And the name of the [physical uranium fund] is called Wormwood

The end of the world can be a slow burn.

"And the third angel sounded, and there fell a great star from heaven, burning as it were a lamp, and it fell upon the third part of the rivers, and upon the fountains of waters; And the name of the star is called Wormwood: and the third part of the waters became wormwood; and many men died of the waters, because they were made bitter." [REV 8:10-11]

I’m no longer a religious man, but I’ve always been fascinated by the Book of Revelation. I might have been incepted when I read the Left Behind series as a pre-teen (the Bush years were a weird time for me, okay?), but as an adult I’ve come to appreciate how the imagery from Revelation informs how we think about doom and disaster – from falling stars, to plagues and famines personified on horseback, to trumpets heralding hailfire. But what separates the Great Tribulation of the Bible from many depicted in modern science fiction is the duration – the remaining denizens of the planet really have it rough for several years as horror upon horror are visited upon them, discrete events that happen in sequence. The end of the world can be a slow burn.

So too do I think that there’s a chance that we’ll be here for a few years yet, in a similar spot and with a similar level of doubt, talking about “what’s next” in uranium. The illiquid nature of the market, the inelasticity of the demand (but also of the supply), the number of state-owned entities facing each other on both sides of the market…this market is a superdreadnought that takes time and effort to turn.

For those out of the loop but reading this anyway [hi dad!], this week Sprott Asset Management debuted their at-the-market (ATM) offering for their new physical uranium vehicle (the Sprott Physical Uranium Trust) – enabling them to sell new shares (trust units) and use the proceeds to buy physical uranium, scooping up about 900,000 pounds in all. A gigawatt-class reactor uses around 450,000 pounds per year, so this is no small amount. Along with other recent raises, Sprott (and its direct predecessor, the Uranium Participation Corporation) has in 2021 bought up more than 1% of the annual mined supply of the commodity, taking it out of circulation and into long-term storage. It would be the uranium story of 2021 even if there was no more story to tell, but there are still four months left in the year and a lot of rope left on that initial ATM prospectus.

Uranium’s “Thanos Moment”

When I started thinking about the interaction of big capital with the physical uranium space back in December 2020, I eschewed Biblical imagery for the contemporary – going with Thanos as my apocalypse du jour. When he shows up, as I conceptualized it, the game is irrevocably changed. He’s big and purple and better than you, and he’ll accomplish his mission even if it takes him through you. Cold, unfeeling institutional capital felt like a good metaphorical partner to the Mad Titan, right down to Brolin’s gravelly Texas drawl.

I even put a slide package together and circulated it to a few friends – hailing the “Thanos Moment” as when Wall Street types transition from buying uranium equities to taking physical positions in uranium. Here’s a small taste of what was on my mind last February:

As I saw it (and frankly, as I still see it today), there’s a see-saw in any mined commodity between the valuation of the sector’s miners/developers and the physical commodity itself. We use different metrics to express our belief in the physical commodity’s pricing – futures, options, indexes like USO to track WTI oil, or a physical holding fund like PHYS or SPUT – but it all boils down to investors taking a directional position on the price of the underlying good. The soybean sensei Nick Jones put it eloquently, uranium miners were awfully frothy at their 2Q21 local maximum – and spot uranium looked like a deal at $30 when folks were paying $50 or more in the implied valuation for some of the equities. Even 25% below their highs, I still think that there is a compelling debate over how one could obtain the best capital returns given a bullish uranium price outlook. [Inevitably, someone will show up here and say, “nuh-uh, $50 uranium isn’t priced in yet” and then provide some cherry-picked data as to why. In the words of Rooster Cogburn, “I can do nothing for ‘ya, son.”I

A major uranium event, Biblical in narrative if not in scope

But I erred in one key part of that analogy – and that’s that Thanos and the Infinity Saga was too quick a disaster to truly capture the pacing of events and “right tail” outcomes of a vehicle like the Sprott Physical Uranium Trust (SPUT) coming into the market. If you’re in the unlucky half of citizens of the Marvel universe, you’ve got less than a week to live in between The Hulk crashing through the roof of the Sanctum Sanctorum (“Thanos is coming!”) and The Snap which turns half of the population to dust. There’s not a lot of uncertainty in the outcome there (especially for the moviegoers who know they are watching Part 1 of 2.)

SPUT is methodical by design – with ATMs offered block by block, trade by trade, pushing on the equilibrium of the market a few pounds at a time to see where the new equilibrium ends up. There will be slow weeks, and there will be fast weeks (an NYSE listing, for instance), and there will probably be weeks in which either broader macroeconomic factors (a crunch in commodities or market turbulence driving major shareholders to dump units) or news within the uranium ecosystem will drive a gap/premium to NAV that will momentarily sideline SPUT as pricing works itself out. I doubt that every week will be eventful as this one, and perhaps we have not yet seen the most exciting week.

The uranium market has been hit with a meteor – a personalized Wormwood sent from the good folks in Toronto to our front door – but the key to this analogy is that Wormwood isn’t the end (or the beginning); it’s just the next thing in a great line of next things.

Interlude: And so we await the fourth trumpet

Revelation is an allegory of ever-increasing and prolonged woe – there’s always another angel, another trumpet, another seal to be opened, another bowl to be poured out – and so too will we see successors to Sprott’s giant meteor. Two other companies have already declared their intent to build ATM offering programs (I doubt they will be the last to do so). The official purpose for the proceeds from these raises can be described as “lol whatever we feel like, scrubs,” so this probably includes some physical uranium in addition to good ol’ G&A. Others will see opportunity in the arbitrage, front-running Sprott or seeking other vehicles for a similar play (and there are other vehicles). Like the rogue planet in Melancholia or the big rock in Armageddon or the not-so-brave Sir Gawain dreading his appointment with the Green Knight one year hence, there’s a certain inevitability hanging over the market, like the quiet in between the artillery barrage and the sound of men going up and over the trenches.

14,000,605 possible futures

Prior to the showdown between some of the Avengers and Thanos on Titan, Doctor Strange looks into the all possible futures to see how it all plays out – 14,000,605 possible futures (Thanos wins in 14,000,604 of them). We’re in a similar spot – there are so many variables here, all time-dependent and interdependent – so it’s impossible to know how it will play out. Here’s a sample of what’s on my mind:

  • More uranium will be sequestered, but we don’t know how much and how quickly
  • Some of these pounds (from SPUT and other non-end-users) will eventually re-enter circulation, but we don’t know how many and when
  • There’s supply, both brownfield and greenfield, waiting in the wings – but we don’t know when it will come online and at what incentive price [though we can make some reasonable assumptions in our projections]
  • The future of the nuclear power industry (and its uranium demand) is uncertain, too, with many reactors teetering on the brink
  • The COVID-19 pandemic isn’t over yet – and many factors affecting nuclear power’s outlook are still in flux (materials, mining, labor, fossil fuel prices, electoral politics, etc.)

I want to stress the time-dependence of all of this once more before signing off – it’s impossible to judge where we are headed by the last week alone. How quickly we see non-end-users accumulate pounds matters. Could a massive campaign of investor buying heal the market imbalance faster than those with the “squeeze” mentality might prefer? Could an unexpected event could harm long-term price prospects if it reverses these capital flows and brings pounds in escrow back to the market? Like the pause between each discrete event in Revelation, so too will the market will ponder the (dis)equilibrium at each new price point and re-plan accordingly (a luxury that participants did not have in the mid-aughts).

These sure are interesting times.

-808s

[P.S. – while I am uncertain if I agree with their conclusions, I did enjoy this twitter thread by the (presumably pseudonymous) Harry Chris, which discusses Sprott’s financial incentives to grow the size of SPUT based on their initial buy-in and ad spend. It’s worth a read.]

[Edited 8/27 – last paragraph’s grammar was atrocious. Thanks TM!]

3 thoughts on “And the name of the [physical uranium fund] is called Wormwood

  1. Thanks Jeff for an awesome read. Brilliantly crafted to provoke thought and to balance reason with possibility. I might even find the time to watch a bit of Marvels, particularly now I know it helps me to think about new possible futures in uranium (I am about 14,000,600 scenarios short at this point in time).

    Like

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