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As Sprott Goes Hunt Brothers On Uranium a Copycat Joins the Squeeze to Force an Explosive Move Higher

As Sprott Goes "Hunt Brothers" On Uranium, A Copycat Joins The Squeeze To Force An Explosive Move Higher

Exactly two weeks ago, we laid out…

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As Sprott Goes "Hunt Brothers" On Uranium, A Copycat Joins The Squeeze To Force An Explosive Move Higher

Exactly two weeks ago, we laid out the investment thesis for what our friends at Adventures in Capitalism dubbed was a "bitcoin-like opportunity in Uranium." In a nutshell, in mid-August, the Sprott Physical Uranium Trust, then roughly $300 million, announced that it would unleash an unprecedented buying spree in physical uranium, a relatively small market, in hopes of forcing a physical shortage and sending the price of urnium higher, leading to more buying of the Trust, more purchases of uranium, even higher prices and so on.

While some voiced concerns that this strategy was similar to what the Hunt Brothers tries to do with silver back in 1980, when the precious metal rose tenfold in months only to crush just as rapidly once the market became "uncornered"  there are several distinct differences between what the Hunts and Sprott are doing (most notably the inability by producers to rapidly flood physical to meet demand, as well as the lack of a sizable paper market to short the move) so far - less than a month later - Sprott's strategy has proven extremely successful, so much so that the Canadian asset manager upsized the size of its Trust from $300MM to $1.3BN... and just this morning got its first copycat, Uranium Royalty Corp (UROY) which this morning announced that it was taking a page out of the Sprott book and would expand its physical uranium holdings to 648,068 pounds.

But before we get there, a quick excerpt from a report this week by Bank of America which has broken down the Sprott strategy and discussed how it will impact the price of uranium going forward, and why it just hiked its price target for Cameco by 45% to $29/share

SPUT/Byron/Dresden add 4% to global demand, PO upped

Uranium (U3O8) purchased by the Sprott Physical Uranium Trust (SPUT) since launching an at-the-market (ATM) equity program on August 17th has added 3% to global demand. This is 52% annualized, or $4bn at flat prices. Prices have risen 42% to $43.75/lb. A supply response is likely but might take time and more SPUT buying is likely, we think. The Illinois House and Senate approved funding to keep the Byron & Dresden nuclear plants from closing. We add both back to our model, increasing annual U3O8 demand by 1.1%. We increase 2021E-2023E U3O8 prices by 18%, 41% and 18% to $36.30, $53.50 and $48.50/b. We raise our price objective (PO) for Cameco (CCO) by 45% to C$36.25/sh ($29/sh), CCO: Neutral as we think outlook is mostly reflected in the shares.

SPUT ATM funding increased to $1.3bn

SPUT has raised roughly $245mn of the $300mn maximum set-out under its ATM program. On Friday, SPUT obtained approval to increase the maximum to $1.3bn. The limiting factor on future SPUT capital raises is market demand for its units, which appears to us to be strong and correlated to SPUT’s ability to continue pushing up uranium prices. Given the relatively small size of the U3O8 spot market (~$2.7bn in 2020, unadjusted for churn), SPUT buying should push spot prices still higher, until supply responds or the price gets high enough to spook investor demand for SPUT units.

So the weakest link in the Sprott strategy is how quickly will incremental supply come on line. The good news for Sprott is that, at least according to BofA, it won't be for some time.

A supply response is likely but not immediately

U3O8 held by junior miners and hedge funds, uncommitted supply from producers and a reversal of carry trades are among potential near-term sources of new market supply. Potentially larger sources are 58Mlbs of idled production capacity and 16.8Mlbs of unutilized capacity in Kazakhstan. However, a large majority of this is unlikely to respond without long-term contracts and would require six or more months to ramp-up.

UxC estimates that hedge funds hold around 11Mlbs of U3O8 that was mostly purchased in 2018 and 2019 when prices averaged just $24.61/lb and $25.84/lb vs. the current spot price of $43.75/lb.

There can be many sources of uncommitted supply with BHP’s Olympic Dam (8-10Mlbs annually) and the Navoi mines in Uzbekistan (9Mlbs annually) the usual candidates. Other less obvious sources also exist. For example, we estimate that in H1’21, China imported nearly 21Mlbs of U3O8 which equates to approximately 82% of the country’s 2021E reactor requirements. In addition, Chinese utilities are estimated to hold as high as or more than 460Mlbs of U3O8 inventory, sufficient to cover expected requirements for the next 11 years. As prices rise we see the possibility for some of the U3O8 produced in Chinese owned mines outside of China to be sold into the spot market. We estimate that in H2’21, Chinese owned mines outside of China will produce roughly 8Mlbs of U3O8. We do not expect Chinese inventories to be sold, however. Those are considered strategic.

Kazakhstan under-utilizing capacity: In Kazakhstan, the world’s largest U3O8 producing nation, there are several uranium mines now producing below capacity. On a 100% basis, these mines have a capacity of around 75.4Mlbs but we forecast them producing 58.6Mlbs in 2021E, leaving 16.8Mlbs of additional production potential trough flexing up utilization. However, similar to Cameco, Kazatomprom has indicated it will not flex up its production until they are signing long-term contracts and the price is fair. The latter condition may now be realized, the former remains to be seen. We think KAP sees $40-$45/lb as fair pricing.

Idled capacity is substantial but a majority is disciplined: According to data compiled by the World Nuclear Association (WNA), there is 54.4Mlbs of idled capacity. Cameco, which controls 58% of this idled capacity, has indicated it must fill its contract book at attractive pricing before it will restart McArthur River and has indicated that very high prices would be necessary to restart Rabbit Lake. The price indicated by Cameco for a McArthur restart is $40/lb or greater. Paladin has suggested a similar approach with its Langer Heinrich mine which accounts for another 11% of this idled capacity. Of the remaining 31% of potentially undisciplined producers only 17% (8.9Mlbs) is profitable at the current spot price on a full cost basis. However, much of this potentially undisciplined production will soon be profitable as prices rise.

But while we wait for supply to rise, one thing is clear: producers - such as Cameco - will benefit when utilities re-enter the market, to wit:

The higher spot price means produced supply is more competitive vs. the carry trade, presenting an opportunity for longer-term contracting. When utilities re-enter the term market, existing producers should benefit. Will utilities enter the term market this week as they have historically? Likely, but volumes are uncertain and coverage is solid.

Of course, much of the production on the cost curve would require far higher prices to be profitable. The chart below shows the estimated 2021 global uranium industry cost curve. Full costs include all mining, processing and site G&A costs as well as sustaining capex. Sunk costs and a rates of return are excluded. The exhibit shows that our long-term U3O8 price forecast of $47/lb is in line with the 90th percentile on the cost curve.

In other words, there is some marginal supply available but the price of uranium will have to rise well above $60 for it to be accessible. Today uranium is trading around $46, up almost 50% since Sprott launched his buying vehicle.

And while utilities are currently well-covered, NPP life extension may change that substantially. As BofA notes, "US utilities have the best contract coverage in 30 years. In the EU coverage is even better. We think utilities thus have bargaining power even with much higher spot prices and see contract prices that are lower (closer to our $47/lb long-term price). Yet, potential nuclear plant life extensions like Byron and Dresden will mean less inventory and contract coverage. We lower our 2021E loss per share (LPS) to $0.45 from $0.22, raise 2022E EPS to $0.25 from $0.08 and raise 2023E EPS to $0.59 from $0.20. Using a net asset value approach, CCO shares imply a $50/lb U3O8 price."

So what does all this mean for the industry? In a nutshell, sharply higher prices: here is BofA.

Given that we think there will be at the minimum a sustained bid in the spot market for U3O8 from SPUT combined with already tightening markets and the addition of Byron and Dresden to our demand forecast, we raise our 2021E to 2023E U3O8 price forecasts by 18%, 41% and 18% to $36.30, $53.50 and $48.50/b. Our long-term price is pushed to 2026E from 2025E and increased to $47/lb supported by an updated production cost curve. Our view is that prices will continue rising but peak in Q1’22 as plans for productive supply responses are revealed. We expect CCO to restart McArthur River in 2023E at a capacity utilization of around 30% and steadily ramp up from there.

 

A key driver of how fast uranium prices normalize will be the response time at the world's largest miner, Cameco, which according to BofA is "the only large, liquid, US listed vehicle for exposure to uranium." As BofA notes, "we are now assuming that CCO restarts it McArthur River mine, the largest uranium mine in the world at annual production of 25Mlbs, in 2023E. However, we see a very gradual restart with capacity utilization of just 30% in 2023E, 50% in 2024E to 2026E and then 100% from 2026E onward."

To be sure, Cameco will be asking itself does it want to produce more and lower both the price of uranium and its stock, or take its time with ramping production. One look at the recent action of the OPEC+ cartel should give an indication as to what it may do.

In other words, we do not expect major downward pressure on either the price of uranium or CCJ for the foreseeable future, something which even retail investors have now grasped making CCJ the most actively discussed name on the WallStreetBets forum a few days ago.

So with all that in mind, we look at what appears to be the first Sprott copycat to emerge in the past month, namely Uranium Royalty, which has surged as much as 18% after announcing that it’s entered into contracts for three additional spot purchases totaling 300,000 pounds of uranium, noting that the average cost of the purchases is $38.17 per pound, a number which is already a substantial discount to today's price.

Following completion of the deliveries, URC CN will hold a physical inventory of 648,068 pounds of uranium at a weighted average cost of $33.10 per pound. More from the press release:

It is within URC's mandate to make periodic purchases of physical uranium to provide attractive commodity price exposure to shareholders, especially in these early stages of a bull market in uranium. The global mega-trend towards de-carbonization is providing a major catalyst for carbon-free, safe, and reliable nuclear energy. The supply and demand fundamentals for uranium continue to improve, with demand for uranium now exceeding pre-Fukushima levels and global mine production (128 million pounds) expected to lag global consumption (191 million pounds) by 63 million pounds in 2021 (UxC data – Q3 2021 report).

This is the 5th year of the production/consumption gap which has had a positive impact on drawing down excess market inventories. The purchasing activities of producers and financial entities, like the Sprott Physical Uranium Trust have accelerated this rebalancing as of late, resulting in a 49% rise in the spot price in the past five weeks.

As Sprott continues to upsize its physical uranium fund to meet growing demand, and as the price of both uranium and producers continues to rise, expect many more tactical and strategic buyers of uranium to emerge as suddenly Uranium is the new silver and everyone is hoping to be the new Hunt Brothers.

Tyler Durden Wed, 09/15/2021 - 11:44

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ASX Small Cap Lunch Wrap: Who’s taking the money and running today?

Danish artist Jens Haaning was given US$84,000 by the Kunsten Museum of Modern Art in Aalborg to create a work … Read More
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Danish artist Jens Haaning was given US$84,000 by the Kunsten Museum of Modern Art in Aalborg to create a work of art.

But instead of using the cash to create the artwork, he instead returned two blank canvases which he renamed “Take the Money and Run”.

“Jens is known for his conceptual and activistic art with a humoristic touch. And he gave us that – but also a bit of a wake-up call as everyone now wonders where did the money go,” museum director Lasse Andersson said.

The contract states that the money is not Haaning’s and must be paid back when the exhibition closes on 16 January 2022.

Andersson said the museum would wait and see what Haaning does, but if he doesn’t return the money they will take the “necessary steps to ensure that Jens Haaning complies with his contract”.

 

To Markets …

The ASX 200 is down 123.10 points or 1.69% at midday today to 7,152.50.

In Europe a range of factors (cough cough Brexit) have sent gas and oil prices soaring.

“Energy prices are on the rise once again today, with Brent crude hitting the highest level in almost three years,” IG analyst Josh Mahony told Morningstar. “Supply constraints appear to be coming at the wrong time, with demand gradually picking up steam.”

In the US, oil prices rose as supply constraints continued to draw on inventories around the world and the rally in natural gas prices also pushed up crude, according to ANZ Research analysts.

But as traders booked profits on the recent rally, the Brent crude price fell 0.6% from 3-year highs to US$79.09 a barrel. And the US Nymex crude price fell by US16 cents or 0.2% to US$75.29 a barrel.

Copper and nickel fell by up to 2% and the gold futures price fell by US$14.50 an ounce or 0.8% to U$1,737.50 an ounce, with spot gold trading near US$1,733 an ounce.

Iron ore fell by US$6.30 a tonne or 5.3% to US$112.35 a tonne.

Investors are closely monitoring the outcomes of many high-stakes deadlines on Capitol Hill this week, setting up potentially chaotic negotiations against the backdrop of expiring government funding and the threat of a possible US default.

In testimony to the Senate, US Federal Reserve Chair, Jerome Powell, noted: “As reopening continues, bottlenecks, hiring difficulties, and other constraints could again prove to be greater and more enduring than anticipated, posing upside risks to inflation.”

“The sooner something there [Capitol Hill] happens, the happier the market will be,” said JJ Kinahan TD Ameritrade’s chief market strategist. “Watching the sausage being made is always a really ugly process.”

 

ASX SMALL CAP WINNERS

Here are the best performing ASX small cap stocks for September 29 [intraday]:

Swipe or scroll to reveal full table. Click headings to sort:

Code Name Price % Change Market Cap
TVL Touch Ventures 0.56 40 $ 285,347,947.20
RDT Red Dirt Metals Ltd 0.845 34 $ 82,796,616.00
CLE Cyclone Metals 0.006 20 $ 23,896,184.91
DCX Discovex Res Ltd 0.006 20 $ 12,843,320.38
CAV Carnavale Resources 0.007 17 $ 14,581,381.82
SIQ Smartgrp Corporation 9.15 16 $ 1,049,639,954.94
WC8 Wildcat Resources 0.029 16 $ 12,937,500.00
OEL Otto Energy Limited 0.0115 15 $ 47,950,097.73
EVE EVE Investments Ltd 0.004 14 $ 13,450,996.62
NSX NSX Limited 0.11 13 $ 27,413,468.66
AFR African Energy Res 0.034 13 $ 20,601,318.90
CCZ Castillo Copper Ltd 0.036 13 $ 41,536,094.98
HCD Hydrocarbon Dynamic 0.018 13 $ 7,044,641.70
SBR Sabre Resources 0.0045 13 $ 6,732,254.60
MAY Melbana Energy Ltd 0.0245 11 $ 58,812,381.98
ALB Albion Resources 0.25 11 $ 6,962,979.38
LCT Living Cell Tech. 0.01 11 $ 5,142,968.83
LNY Laneway Res Ltd 0.005 11 $ 17,568,296.70
OEX Oilex Ltd 0.005 11 $ 25,597,936.60
MTC Metalstech Ltd 0.57 11 $ 85,005,894.85
CT1 Constellation Tech 0.011 10 $ 14,688,617.34
SHH Shree Minerals Ltd 0.011 10 $ 10,632,368.92
TSC Twenty Seven Co. Ltd 0.0055 10 $ 13,304,069.53

 

The biggest small cap winner was Touch Ventures (ASX:TVL), up 40% after listing on the ASX today, raising $100 million at 40 cents a share supported by Afterpay and the Huljich family.

Touch Ventures chairman Mike Jefferies said the ASX listing was a significant milestone for the company.

“A key investment objective for Touch Ventures is to deliver long-term absolute returns to shareholders, primarily from the capital appreciation of its portfolio,” he said.

“Our structure also enables us to provide access to venture capital investments to investors as a company listed on the ASX.”

The company has also completed its investment into Refundid – an instant returns platform for shoppers providing a full refund to consumers before their items are returned to the merchants.

The company invested $1 million to acquire a 10.4% equity interest (10.0% on a fully diluted basis) in Refundid and has agreed to provide a $1.0 million term loan facility to be used to fund customer refunds.

“We were impressed by Brad and the team at Refundid having already built an incredible product, clientele and brand in such a short time frame and are proud to be a part of their journey as they enter their next phase of growth,” TVL CEO Hein Vogel said.

Next up was Red Dirt Metals (ASX:RDT), up 34% on no news, followed by Cyclone Metals (ASX:CLE) andDiscovEX Resources (ASX:DCX). Both were up 20% on no news.

Up 17% was Carnavale Resources (ASX:CAV) off the back of its latest exploration update.

The WA gold explorer said its initial aircore drilling was complete at the Ora Banda South Project – with results expected in mid-November.

And salary packaging and fleet management provider SmartGroup Corporation (ASX:SIQ) rose 16% after getting a takeover offer from TPG Capital (the private equity group, not the telco) and Potentia Capital.

 

ASX SMALL CAP LOSERS

Code Name Price % Change Market Cap
CCE Carnegie Cln Energy 0.002 -33 $ 44,707,721.13
WOO Wooboard Tech Ltd 0.0015 -25 $ 7,644,325.48
MLS Metals Australia 0.002 -20 $ 10,567,970.12
YPB YPB Group Ltd 0.002 -20 $ 12,479,551.30
AIV Activex Limited 0.13 -19 $ 28,341,228.16
RMI Resource Mining Corp 0.025 -17 $ 9,776,822.46
RBR RBR Group Ltd 0.005 -17 $ 7,691,880.52
PGD Peregrine Gold 0.345 -16 $ 13,775,505.95
AUH Austchina Holdings 0.006 -14 $ 12,582,670.53
DDD 3D Resources Limited 0.003 -14 $ 13,581,302.32
EN1 Engage:Bdr Limited 0.0035 -13 $ 10,211,810.06
RNX Renegade Exploration 0.007 -13 $ 7,037,013.10
SUH Southern Hem Min 0.046 -12 $ 12,710,867.36
NAG Nagambie Resources 0.071 -11 $ 39,994,587.68
TKM Trek Metals Ltd 0.12 -11 $ 35,397,498.29
LSR Lodestar Minerals 0.008 -11 $ 11,618,436.13
AWN AWN Holdings Limited 0.76 -11 $ 33,660,170.00
CNJ Conico Ltd 0.043 -10 $ 48,010,313.95
AJQ Armour Energy Ltd 0.026 -10 $ 47,486,381.93
RLC Reedy Lagoon Corp. 0.026 -10 $ 15,660,758.81
MBK Metal Bank Ltd 0.009 -10 $ 11,890,683.04
SIH Sihayo Gold Limited 0.009 -10 $ 36,854,614.13

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Lefroy finds 6 anomalies at Burns, will kick off RC drilling next month

Special Report: Gold explorer Lefroy has identified six new magnetic anomalies, extending the Burns intrusive corridor to 3000m at its … Read More
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Gold explorer Lefroy has identified six new magnetic anomalies, extending the Burns intrusive corridor to 3000m at its Lefroy gold project near Kalgoorlie.

Burns has a distinctive, positive, aerial magnetic signature due to strong magnetite alteration of the porphyry and basalt rocks that host the mineralisation.

An aeromagnetic survey over the prospect identified the new anomalies, which have defined a corridor of dioritic intrusions – each of which are considered prospective for mineralisation.

Notably, the northwest trending corridor is over 3000m long and is coincident with a +200 parts per million drill hole copper anomaly based on resampling of wide spaced historical geochemical holes.

Lefroy Exploration (ASX:LEX) is focusing on the largest and northernmost magnetic anomaly – Lovejoy – which lies beneath Lake Randall and is adjacent to the strongest drill hole copper anomaly.

Multiple anomalies support a major structure at Burns

While the company has yet to establish the association between Burns and the diorite porphyry intrusions, it believes there’s a genetic relationship between them.

Lefroy also considers the copper and gold mineralisation hosted by both the diorite porphyry, basalt, and massive magnetite veins to be a new style of gold-copper-silver mineralisation in the area.

“The images from the new magnetic data further support our interpretation that the Burns prospect is one of a number of magnetic anomalies each centred on diorite porphyries considered prospective for gold-copper-silver mineralisation,” Lefroy managing director Wade Johnson said.

“These form a corridor of intrusives, likely along a major structure that potentially extends further to the northwest out to Neon.”

Pic: TMI RTP aeromagnetic image showing the full extent of the new aeromagnetic survey and the pronounced annular magnetic anomaly around the Burns Intrusion.

Lovejoy the priority target

The company says the magnetic anomalies provide strong rationale for an exploration program.

Planning is underway for an RC drilling program to begin in October, with drilling at Lake Randall – initially at the Lovejoy site – planned for November.

“We are very keen to commence RC drill testing of these magnetic anomalies, firstly on land then out on to Lake Randall, with Lovejoy the priority,” Johnson said.

“We have plenty of scope to demonstrate that what we have already discovered at Burns is part of a much larger mineral system, outboard of the larger Burns Intrusion that is also yet to be evaluated.”

 


 

 

This article was developed in collaboration with Lefroy Exploration Limited, a Stockhead advertiser at the time of publishing.

 

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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REZ’s nickel hunt continues at East Menzies with more historic finds

Special Report: REZ’s East Menzies gold project is continuing to reveal its nickel prospectivity, with further research of old reports … Read More
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REZ’s East Menzies gold project is continuing to reveal its nickel prospectivity, with further research of old reports unearthing more significant intervals of nickel mineralisation from as close to just 1m from surface. 

Resources & Energy Group’s (ASX:REZ) ongoing nickel investigations at the Springfield and Cepline prospects, part of East Menzies project in WA, have uncovered peak assays from historic drilling of 12m at 1.22% nickel from 2m, 9m at 1.08% nickel from 1m and 7m at 1.46% nickel from 16m.

These intercepts, which were the result of aircore drilling by Pronto Resources in 2008 and rotary air blast drilling by Great Australian Resources (GAR) in 2004, also contained cobalt and zinc mineralisation.

It reads like an Indiana Jones or National Treasure script, REZ was drilling for gold at the Springfield prospect when it hit nickel.

The Richard Poole-led company then discovered some old CRA (now Rio Tinto) and BHP reports which showed the two mining heavyweights had found nickel as far back as the late 60s but weren’t interested in it because they only wanted gold.

Over five decades later, nickel is all the rage thanks to the energy transition and the base metal’s importance in batteries.

“Significantly, the bottom of hole assays for the GAR drillholes terminated in bedrock zones with high nickel content.” – Executive Director Richard Poole  

These results included 15m at 0.13% nickel and 14m at 0.06% nickel, both from 82m depth.

“This further research by REZ has identified additional mineral exploration results at the

Cepline prospect which support the initial findings of nickel mineralisation by BHP in 1986.” – Executive Director Richard Poole   

Nickel holy grail

Now, Richard Poole says these additional results support the view that the ultramafic rocks along the Springfield side of the East Menzies project are prospective for nickel sulphides.

Nickel resources are usually divided between laterite or sulphide deposits.

Sulphides are the holy grail for explorers because they are easier and cheaper to process. This is also what makes nickel sulphides the preferred choice of electric vehicle battery makers.

BHP back in 1986 reported significantly high values of nickel, with a peak grade of 2.9%, and as close to surface as just 6m.

This was at the Cepline prospect in the Springfield Venn zone, some 800m north of the REZ’s recent scout drilling program.

Borehole location plan showing geology and intervals of sulphide mineralisation

Nearly 20 years earlier, CRA reported surface rock samples grading 0.95% to 1.43%, and drill results of 10ft at 1.49% from 55ft and 15ft at 0.77% from 170ft.

Sydney-based REZ is undertaking further research towards developing a suitable exploration program to investigate the mineral bearing potential of the area.

Resources & Energy Group (ASX:REZ) share price chart

 


 

 

This article was developed in collaboration with Resources & Energy Group, a Stockhead advertiser at the time of publishing.

 

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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