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A Trade Idea - Uranium

Always an Explosive (and volatile) Topic

Uranium - Why Invest?

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The uranium sector has been an interesting sector for me since early 2017. I was already working in the renewable energy space and was well aware that the world was on the look-out for carbon lite sources of energy. Nuclear energy (with which Uranium is a raw input) seemed to tick all the boxes:

  1. 24 x 7 Base-load energy. Nuclear power plants run all day every day. There  is little need to worry about the sun shining, or the wind blowing.
  2. Carbon free. Besides carbon being required to construct the nuclear power plants, and to mine and enrich the uranium, Nuclear energy is carbon free
  3. Energy dense, pollution light. Nuclear waste can be safely stored with very little waste produced per unit of energy produced. The amount of electrical energy needed per person in his/her entire lifetime would create waste the size of a can of soda.
  4. Plentiful uranium globally. No need for forever wars in the middle east, or across the Russian/Ukrainian plains for fossil fuels. Allows for nations to create energy sovereignty if they choose, by stockpiling enriched uranium.
  5. We need it to keep the lights on. This is probably the main point for me. 20% of the electrical load in the USA currently comes from nuclear energy. Without enough Uranium, and without enough enrichment, many developed nations will struggle to keep the lights on. Ask Germany.
  6. There is currently a supply demand imbalance. With many nations (hello China) scrambling to build and commission new nuclear reactors, miners have not been able to keep up, with the spot price of uranium not enticing enough to get marginal developers/producers to commit to meeting demand.

To keep it simple, I believe the chances of the nuclear energy industry going away or shutting down to be pretty slim. Therefore, the price of uranium has to reach a point where mining companies believe a profit can safely be made. Until that time comes, the uranium in the ground will act as a call option on the price of uranium, and the value of mining companies with good deposits should appreciate in price alongside the price of uranium.

So Why Uranium With Covered Calls?

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For my own personal investment strategy, I look to hold undervalued assets that have negligible chances of going to zero, which will pay when they revert to their historical mean in value. These sectors are usually cyclical, or for certain reasons, sentimentally unloved. Due to this, their volatility is usually gut wrenching. To go through 50% drawdowns only to finish the year even is par for the course with such investments. The silver lining in this is that they offer very attractive options premia as a result. Enter the technique of selling Covered Calls.

My mental checklist for deploying the covered call strategy:

  1. Underlying has near 0 chance of bankruptcy or going to zero.

  2. The underlying is a good candidate for a long term buy and hold

  3. There is sufficient volatility to generate healthy options premia

  4. I am bullish on the sector or security

  5. Options volumes and open interest are ‘high enough’

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    Returns for selected securities in the Uranium mining space calculated using the app from coverd.io on 19th April 2024.

Uranium is for the moment unique in that it is not only extremely cyclical, it is also pretty unloved. As we go through prolonged energy crises in the near future, I believe both these aspects will soon turn. By using the covered call strategy, I am able to generate healthy premiums to help with my carrying costs, and also weather the volatility.

Look at the table above for ROI estimates generated for options expiring roughly one month out. Pretty juicy! I use the coverd app to help me ascertain and judge relative risk and reward quickly, allowing me to compare options pricing between numerous securities (Stocks or ETFs) and expiry dates.

I will leave this brief intro here for now.

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A recent chart of URNM, Sprott’s Uranium Mining ETF. Make that volatility work for you!

Key sources of additional information:

https://www.uraniuminsider.com/ (I am a happy subscriber of Justin's newsletter)

https://www.gorozen.com/ (Great information with podcasts and reports on the natural resources sector)

https://twitter.com/quakes99 (The OG of uranium twitter)

Recent Media of interest:

  1. https://financialpost.com/feature/nuclear-energy-surge-starts-uranium-golden-age
  2. https://www.energy.gov/ne/articles/sapporo-5-leaders-make-significant-progress-securing-reliable-nuclear-fuel-supply-chain
  3. https://nypost.com/2024/04/17/business/john-catsimatidis-red-apple-group-to-roll-out-of-small-nuclear-reactors/

Disclaimer: I am only sharing my thought process, and my own investment strategy. I do not in any way want to influence your own financial decisions. Please speak with a certified financial advisor and/or do a ton of your own due diligence before risking any of your own capital.