In this week’s video insight, David Buckland and Gary Rollo discusses the recent surge in uranium stocks. Gary explains the rationale behind their investments in uranium, emphasising the changing attitudes towards nuclear energy in the context of decarbonization. He highlights a supply-demand imbalance resulting from a decade of underinvestment in uranium production after the Fukushima disaster, making the commodity an attractive investment. They delve into one company they like, Boss Energy (ASX: BOE).
As an Australian uranium developer poised to become a producer with a credible strategy, low capital expenditure, and uncomplicated extraction process. The discussion touches on the strong performance of uranium prices and the evolving dynamics in the energy market. Gary underscores the importance of supply certainty for utilities and continues to seek investment opportunities in the energy sector, particularly in uranium, while keeping a watchful eye on emerging projects that can efficiently monetise the industry’s favourable conditions.
Hi. I’m David Buckland, and welcome to this week’s video insight.
Today, I’m being accompanied by Gary Rollo, the portfolio manager for the Montgomery Small Companies Fund. And today we’re going to talk about the very topical recent run-on uranium stocks.
Gary, the Montgomery small company’s fund has invested in a couple of uranium stocks Why?
Well, David, thanks very much.
Okay. We made our first uranium investment in March 2022. We were attracted by the commodity fundamental set up.
Attitudes on the demand for uranium changed with decarbonization investment in energy, where it’s clear that nuclear has a role.
And we’ve seen a decade plus of supply side under investment in the wake of the Fukushima disaster that’s delivered a material degradation in the underlying commodity production capacity. In our view, that was a great setup for the commodity. So, we reviewed our investment options to gain exposure.
Why did you choose to invest in Boss Energy Gary?
Great question, Boss energy is an Australian uranium developer on the cusp of becoming a producer. We make all our investments on a bottom-up stock picking basis. And, so having identified uranium as offering an attractive industry set of conditions, we wanted to find a stock that met our criteria.
And in Boss, we had what we thought we were looking for its strategy to get production was the most credible out there. It fitted our key requirement of getting there quickly, to take advantage of those good industry conditions that we saw, as it’s a fast brownfields project restart rather than a long Greenfields project new development story. It has also got other valuation relevant advantages, for instance, its jurisdiction is Australia.
Boss had an acceptable permitting status, its hard to get uranium projects permitted, and it also had the time at the time the investment was being presented, a low Capex to restart. Its funding needed was small and it was based on an uncomplicated extraction process.
In the end, we’re looking for investments that can monetize the industry conditions we see not be bystanders to it, and Boss Energy had the criteria to tick that box.
Gary in recent months, the uranium price has performed superbly. Did you want to just elaborate on why that’s been the case?
Look, the commodity demand and supply side fundamentals are now playing out strongly. The demand side is driving long-term contracting activity. This is uranium being consumed by utilities in their nuclear reactors, and those companies are now looking for supply side certainty because industry conditions are changing, and no doubt reflect the current state of energy politics too. So, utilities have changed, and they are lifting their purchasing behaviour.
Purchase contracting activity in 2023 year to date is at levels we haven’t seen for a decade. And historically, that’s the main driver for the uranium price. The contract uranium price has gone from U.S.$40 to U.S.$60 over the last two years. And that dramatically changes the project economics for a uranium miner. Supply certainty is much more important than price for these customers with their multibillion dollar assets.
Now on Boss Energy, it’s fundamentals have tracked well. Management have delivered on project execution. The updates so far suggest the project is on time and budget. We should see first production from this mine this quarter, and Boss Energy share price has moved to reflect those industry fundamentals in the uranium market, but also its transition from a developer to a producer. Upside in Boss Energy from here is now much more dependent on the evolution of the contract price of uranium.
And, Gary, your thoughts on the energy market situation from here?
Well, energy still looks like an interesting place for us to make investments because the supply side there looks brittle, and that’s a set of conditions we want to exploit. So, we’re going to continue to look for exposures.
In uranium specifically, we must pay attention to the evolution of supply. The rise in the uranium price hasn’t gone unnoticed, and there are many uranium producer wannabes that have raised small amounts of capital and are looking for a route to bring their projects to market. However, that said, in uranium, it’s not that easy. It will take time, and there are many projects that probably require too much capital or are too complex to permit or process that are not going to find it easy to get funding for production. So, we continue to look at the options that are out there for us on a bottom-up basis to find the next one a bit like Boss Energy that can make it to production quickly and monetize those strong industry fundamentals we continue to see.
The Montgomery Small Companies Fund own shares in Boss Energy. This video was prepared 12 October 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Boss Energy, you should seek financial advice.