"The Most Asymmetric Trade For The Coming Years" - Hedge Funds Flood Into Uranium Stocks

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by Tyler Durden
Tuesday, Oct 12, 2021 - 06:10 PM

One month ago, we brought readers' attention to one of our favorite market sectors which we have been recommending ever since Dec 2020 - uranium - which we were confident was set for a powerful move higher as a result of an auspicious confluence of technicals and fundamentals: on one hand, as delineated in "A Bitcoin-Like Opportunity In Uranium?", the Sprott Physical Uranium Trust has emerged as a powerful buyer of physical uranium, which in a market as illiquid as uranium, would serve as a powerful catalyst to move prices of both the underlying commodity and various producers sharply higher (the subsequent upsizing of the Sprott Trust by $1 billion only assured that this price-indescriminate buying would continue). That's precisely what happened. On the other hand, the recent global energy crisis has once again turned global attention to nuclear power as an efficient alternative to unreliable "green" energy, with countries from Japan to Finland and France hinting they are making preparations to restart NPPs.

In subsequent days we saw a record investor rush into uranium ETFs...

... coupled with a spike in retail buying as Uranium producer CCJ briefly became the most talked about stock on the Wall Street Bets forum.

And while the sector did see a modest pullback in the second half of September as the initial excitement over the move in uranium died down, a new leg higher may now be starting.

Only this time it's not retail investors that are seeking to spark upward momentum, but much more patient hedge funds that are piling in.

As the FT wrote overnight, after years of stagnant prices, a 37% rally in prices for nuclear fuel uranium has helped attract investors back to the sector. Funds such as Ben Melkman’s New York-based Light Sky Macro, Anchorage Capital and Tribeca Investment Partners who have emerged as positive on the outlook for the raw material, as a global energy crunch highlights the role of nuclear power in a transition away from fossil fuels.

The price of raw uranium rose to its highest level since 2012 at $50 a pound last month before giving up some of its impressive gains at the end of the month.

The move - which was inspired by the buying momentum triggered by the Sprott Trust and subsequent retail influx - has attracted new, and much deeper pocketed investors into the market for the first time since before the financial crisis, when buying by investors drove the price from $20 a pound to a record high of $136 a pound in June 2007.

"We’ve been patiently waiting for something to happen for a long time," Ben Cleary, of Tribeca Investment Partners whose fund is up 345% net of fees this year, told the FT. “Clearly there’s speculative money coming back into the sector, there were massive price moves in September.”

Well yes, and we documented them all, but they were mostly retail money and ETF buying. The difference this time is that finally the institutions are waking up to what could be a historic surge, especially if the fake ESG lobby starts dumping the bloated FAAMG names and seeks refuge in such "soon to be green" sectors as uranium. Incidentally, the entire Uranium sector is a tiny fraction of Apple's market cap.

Of course, first and foremost we have to again give props to Sprott’s Physical Uranium Trust - as we have done repeatedly in the past 2 months - which is one of the few that buys and stores physical uranium. however, most other funds add exposure through mining equities, which have rallied 58% this year.

The rapid rise in natural gas and coal prices to fresh highs this month has exacerbated an energy crisis in Europe and China, and has “placed uranium back in the spotlight”, said Rob Crayfourd at CQS New City Investment Managers.

And, echoing what we said a month ago, Crayfourd said that “the political fallout of this energy crisis will be a greater willingness in the west to extend the life of the existing reactor fleet. It has focused governments on the benefits of secure supply of energy from the nuclear fleet. We expect that to lend support [to prices].

For an example of just that look no further than French President Emmanuel Macron who today said that France would aim to become a leader in green hydrogen by 2030 and build new, smaller nuclear reactors as he unveiled a five-year investment plan on Tuesday aimed at fostering industrial champions and innovation.

While the funds making their way into the uranium sectors are still relatively small, they are hardly inexperienced: Light Sky’s founder Melkman, who was previously a partner at hedge fund Brevan Howard, has gained more than 5% this year, said a person who had seen the numbers.

“Light Sky Macro sees an immediate and sizeable opportunity in the uranium sector, making it one of our highest conviction views for 2021,” he wrote in a note to clients, seen by the Financial Times, earlier this year. A drawdown of inventory during the coronavirus pandemic has compounded tightening supply, while demand is expected to surge in the coming decades, added Melkman, who has been investing in the sector since 2018.

“The growing focus on ‘green energy’ at a political level and the growing demand for [sustainable] assets in the investment community should turn uranium into one of the most asymmetric trades for the coming years,” he wrote, meaning that the possibility of potential gains far outweighs the risk of losses.

Also profiting is Sean Benson, founder of London-based Tees River. His uranium fund, which buys equity stakes in uranium miners, is up 115% this year.

Benson argued in an investor letter that a deficit of supply relative to demand and a “very supportive” climate change agenda mean that “the current uranium cycle is better than the last on every fundamental metric”. His Critical Resources fund, which invests about one-third of assets in uranium, is up 44% this year.

Judging by the surge in uranium stocks today the market is finally starting to pay attention, and while the recent move may seem outsized at least when comped to recent history, when one considers just how much upside there could be in the sector should nuclear power make a triumphal return, we could be in the early stages of a truly staggering move higher.