Q&A with Guy Keller,Portfolio Manager, Tribeca Nuclear Energy Opportunities Fund
Can you start by telling us about the Tribeca Nuclear Energy Opportunities Fund?
The Tribeca Nuclear Energy Opportunities Fund is now in its 8th year. We launched this out of our global natural resources platform. When we looked at the investment opportunity in uranium back then, just on the fundamental supply demand outlook, things were looking up with respect to China. If we fast forward to now, of course China is still a very important part of the future demand for uranium for nuclear energy, but we’ve seen a huge shift in the narrative in the last few years in particular around technology companies, data centres, AI, clean, reliable, and firm base load power, of which the only thing that ticks that box with current technologies is nuclear. In countries like the United States where there’s around 96 reactors in operation, there’s been a really big push already. So, we’ve really seen the whole thematic change to nuclear technology now becoming very investable.
We’re the only dedicated strategy in Australia focusing on uranium and nuclear, and that’s very important because there’s a lot of stockbroker activity around some of the uranium stocks. But we’re literally the only ones that also do downstream in nuclear, such as with generators and other technology, and we’re only one of a handful of dedicated investors around the globe as well.
Let’s look at the current state of the global uranium market. Looking at supply and demand dynamics, do you see a risk of a deficit in the near term?
I always look at it from the primary mine supply angle with respect to demand, and from that respect we’ve had a primary mine supply deficit for almost two decades. Where the nuclear end users, the global utility companies, have been extraordinarily lucky is that they’ve had a lot of secondary supply and inventory that’s been available to them over the last decade or so. But you know, as my teenage children work out, there’s food in the pantry, but if nobody is restocking the pantry, it eventually runs out. And that’s the situation we’re getting closer to in the uranium market. We have not spent capital developing mines. We’ve only just starting to restart old mines that have been on care and maintenance. Greenfield supply is almost non-existent, and some of our more mature supply in Kazakhstan and in Canada is getting to the point where there’s not much more wiggle room for extra capacity without a huge investment in capex.
Do you see money going into growing that supply or into the junior explorers who could help grow supply?
It’s been interesting because there’s been money and government incentives going into every other part of the fuel cycle except uranium. There tends to be this naïve view that the market will solve the uranium supply problem. We’re sitting here at a US$80 term price, which is not a true reflection of where sellers are looking to contract long term supply. It’s actually higher than that, but there’s a lot of gaming around how that is made. And then there’s this dangerous obsession with the spot price which is being pushed around.
So there is money. Investors are trying to be safe in names like Cameco and in the producers of uranium that have got some cash flow, but we’re not seeing any significant capital roll down the stack. We’re seeing a small bit of interest and then uranium explorers and developers are able to raise capital, but that’s sustaining capital. It’s not significant capital to move projects forward projects because the price is not high enough to incentivize any of that capital to move significantly towards solving that supply deficit.
What kind of price would we need to incentivize investment?
Well, it’s interesting. We had the World Nuclear Fuel Market Conference here in Sydney in June which hosted a bunch of utilities companies from the US, Asia, Europe, and the Middle East.
Looking back to that term price, there seems to be an unwilling conclusion drawn that the fuel buyers know they’re not going to get significant supply at a US$80 term reference. But they can’t go and contract at a US$90/95 term price because their board members and their CEOs, who are not nuclear people, are seeing reports of that US$80 term price. So it definitely needs to be higher, and I think the fuel buyers understand that, but they need it to print higher to give them the reason to go lock in supply.
The flip side to that is the Chinese buyers who are basically saying that they’ll take any pounds, at any price. But Western suppliers are hesitant because of geopolitical risks. They don’t want to announce to the market that they’ve just sold all their future uranium to a Chinese entity because of these geopolitics.
So, it needs to be higher, and where that price is going to land will ultimately be decided by the market. And, if the last cycle is anything to go by, it will overshoot a natural equilibrium level because activity breeds activity.
There’s been a lot of talk about AI and data centres and the massive increase in energy consumption that comes along with this. Do you see this as a significant driver for the growth of the industry?
It’s massive, especially in Western countries. In countries like China and India, the growth in nuclear power has been government driven. So, the economics of industry don’t necessarily matter as much. They’re just wanting to secure baseload, clean electrons.
Historically, what we’ve seen in the West with deindustrialization, is aluminium smelters in the US doing discounted electricity deals with utilities that are subsidised by state or local governments because that aluminium smelter will employ 3000 people directly and 10,000 indirectly. And with this structure, the utilities have not had any demand certainty or price certainty.
Now what we’re seeing globally, but most clearly in the US, is these 20 year deals, with pricing that’s double or more of the current wholesale price, and you’ve got a government pushing for more and more and trying to get rid of bureaucracy and red tape. So, these utilities are in a position they’ve not been in for decades where they’ve got demand certainty and price certainty, but they’re not passing any of that certainty down into the fuel cycle. They’re hoping that governments will solve enrichment and conversion bottlenecks in the West, and they’re expecting that the market will solve the uranium supply. But it doesn’t work that way. As an investor, I’m not going to give money to a greenfield project at a marginal price if I don’t have certainty from a utility that that they’re going to be there for five or 10 or 20 years. I think that’s the domino that still needs to fall in all of this and why we’re seeing such extraordinary price action in the utilities and the nuclear developers and not necessarily in uranium yet for a few reasons. Either the utilities need to wake up to this reality or the tech companies who are very well aware of what’s required to run a nuclear power plant, are not engaging in multi-billion dollar contracts without knowing every nut and bolt and every logistical movement.
Do you foresee the technology companies going directly to the mining companies on this front, such as the auto OEMs have done with the various battery metals producers?
Until recently, I would have said no on the basis that a lot of those OEMs and gigafactories got a bit burned, especially trying to chase the lithium gravy train, and ended up committing to a whole bunch of projects that that are now marginal at these prices. So, I would have said no on that basis.
However with what we’ve seen recently with MP Materials and the involvement of US government, and the commitment from Apple, that has led me to be a bit more comfortable with the fact that they may get more directly involved. I don’t think US utilities want to end up owning a uranium mine. And I don’t think a tech company necessarily wants to own a uranium mine either. However, they’re going to be a lot more creative and innovative with financial motivations to secure supply than a utility because the utilities and fuel buyers are very different. So, you may find that you see prepays or financing of mines to secure some of that supply. Because of these deals with MP Materials, I’m getting a little bit more constructive that we may see more announcements on this front.
How are ASX listed companies positioned in terms of quality of asset, jurisdictional advantage potential to really bring supply to the markets?
In the June quarter which just ended, some of those ASX names had a very strong price performance. A lot of those names had been heavily shorted as a percentage of their free float in dollar notional. It wasn’t necessarily a huge amount of money, but as a percentage of free float it was. So they were topping the charts in Australia, displacing some of the lithium names that had been on top.
We’ve seen a bit of a revaluation there. We’ve got around seven uranium stocks in the small cap universe down here, which is only 200 stocks total in Australia. In North America it’s something like 2000 or 5000 stocks total. So, seven out of 200, which is roughly 3 or 4% of that index, is more relevant than the small cap stuff in North America. And Paladin Energy (ASX:PDN) has come back into that index so you are seeing more eyeballs on this because Paladin has been demoted back into the small lords. And so that index weight is higher, but the volatility and fascination with the spot price makes things very difficult here.
With respect to jurisdiction, we’ve got two producers: Paladin and Boss Energy (ASX: BOE), operating in Namibia and in South Australia, two great jurisdictions. NexGen Energy (ASX: NXG | TSX: NXE | NYSE: NXE) has a listing here in Australia. They have that turbocharged mega project in the Athabasca region and have some regulatory news coming up towards the end of this year. And otherwise, we’ve got some greenfields and a whole bunch of explorers, but it’s not the depth of market that you see in Canada and the US. So, the larger institutions really struggle to get this significant and meaningful exposure which is why you see some of that volatility down here.
The market seems more favourable towards producers than the early stage explorers at this moment. How do you think we get that interest into the explorers and those companies that will really help to bring more supply in?
There are two sides to the answer here, the first looking at the type of investors that are in the space. In North America we tend to see investors investing in uranium as a proxy to the nuclear story. Nuclear is in the backyard of the US and Canada, so they understand those drivers. If you look at what happened in 2021, for example, when we had that big meme trade spike, everyone piled into uranium stocks. What we’re seeing this time in North America is they’re piling into the nuclear stocks, because they’re more aligned with the technology side of the industry. That exposure has gone away from uranium in Australia because we’re not a nuclear country. We don’t have exposure to it, and there’s not much nuclear in Asia either. So, we tend to view it more as a commodity. Essentially looking at what the uranium commodity price doing and how do I get that exposure in uranium mining stocks or explorers?
And as a result, there’s a long memory down here of investors getting burnt by the lithium trade. A lot of investors made money on the way up, but a lot got burnt on the way down, especially in the juniors where they just couldn’t get out. Investors got burnt a bit in rare earths. Nickel has not been a great trade for them. Gold has been underwhelming in the explorer space compared to the to owning the gold price.
And so there’s that hesitance down here to now pile into uranium, especially when the spot price is swinging around up to US$80 then back to US$72 and spot price doing this and that. If we get a US$90 spot price again, this makes a very different landscape. I think people are falling all over themselves to find the next exploration play that’s going to be a 10 bag for them. But it’s just not the sentiment there in the market at the moment we certainly have seen a few false starts.
Looking ahead, what should investors be watching out for in the uranium space over the next 12 to 24 months?
I always get asked the question what’s going to happen next month or next week, but the uranium market doesn’t move that fast. For every quarter that we continue to bumble along, that’s another quarter of uranium being consumed and utilities being uncovered. That’s another quarter of demand-related announcements around new capacity builds, more up rates, more restarts, or more deals, and it’s another quarter of tech companies getting nervous seeing utilities not responding and buying fuel. We’re in Northern hemisphere summer at the moment. We generally see seasonal uplifts from September into the end of the calendar year from utilities. But the reality is what the uranium sector needs to see is utilities starting to get busy in contracting uranium.
We’ve just seen BHP putting out some capex estimates on their Jansen Potash project in in Saskatchewan where that capex has blown out significantly and the timeline that they brought in optimistically has gone back to the original timeline for first delivery. That’s a big mining project in Canada and there are some obvious candidates in Canada in uranium that that are waiting for these regulatory hearings to potentially start their journey down final investment decision.
So I think that’s a little bit of a bellwether there where these big greenfield projects, you’ve got BHP who should be able to do things on time and on budget, but are blowing out. So, some of these supply response expectations in the next 12 or twenty four months are going to get pushed out as well and become more expensive.
That kind of news is what you need to look for as well as headline that you don’t always expect like the US government going and sequestering uranium pounds or a tech company coming in as we discussed earlier. So that kind of nonfundamental news flow is always out there, and that’s kind of your call option on this progressing quicker than it otherwise may do so.
