Guy Keller is a portfolio manager at Tribeca Investment Partners where he manages the Tribeca Nuclear Energy Opportunities Fund. He joined Tribeca in 2017 from Macquarie Bank where he was the head of the Asian Base Metals Trading desk in Singapore and a director at the bank for 15 years. At Macquarie, Guy ran trading strategies across base metals, precious metals, and iron ore, and built up an extensive global network of industry contacts through his stints in Sydney, London, and Singapore.
Guy started his career in London with N.M Rothschild’s Bullion Division and subsequently Credit Suisse First Boston in the London Bullion Market as a precious metals trader. He holds a Bachelor of Social Science in Economics from the University of New South Wales and a Master of Applied Finance from Macquarie University, Sydney.
Thanks for joining The Assay. Tell us about your background in mining investment, and how you came to focus on the uranium sector.
The foundation of my experience has been built over 20 years of trading in the physical commodity and derivatives markets. At Tribeca, we follow a formulaic approach in analysing the commodity universe and looking at supply and demand dynamics and other macro factors to create a ‘batting order’ of most-to-least preferred commodities. This forms the basis for our fundamental, bottom-up analysis of companies. It was during that process just over 18 months ago that uranium caught our attention, leading us to conduct a deep-dive analysis on the provision of electricity globally, and whether there was a case for long-term sustainable nuclear generation growth in the global generation mix which would underpin demand for uranium. Once we were able to validate that the nuclear industry was undergoing a renaissance lead by ambitious but achievable growth in China, we shifted our focus to the massive, growing structural supply deficit that had been caused by a decade of unsustainably low uranium prices. This had eroded primary mine supply to a level that could not meet current demand. When we modelled the volume of uranium required to fulfill the future requirements of the biggest reactor build program in decades, the opportunity was obvious. Added to this was our excitement to discover that the deficit was being met by drawing inventory (which is not infinite) and secondary supply which, for various other reasons, was tightening.
When we play our investment thesis out over a medium-term time horizon, the conclusion is clear: uranium prices simply have to move higher to incentivize pounds of uranium back into the market. And even then, according to the World Nuclear Association’s 2019 Nuclear Fuel Report, the return of these idled pounds will only be enough uranium to meet their forecast Low Demand Scenario (they also model Reference and Upper Demand Scenarios). As an efficient and clean source of baseload power generation, the world must continue to look towards nuclear power generation to meet its energy needs, so simply turning nuclear power off is not an option.
“Uranium prices simply have to move higher to incentivize pounds of uranium back into the market”
The uranium mining sector was also attractive because it was so beaten up and unloved, we were presented with extraordinary value in gaining exposure to some high-quality assets that were valued at much higher multiples during previous uranium bull markets. That value is still there, and we believe has much further to run as our bullish thesis plays out.
How has your investment thesis played out to date and what is your outlook?
We believe that higher uranium prices are necessary in order to solve the supply and demand imbalance that has occurred over recent years. We have seen a shutoff of supply from key global producers due to production becoming uneconomic at low prices. At the same time, we have seen inventory drawdowns from key end users such as utilities and producers. In time, higher contract and spot prices will be needed in order to incentivize future supply to meet growing demand.
Uranium is an interesting commodity which has different dynamics to other commodities such as base metals. The market is relatively opaque in that most consumption is contracted on long-term offtake agreements between end-users such as utilities; there are limited production sources of uranium globally (concentrated within Canada, Kazakhstan, and Australia); and there are long lead times involved. It can often take over two years for mined material to pass from the mine mouth to the reactor core due to the enrichment process.
We structured our thesis on the belief that the spot price would lead the sector higher as, for various reasons, the broader market wanted to see a spot price above 30 USD/lb for them to start believing this would not be another false start. This would cause a sector-wide price appreciation before a consolidation into those shovel-ready miners who could progress towards production.
What is the mandate of the Nuclear Energy Opportunities Fund that you manage?
Uranium is a long-standing core investment theme across the various natural resource-focused funds that Tribeca manages. In August 2018, we set up the Tribeca Nuclear Energy Opportunities Fund as a dedicated investment strategy offering a concentrated approach to the nuclear sector. The fund invests via equity and debt instruments in companies involved in the nuclear energy industry, including those in the exploration, development, and production stages of uranium assets. We also assess investments in companies which provide infrastructure and service to the industry.
Currently, the core of our portfolio is a mix of exposures directly linked to the uranium spot price, as well as exposure to brownfield projects currently on care and maintenance. We have also leveraged Tribeca’s position as a specialist natural resources investor by participating in off-market placements of equity at attractive discounts; some of these raises have helped us build out our warrant book.
Do you have any investment preferences in terms of countries and/or regions?
We have a global mandate and our current portfolio consists of assets located and operating in developed markets such as the US, Canada, and Australia as well as listed companies that have exposure to African development projects.
What catalyst are you looking for to drive an increase in the uranium price?
COVID-19 provided the spark that lit a fire under the uranium spot price, and we have seen it rally over 35 percent from March lows of 24.90 USD/lb to almost 35 USD/lb today. However, it is worth remembering that the current price level is still at least 10 USD/lb shy of incentivizing Cameco to switch back on their tier 1, low-cost McArthur River project. Therefore, we believe there is plenty of room to run before we see any meaningful supply response.
Uranium has proven to be unique in the commodity world during the recent COVID-19 upheaval. Unlike other commodities, the demand for uranium has not been materially affected. Nuclear reactors continue to provide low carbon base load electricity 24 hours a day, 7 days a week. Reactors, by design, operate with lighter human interaction and so physical distancing policies have not impacted their operations to the same extent as other facilities.
“We believe there is plenty of room to run before we see any meaningful supply response.”
In stark contrast, COVID-19 has shone a spotlight on the extreme concentration of uranium mine supply. We highlight that more than half of the global monthly uranium mine supply is offline, with the next closest commodity being zinc with less than 20 percent of mine supply affected.
Our physical market contacts inform us that the current rally has been driven by a mix of traders and producers buying material. Cameco is not currently producing any uranium and will continue to be buyers in the spot market for the remainder of the year. KazAtomProm will have to draw down inventory to levels well below their preferred reserves in order to fulfill their current sales commitments, and their shorter term “just in time” sales to utilities have ceased. They have also warned that a sustained outage may force them into the spot market as well. All this will continue to tighten uranium supply and no longer allow utilities to avoid engaging in long-term contracts. The most bullish point to make here is that, for various reasons, the utilities, who are the largest buyers, have been mostly absent from the spot and shorter term market to date. When they return to find a dearth of available material, they will have no choice but to pay a price high enough to encourage mines to re-start. Remember, restarting any mine, let alone a uranium mine, is not a fast process. Most of our modelled restarts will require anywhere from 12 to 24 months to properly ramp up.
Another catalyst for higher prices is the release of the long-awaited U.S. Nuclear Fuel Working Group report. The recommendations in this report still require legislating and costing, however we have been informed the policy document has bi-partisan support. In a nutshell, we view the report as bullish because it proposes long-term broad measures to grow the US nuclear industry and advance US nuclear technology and innovation. It also confirmed previously leaked desires to build a US strategic stockpile of uranium, purchased from at least two US producers for at least the next 10 years. There are many details to be finalized such as volume, price, and the mechanism. However, there is now another source of competition for US origin pounds of uranium. If you are a utility that had penciled in potential US supply at various price points for the next 10 years, you now may have to find alternatives for some or all of that anticipated supply if the U.S. Department of Energy gets aggressive.