Uranium: "The Most Asymmetric Trade I've Seen In My Life" (w/ Lyn Alden and Marcelo Lopez)

Uranium:

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LYN ALDEN: Hello, I'm Lyn Alden, and I'm here with Marcelo Lopez from L2 Capital. And we're going to talk about the uranium sector. So Marcelo, welcome to Real Vision. MARCELO LOPEZ: Hi, Lyn. It's a pleasure to talk to you again.

I've been following your macro analysis for a while now, and I'm a real fan of your work. And thanks, Real Vision, for the invitation. LYN ALDEN: Yeah, so to get started, I guess tell us a little bit about your background and what makes you so interested in the uranium sector at this time.

MARCELO LOPEZ: Sure. Well, I should start by saying that I'm also an engineer, and it all started when I was doing the training program at Lloyd's Bank in Brazil in the late '90s, and the Russian crisis happened, and the Long Term Capital Management went belly up. As you can suspect, Brazilian stocks crashed big time, and I thought it was the best time to start an investment fund focused on Brazilian equities.

So I resigned from Lloyd's Bank and started my first investment fund at the end of 1998, and this fund returned to over 200% to investors in less than a year and a half-- and unfortunately, not because it was brilliant. It was just the opportunity was too great. Then, after that, I felt the market was a bit toppy and I needed more knowledge. So I closed the fund, returned the money to investors, and went to Spain to do my MBA. After the MBA, I went to Finland to do my specialization in finance.

And after that, I moved to London, and I worked for a big hedge fund called Gartmore. It was later acquired by Henderson Global Investors, and until the end of 2006. I believed I had found a great investment opportunity then, which was real estate market in Brazil. So again, I left my job and decided to invest in real estate markets.

And I co-founded a company that went to grow into one of the biggest real estate firms in Brazil. Today, this company is owned by Julius Baer, and it's referenced in the country. And in 2013, I decided to go back to the financial markets, and I founded the L2 Capital, an asset management company.

The idea was to focus on opportunities globally and look for asymmetric investment themes. So we look for trades in which we have an information edge, and we are not afraid of concentration. We actually embrace it, together with volatility. So well, that's the story, and uranium is simply the most asymmetric trade I've ever seen in my life.

LYN ALDEN: Yeah, I started covering uranium last autumn. And so I cover a bunch of different asset classes, and I had been hearing about uranium for a long time, looking into it to some extent. But I finally did a deep dive on it and saw that the opportunity set there was really good. And one of the advantages of it is that in many ways, it's very uncorrelated to a lot of other assets, including several other commodities. It doesn't trade in that broad reflation theme in quite the same way.

It's really its own supply and demand cycle. And, of course, as anyone managing a portfolio, having something that's really uncorrelated is really helpful when they build out their diversification plan. And so with uranium, of course, what we're talking about is nuclear energy, mainly for electrical use case.

And so tell us a bit about why are prices so low, and why is the market starting to wake up now, do you think? MARCELO LOPEZ: Sure. Well, if I just step back for a moment and tell people, why invest in uranium, because I think it's an important thing. For people who don't know uranium too well, uranium is the fuel that powers nuclear reactors. And nuclear reactors provide clean, safe, and -- RAOUL PAL: Hi, I’m Raoul Pal. Sorry to interrupt your video - I know it’s a pain in the ass, but look, I want to tell you something important because I can tell that you really want to learn about what’s going in financial markets and understand the global economy in these complicated times.

That’s what we do at Real Vision. So this YouTube channel is a small fraction of what we actually do. You should really come over to realvision.com and see the 20 or so videos a week that we

produce of this kind of quality of content, the deep analysis and understanding of the world around us. So, if you click on the link below or go to realvision.com, it costs you $1. I don’t think you can afford to be without it. MARCELO LOPEZ: For people who don't know uranium too well, uranium is the fuel that powers nuclear reactors.

And nuclear reactors provide clean, safe, and reliable energy. So the investment thesis in uranium is quite simple. You have demand increasing, supply decreasing, the end buyer is almost indifferent to the price it pays, and the price is very wrong.

Uranium prices have gone up last year from around $25 to $30 a pound, but our calculations show that the price has to go to at least $60 to bring equilibrium to this market. And we have mapped every single uranium mine on the planet. Now, in terms of demand, we project that it should grow by around 2% per year for the next few years. It might seem low, but it is a growing industry, and we've been draconian to our numbers.

We did not include anything that is proposed, and just so you know, there are more than 350 nuclear reactors proposed today. And on the other hand, we include all reactors that might be decommissioned. And that's an important point, that there might be a surprise in this industry, not only because of the number of reactors that are being built-- which is over 50 today-- but also because of the delayed shutdowns, which, as I mentioned, are very important. So a couple of years ago, I went to Spain to talk to the fuel buyers there, and they were telling me that all the nuclear reactors in Spain were scheduled to shut down last year, and all of them got extensions to 2027, and some up to 2035. So it means up to 15 years of uranium demand that was not on anyone's numbers.

Same thing in France. France was going to shut down 14 nuclear reactors in 2025, and they got extensions to 2035. Same thing with Mexico, Russia, the US, and many others. So reactors that should have a life of 40 years are getting extensions to 60, 80, and there are discussions now to increase the life of a few reactors to up to 100 years. And now, with this ESG wave and the pressure of governments to achieve the zero emission goals that they set, we will most likely increase the demand for nuclear energy, and hence for uranium.

Now, having said all of that, it's very questionable to-- it's very interesting to ask why prices are so low, but it was just the perfect storm for miners. So Fukushima was, obviously, the most impactful event. After the accident, Japan shut down all its nuclear reactors, so the world lost a big buyer of uranium and gained a seller, because Japan started selling part of its inventory.

And yeah, it was taking delivery of some contracts, but it was also active in the spot market. And because Japan had a lot of inventory, it didn't help prices at all. And miners didn't stop mining at that time. They thought Japan would be back online very quickly, and they kept on producing and shooting themselves in the foot. Besides, the sentiment was very negative at that time. As I mentioned, Japan shut down all its nuclear reactors.

Spain said they were going to shut down by 2020, Germany 2022, Belgium 2024. And in all of these, reactors would be decommissioned. And on top of that, there was a lot of pressure from environmental groups for politicians to either shut down existing reactors, or at least not let any more. Be built. Still, at that time, there was a program in place called Megatons to Megawatts, which ended in 2013, in which Russia was dismantling part of its nuclear arsenal, downblending the highly-enriched uranium, and selling it to the US. So it was good for Russia because they made some money.

It was good for the US, because they not only avoided that this highly-enriched uranium fell into the hands of a rogue government or a terrorist organization, but they also had plenty of cheap uranium to power its nuclear reactors. It was just bad for the miners. Moreover, Kazakhstan was ramping up its production.

In the beginning of the century, Kazakhstan was responsible for less than 10% of the global uranium supply, and now it's around 40%. They use a mining method called in situ leaching, and they were able to reduce costs dramatically. And the Kazakh tenge, which is their currency, also helped them a lot. And last but not least, secondary supply and underfeeding we're increasing.

Now, I should stop here for a moment and explain briefly what underfeeding is. So uranium is found in different isotopes-- and I'm going to simplify this, OK? So the most common is the 238, which corresponds to around 99.3%. Uranium-235 corresponds to 0.7%, and that's the one that's unstable and, therefore, the one we want, because you can bombard the nucleus. It can explode and generate all the energy. So when people say they are going to enrich uranium, "enrich uranium" is just to increase the content of the isotope 235 in the mix from 0.7% to 3%, 4%, 5%, whatever the nuclear

reactor needs. And the way you do it today is using centrifuges. These centrifuges spin at high speeds, and they cannot stop.

They are, in some sense, like nuclear reactors, because nuclear reactors are very expensive to build, but once they are built, they're relatively cheap to operate. So when the centrifuges start spinning, they cannot stop, because if you stop them, you don't know where the plates are going to end up, and you might wreck them. So they have an incentive to do what's called underfeeding. And underfeeding occurs when they feed less uranium into the centrifuge-- hence the name underfeeding"-- but these centrifuges spin for longer, and they produce the same amount of enriched uranium using less uranium.

And that uranium that they didn't use, it's theirs, so they can go to the market and sell this uranium as long as it makes financial sense to them. So it is as if they create a whole new mine out of the blue. Now, I heard this metaphor a few years ago, and I think it helps explaining underfeeding. Imagine a miner as being a producer of oranges. The enrichers would be the guy who's going to squeeze the orange, and the nuclear reactor is the one who's going to drink the orange juice.

So the thing works like that. The miners give the enrichers four oranges. The enrichers then squeeze those orange juice and gives the nuclear reactor one glass of orange juice. Now, imagine suddenly these enrichers have a lot of capacity, unused capacity. It was a mixture of new technology with less demand. Remember, Japan was offline.

So now, they can take their time to squeeze these oranges, and they realize they don't need to squeeze four oranges. They can squeeze three oranges really well and produce the same amount of orange juice, and that orange that's left is theirs, so they can go to the market and sell that extra orange. And this extra orange represents underfeeding. So underfeeding was increasing at that time. So as I mentioned, it was the perfect storm for miners.

I mentioned underfeeding, Japan, the narrative, Kazakhstan, the miners' lack of discipline, and the Megatons to Megawatts program. And where are we today? Well, today, we are in a totally different place. So Japan is back online. There are nine reactors that have restarted, although only four are operating today, producing clean and abundant energy, and 18 more are waiting for approval to get started. And the hard winter that they just faced is reminding them about the importance of nuclear reactors. The program Megatons to Megawatts is over.

It ended in 2013, and I doubt we are going to see anything like it over the next few years. Russia has already dismantled most of the nuclear weapons it wanted to dismantle, and there's not enough political interest in doing something like it again. In terms of Kazakhstan, Kazatomprom is now a listed company, and it announced that it would cut supply by the most it can, which means 20% as gross subsoil use agreements. And they have delivered on that, and I'm actually really impressed. Besides, they started a marketing arm in Switzerland to sign long-term contracts with its clients and stop selling uranium to the spot market. And it's not only Kazatomprom, but Cameco has also suspended production of the biggest and the best mine in the world, which is McArthur River, since 2018.

And the second-biggest mine in the world, Cigar Lake, is also offline because of COVID. It's actually impressive, the similarities between now and the previous bull market, when both mines, McArthur River and Cigar Lake, were also offline. In terms of the narrative, the narrative also has changed substantially.

So now, the talk is about clean energy, and the likes of Nature Conservancy are supporting it, and Michael Shellenberger is actually talking to everyone he can about the benefits of nuclear energy. And last but not least, underfeeding and secondary supply are diminishing. So with more reactors coming online and more demand for an enrichment, there's less incentive for underfeeding. I won't get into the details about the impact that FMRs might have on underfeeding, because it's going to be too specific for this conversation. But the reality is that the future of the sector has never looked so bright. So basically, that's why prices are so low, and that's the situation today.

LYN ALDEN: Yeah. MARCELO LOPEZ: Sorry, if I just mention, something that wasn't present in the last bull market and is really important in this one is the supply discipline. And this was planned, but what wasn't planned is the supply disruption due to COVID adds to this 10 years of underinvestment in the sector. The fact that a few mines are coming to the end of its lifespan and decreasing secondary supply, and you have the perfect setup for a massive upside. LYN ALDEN: Yeah, thanks so much for the summary. I think that gives us a really good foundation to work from.

And a lot of people as investors, a lot of people have a more Western focus. They say, OK, the United States isn't building a ton of new reactors. We've had Germany shutting down some reactors. But a lot of the growth that we're talking about here is actually from the East. We're seeing China, they're building reactors. India is building reactors, Middle East, South Korea.

And then, as you point out, in the West, instead, we have extensions of existing reactors, and that combination is what's fueling this bull market. And if you look at, for example, India, it's interesting, because when we're talking about what classifies as a clean source of energy, it's important to realize that people are talking about phasing out oil and gas, let alone the fact that coal is still a dominant energy source throughout Asia. And so for example, India gets 2/3 of its electricity from coal. And if you look at the air pollution in multiple cities, it's extremely high from a lot of their production.

And so a lot of these countries have a pretty strong incentive to find other sources of energy besides coal. And even they're looking to natural gas, they're looking to solar, they're looking to wind, and then nuclear fits into that as well. And another study I saw showed that in the United States alone, there's tens of thousands of deaths from particulates associated with burning fossil fuels. And so let alone CO2 and all that discussion, just the particulates, the really tangible stuff comes from the automobiles. It comes from the coal plants that we still have. And if you extrapolate that across the entire world, we're up into the hundreds of thousands, perhaps the low millions of deaths worldwide that are attributed to these particulates.

And so when we talk about some of the risks and concerns of nuclear, we have had a handful of horrible events. But one of the analogies that I use, it's like basically, the public thinks of it in a similar way to how we think about airplanes. And so for example, if you look at what is statistically the safest form of travel, airplanes are incredibly safe, especially if you're talking about commercial, high-end operations, and we don't really think twice about driving a car.

And yet, our chances of having an accident and a fatal accident in an automobile is far, far higher. And it's kind of like the nuclear to coal or nuclear to other sorts of energy is the same way, where the total number of people that have ever been affected by nuclear energy, especially relative to the amount of energy produced, is extremely low over the multiple decades of operation, whereas the number of deaths attributable to coal directly and indirectly is actually extremely high. But whenever a nuclear reactor does have a problem, it's a catastrophic failure, in a similar way that when an airplane goes down, even though it's extremely rare, it makes global headlines for weeks.

And so we're in that environment where it's had a bad rap for a while, sometimes for good reasons, but there's all sorts of new technologies that can be developed to make safer reactors rather than relying on 1960s and 1970s technology. And we're getting more and more interest pf that out of Asia, especially because they want to be more energy-independent. They want to have cleaner air wherever possible. And so I guess that the next logical question is to point out that the uranium market is somewhat different than other commodities, because these electric utilities, they have long contracts with the way that they get sourcing from, generally, and that plays a big role in the overall supply and demand balance. So can you tell us a little bit about what's going on with the electric utilities at the current time? Are they are they coming to market to buy, or are we not at that point yet? MARCELO LOPEZ: Sure, great question, Lyn, and you raised some very interesting points here.

Obviously, the growth is mostly in Asia. China, if they want to achieve what they propose to achieve by 2060, they have to increase nuclear production by 382%. So we are talking about over 200 nuclear reactors to be built there.

It's an impressive growth. Now, in terms of utilities, that actually was the most important question for me when I started looking into this sector back in late 2017. If I can see that this market is going to go up big time, why can't the utilities see, too? Why aren't they contracting? Where's the catch? So there's a few things here. The first one is to know how utilities buy their uranium. Basically, there are three ways-- the spot market, which entails purchase with deliveries up to one year, the carry trade, which is a bit longer, up to three years, maybe four, and the long-term market, which is where most of the contracts have been traditionally done. So what happened after Fukushima is that there was a lot of material available, so utilities didn't need to buy for the long term, as traders would offer to buy material for them now and deliver in two, three, maybe four years in the future.

So the traders would just go to the spot market, buy the material, charge utilities for storage, interest, taxes, put their profits on top, and there you go. Now, utilities then had visibility for the next three or four years and delayed contracting, and that was great for them. But now we are approaching a time in which the spot market is not going to be sufficient, and many mines are either in care maintenance or just shut down completely. And it will get more and more difficult to find big amounts of material in the spot, which will reduce the carry trade. Besides, the price differential between spot and what some perceive as being the long-term price has shrunk significantly, and this should also reduce the carry trade. And this will make you think about the long-term contracts again.

I'm not saying that this is the end of the carry trade market. I'm just saying that the focus will now go back to the long-term contract. The second thing is that few buyers have very little incentive to call the bottom in prices. It's not that they are going to get a massive bonus for that. And at the same time, they're not punished if they pay more for it, as long as that's the price available for everyone. Just look at the conversion market, for instance.

We saw the price go up from just over $4 a kgU more than $21 today. It's a five-time increase, and no one got punished for paying more. Also, you mentioned a few buyers from a utility going to talk to his or her risk officer or CFO and say, OK, let's buy uranium. I believe we should find a long-term contract at $50 a pound. I've been looking at this market and I have done some extra work, and I believe prices are fair at $50. So the risk manager or CFO will look at the prices on the screen and say, well, come on, it's less than $30 today.

Are you telling me to pay 60% more than the price I can see on my screen? That doesn't make sense. Get out of here. In addition, there's uncertainty in the sector itself. So Exelon is threatening to close two of the best-run utilities because of unfair competition from subsidized renewables. So there's a lot going on. Another thing-- and that's interesting.

People have to be aware of what's called the nuclear fuel cycle. And to simplify things, the nuclear fuel cycle is mining, conversion, enrichment, and fabrication. And each one of these processes can happen in a different part of the world. So for instance, uranium mined here in Australia can be converted in Canada, enriched in the UK, fabricated in Sweden, to enter a nuclear reactor in Brazil.

And it normally takes something between 18 to 24 months for this cycle to be completed. You can think that if a nuclear reactor has inventory today that should last until 2023, they're pretty much working with the just-in-time process. And you don't want to operate a $10 billion facility using the just-in-time process, so it is normal that they carry a lot of inventories in different stages of the cycle to last two years, and most likely more. And if you look at the level of inventories that are gathered today, you're going to be shocked. In some cases, it's less than two years.

It's the lowest it's been over the past 15, maybe 20 years. So I mentioned the nuclear fuel cycle because most people-- even a few investors in the sector-- think that the natural cycle is mining, conversion, enrichment, and fabrication. But in reality, many utilities do it backwards.

So they contract their fuel, and then they work back to enrichment, conversion, and then they look at their uranium demand. And because of a bottleneck in the conversion market, they couldn't make a decision on uranium purchases. And in addition, last year was a very important year for utilities, not only because of the impact of COVID, but also because of the Russian suspension agreement, which affected many of them directly. After the resolution of the RSA, and now, let's call it, the almost normalization of the commercial markets, at least there is light at the end of the tunnel. Utilities can go back to the markets to secure the uranium they need.

Now, honestly, I talk to many utilities. So if you ask them, is this a good price, or would you contract here, I'm sure the answer would be, yes, of course. But every single one of these utilities is dealing with a legacy of contracts.

Last year was not a good year, financially speaking, for them, and cash flows were down big time-- some up to 30%. So they are facing a cash crunch and trying to conserve cash. So what seems irrational to many, it's actually very rational and expected. And in addition, the majority of the long-term contracts have really expired from 2025 onwards, and they should be renewed at least a couple of years in advance. So we are actually coming from a period of abundance of uranium to a period of scarcity. And during this transition period, many people-- and utilities, too-- still think there's a lot of uranium for them.

It's the good old recency bias. So utilities have got many things in the plate at the moment, and uranium contracting took a back seat. But I believe they will be very keen to go back to the market again and start contracting in the second half of this year. The most important thing for utilities is security of supply, and COVID reminded them of that. As I mentioned before, nuclear reactors are very expensive to build, but they are relatively cheap to run, so uranium prices do not affect them that much. Their priorities are security of supply, diversity, and time.

Cost is not the major issue here. LYN ALDEN: And so when we look at the overall cost profile of the industry, we see right now the spot price is under 30. Long-term contracting price is higher than that. The production cost varies, of course, depending on what mine you're looking at, but in many cases, it's 50 or 60. And some of the best mines are far lower than that.

And so I guess walk us through some of the production profile that would happen. We start to get a price rise, Cameco can restart the mine you talked about. We also have Kazatomprom can conceivably increase production. And so where would that leave the market after there, when you look at the longer term of that supply and demand characteristic? MARCELO LOPEZ: Sure, a great question. And yes, Cameco can increase production, and Kazatomprom can increase production substantially, but it doesn't matter; it still won't be enough.

Now, for people who don't follow the sector in 2017, Kazatomprom announced that it was cutting its estimated production by 20% from 2018 onwards. According to the laws of Kazakhstan, once a mining license is granted, miners have to stick to their production guidelines with a plus or minus 20%, meaning if the price of the commodity skyrockets and the miners want to take advantage of this, they can increase their estimated production by 20%-- and the opposite if price collapses. So Kazatomprom kept announcing a 20% cut, showing discipline-- which which is great. And they will continue with this 20% reduction until 2022 at the least. But let's see what they will announce in the second half of this year.

So the 2022 production will be just under 50 million pounds. If they were to ramp up, they could go up to, let's say, 70 million pounds. But, of course, the costs will go up too. So the only intelligent reason they would do this is if prices respond accordingly.

But still, 70 million pounds is not enough. According to UXC, the uncovered demand by 2035 is about 1.4 billion, actually, pounds of uranium. So one of the previous executives of Kazatomprom said last year that the world will need another two Kazatomproms by then. And earlier this month, Tim Gitzel from Cameco said that the world will need six MacArthur Rivers or Cigar Lakes by then.

And they were not joking. Just a reminder that Cigar Lake, which produces around 18 million pounds of uranium per year, will be exhausted by 2028. Now, I believe the price will go up substantially from here to give incentive for the miners to produce uranium again. And this bull market is being driven by a destruction of supply, not only increased demand. And it's just not press the button, and the supply will come. You have to find the pounds.

You have to permit and commission the mine. You have to invest in infrastructure, raise capital, hire people, and everything else that comes with it. And it takes years to do that-- maybe 10, maybe more in the developed world.

So people think that they will have time to act, but they might not. According to TradeTech, the world needs circa just 80% of the current projects, but experience shows us that only one in over 50 projects become a producing mine, so I believe we are going to face a uranium run at some point in this decade. LYN ALDEN: And so from an investor perspective, if they see this whole case laid out, it makes sense to them, and then they're looking to get into the space and trying to figure out the best way to play it, they could focus on the producers.

They could focus on the holding companies. They can focus on the smaller exploration companies. And they also, at this point, probably look at a price chart and see that-- it's funny, you had this multi-year decline in a lot of the stock prices of the industry, and then, just in the past few months, there's been this pretty big pop. And so the long- term returns have been pretty poor, but then, people can feel like they might have missed out on it. And so so both of us are long, so it's easier to ride at this point. But say someone's coming into the industry and they see this price go up.

Would you say that they've missed the opportunity? Should they look for dips? And then, if they do decide to allocate, what kind of companies you think they should look for? What are some of the key things, and what kind of size of the stock do you think is the sweet spot? MARCELO LOPEZ: Sure. Well, you're right in the sense that the share price of many uranium miners have gone up big time. But I still believe we are very, very early in the cycle. If you want to think about the sector overall, you can pretty much buy all listed companies for around $20 billion. So in other words, with $20 billion, you can buy the whole sector that provides the essential fuel that powers 11% of the world's electricity, or 60% of the clean energy produced.

So if you want to put that into perspective, Tesla-- which is, I don't know, a car company, a battery company, whatever it is-- but somehow, it is related to ESG is worth today almost $800 billion. This is 40 times all the uranium listed companies put together. So the upside potential for this sector is enormous. Now, in the previous bull market-- which was less appealing than this one, because there was no shortage of uranium which exists today-- and just a step back here. Last year, there were around 180 million pounds of uranium consumed in nuclear reactors, whilst there was only 120 million pounds produced by miners.

So there is a gap between primary supply and demand. And this wasn't like that in the previous bull market. The previous bull market that started back in '03, '04, it escalated when Cameco had to shut down McArthur River and postpone the production of Cigar Lake because of flooding. By the way, these two mines are not producing today.

The similarities are huge. So Cameco, which was the biggest producer at that time, had a lot of complications, and they sold a stock price soar almost 1,400% over this period. But you can just look at the supply.

There are no pounds coming from Canada or the US at the moment. Ranger, a mine that produces around 4 million pounds per year, was shut down last month. Cominak, a mine that produced around 3 million pounds, is going to be shut down next month. Cigar Lake, which is in care and maintenance, will reach the end of its life in another seven years. And Olympic Dam, which feeds the spot market, is not going to increase production. At the same time, China is building a fleet of nuclear reactors-- same as India, Russia, Brazil, Argentina, Turkey, Saudi Arabia-- you name it.

So yes, the share prices are up. Some of the juniors have at least doubled from a few months ago. But I still think that we are very early in the cycle. This bull market should last for a few years, in my opinion. LYN ALDEN: And so if an investor wants to get in, if they look at the landscape there, there's a couple of the major miners that they can get into.

Then there's a bunch of smaller ones in different exchanges around the world. And then, there are a couple ETFs out there that give them a pretty broad intersection, a cross-section of the industry. And so if you were an investor, how would you play that? And of course, there's also funds.

You can talk about your fund as well. So what are they the main characters should they look for? Should they be buying the large caps/ should they be buying ETFs? Should they try to dabble in some of the smaller companies? Should they invest in a fund? What do you think are the pros and cons, and what are you really looking for in this industry to make sure you get the most risk-adjusted returns out of the bunch? MARCELO LOPEZ: Sure, sure. Well, I'm quite biased to answer this question, because I, obviously, run a uranium fund, and we've been very successful with it. But let's talk about the ETFs for a moment. ETFs are an easy way to play whatever sector one is interested in-- with a few pitfalls, which I won't discuss here. But there are a couple of ETFs in the sector.

There's URA, which is the biggest ETF, and it's probably the most famous one, especially because it didn't have competition. But this ETF is a disaster. They started back in 2010, right before Fukushima, and they got their entire bear markets in uranium.

And so investors were losing money left and right. So what they did was to diversify its holdings back in 2018 and buy things like Barrick Gold-- which I really don't understand-- and a few other companies that somehow are or were involved in nuclear energy. So they have things like Macquarie Group, Sumitomo, Rio Tinto, Hyundai Engineering-- which these companies do not represent the uranium mining sector at all. Now, they realized it was a mistake and decided to increase the percentage of uranium miners in the ETF. So before the 2018 restructure, they were 100% uranium mining companies.

Then, from '18 to '20, they were 50-50 with uranium mining companies and the nuclear cycle overall. But now, they are 70% uranium mining companies. So this is an important ETF to follow-- not to invest in, but it's important to follow, especially if you're invested in the junior mining companies. Because part of the flows into this ETF end up going to the smaller companies, and the impact can be relevant. Now another ETF is the URNM, which is relatively new.

They started with positions I didn't agree much, but I could understand why they did what they did-- positions like BHP, Rio Tinto, et cetera, which they don't hold anymore. So today, they are a much better player than URA, for certain. I wouldn't own a couple of stocks they own, but again, if what we are discussing is ETFs in the sector, this one would be better. And they have been growing a lot. If I'm not mistaken, the AUM, the Assets Under Management, has grown by more than 30 times since inception just over a year ago.

They're still not as big as URA, but I believe they are on the right track. There's also the physical funds. Physical funds are funds that hold uranium ore, UF6, and people can participate in the price movements of the commodity. So I'm not going to enter into the details, but there are a couple here. One can buy Yellowcake, which is listed in London, or Uranium Participation Corporation, which is listed in North America. So if people think that the price of the commodity is going to go up and do not want to be exposed to the risk of the miners, he or she can buy these funds.

Well, I, obviously, run a uranium fund. I have been running it since late 2018 when we set it up. And I'm deeply involved in the sector. So obviously, I'm very biased, as I mentioned before, to say that an active fund can provide better returns.

Our fund has performed way better than the ETFs in the sector, and that's what one can expect. We spend a lot of time visiting companies, facilities, talking to everyone in the sector, and we participate in the conferences, too, mostly as a speaker now. As you know, it's not easy to get information in the sector, and there are many little details that make a difference. So this contact is important to try to assemble the mosaic. And sometimes you hear about a project, and it's fascinating, but it will never fly for one reason or another.

And you have to investigate it in detail. And few investors have the time and the resources to do it, so to me, it makes sense to have an allocation to an active fund instead of buying the miners themselves. But for people who want to go into the sector and do a deep dive, yeah, they'll probably find good investments there, too. LYN ALDEN: And so I guess if we look forward now, we have the overall view of where things have to go.

The one tail risk that I think about is, what if we have another disaster, and then a large country has to bring off a big portion of its fleet? That would be the blacks swan to be concerned about. Are there any other major risks that you'd say that are in the industry that could turn this around? And one analogy that people give, or just one way of people describing it, is that a lot of other commodities, it's somebody optional. Gold, for example, is based on people's willingness to allocate to it as a store of value, whereas something like uranium is required to literally keep the lights on. And so it's not so much an if question, it's more like a when question, as I've heard Rick Rule describe it. But what are the potential things that could either greatly delay that, or that could potentially throw it off course altogether? MARCELO LOPEZ: Well said.

Unfortunately, uranium is not a risk-free investment. So I agree with you. I believe the major risk will be another nuclear accident. This will dampen sentiment and will most likely delay the recovery in price that I expect.

So having said that, nuclear accidents are not something that happen all the time. There were three in history, one with victims. And this one, Chernobyl, was a series of errors, one on top of the other, so I don't think we are going to see something like it again.

People talk about Fukushima, and I say that Fukushima is the best reason why we need to have more nuclear reactors. Almost 20,000 people died because of the tsunami, around 1,000 people died because of the evacuation process, and no one had any injuries because of the nuclear accident. And it's somehow interesting to see, because Fukushima just entered the map because of the nuclear accident, and the nuclear accident didn't hurt anyone. You mentioned this in the beginning, but I like to compare it to sharks and insects. Insects kill more than 600,000 people every year on average around the globe, being it from transmission of diseases, allergies, poison-- whatever.

Now, guess how many people, on average, die every year because of a shark attack? LYN ALDEN: I would probably guess dozens. MARCELO LOPEZ: 10. 10 people die, on average. But when it happens, people close the beaches, put boats on the sea. They start discussing what has to be done, put nets to protect swimmers and surfers, and all that. But they are quite tranquil around insects that kill 60,000 times more.

It's the reality versus the perception. It's the plane you mentioned. And also, there's a association between nuclear reactors and nuclear bombs, which are completely different. But people get scared. And I believe the first step is to educate people. Bill Gates was on 60 Minutes last week, and he said exactly that.

It's going to be a lot of work to convince people. I, for instance, was completely ignorant about nuclear energy until 2017. I used to think that it was very dangerous-- it could explode, kill everyone, and all that. But the more I learned, the more I fell in love with nuclear energy. And I think it's the future. Now, other things to consider is China not implementing its plan to build more nuclear reactors and things like that.

But it's not something that keeps me awake at night. Even if we assume that no more nuclear reactors are going to be built, there's still more demand than supply. So this imbalance has to be sorted, and I think the only way it will is when prices go up. LYN ALDEN: And I guess to wrap up, are there any kind of major things we should look for as turning points, or things that can serve as catalysts? And so I think one thing we were discussing before offline was that the Honeywell Metropolis Works plant. And so what are the implications of that for the industry, and are there any other major things we should look for as this overall market progresses? MARCELO LOPEZ: Good question, Lyn.

So for people who are not following the sector closely, Converdyn-- which is a partnership between Honeywell and Global Atomics-- is a producer of UF6. So they convert the U3O8 that they receive into UF6. And due to the oversupply of material, back in three years ago, they decided to shut down the conversion plant. It was not the first time, by the way.

This plant is quite important, and it accounts for a big chunk of the world's production capacity. So just like that, more than 10% of the conversion market disappeared. Now, the talk of Honeywell bringing the Metropolis plant back online has been going around for a while, and we expected it to be turned back on soon. So yeah, it's big news, of course, but everyone who follows the sector closely already expected it. So the announcement said that the plant will restart production in 2023, or a couple of years from now.

So the news is good for the US, because it will create a few jobs there, of course. But more importantly, it will be the only conversion facility in the US, so it is strategically important for the fuel cycle. But what does it mean to the uranium market? Well, it's very good news, in my opinion.

As I mentioned before, the nuclear fuel cycle is not as most people think-- mining, conversion, enrichment, and fabrication. And utilities were worried last year about their enrichment and conversion needs. There was a big bottleneck in the conversion market, and this was one of the things that were keeping utilities away from purchasing uranium.

They had bigger problems. If you can't get conversion, how good would it be to get uranium? Now that the Metropolis plant will reopen, it will most likely stabilize the conversion markets, and it will, in my opinion, pave the way for utilities to start negotiating long- term contracts again. But one thing I would like to mention is the explosive-- if I must say that-- but the explosive potential of this market.

The conversion market started to be more disciplined back in 2014 and the miners in 2016. Look back in 2017, everyone thought there was a lot of available conversion. So Converdyn was shut, and overnight, the world lost a lot of their conversion capacity, and everyone was tranquil.

Now, since then, conversion has risen from a low of just over $4 a kgU to $21.50 today this is an increase of five times, and utilities are paying for it because they need it. Uranium represents very little in the overall cost of running a utility, and its price can go up big time. LYN ALDEN: And so are there any other kind of developments that you follow? For example, I've seen discussions about other use cases. So we have-- generating electricity is the major use case here, but some folks are talking about, for example, changing container ships to run on nuclear energy. And so of course, we have aircraft carriers, for example, run on nuclear, but they're multi-billion dollar ships, and so they can afford that.

They're really high capex. Whereas cheaper, very large ships, they run on fuel. And whereas many people that are looking more towards environmental to optimize that have proposed that it's worth the expense to have a more nuclear fleet for some of these kind of large transportation ships.

Do you factor things like that into you analysis as either upside potentials, or do you just focus on what's being built, say, in the next five or 10 years? MARCELO LOPEZ: Yeah, I just focus on the next five years, and nuclear reactors are very predictable. So you know which ones are going to be decommissioned. You know which ones are going to be built. And just so you know, we haven't included any SNRs in our analysis.

And SNRs is the thing that's going to start hitting the market from 2027 onwards, and it has a huge potential. Even countries like Australia, which do not use nuclear energy yet, can go back to-- can move their energy source to small nuclear reactors, which is great news to Australians and to the sector. But we haven't included any of those into our calculations.

This is something that's not going to move the needle too much, and especially, I don't think they will impact the markets too much in this cycle. LYN ALDEN: Yeah, one of the overall interesting things is even when we talk about newer technologies, all those three plants you talked about that had those disasters, even though they all occurred in different decades, they all were relying on that really old technology. They were all built around the same decade or so. And so as we go forward. There's kind of more developments happening to make smaller reactors, to make safer reactors, and to basically bring it up to the 21st century rather than keep relying on mid-20th century technologies.

I guess as we close out now, I would just point out that if we take a step back and look at portfolio construction or macro analysis, it can't really be stressed enough the importance of having totally uncorrelated investments. And so for example, if you look at the past several years, now we had gold do really good from 2018 to 2020, and then the second half 2020 till now, we've had Bitcoin on its asymptotic-- just a huge run. We had different periods where emerging markets do well. We have different periods where growth stocks do very well from yields going down.

And then, if yields start going back up, we have a reversal. And so there's all these different periods where some types of things outperform others. And if you're overweight on, say, a standard 60-40 portfolio, you have a couple risks that could kind of make your whole portfolio lackluster for a couple of years. But having some of these side bets, even a small percentage of capital invested in something like uranium, along with these other just uncorrelated things, I think that can give a lot of advantage to a portfolio.

So if you were to talk about allocation, what kind of percentages do you think it would be appropriate, for example, for someone to allocate to this sector? MARCELO LOPEZ: Sure, well, I wouldn't be a parameter, because I have more than 70% of my net worth invested in uranium now. But I totally agree with you-- it's something that people are not paying attention to, but it's the uncorrelated asset. It's a very uncorrelated asset.

So even last year, during the biggest crisis that we faced in March, uranium prices-- not the miners, but uranium prices didn't go down. Even gold went down for a week or so, but uranium just was indifferent to the whole noise. And if you look from 2011 till 2018 everything went up-- real estate, equities, cryptocurrencies, whatever you want-- and then, in 2018-- but uranium, right? Now, in 2018, everything came crashing down to the end of the year, but uranium went up by 30%. Now, come 2019, and everything went back up again but uranium. Now, in 2020, until the first half of the year, uranium was up big time. Well, actually, until the end of the first quarter, uranium was OK, slightly up, and everything else came crashing down.

So yeah, I think it's the perfect uncorrelated asset. It has its own dynamics . It's a supply and demand issue. As I mentioned before, it's a very easy call. You have demand increasing, supply decreasing. The end buy is almost indifferent to the price it pays, and the price is very wrong.

So I see it as a perfect uncorrelated asset. LYN ALDEN: Yeah, thanks so much for sharing all this with us. Where can people find you if they want to learn more, or see some of your writings or things you're sharing with people? MARCELO LOPEZ: Sure, well, I'm active on Twitter, @marcelolopez.

And if they want, they can send me an email, Marcelo@l2capitalcom.br And I'll be more than happy to answer them. LYN ALDEN: Thanks so much. MARCELO LOPEZ: No, thank you, Lyn. Great pleasure to talk to you, and thanks, Real Vision.

NICK CORREA: I hope you enjoyed this special episode of the Interview, the premier business and finance series in the world. However, this is just the tip of the iceberg. For more in-depth content and expert analysis, visit the membership link in the description to unlock a week’s access for only one dollar. This dollar can change your life.

2021-04-18 11:06

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