Buy Hold Sell: Is there still upside to uranium? (and 4 stocks fundies are buying)

A very basic but irrefutable law governs the price of commodities—the law of supply and demand. Currently, the uranium market is undersupplied as more nuclear reactors requiring fuel are being brought online. 

Earlier in the year, the World Nuclear Association released a report modelling uranium supply and demand out to 2040. The report outlined three scenarios with different levels of demand. The key point is that the supply the Association modelled is barely able to meet the requirements of the lowest (and highly unlikely) demand scenario.

So, with demand set to outstrip supply for the next decade or longer, there is a real possibility uranium prices can continue their extraordinary rally. And for context, over the past year, USD prices per pound have risen from under $50 to north of $100, before pulling back recently to circa $90. 

It's one thing for an underlying commodity to rally. Where the rubber meets the road for investors, however, is in equities. In that vein, we engaged Rick Squire from Acorn Capital and John Forwood from Lowell Resources to discuss the risks and opportunities in uranium. 

They also share a couple of stocks that may have gotten ahead of where they should be, as well as four names they would buy today. 

Note: This episode was recorded on Wednesday, 10 April 2024. You can watch the video, listen to the podcast, or read an edited transcript below. 

Edited transcript

Chris Conway: Hello, and welcome to Livewire's Buy Hold Sell. My name is Chris Conway, and today we're focusing on the hottest commodity in the Australian market right now - uranium. To do that we're joined by two small resources specialists, Rick Squire from Acorn Capital, and John Forwood from Lowell Resources.

Gents, welcome.

Rick Squire: Thanks for having us.

John Forwood: Thanks Chris.

Where are we in the cycle?

Chris Conway: Rick, I'll start with you. Uranium prices, they have cooled a little bit recently after a cracking run, where are we in the cycle?

Rick Squire: It's a really interesting point. We saw uranium end last year at a 15-year high in terms of the spot price. It then ran hard in January, but it's pulled back a little bit since then, and that's cooled down some of the investor's appetite for it. But what we're seeing at the same time is the term price, the longer term price for uranium, has continued to edge up, and that's the thing that gives us the most comfort because that's the one that ultimately is going to drive the revenue for these companies, not the spot price today. So it's something that certainly at Acorn we remain quite positive on, that the fundamentals remain quite positive.

Chris Conway: John, what about you? Bullish or bearish? And why?

John Forwood: Bullish for the reason that Rick mentioned. I'm hearing that term contract prices are around the US $80 a pound mark now, and that's a very healthy price. But the spot price could well, shoot way over that, and could go past back over US$100, $120. So I think if the spot price does that we'll really see some action in the equities.

Local or offshore exposure?

Chris Conway: John, I'll stick with you. When it comes to exposure, do you prefer local or offshore? And why?

John Forwood: We have a mix in the fund. So we've got ASX-listed, with projects in places like West Africa, and we've got TSX-listed (Toronto Stock Exchange), with projects in the famed Athabasca Basin. So we are pretty agnostic. Just go where the best projects are and the best management.

Chris Conway: Right, gotcha. Rick, anything to add on that front - local or offshore?

Rick Squire: We certainly look at both. If you look at the size of the two markets, the TSX is quite a bit bigger than Australia, but that's because it's really dominated by two big companies in Cameco and NextGen. But the reason they're so big is the Athabasca Basin is a geological freak, so it's a great place to be, not just as a producer but also an explorer. So that's why it's important to be looking at both exchanges.

What are the risks when considering uranium stocks?

Chris Conway: Rick, I'll stay with you. Risks - what do people need to be aware of when they're diving into the uranium opportunity?

Rick Squire: For uranium, it's important to think about the scale of the operation. A lot of these smaller operations, I think they're going to really struggle, in terms of the cost base and substantially delivering into these contracts. And also, be aware of some of the technical risks around them. So again, you go look at the lithium, the challenges with some of those funkier lithium projects, they've really struggled recently. But the same thing in uranium, that there's some of these more funky deposits out there. Just be mindful that it might be good in a bull market, but it may not survive the other side of the cycle.

Chris Conway: John, anything to add there? Any red flags that you look for?

John Forwood: The permitting. You just look at Australia, and various states do allow uranium mining and some states allow exploration but not mining, so you've really got to be cognisant of that. And then I think it is an opaque market. There's numerous stages to get from yellow cake through to nuclear fuel rods, and knowing where the short falls are, the deficits, and where the surpluses are in that supply chain can be tricky.

Stocks that are overpriced

Chris Conway: John, I'll stay with you. The rally in prices that you've both spoken about has dragged up the share prices of just about every uranium facing company. Is there one that you've identified that has maybe run a little too hard and you'd probably be selling now?

Cameco Corp (TSE: CCO)

John Forwood: I think if you go back to the previous pre-Fukushima uranium boom in the 2000s. What happened then was that the big boys ran hard in the early period over, say, the five-year period, and then the juniors didn't do much for the first few years and then they took off, in terms of going past the big boys, in terms of market appreciation in percentage terms.

So I think that's happened a bit this time around as well. Rick mentioned the big companies, Cameco, I would say that they perhaps have run pretty hard. They're trading on a 30x plus PE multiple today. That's one that I'd be maybe trading out of, and looking to get into the smaller companies that haven't had the appreciation yet.

Chris Conway: Rick, one that you think maybe is a little bit overpriced, has run too hard?

Deep Yellow (ASX: DYL)

Rick Squire: For us it's Deep Yellow. It's done a great job, in terms of positioning the company and messaging to the market, in terms of the growth potential on it. And they've done a recent raise which has positioned them well to getting into production. But I think there's probably a little bit too much built in for their WA project, in terms of the value on that and the technical challenges around it, and also the timeframe to bring it on. So not that it's a bad stock, I just think that it's overrun its value.

What are you buying?

Chris Conway: Let's talk stocks that you do like. Rick, I'll stay with you. What are two names that you've been buying, or would be buying now?

Orpheus (ASX: ORP)

Rick Squire: I agree with John that you've seen there's that cycle down out of the bigger companies into the smaller ones. So a much smaller one we like is Orpheus – ORP. It's a small company. They've just picked up some really interesting ground. It's a tiny, tiny market cap, but it's something that we think will show some really strong upsides.

Chris Conway: Just a quick follow up there, mate. Sorry to interrupt. I know you're a geologist by trade, so is it when you look at, it’s the ore body? Is that what is enticing about it for you as you look at that opportunity?

Rick Squire: That's right. It's really the exploration potential, and they've picked up some new ground. It's in areas that are not traditionally that well known for, well, certainly development assets, but that's one that we quite like, in terms of the exploration potential.

Chris Conway: And Rick, the second name that you like at the moment.

Peninsula Energy (ASX: PEN)

Rick Squire: I'm going to throw in something a little bit spicy, in terms of Peninsula. It's been an unloved one. They had to raise additional capital and it's really struggled in terms of that run up. But now that they've got a line of sight on that funding, they've still got to get some bank or government funding to get them across the line, but they've got a US asset, and if they do that, that's one that has the potential for a rerate. Now there are some technical risks around that, because while it's a mine that has operated in the past, they're using a different processing method this time. But it's a conventional method. So, a little bit spicy, but one if it does go well it should be quite spectacular.

Chris Conway: That's all right. Our viewers like spicy, mate, so it should be all good. John, have you got anything spicier?

Aero Energy (TSXV: AERO)

John Forwood: Look, I've got a couple of exotic ones, if you like. The first one is a listed entity, listed on the TSX-V, active in the Northern Athabasca Basin. It's a company called Aero Energy. And it's got ground near the very appropriately named Uranium City on the northern edge of the Athabasca Basin, which is a bit of a forgotten area. But certainly got some very high grades, percent plus grades at surface and some really interesting geophysical anomalies, which is important because a lot of Canada is covered by lakes and water so you don't actually get outcrop. So having geophysical anomalies, particularly in Athabasca Basin style, uranium is a very important target to chase.

Piche Resources (Upcoming ASX IPO)

The other one is one that we've put a bit of seed equity in, but it's an upcoming IPO on the ASX, and that's called Piche Resources. And they're active in Argentina, which is not a well-known uranium destination, but there's definitely some really interesting and extensive uranium mineralization that they've got licensed there. So we are pretty excited about what could be an emerging new uranium province.

Chris Conway: Wow. Some fantastic opportunities, gents, thank you.

Well, that's all we have time for today. If you enjoyed that Uranium Special of Buy Hold Sell, make sure to give it a like, and don't forget to follow our YouTube channel because we're adding lots of great content every single week.