Oh, Look, a Shiny New Uranium ETF, but Why Aren’t My Stocks Moving?

There are two reasons. Well, actually one, which works two ways: Operational Shorting and Operational Buying, common activities associated with the creation/redemption process. For our purposes, we are chiefly concerned with the former: Operational Shorting.


Take URNM, for example. It’s a new uranium ETF issued by Exchange Traded Concepts on the behalf of North Shore Indices. Folks will certainly line up to buy units under the innocent assumption that the securities the fund ostensibly represents will in turn be purchased, thus boosting prices, and these folks aren’t to be blamed because the basic, albeit misguided, expectation of the average ETF investor is this: I buy ETF shares and the authorized participant (AP) will in turn buy shares of the companies of which the fund is composed. But this doesn’t always happen. In fact, for some ETFs, it almost never happens as advertised (e.g., Global X Uranium ETF).

So what does really happen?

Well, instead of buying the represented securities, APs have found that they can make oodles of moolah by selling you nonexistent ETF shares that may be generated at some date in the future. This is Operational Shorting. You can even gauge when Operational Shorting is taking place or is about to take place by measuring the growth of creation units, which typically are made up of up to 50,000 ETF shares each, relative to price-action of underlying securities.

Operational Shorting is what underlies much of the puzzling behavior of boutique ETFs: Investors buy the ETF, the ETF may even rise a bit in price, but the stocks the ETF is supposed to represent don’t budge — because no AP is really buying a single share of those companies! It’s a swindle that is a built-in function of ETFs and it is legal under present market making rules.

APs for URNM, for example, can sell you new ETF shares to fulfill your order, but the APs will very often opt to delay physical share creation.

What is ‘physical share creation?’

Physical share creation is the actual practice of purchasing the shares of the securities (e.g., GoviEx, Uranium Participation, Cameco, etc.), then swapping the actual shares for the ETF shares that were initially issued to you to fulfill your order. In an honest world, physical share creation always happens, but this is not an honest world. In this world, you often hold AP-issued placeholder paper (naked) for ETF shares that have not yet been created and that may never be exchanged for real shares of the companies you think you are investing in.

What to watch out for:

For starters, watch volume. A creation unit is composed of 50,000 ETF shares (In the case of URNM, it may be 25K). Once order balance rises or exceeds this level, ETF shares, if they aren’t naked, are supposed to be swapped for the aforementioned securities (physical share creation). If volume is pumping in your ETF beyond the level at which creation units may be exchanged for actual securities but the underlying securities aren’t moving, you’re probably witnessing Operational Shorting by greedy APs that crossed the Rubicon.

This is rarely the fault of the ETF’s sponsor. They want to build the ETF of their dreams, full-to-overflowing with the unsung companies that they believe deserve your attention and capital, but are otherwise ignored by Mr. Market. But there’s a problem. A lot of these companies were ignored by Mr. Market because they are illiquid. And many ETF managers don’t realize that this will pose a problem for their ETF until the ETF has debuted and order imbalances start building — a situation of which APs soon take advantage.

Tom, as usual, you’re confusing me. Help me understand this problem.

Okay, so the ETF owns these deserving, illiquid stocks, like Global Atomic or Bannerman Resources and investors are lining up to buy them, utilizing URNM as a proxy. So far so good. But APs soon discover that the ETF is substantially more liquid than the underlying securities with which the ETF has been padded out. They’ve got half a dozen creation units built up but there’s no way to exchange them for the underlying securities without upsetting price or incurring liquidity costs, which can be high. At first, the APs typically do nothing unless or until order flow reverses.

Tom, what are you saying?

When order flow reverses while APs are sitting on unswapped creation units, APs may elect instead to earn the ETF’s own bid-ask spread rather than incur the trading costs associated with buying the fund’s underlying securities, effectively initiating an Operational Short.

Hey, maybe this new ETF is different and its APs will subordinate self-interest to the interests of the fund’s investors. Time will certainly tell. It always does. If the rumored 25K is indeed URNM’s creation unit threshold, then it has had time to build its first creation unit. Will it be exchanged for underlying securities or will URNM’s APs pull a pig in a poke?

On another note, I’ve got a ton of respect for Tim Rotolo and want him to succeed. So I hope the design of the ETF doesn’t put his fund in the kind of bind that often entices APs to resort to Operational Shorting.

Expectations for Gold Remain Low While Key Gold Indicator Wallows in the Dumps

The Grasberg-Saville Gold Rating remains firmly ensconced in bear territory this week. This is the Rating’s 13th such week signalling persistent bearish fundamentals for gold.

Although TIPS continue to consolidate above support, the KBW Bank Index Inverse Change Ratio continues to plummet, with the underlying Index rocketing northward for the second month above the key 104.43 breakout level. The 30s/Dollar Ratio and the 30s/5s Yield Curve Change Ratio also are under pressure.

We are paying particular attention to the KBW Bank Index ($BKX). It is set to open 2020 with a bullish bias in price-neutral territory. If it continues to rise, we expect selling at 117.36, which should afford gold a bit of relief. Selling could also hit the Index well-ahead of 2020 initial resistance, which also would bode well for gold.

$AUNFF : Aurcana Corporation — Independent Economic Analysis

Long-Term Price Case (Ag, Au, Pb, Zn)$24/oz., $1,700/oz., $1.00/lb., $1.20/lb.
Flagship ProjectRevenue-Virginius
Proven & Probable Reserves (AgEq) [FCM Estimate]17,165,350 ozs.
Shares Outstanding152,050,000
Market Cap$27,369,000
Average Annual Production2,673,731 AgEq ozs.
Recovery (Ag, Au, Pb, Zn)95%, 69%, 95%, 94%
Mill Feed Head Grade (Ag)24.70 oz/st (771.875 g/t)
Mill Feed Head Grade (Au) 0.06 oz/st (1.875 g/t))
Mill Feed Head Grade (Pb)4.97%
Mill Feed Head Grade (Zn) 2.15%
Payable Silver12,865,000 ozs.
Payable Gold19,600 ozs.
Payable Lead51,256,000 lbs.
Payable Zinc15,527,000 lbs.
LoM6.42 Years
True All-in Costs (TAIC)$14.43/oz.
Gross Revenue$411,968,400
Smelting & Refining($24,520,000)
Freight & Insurance($12,986,000)
Net Smelter Return$367,129,362
Total Operating Costs ($144,387,000)
Operating Profit (EBITDA)$222,742,362
Income Taxes($16,015,176)
Total Capital Costs($42,618,000)
Net Income$164,109,186
Net Profit Margin40%
Absolute Cost Structure (ACS)60%
MTQ Score (Higher is Better)0.7
True Value$1.08/sh.
True Value Discount (TVD)83%
Cash Flow Multiple10x
Average Net Annual Cash Flow$25,587,612
Future Market Cap$255,876,120
Future Market Cap Growth835%

There’s massive re-rating potential for Aurcana, which is the 100% owner of the fully-permitted Revenue-Virginius Mine, which also happens to be one of the world’s highest-grade primary silver mines at 24.70 oz/st (772 g/t).

Its estimated Net Profit Margin of 40% at $24/oz. Ag is wonderful and its Absolute Cost Structure is a mere 60%. Due to world-class Project Economics, Aurcana has been awarded a rare 10x cash flow multiple and potential returns of 800% if the mine enters production at or near our long-term price case.

The Virginius Ore Deposit

by Berton Woodward Coxe

The Virginius ore deposit, Ouray and San Miguel Counties, Colorado, yielded 14.5 million oz of silver between 1880 and 1912. The deposit consists of several quartz, base-metal, and silver mineralized fissures which is hosted by Tertiary volcanic rocks of the San Juan volcanic field and was deposited in fractures radial to the northwest margin of the Silverton caldera.

Four stages of mineralization have been recognized: (I) quartz, galena, sphalerite, chalcopyrite, and argentiferous tetrahedrite; this stage comprises a bulk of the total vein material and all of the silver; (II) rhodonite, rhodochrosite, quartz, magnetit, galena, chalcopyrite, and pyrite; this stage is observed only in the lower levels of the mine; (III) quartz, calcite and pyrite which replace stage I minerals; (III-A) barren quartz deposited locally crosscutting state II mineralization.

Vein-related wall rock alteration is confined to a 2.0 to 3.0 m envelope surrounding the vein and consists of sericitization, slicification, and pyritization. Tetrahedrite is the primary silver-bearing phase and averages 15.5% silver. Silver is negatively correlated to arsenic in tetrahedrite. Galena is conspicuously non-argentiferous. Homegenization temperatures of fluid inclusions average 218 degrees Celsius for stage I mineralization and 101 degrees Celsius for state III mineralization. No evidence for boiling was recognized in the samples studied. Salinities of the ore-forming fluids were mostly between 2.0 and 3.0 % NaCl equivalent. Oxygen isotope data indicate that the Virginius ore-forming fluids underwent extensive isotopic exchange with the country rock. The most notable aspects of the Virginius ore deposit include the overall high grade of silver (40+oz/ton), the general lack of mineralogical or metallogenic zoning, the extreme vertical range of the ore shoot (700 m), the lack of evidence for boiling of the ore-forming fluids, and the total amount of silver produced from such a narrow structure.


Coxe, Berton Woodward. “The Virginius Vein Ore Deposit, Northwestern San Juan Mountains, Colorado: A Study of the Mineralogy, Structure, and Fluid Inclusions of an Epithermal Base-Metal and Silver Vein in a Volcanic Environment.” (1985). https://digitalrepository.unm.edu/eps_etds/180

$DYLLF : John Borshoff’s Shopping List

We think a bid of up to U.S. $55M (cash and shares) for turnkey Kayelekera is possible in an effort to begin padding out Deep Yellow’s 2023-2030 development pipeline.

In other words, Borshoff certainly could strike a better deal than has already been made with Lotus — a deal with which the Malawi government would be comfortable, as the preexisting one that Paladin struck with Lotus is raw. It is our hope that Bintony Kutsaira continues to stonewall the June A$5M arrangement.

Were I Borshoff, I would aggressively undercut Lotus and negotiate with Kutsaira a mine stake boost of up to 30%, from 15-20%, in exchange for generous tax breaks through 2030.

This is just our opinion. As always, anything can happen.

We also think Forsys Metals is an attractive acquisition target, with each outstanding share of Forsys presently representing a whopping $15.11 worth of U308, or ~0.6 lbs./share (you WANT to command a lot of resources per share), a result of the company’s long-term commitment to effective dormancy and ultra-low cash burn.

Another metric that probably hasn’t gone unnoticed is Forsys’ Market Cap Valuation per Resource Lb., which is a mere $0.14, which in our eyes, makes the company one of the most undervalued development-stage uranium names.

Additionally, Forsys Metals’ $12.8M market cap is currently valued at half a percent of the value of proven reserves at Norasa ($2,371,805,000), which is outrageous.

$OGLDF : Otis Gold — Independent Economic Analysis

Long-Term Price Case$1,700/oz. Au
Flagship ProjectKilgore
Ownership100% (Royalty-Free)
Indicated Resource825K ozs.
Shares Outstanding175M
Market Cap$12,057,500
Average Annual Production111,700 ozs.
RecoveryCrush: 82%/ROM: 50%
Payable Product558,700 ozs.
LoM5 Years
True All-in Costs (TAIC)$1,239/oz.
Gross Revenue$949,790,000
Total Operating Costs ($435,570,000)
Operating Cash Flow (EBITDA)$514,220,000
Income Taxes($159,408,200)
Total Capital Costs($97,460,000)
Net Income$257,351,800
Net Profit Margin27%
Absolute Cost Structure (ACS)73%
MTQ Score (Higher is Better)0.4
True Value$1.47/sh.
True Value Discount (TVD)95%
Cash Flow Multiple5x
Average Net Annual Cash Flow$51,493,700
Future Market Cap$257,468,500
Future Market Cap Growth2,035%

Notes: All Values in U.S. Dollars

The kind of arrangements about which we daydream don’t happen too often, but there’s no practical reason why some of them couldn’t. For instance, we’d like to see an Otis/Bullfrog business combination.

I try to avoid as much modernist lingo as possible, including the catchword, ‘synergy.’ Which is to say, I don’t necessarily think an Otis/Bullfrog business combination would necessarily prove ‘synergistic.’ Rather, a single entity could better benefit from an economy of scale, enabling it to quickly fund additional inorganic growth.

I have also imagined an interesting three-way merger: Otis + Bullfrog + Paramount.

$CPMMF : Crystal Peak Stake Initiated in November

We stalked this trade a long, long time. See our 9 July analysis of the company here: Crystal Peak Minerals — Independent Economic Analysis

We got in at a considerably better average price over the last month than we ever imagined (U.S. $0.0577). But why did shares get so cheap?

I don’t have an answer. Insiders haven’t abandoned the stock. Director William Basse bought a few shares last week. The Cynosure Group may be shedding shares and EMR, which owns a > 60% stake, may be shedding shares, too. Who knows?

The Department of the Interior has authorized construction at Sevier-Playa, a huge de-risking milestone, and one of two factors for which we were waiting as would-be investors. The second factor was price: we weren’t going to pay a lot for the greenfield Project in the present SOP climate.

Price may also be anticipating the impact of debt and equity financing, an announcement about which could come by Q2 ’20, with construction set to commence in Q2 ’20, as well. Debt will be approximately 60% of project finance. I’d like to see an off-take account for up to an additional 15-20%, with the remainder achieved with equity at a later date.

$CCJ : Cameco — Levels We’re Watching

Cameco is in a tricky position, technically speaking. Sellers are in control, albeit marginally. Without a move above 10.30 next month, the stock will end the year with a bearish bias, with a price-neutral start in 2020.

Come January, we will be looking for buyers to enter at 8.16. If they get traction, we anticipate renewed selling interest at 10.53. If buyers usurp bears at 10.53, we will be looking for a fight through congestion to 11.85, a clear break through which clears a path to 14, 15.18 and higher.

On the flip-side, if buyers prove too weak at the 8.16 level, a dip to 6.85 is possible with a subsequent decline to 4.70 and lower, at which price we would be ferocious buyers.

To sum it up, we are buyers above 11.85 and short-sellers under ~6.80, covering and repurchasing just under 5.

2020 Ginger Group Forecasts

With our key Grasberg-Saville Gold Rating still languishing below 50 at 43, our near-term expectations for gold remain tempered. With that in mind, here are the levels we are watching:

We expect sellers to remain active at ~1530 and congestion from 1611-1530, with a break above 1611 clearing a path to 1738, then 1806 and perhaps higher. Any failure at 1530 will send gold back to 1390, then 1311, a clear break of which takes us back under 1200.


More selling expected at ~18.30, congestion from 19.81-18.30, with a clear break of 19.81 sending us higher to 22.16, then 23.64 and perhaps higher. Any failure at ~18.30 will send silver back to 15.78, then 14.33, a clear break of which will take us back under 12.


Selling expected at ~946 with additional congestion above from 1004-946. A clear break of 1004 opens the door to 1097, 1145 and perhaps higher. A failure at 842 makes price vulnerable to a quick move down to 784, 689 and a total wreck in the 640s.


We expect Copper to open up in 2020 the way it closed 2019 — in price-neutral territory. If sellers can be overcome at 2.78, and congestion from 2.92-2.78 pierced, the door to 3.21 and higher opens. But weakness below 2.54 puts Copper at risk of selling off to 2.40, then 2.18 and lower.

Our primary exposure to copper is through Taseko Mines, whose Florence Copper Project will be profitable at today’s Cu price and will prove a veritable cash cow at the long-term price case and above.

Our estimated Total All-in Costs (TAIC) of $1.98/lb. is stellar and will result in a healthy Net Profit Margin of 34%.

Florence is a well-timed Project with a bright future that will generate the cash required to self-fund the advancement of Yellowhead, Aley and Harmony.


Like Copper, we think Light Sweet Crude will open 2020 in neutral territory. We are very bearish energy and believe much lower prices are in store. We think a failure to find bids at 50.17 will force a test of 44.3, another failure and a quick plunge to 34.79, then 27.62 and possibly lower. On the flip-side, if Crude manages to overwhelm sellers at 60.67, the price per barrel could rise quickly to 66.65, 76.05, and then perhaps as high as the low 80s. This isn’t the scenario we think is likely, but it’s certainly possible.

We have our sights trained on XOM and are willing to pay up to 52.30, but no higher.

The Dollar Index

We think the Dollar is vulnerable and that weakness will persist with anemic buying at 97.3, a bit more at 96.11 and finally a break of that level which ushers in a tumble to 94 and below. On the flip-side, a break of 100.7 opens the door to 102.7, 103 and perhaps higher.


It’s no secret we are bullish the RAND. We think we’ll visit the 14.19 level in 2020, which opens the door to 13.59, 12.63 and points lower.

What the hell is the Ginger Group?

I could tell you, but, well, you know…

Random Thoughts

The PHLX KBW Bank Index broke out of the key 104.43 level this month, and that is not a good harbinger for gold. I wish it weren’t so, but it’s a fact.

The Dow Transportation Index, on the other hand, hasn’t confirmed breakouts in the Dow, S&P and NASDAQ, though it is floating above the key 10,663 level.

The NASDAQ is approaching resistance at 8,718.13, as are the Dow at 28,185,07. and S&P at 3,141.77.

PHLX Housing is making a mad dash for resistance at 374.12, Healthcare (IXHC) and Biotech (NBI) are cracking through key levels at 847.32 and 3,575.99 respectively, and the SOX is on fire a la March 2000.

Something positive, and one other thing: the TIPS trend remains unshaken, which is, in my opinion, a crucial piece of the gold fundamental picture. The HUI also has broken through and based above a level that we identified as important: 199.7. In 2020, were the HUI to resist selling pressure at 231.2, and continue to rise through 255.18, it would be safe to acknowledge that a new bull market is underway.