March 29, 2022

Uranium Could See the Next “Feeding Frenzy”
Gold’s safety appeal continues to be the driving factor behind its latest weekly gain. While the yellow metal is currently back below the benchmark $2,000 an ounce level, it sits at a 1-year high and is above several key short- and intermediate-term trend lines, confirming that the bulls are still in control.

Unsurprisingly, the ongoing conflict between Russia and Ukraine remains in the driver’s seat for gold, as safety-related demand for the metal is still quite high as a hedge against foreign currency and emerging markets volatility related to the war.

Other metals are as strong, or stronger than, gold as not only war-related demand but growing global usage for industrial metals increases while Covid’s influence wanes.

Indeed, a major benchmark for the global manufacturing rebound is steel, the price of which has gained 20% since early December. Part of this increase is due to analysts’ assumptions that China’s use of the building metal will increase dramatically in the coming months on the back of higher domestic fiscal spending. In the U.S., meanwhile, IHS Markit just reported that manufacturing activity was higher than predicted for March, which also bodes well for growing steel consumption.

Meanwhile, on the policy front, gold is unlikely to face serious headwinds from tighter central bank policy anytime soon. Although many investors worry that the Fed’s pivot towards a new rate hike cycle will crimp gold demand due to competitive pressures from interest-bearing assets, some industry experts have a much more contrarian view.

Peter Grosskopf, CEO of precious metals asset management firm Sprott, is one such dissenter. He refers to Fed Chairman Jerome Powell’s recent interest rate statements as amounting to a “fake taper.” Grosskopf said the Fed’s threat to raise rates six times this year and remove stimulus measures is “unlikely to be implemented,” due in part to record global debt balances.

Elsewhere in the market, war is doing more than just boosting precious and industrial metals demand. It’s also enriching uranium miners, as uranium oxide prices have reached $59 a pound—a level unseen since more than 10 years ago, before the Fukushima nuclear power plant disaster. Moreover, prices are up by more than a third since the conflict between Russia and Ukraine began on February 24. And the Global X Uranium ETF (URA), of which we own a position (see section below), is up 25% since then.

But unlike most major metals, uranium isn’t currently experiencing a shortage. Because Russia is a key supplier of secondary uranium, however, uranium users have been on a buying binge of late. With around 43% of global operational and planned capacity located there, according to the World Nuclear Association, sanctions against Russia are expected to disrupt the global industry.

As a recent Wall Street Journal article observed, “One factor that helps keep uranium-ore demand down is the oversupply of enrichment capacity,” with much of that capacity in Russia. But regardless of whether or not Western nations decide to sanction Russian uranium, “Western utilities could be more inclined to seek supply from elsewhere on future contracts to ensure security of supply,” WSJ said. Hence the scramble to obtain more uranium in case war-related shortages hit the energy metal.

All told, it’s starting to look like uranium’s latest rally has even more legs than even the most sanguine forecast expects. Consequently, I’ll be on the lookout for more buying opportunities among the individual uranium mining stocks in the coming weeks as this space could prove to be the next big feeding frenzy for the metal bulls.

Note: In the portfolio, we have no new additions this week.

Updates
Uranium and uranium miners were in the doldrums for several months after prices peaked last fall, as the industry fell out of favor on Wall Street along with the overall alternative energy group. But the energy metal is attracting new interest among investors in the wake of Russia’s invasion of Ukraine, while prices for uranium have lately firmed up. Consequently, the most actively traded uranium fund—the Global X Uranium ETF (URA)—recently provided us with another attractive entry point after correcting almost 40% between November and January. Participants subsequently purchased a conservative position in URA on March 1, using an initial stop-loss slightly under the 20 level. After the 13% rally in URA from our initial entry point, I further recommended locking in 50% profit and raising the stop to slightly under 23 (closing basis) on the remaining position last week. Let’s maintain this protective stop for now. HOLD A HALF

South Africa-based Gold Fields Ltd. (GFI) is one of the world’s largest gold miners with total attributable annual gold-equivalent production of over 2 million ounces, attributable gold-equivalent mineral reserves of 52 million ounces and mineral resources of 116 million ounces. The stock typically outperforms the physical metal when gold is in an established intermediate-term rising trend. Management said it expects production to grow by an additional 20% to 30% over the next three to four years and expects growth to be “more or less linear” in the years ahead, with 2022 production forecast to increase around 7% from last year. Additionally, Gold Fields said it will pay a final dividend of 2.60 rand per share, taking the total payout for the year to 4.70 rand per share. After buying a conservative position in GFI on February 17, the stock has since rallied 30%. Per the rules of my trading discipline, I recently recommend taking 50% profit and raising the stop-loss on the remaining position. Let’s further raise the stop to slightly under 13.50 (closing basis). HOLD A HALF

With inflation likely to persist, not only industrial metals but commodities in general should outperform. One way of playing the bullish trend in natural resources is the Invesco DB Commodity Index Tracking Fund (DBC), an actively traded index ETF which is based on several major commodity futures contracts ranging from metals (including gold, silver and copper) to grains (including corn, wheat and soybeans) to energy products (including oil and natural gas). A combination of strong global demand for farm commodities, exceptionally volatile weather in many food growing regions around the globe and rising input costs (i.e. fuel and fertilizer) should contribute to rising hard asset prices in the months ahead. Additionally, crude oil prices are expected to remain elevated in the coming year, and for that reason I expect DBC—which is heavily skewed toward the energy sector—to continue to outperform. Traders recently purchased a conservative position in DBC using a level slightly under 21.50 as the stop-loss on a closing basis. After the 21% rally since our initial entry, I previously suggested taking 50% profit in this position. I also suggest raising the stop at slightly under 25 (closing basis) on the remaining position. HOLD A HALF

Prices for steelmaking coal are on the rise due to the improved outlook for steel production and consumption globally. Natural Resource Partners (NRP) is a master limited partnership engaged in owning and managing a diversified portfolio of mineral reserve properties, including coal and other natural resources (mainly gas and timber). Approximately 65% of the firm’s coal royalty revenues and around 45% of coal royalty sales volumes were derived from metallurgical coal in the latest quarter, making the stock a good proxy for steel demand. The company released fourth-quarter earnings results last week that boasted revenue of $84 million, a 114% increase from a year ago, along with per-share earnings of $2.42.

The company stated, “Strong demand for metallurgical coal, thermal coal and soda ash in the fourth quarter produced one of the best quarters in terms of free cash flow generation in the Partnership’s history.”

Management was sanguine about the year-ahead outlook, with plans to generate even more “robust” free cash flow in the coming months while paying down debt and solidifying its capital structure. The company also recently declared a 45-cent per share quarterly dividend (4.7% yield). Participants recently purchased a conservative position in NRP, and after a 10% rally, I recommended selling a half and raising the stop on the remaining position to slightly under 34.50. I now suggest raising the stop a bit higher to slightly under 38 (closing basis) where the 25-day line comes into play. HOLD A HALF

Peabody Energy (BTU) is the world’s largest private sector coal company, engaged in the mining and distribution of steelmaking and thermal coal. The company has lately benefited from significant price increases for seaborne metallurgical (met) coal used for making steel. Peabody has made it clear that it expects the steelmaking coal segment to lead the way in 2022. In Q4, Peabody reported revenue of $1.3 billion, which was 71% higher from a year ago, driven by higher coal prices and sales volumes. Per-share earnings of $3.90, meanwhile, beat estimates by $2.79. Also during the quarter, the company generated $427 million in free cash flow (about one-fourth of its current market cap) and retired $200 million of secured notes as it continues to pare debt. Management further guided for the strong conditions in the coal market to persist, while expecting that export volumes of met coal will increase “substantially” due to recent mine expansions. Participants on March 22 bought a conservative position in BTU using a level slightly under 19.75 as the initial stop-loss (closing basis). After the 19% rally from our initial entry point, I now suggest selling half the position and raising the stop on the remaining position to slightly under our initial entry point of 21.90 (closing basis).SELL A HALF

Reliance Steel & Aluminum (RS) is the largest metals service center operator in North America, providing metals processing, inventory management and delivery services for several industries, including construction, energy, electronics, automotive and aerospace. With metals demand and pricing buoyant in each of these key industries, Reliance finished 2021 on a high note, setting records in a number of key metrics despite supply-chain disruptions and labor market tightness. The company also returned over $500 million to shareholders through dividends and buybacks, with $713 million remaining on a $1 billion share repurchase authorization. Further out, management said it was optimistic about business conditions across its end markets and estimates a 6% increase in tons sold for Q1 compared to the year ago. Reliance also guided for Q1 per-share earnings to range between $7.05 and $7.15 (up 4% sequentially at the midpoint and in line with estimates). In view of the relative strength in this dual steel/aluminum company, traders recently purchased a conservative long position in RS. I suggest using a level slightly under 180 as the stop-loss on a closing basis. BUY A HALF

Sigma Lithium (SGML) is a Canadian company that develops, through its subsidiary Sigma Mineraao S.A., hard rock lithium deposits in the Americas. Sigma’s properties are located in Brazil’s Minas Gerais State in the municipalities of Aracuai and Itinga, and the company holds nearly 30 mineral rights in four properties spread over 120 miles, including nine past-producing lithium mines. The firm is focused on producing battery-grade lithium concentrate from its Grota do Cirilo property—the largest lithium hard rock deposit in the Americas—to support the booming electric vehicle (EV) industry. Analysts expect Sigma will begin generating revenue by the end of 2022 as its lithium production commences at half scale, bringing the company one step closer to its goal of being the world’s largest low-cost lithium producer. Additionally, Bank of America recently picked Sigma as one of its top “scarcity plays” in the face of a tight supply backdrop in the global lithium battery space. Participants on March 22 bought a conservative position in SGML using an initial stop-loss slightly under 10.50 (closing basis). Last week, I suggested taking 50% profit in this stock after it rallied 14% from our initial entry point. I also recommend raising the stop-loss in the remaining position to slightly under 12 (closing basis). HOLD A HALF

In view of copper’s strong near-term fundamentals (inventories are near record lows while global demand remains high), we added Teck Resources (TECK) on February 8. The company plans to start up its Quebrada Blanca Phase 2 project in Chile during the second half of this year, which will double its consolidated copper production by 2023. Teck also raised its annual base dividend to 50 cents per share (from 20 cents), and declared a dividend of 63 cents per share. Going forward, Wall Street expects high double-digit top line and triple-digit bottom line growth for Q1 and Q2 2022. For the full year, management expects copper production to average about 280,000 metric tons, (down 2% from 2021), while forecasting steelmaking coal sales of around 6.3 million tons for Q1 (up 2% from the year-ago quarter). After Teck’s recent 11% rally, I previously suggested booking 50% profit. I also recommend raising the stop-loss on the remainder of this trading position to slightly under 37.10 on a closing basis. HOLD A HALF

Portfolio

Buy means purchase a position at or around current prices.
Buy a Quarter/Half means allocate less of your portfolio to a position than you normally would (due to risk factors).
Hold means maintain existing position; don’t add to it by buying more, but don’t sell.
Sell means to liquidate the entire (or remaining) position.
Sell a Quarter/Half means take partial profits, either 25% or 50%.