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.

$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.

$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.

$GLATF : Global Atomic — Independent Economic Assessment

Long-Term Price Case$65/lb. U308
Flagship ProjectDASA
Mineral Resources82M lbs. (1,200 ppm)
Shares Outstanding144,200,000
Market Cap$53,930,800
Average Annual Production4,864,437
Payable Product69,075,000
LoM14.2 Years
True All-in Costs (TAIC)$48.54/lb.
Gross Revenue$4,489,875,000
Total Operating Costs ($24.96/lb.)($1,724,112,000)
Operating Profit (EBITDA)$2,765,763,000
Niger Royalty (12%)($331,891,560)
Income Taxes (30%)($829,728,900)
Total Capital Costs($467,100,000)
Net Income$1,137,042,540
Net Profit Margin25%
Absolute Cost Structure (ACS)75%
MTQ Score (Higher is Better)0.3
True Value$7.89/sh.
True Value Discount (TVD)88%
Cash Flow Multiple5x
Net Annual Cash Flow (Including Avg. BST, Iskenderun, Turkey Net Annual Cashflow)$86,568,633
Future Market Cap$432,843,165
Future Market Cap Growth703%

Statistical Bias of Common Uranium Stocks

Benchmark World Uranium Index, 22 November 2019 = NEUTRAL (-0.3194)

GoviEx Uranium, 22 November 2019 = NEUTRAL (-0.2679)

Denison Mines, 22 November 2019 = NEUTRAL (-0.0665)

Forsys Metals, 22 November 2019 = BEARISH (-0.6338)

Deep Yellow Ltd., 22 November 2019 = BEARISH (-0.5356)

Fission Uranium, 22 November 2019 = BEARISH (-0.7586)

NexGen Energy, 22 November 2019 = NEUTRAL (-0.3502)

Save for NexGen Energy and Deep Yellow (Sept. ’18), most of the uranium stocks under study have not enjoyed a significant statistical bull run over the last decade. We will be waiting for sustained readings above 0.5 for confirmation of statistically significant bull moves.

Uranium Priced in Gold

As of this writing, 1/2 g of gold will buy you 1 lb. of U308.

Here’s an edifying chart, compliments of PRICEDINGOLD.COM

Relative to its price in gold grams, spot U308 is revisiting decadal lows.

I don’t often share my thoughts about uranium, but I did so recently in an email to @uraniuminsider. I will reproduce them here, with a couple of minor elaborations. As usual, this is just my opinion.

Undercutting remains the rule of the day, due to broad adherence to the ‘Open Society’/closed economic model (latter day thalassocratic) that operates under the guise of ‘increasing proliferation resistance’ in political theater parlance, but in actuality aims chiefly to annihilate smaller producers (primary & secondary). A side effect is an abandonment of market price discipline — a sacrifice considered an acceptable cost of the non-proliferation cover story.

‘Open Society’ (read: Closed & Rapine) adherents would have the casual spectator assume the strategy is aimed at a boogeyman, like Iran, Pakistan or North Korea, but is in fact squarely directed at nation states that have historically proliferated (prospered) under high-price regimes: U.S., U.K., France, Japan (quietly), and Israel.

I assume a general shift of the balance of power eastward into effective geographic nebulosity was the primary objective, by way of a return to predatory, super-scale, centrifugal hegemony in perpetuity, in spite of, and often in service of, a low-price regime in an undisciplined market. Consequently, as profit is of secondary importance to the latter day thalassocratic merchant class with supplemental income sufficient to offset the thinnest of operating margins, the prospects for primary producers is dimmer now than at any time in the past half century.*

In addition, it is my assumption that secondary supplies are deeper than is commonly assumed. I also am of the opinion that gray munitions and HEU stockpiles have been cannibalized by enrichers, and this under-the-table supply has contributed to a protracted low-price regime. There is no way to accurately calculate the size of the gray market, but I think it is safe to assume that it is quite large. Additionally, M.A.D. is passé and headline numbers of nuclear weapons stockpiles only need to live in tables and graphs in the media, not in actuality.

So an undisclosed stockpile of weapons-grade HEU (some possibly repatriated) slated for downblending at Y-12 and elsewhere has to be worked through before we experience a contraction in the secondary market and a renewed interest by financiers in the primary market, and then only in regions where human capital may be exploited cheaply.

I used the word ‘rapine’ above, as our thalassocratic overlords are first and foremost merchants with a penchant for fluid inventory that is the outcome of endeavors with exceptionally low capital intensity: they are pirates. Much like the Phoenicians of yesteryear, today’s merchants operate by way of advanced legerdemain and crypsis, rather than through primary productive enterprise, which necessarily requires that labor is interacted with — their worst nightmare.

So we must wait for a catalyst, which in this context is likely an unforeseen crisis driven by an exotic economic force multiplier — something large enough to waylay the Phoenicians for a handful of quarters, raising the cost of fraud.

*Which is why I am a buyer.

The dialog with my buddy @uraniuminsider has continued and it has afforded me an opportunity to expound a bit more.

On Iran and Sanction Waivers

I never put much stock in Fordow, as it had a tiny array of centrifuges. I tend to interpret elimination of waivers as a green-light to take additional enrichment capacity underground at Natanz, which enables Iran to function as a de facto black enrichment subsidiary of Russia, China, the U.S., Israel, and others. And one might venture to say that Iran is a chief source of EUP continually hitting spot.

On Iran, generally speaking…

Iran, in my book, has a very special place on the Grand Chessboard, extending back to the Komnene house, and our present political actors today and in the past have had simple instructions: never pierce the veil. Or to riff on a line of intelligence asset Arthur C. Clarke: “All of these worlds are yours, except ‘Iran.’” I don’t mean to suggest that only Iran falls under a unique exclusion policy, but that of those regional entities that fall under such an umbrella, Iran is of particular importance.

On Catalysts

I don’t expect a catalyst to originate in Iran. But the Komnene Empire has its own enemies, and they certainly could script and foment a ‘situation’ designed to place pressure on Komnene interests; a situation with the capacity to uncap competitive productive enterprise until the conclusion of what would prove an internecine conflict.

Final Thoughts

We investors are always caught in the middle of these age-old conflicts. Our present conflict is a protracted one, and as in the past, financial weapons have been deployed after a spectacular fashion hitherto unheard of. Hence, internecine conflict: no one will emerge unscathed from the aftermath of this hubris; the winner will be the side less injured than the other.

So I envision a short interruption (if not complete cessation) of gray market activity accompanying a general market crash and a concomitant resumption of commodities-specific primary production, to our benefit, but certainly not in a long-term, sustainable way.

I see precious few business leaders other than Borshoff taking advantage of the downturn to refine their business models and mine plans in a way that will leverage a sudden resumption of demand. Plans remain too complex relative to envisioned scale. The winner will develop a very large mine rapidly, utilizing off-the-shelf technology. I think Borshoff will prove capable of doing this at 300ppm.

Bill Banning Uranium Mining Near Grand Canyon Moves to Senate

If the Grand Canyon Centennial Protection Act becomes law, approximately 1 million acres of federal land will be closed to uranium mining permanently.

That being said, were the bill or a companion bill to pass the Senate, it would not be signed by Trump (or any sitting President), as it was never destined to become law. What is more, the future of the Grand Canyon’s mineral wealth is above Trump’s paygrade. Consequently, he’ll be asked to shred the bill like a good soldier and the federal lands in question will remain optionable by mining interests in the decades to come.

Urenco to Upgrade 12,000 t Depleted UF6 at UEChK

Since May of this year, 3,600 t UF6 travelled by rail to Yekaterinburg where the depleted uranium will be re-enriched to reactor grade. This is the first such shipment of depleted U from Gronau for re-enrichment since 2009. An additional 8,400 t has been scheduled for transport through 2022.

The 12,000 t depleted U (average assay = 0.30% U-235), once returned to Urenco, translates to just under 2,000 MT natural uranium (4.4 Mlbs), or a little over 2% of annual demand.

$FCUUF : Fission Uranium — Independent Economic Analysis (U/G PFS Update)

U/G PFS, 23 September 2019
Long-Term Price Case$50/lb. U308
Flagship ProjectPLS (Triple R)
Mineral Reserves81.4M lbs.
Shares Outstanding486,266,370
Market Cap$99,684,606
Average Annual Production13.1M lbs.
Payable Product78.7 lbs.
LoM7 Years
True All-in Costs (TAIC)$35.26/lb.
Gross Revenue$3,935,000,000
Provincial Revenue Royalties($287,142,555)
Net Revenue$3,647,857,445
Total Operating Costs ($567,803,677)
Operating Cash Flow$3,080,053,768
Provincial Profit Royalties($328,593,580)
Income Taxes($492,136,715)
Total Capital Costs($1,099,582,645)
Net Income$1,159,740,828
Net Profit Margin29%
Absolute Cost Structure (ACS)71%
MTQ Score (Higher is Better)0.4
True Value$2.38/sh.
True Value Discount (TVD)88%
Cash Flow Multiple10x
Net Annual Cash Flow165,677,261
Future Market Cap1,656,772,610
Future Market Cap Growth1,068%

Notes: All Values in U.S. Dollars