Why this uranium bull sold all his holdings, except one

The nuclear fuel precursor is currently seeing something of a "bubble", but write-off uranium at your peril says Michael Goldberg of Collins St Value Fund. And he’s probably worth listening to, having helped deliver a jaw-dropping 65% (net of fees) in the 12 months to the end of June 2021.

Nuclear power has copped a bad rap, and not only for the obvious calamities that can result – as former residents of Russia's Pripyat (those who weren’t fatally burned or poisoned by Chernobyl’s fallout, that is) and Fukushima can attest. There are also the political meltdowns often accompanying the “clean” but often problematic fuel source. 

In the latest episode of The Rules of Investing, Goldberg details:

• Why nuclear is a huge but underappreciated theme
• His fund's near-perfect uranium bail-out
• Why "old energy" still has plenty of life yet
• A handful of stocks with which he's playing energy.

Scotty's submarines

Most recently, the topic sits at the heart of the US-Australia-UK pact’s latest maritime trade deal (and ugly China dispute) over Prime Minister Scott Morrison’s submarine fleet, coming to a beach near you a quarter-century from now.

Without going into the specifics of why such events are (hopefully) unlikely to ever happen again, Goldberg recognises why the fixation on Fukushima and Chernobyl lead many investors to actively avoid uranium.

“But uranium - and nuclear energy - is not a bit player in energy. 25% of the US grid is fuelled by nuclear energy; 70% of France’s energy mix; 11% of the global grid is supported by nuclear, and it’s growing – China, India, Canada and elsewhere.

The Collins St team has pored over the fundamentals of nuclear energy as an investment theme. And they’ve concluded it’s almost unmissable.

Back in 2017, uranium’s spot price was about $18-19, but the average cost of production around the world – then and now – is between $40 - $45. Not long after, prices dived to about $20.

“We asked ourselves what was going on,” says Goldberg. “There’s a disconnect between the way people think about nuclear energy and the truth about its demand and place in the world.”

To capitalise on what they saw as an open-and-shut case of market mispricing, Goldberg and business partner, Vasilios Piperoglou – Collins St Value’s co-founder and head analyst built a "micro-portfolio" of uranium-exposed. This basket – something like an ETF – within the broader portfolio. (And I use the term “broad” advisedly, given CSVF's high conviction approach is built around owning about a dozen stocks or fewer stocks at any given time.)

“Our timing on the spot price was almost perfect, to the day,” says Goldberg. With barely a hint of hubris, he recalls the uranium price climbing and plateauing just north of $30 in early 2020.

“But the overall trade in uranium did literally nothing. Many of the stocks fell significantly from late 2017 to early 2020,” he says.

They took a calculated risk on the trade-off between the near-speculation that required uranium valuations to hit a level Goldberg and Vas believed made fundamental sense – and the price at the time. So far, this “flutter” hasn’t quite paid off, but Goldberg and Vas remain hopeful.

Grab your slice of yellowcake

Applying the acronym widely adopted in the industry - but for other reasons - There Is No Alternative (TINA), argues Goldberg.

“Nuclear (and thereby uranium) is the only option for zero carbon emission energy. There is no other. And we’ve also seen the machinations in the US,” he says.

For example, in North America recently:

• Some nuclear power utilities have seen their lives extended
• Several uranium refiners have signalled they will reopen.

“Until that happens, if you want uranium refined you’ve got to deal with either the Russians, Kazakhstanis (going to the earlier point about the political problems surrounding nuclear energy and uranium). Or, if you’re lucky, you can line up behind the French. There’s no other way to get uranium refined,” says Goldberg.

The moves in the US point to two things:

• a high-level view of an anticipated uranium demand increase
• they expect to be able to make a profit.

If the future all looks so rosy for uranium, you might wonder why Collins St Value has now sold all but one of its positions.

This begs the question...

Why have Goldberg and Vas done this?

“We sold because there’s a bit of speculation propping up prices at the moment, but that also doesn’t mean the market can’t catch up. And for all we know, Paladin could be at $2 in 18 months’ time and we’ll look even sillier,” Goldberg says.
“But you make the decision with the information you’ve got to hand and then you live with it.”

(And if you’re wondering which uranium miner they retained, bear with me – you’ll find out before we’re done).

“When COVID came along…we decided it was time to average down. We can never know when the market’s going to catch up and recognise the inherent value in a specific position.”

In the case of Goldberg and Vas, it took three-and-a-half years.

“Almost overnight the market value of these companies trebled, quadrupled and in some cases sextupled.” (Just to clarify, that means they rose by a factor of six).

“Returns in the back half of 2020 were astounding. But it wasn’t unreasonable. It made sense to us that uranium prices had to move, and we’re still in a world where uranium spot prices of $35 -$36 a pound is about $10 below the cost of production.”

The opportunity Stateside suggests the opportunity is even bigger still, contracts based on an underlying price of between $50 and $60 being written by major US utilities.

Vas and Goldberg initially used a $60 to $65 per pound price as their uranium “sell signal”, despite their modelling indicating a fundamental value of around $45. And fortunately, they built some further upside into the equation, lifting this “sell” price to a little over $70. And when prices hit this level, they sold:

So, why didn't they strap in and ride to the moon?

“We got what we wanted. From here on in it is speculation and we hope it works out well for everyone else," says Goldberg.

For those who have held on, he is sincere in wishing them luck. “I think it’ll be good for the world if nuclear energy is successful. But we’re not interested in speculating, only in investing.”

Still fuel in oil's tank

And if nuclear elements aren’t your flavour, Goldberg has some other ideas. These are also in the energy space but in the “old-world” oil and gas sector.

Two local players he and Vass have been buying recently are:

1. Beach Energy (ASX: BPT)

2. Mermaid Marine

(which rebranded as MRM Offshore (ASX: MRM) around five years ago)

“Directors, banks and financiers get no credit for boosting their spend in this space. Getting financing in this space is now near impossible – the banks won’t support you and your shareholders will crucify you,” says Goldberg.

“I’m on board with the concept of demand for oil and gas declining in future, but there is a disconnect between what people believe and what’s really playing out.”

For example, the view that oil demand will fall off a cliff as EV uptake rises is a furphy, in Goldberg’s eyes.

“It’s just not true. The use of oil by passenger cars is just 15% of the demand for oil. Another 15% goes to air travel and about 70% goes to production, plastics and haulage.”

For Goldberg, the contentious view on “peak oil” doesn’t mean zero oil consumption is just over the horizon.
For Beach, he says it’s a $2 billion plus market cap company trading on a (PE multiple) of about 5 to 6 times: “That’s exceptionally cheap.”

“Unless you think the entire industry is broken, if they last five years, you get your money back in earnings. There will always be these pockets of opportunity because of the emotional decisions of investors at large.

“If you can see through that, you can make a tremendous amount of money,” he says. And for this reason, he maintains not only nuclear energy but oil and gas are very interesting places for investment returns over the next couple of years.

What's the uranium stock?

And finally, that single uranium stock hold-out in the Collins St Value Fund’s portfolio? Vimy Resources (ASX: VMY). Last month, the West Australian Government and Federal Government approved one of three project approvals required to break ground at Mulga Rock.

Currently trading at 19 cents a share, as of midday Tuesday, the Collins St Value team already regard it as undervalued. But if the other two approvals are signed off as expected, there’s almost certainly another big leg up for the stock.

To hear more from Michael Goldberg, tune into the podcast interview my colleague Patrick Poke recorded recently.

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