Last Monday the administrators were called into Paladin Energy. Paladin if you’re not familiar is (or should I say was) a uranium producer.
Bankruptcies happen all the time, so why should we care?
Well, for starters Paladin wasn’t just any company.
It was a previous market darling in the last uranium bull market. It has now followed some 80% of its siblings into a death spiral where employees are released back into the wild armed with pink slips, equity holders have been rewarded with brokerage statements all neatly printed… in red, and management teams get to bicker amongst each other as to whose fault it is while their trophy wives are told they’ll have to forego the collagen implants.
This is what happens in devastating bear markets.
Here is what equity holders have been treated to for the last 5 years. You could have had more fun setting fire to your own hair.
Now that equity holders have been wiped out, the bond holders will be left to fight over the remaining assets.
Better than being an equity holder but not a position you’d want to be in.
The reason I bring this up is because this is EXACTLY the kind of news I love seeing. Not because I’m a mean bastard, even though I’ll admit to a certain amount of satisfaction in seeing this probability ahead of time and steering clear of Paladin.
I love it because supply and demand matter a great deal and, quite honestly, when I invest, I want an unfair advantage. Paladin rolling over and pointing its feet at the sky decreases the supply side and increases my advantage.
When companies fail, their stock goes to zero. The bond holders are left to squabble over the leftovers. But also… when this sort of thing happens in the face of a favourable (yes, favourable) supply and demand setup, then it’s time to put down your coffee and pay attention.
Here, take a look at the entire sector I’m talking about:
This isn’t one company. This is the entire sector, folks. It’s a truly beautiful thing.
Here are some quick highlights:
- A brutal bear market where the price of uranium is down over 85%, and where
- Equities are down some 90%
- And the number of mining companies competing in this space has been slaughtered from 500 to less than 40
Think about that.
Given that the industry has been beaten like a red-headed step-child, it’d be completely rational to expect the industry to be exhibiting the sorts of fundamentals like those of the video cassette tape industry in the 2000s, just before it all stepped off a cliff and was completely replaced.
That is NOT the case.
The world consumes around 180 million lbs of uranium while mine production is currently around 160 million lbs.
It’s actually been that way for a couple of decades now with the shortfall being made up from secondary supply. I’m not going to get into the nitty gritty of it here in this short message to you, but this secondary supply is changing quickly, and when it’s gone, an entire industry, which has been absolutely decimated, will find itself in a roaring bull market.
This bull market will be exacerbated by the fact that bringing additional supply to the market is going to be extremely difficult to do in a short timeframe.
On average it takes between 7-8 years to bring a medium producing mine onstream and between 10-15 years to bring a large one onstream. This time delay will cause dramatic pricing pressures as the fundamentals catch up with an industry ignored and left for dead.
Some bullet points to consider in terms of coming demand:
- 60 new reactors currently under construction
- 168 new reactors on order
- Japan reopening reactors with 9 coming back online this year alone
Most people don’t know this but in the US alone nuclear power accounts for 20% of the country’s energy, and globally that number is 33%. China and India are building and implementing much more nuclear in favour of coal.
Now, let’s go back to our friends at Paladin. Here is what the last bull market looked like for this company:
An investment of $1,000 (less than an air ticket to pretty much anywhere I can think of) at Paladin’s lows would eventually – just five years later – be worth a whopping $1 million. Not too shabby!
Now, that’s all well and good, but truthfully this is never going to happen. Thinking that we’ll be smart enough to buy at the exact lows and sell at the exact highs is as delusional as thinking that men, when lost, will stop and ask for directions. It’s just not going to happen so let’s not pretend it’s so.
While we’re not uncomfortable investing into sectors or markets few others dare touch, I did find it interesting that Asia’s second richest man, Li Ka-shing, just doubled down on his investments in the Uranium space.
“Hong Kong billionaire Li Ka-shing isn’t fazed by a commodity that’s been on the skids for five years. He just more than doubled down on his investment in a Canadian uranium explorer.”
This is a sector where uranium producers pull uranium out of the ground at an average cost of $50 per lb, only to sell it into the market at $24 per lb.
No industry can operate at a loss for any length of time anymore than you or I can go without food and water. Right now we’re buying companies trading below their net asset value just as the demand is ramping up.
We’ve seen this before, and it always ends the same way… with a re-valuation.
The thing is the extraordinary set of circumstances we have in uranium mean that we’re sitting at the foot of a mountain which will be climbed by the industry, and we’ve got a window of opportunity to take a ride up in the cable car for cents on the dollar. Eventually, that cable car will be full and the price of admission will be many times higher.
I send you this little note because we believe the uranium market is setting up for one enormous move over the next few years.
These sorts of situations are precisely what my team and I search for. Uranium is only one sector of many that we’ve identified and positioned in so far this year in our membership service Insider.
For the next hundred subscribers only, we’ve set up an amazing offer. Given there are around 15,000 people looking at this, that’ll put you in the top 0.67% if you get Insider at this price…
After we have a hundred new members, the offer disappears.