. In the circumstance that we’re in in 2018, there are probably billions of speculative dollars controlled by people who participated either directly or vicariously in the last bull market, and I guarantee their memories are still fresh.
Nick Giambruno: Doug, when we were in Vancouver, you mentioned that uranium is your top pick right now. What makes uranium, and not some other commodity or speculation, more compelling at this moment?
Doug Casey: First of all, I have to say that all commodities are cheap right now relative to their historical prices, relative to their production costs. I’m talking about all commodities. So that whole category interests me.
Meanwhile, stocks are in a bubble. Bonds are in a hyper-bubble. Most real estate is in a bubble. You have to go where things are cheap. And of all the commodities, uranium is the cheapest both relative to the cost of production and relative to historical highs and lows. So that’s why it came down to uranium. It’s simple logic as far as I’m concerned.
Nick Giambruno: Rick, what do you think will turn the uranium market around? Is it going to primarily be supply destruction or demand creation?
Rick Rule: You asked the question exactly correctly, so thank you. Demand creation is taking place as we speak. New reactor construction worldwide is taking place at an absolute record pace. And it’s important to note that the new reactors that are being constructed consume a lot more uranium and produce a lot more power than the old ones that they’re replacing.
Supply destruction is also taking place as we speak. Both of those circumstances are occurring simultaneously.
The critical question is really the pace of Japanese restarts of their reactors. It’s important to note that Japan has had a policy of energy security since the Arab oil embargo in the early 1970s. And the only substance that you can store sufficiently to power an industrial economy like Japan is uranium. You can’t store enough coal. You can’t even store enough liquefied natural gas.
So from the political perspective of Japan, nuclear is an important part of their energy future. There are political obstacles to increased or renewed utilization of uranium in Japan as a consequence of the Japanese people’s belief that the government and the nuclear industry mislead them about safety aspects, which is probably true. I’m not an expert on Japanese politics.
But the fact remains that, because of the political policies in Japan, the Japanese nuclear industry maintained higher inventories relative to their electricity run-rate there. And when the Japanese shut down their nuclear fleet, what had been inventory became supply. The overhang that we’ve seen in the market in the last three years in particular has been very much a function of the fact that Japanese inventories became regarded in the market as supply.
As you restart the Japanese nuclear fleet, first of all, you burn more and more uranium. In other words, you consume more; demand goes up. But probably more importantly, the inventory on the market, which the market now sees as supply, goes back to being inventory. So very quickly you sterilize, from the market’s perspective, the overhang.
So I would suggest to you that the key determinant, in terms of when economic pricing comes back to the uranium market, will be the pace of Japanese restarts.
Looking forward three or four years, new plant construction, particularly in China but really spread all around the world, is sufficient that the Japanese become less and less relevant.
But certainly, at age 65, I would like to get paid sooner rather than later. So I’m paying more attention to Japanese restarts.
Nick Giambruno: Doug and Rick, thank you for your time.
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