Research Summary
The report discusses the challenges of hedging uranium exposure due to the lack of a liquid futures market. It explores two unconventional hedging strategies: shorting expensive miners with deteriorating technicals and taking partial profits in U.UN to recycle into Yellow Cake (YCA). The author also expresses concern about the short-term overbought hysteria surrounding uranium.
Key Takeaways
Uranium Market Dynamics
- Uranium Bull Trend: The report notes a seven-month bull trend in uranium without a single bear bar, indicating parabolic price moves. Despite the bullish long-term fundamentals, the author expresses concern about a potential significant drawdown.
- Short-Term Overbought Hysteria: The author observes a short-term overbought hysteria in the uranium market, with people on social media platforms predicting spot prices of $200-$300/lb.
Hedging Challenges
- Lack of Liquid Futures Market: The report highlights the difficulty of hedging uranium exposure due to the lack of a liquid futures market. Traditional hedging strategies such as buying futures puts or selling calls on long futures positions are not applicable.
- Unconventional Hedging Strategies: The author proposes two unconventional hedging strategies: shorting expensive miners with deteriorating technicals and taking partial profits in U.UN to recycle into Yellow Cake (YCA).
Unconventional Hedging Strategies
- Shorting Expensive Miners: The first strategy involves identifying the most expensive uranium producer with the worst chart and shorting on a technical breakdown. The author uses Ur-Energy (URE.TSX) and Cameco (CCJ) as examples.
- Recycling Profits into Yellow Cake: The second strategy involves taking partial profits in U.UN and reinvesting them into Yellow Cake (YCA), a company that holds a significant portion of the annual global supply of uranium. This strategy provides a right-tail hedge against a potential buyout of YCA by a utility in need of supply.
Actionable Insights
- Monitor Uranium Market Sentiment: Given the observed short-term overbought hysteria, investors should closely monitor market sentiment and price trends in the uranium market.
- Consider Unconventional Hedging Strategies: In the absence of a liquid futures market for uranium, investors may need to consider unconventional hedging strategies such as shorting expensive miners or recycling profits into companies like Yellow Cake.
- Assess Potential for Mean Reversion: The report suggests that expensive stocks like Cameco may revert to their historical averages over time. Investors should assess the potential for mean reversion in their valuation analysis.
