[unlocked for free readers on October 7, 2015]
Did you notice that Dr. Kent Moors is out again with his “trade has hit green light status” teaser pitch for his Energy Inner Circle newsletter? The ad is about an options trade he’s recommending on the US Oil ETF (USO), and we wrote about it back in May when the ad first started circulating. That particular options contract, if my speculation was correct that he was talking about a July trade, is now over and he apparently thinks that the situation is ripe for this trade to pay off again.
Did it pay off last time? If my guesstimate about which strikes he was trading was correct, it did indeed work and make some money, though not a life-changing amount and nowhere near the “make 9.6X your money… or more” amounts that he teased. He wasn’t extremely detailed in his hints and hype, but I estimated that with USO at about $20 he was probably doing a strangle trade buying the $21 calls and the $19 puts with a July expiration. That would have cost about $1.50 before commissions, so in order for it to pay off he would need the stock to move above $22.50 or below $17.50. It hit options expiration last week at $16.99, so you would have made about 50 cents per share or $50 per strangle contract, roughly a 30% return before commissions.
That’s a huge disappointment if you really believed Dr. Moors that this was a reasonable way to make 5X or 10X your money, and it’s an open question as to whether that bet was a reasonable one given what I would consider as a reasonably high probability that it could be a 100% loss, but if you hadn’t ponied up $1,950 with the promise that you’d earn life-changing gains no matter which way oil went you’d probably be pretty happy with a 30% return. Real successful options traders aren’t generally looking for 10X their money, that’s wildly risky and has a high failure rate — they’re looking for repeatable 10% or 20% gains going out a few months, sometimes substantially less if they’re really trying to avoid losses and are (as I think most successful options traders do) selling options instead of just buying them.
And it took a strong stomach to see it through to success. You wouldn’t have gotten your 30% gain on this one if you saw that the trade appeared to be eroding in value before your eyes and sold it to cut your losses a week before expiration — in that case, you’d have a loss. You had to wait until the bitter end to reap a reward with this one, USO didn’t get below $17.50 until July 15, two days before the July options contracts stopped trading on the 17th.
The new ad from Dr. Moors appears essentially unchanged to me, and, if you chose, you could do almost the same trade today at a similar cost — that would be buying the September $17 call and the September $15 put, right now that trade is about $110 so you only need USO to move either above $17.10 or below $13.90 to make a profit. Dunno if it will happen, of course, but it looks like Dr. Moors is still optimistic about the opportunity presented by low volatility in oil prices (or, more accurately, low expected volatility as represented by near-term options pricing). For more detail, you can see the original article I posted back in May — the mechanics and the basic idea are the same, only the strike prices and expirations would be updated.
So… did anyone try that trade? I’m curious as to whether any Energy Inner Circle subscribers or Gumshoe looky-lous managed to do this trade (or whatever similar specifics Moors might have actually been suggesting) and hold on ’til the profitable end, I think a few folks noted that they were going to try a similar trade at the time.
Speaking of Kent Moors, who was a big booster of Uranium Energy Corp (UEC) a while back, I thought I should also check in on uranium. Which has, as you probably have noticed, fallen apart as an investment again.
I hold some warrants on Brazil Resources (BRI.V, BZRSF), the gold “asset accumulator” that also happens to have 75% of a prospective uranium project in Canada (Nick Hodge has recently been teasing this one as well, though it’s been a newsletter favorite for a couple years), and also put tiny speculative bets on both Fission Uranium (FCU.TO) and Fission 3.0 (FUU.V) as a way to play the eventual recovery of the uranium market… and all have lost quite a bit of money so far. Along with almost every stock in the natural resources space.
Fission agreed to marge with Denison in exchange for 1.26 shares of Denison per Fission share, which ends up being a pretty close to equal merger (Fission shareholders will own about half of the new company), but shareholders hate the deal and have soured on uranium yet again. At least, that’s the only conclusion I can reach from the fact that shares in Denison Mines have fallen from 88 cents to 64 cents (Canadian) in the 18 days since the deal was announced. Now, the deal would be effectively worth $0.80 for Fission shareholders (Fission was trading at $1 right as the deal was announced, and had been in the $1.10-1.30 range for most of the previous several months), and Fission today trades at about 76 cents.
No way to make that look pretty. Unless, of course, you decide that this really will become the next big uranium name (it will still be named Denison), and all of this beatdown is just making it a more appealing, low cost buy in a hated sector. The new company will have a market cap of close to C$700 million at this point (though it could have been C$900 million if the price stayed where it was a few weeks ago), it has two properties of real value in Wheeler River and Patterson Lake South, and it’s aggressively exploring both of those places to prepare for preliminary economic assessments and think about starting to build mines to produce that uranium. Right now, they say they have about (combined) 150 million pounds of uranium classed as inferred and indicated resources, but haven’t explored enough or done the economic assessment required to call them “reserves” yet (“reserves” means they can produce the uranium profitably at a given price, “resources” means they’ve identified seams and ore concentrations using drilling and are pretty sure the estimated amount of uranium is there). So in buying the company now you’re effectively paying about C$4 a pound for those prospective resources and whatever they’re able to find in the future.
At a more developed player like the producing, profitable uranium “blue chip” (well, as close as you can get to a blue chip in the uranium business) Cameco (CCJ), which is partnered with Denison on that Wheeler River project and is the king of Canadian uranium miners, you get 1.1 billion pounds of uranium (a third of that is actual reserves, the rest inferred and indicated resources) and an enterprise value of about $6 billion (enterprise value just means we include the debt as well as the equity), so you’re paying between $5 and $6 per pound. And actually, that’s in US dollars so it’s more like C$7.8 billion EV and C$7 a pound.
If we go to the very different Uranium Energy Corp (UEC), which is an in situ uranium producer (meaning they’re more like an oil driller — they pump water in, extract the uranium-rich water, then refine the uranium out of that water in a processing plant), they are producing small amounts of uranium but have very little in the way of resources (about 18 million pounds in measured, indicated and inferred resources across their half-dozen most prospective projects). That number is low partly because they’re not spending a lot of money to expand resources and are, in many cases, just relying on the old data they bought when they started the company and began acquiring old uranium lands that were discovered by the big oil majors in the Southwestern US (most of the oil companies, at least until Three Mile Island, were also uranium companies). UEC is not really a play on reserves, which is good because at $130 million market cap you’d be paying Cameco-like prices ($7/pound) for their much-less-defined resources. It’s really a play on quick production — on the fact that they are by far the most nimble of the meaningful uranium companies — they spend almost no money these days, other than to buy up new properties on the cheap, but the nature of their type of uranium production means they can ramp up their production by investing in new wells within maybe six months or so of the uranium market recovering (as opposed to having to permit and build a new mine, which could take 5-10 years — maybe a typical uranium mine would take 3-4 years to get into commercial production once it’s been permitted). All uranium miners are levered to the uranium prices, but UEC is probably more directly levered to quick changes in the spot price than any ohter.
So there’s a pretty wide variety of options, even if you don’t get into the even earlier-stage uranium explorers (like teensy Alpha Exploration and weensy Lakeland Resources, which announced the intent to merge yesterday… perhaps in a bid to avoid disappearing altogether). Fission and Denison are aiming to grow to the scale of Cameco, becoming big producers in the prolific Athabasca region where the highest grade uranium in the world is found, and they’re right at the stage where they’re going to start thinking about funding massive mine construction. They’ll be nicely levered to a rise in uranium prices, partly because higher prices will make it a lot easier for them to fund development of their big mines, and they have good partnerships and savvy management, including Lukas Lundin as Chairman. Cameco is the largest producer in the Western World (Kazakhstan is kind of the Saudi Arabia of Uranium, but aside from that it’s hard to find bigger reserves and production than Cameco’s anywhere), and while a lot of their production is sold on long term contracts and they’re not super-nimble about being able to produce less or more under giving pricing regimes, you can be pretty sure that they’ll rise in step with uranium — during the last two big uranium bull markets CCJ shares were over $40, and today they’re at $13. UEC is really a bet on uranium spiking up because they can ramp production very quickly, and produce at pretty consistently low prices — no one is sure what their ultimate reserves numbers might be, because UEC probably won’t invest in turning their resources into reserves unless they have to, but if spot prices for uranium spike to $100 UEC will see their actual revenues climb dramatically as they quickly respond to those high prices.
How it works out in the end is anyone’s guess, but I’d say UEC is the best bet for a quick spike in uranium prices like we saw in 2007 or 2011, particularly if you’re planning to be nimble about getting out quickly, Denison is probably the one that will see its value grow most substantially if uranium prices climb gradually and interest is high in funding the development of the Patterson Late South mine and they start to post huge reserves numbers, and Cameco, since it’s profitable now and has huge reserves and is the first stock institutional investors turn to for uranium exposure, is the easy one to buy if you’re just pretty sure that uranium has bottomed out and will probably go higher eventually.
Will uranium go higher eventually? That’s the big question, of course. The drivers of higher uranium prices will be, if they come, the restart of a lot of reactors in Japan and the continuing construction boom for nuclear reactors in China and, to a lesser extent, India and a few other “new” nuclear power countries, and the hope is that these restarted and new reactors will outpace the impact of the retirement of reactors in the US as they age and the shutdown of the German nuclear power fleet (the vast majority of the 400+ reactors currently in use now are anywhere from 25-40 years old).
There are a lot of moving parts in the market, and it’s not just because most uranium is sold on long-term contracts and there isn’t really a meaningful “spot price.” Strategic stockpiles and the dismantling of nuclear weapons in recent years, particularly in Russia, meant that it wasn’t just a question of mined supply versus power plant demand, but over the past couple years as weapons dismantling has drawn to a stop, a lot of smart people are convinced that uranium is now the best natural resource opportunity. The expected supply/demand imbalance, the continuing question of Russian participation (and Russian influence over Kazakhstan), the strategic need for US and Canadian uranium to feed the US power plant fleet (which is both the largest and the oldest), and the eventual likelihood of Japan more aggressively restarting their reactors all combine to make it easy to project a future where uranium prices rise substantially… unless US plants retire because of cheap gas and obsolescence (or an accident), or Japanese plants don’t restart.
And unlike oil, natural gas, coal or other energy fuels, no customers really care that much what the uranium price is — the billion dollars you sink into building a new nuclear power plant today dwarfs the relatively minor commodity input cost of supplying that reactor with enriched uranium fuel (and refueling every couple years), so it’s not like they shut down reactors when uranium spikes to $140 and then restart them when uranium drops below $50 — they run full out all the time, no matter the price of uranium. Absent shutdowns like we saw post-Fukushima in Japan and Germany, the demand is pretty steady and grows only when the number of new plants grows… it’s the supply that has been unpredictable over the years thanks to the metatonnes-to-megawatts program (that was the Russian weapon recycling program with the US — the expiration of that 18 months ago was supposed to immediately cause uranium price spikes, but hasn’t yet)… and the selling or re-stockpiling of strategic reserves.
I still hold a few shares of Fission and Fission 3.0, and still hold those Brazil Resources Warrants as speculative “fun” bets (not so fun right now, frankly), but if I were making a larger speculation on uranium recovery and/or another boom market in uranium I’d probably take the lazy route. Avoid complicated assessments of production costs and avoid dreams of ludicrous returns and just go where the institutional money would flow in a uranium boom — keep it simple and just go with big ol’ Cameco (CCJ), which I don’t currently own. It’s not going to generate 1,000% returns like the very best and luckiest junior uranium miner might in crazy bull markets, but it’s profitable now and it probably will go up by a good 100-200% if uranium tops $100 a pound again (uranium is around $35 today).
So that’s my thoughts on and current exposure to uranium, since a few folks were asking.
A few notes about some other transactions I’ve made in my account, and companies that have generated some news:
I put in an order today to sell my Boston Private Financial Holdings warrants (BPFHW) — these warrants provided a decent gain over the past couple years, but I think there are better opportunities in the financial sector right now. The regional banks and more “traditional” banks appear to me to be a better bet here, particularly the ones like PNC and JPM (both of which I hold warrants on) where management is effectively licking their chops at the idea of interest rates finally rising. I may well add to one of those holdings or to a different large bank in the weeks to come, but for now I’m unloading the BPFH warrants.
Boston Private Financial is both a private bank and a wealth management company, and they’re in a bit of transition still as they build on their acquisition of Banyan Partners last year. I’d say that they are no longer cheap — as they were when I first bought these warrants — and I don’t have a good sense of how they’ll do over the next couple years. They don’t have the same tailwinds as the big banks do, assuming interest rate increases, and they do have significant exposure to high end real estate and, through the wealth management business, to stock market performance, so I’ve sold. Liquidity is not great with these, and I’m not suggesting that it’s terrible and has to be sold immediately, but I’d rather have this cash available for other ideas — hopefully we’ll get a nice haircut in the market as the summer rolls on and see a nice buying opportunity in something.
Beyond uranium all of the commodities stocks, almost without exception, have been clobbered — no surprise there, though abrupt moves always seem to catch you by surprise, particularly when there was so much chatter before about possible “bottoms” in gold, or oil, or whatever. So in thinking further about my positioning in natural resources I’ve also decided to sell one other beaten down commodities-related position in National Oilwell Varco (NOV).
This is an excellent company, but with oil prices remaining stubbornly low and no sign of any letup from the shale producers or the Saudis it’s hard to see another wave of investment in offshore drilling (which is very expensive) over the next year or two. National Oilwell Varco relies on offshore equipment for a large part of their business, and particularly for their highest-margin high-spec drilling equipment, and I suspect the offshore drilling companies will be slow to up their investments. That leaves me with the sentiment that there’s very little chance for NOV to have a return to earnings growth over the next two years, so I’m selling my shares and taking them out of the “core” listing.
NOV is an equipment seller, so while they do make a fair amount of money from service contracts they also require lots of new sales every year and continuing investment in new drilling equipment — they don’t really own an asset, and they can’t “make up” for bad years. On the other side, the much less capital intensive seismic data owners/collectors like TGS Nopec (TGSGY), which I still own, own a valuable asset that I’m confident will eventually show its worth, and it shouldn’t lose much value during low times because it doesn’t cost them much to maintain it. So despite their similarly significant exposure to offshore oil (most of their data is for offshore fields) I’m keeping hold of my TGS shares as my play on oil — I don’t want to be completely out of energy investing, because it’s an important sector and we’re not about to stop using oil, but I’m being cautious. When commodities are on the rebound, then you want to be in the marginal or highly levered players because they have the most to gain — but when things might be weak for a few more years, you want to be in the stable players like the large integrated oil companies or the pipeline owners who are relatively agnostic to prices. TGS is not as agnostic to prices as the pipeline owners are, but they have proven over the years to be by far the most resilient of the major seismic companies. I expect that to continue, but we’ll see… my exposure to oil is now getting quite small, but I’m eyeing some MLPs now that their prices have fallen so hard… they’ve been too expensive for a long time, and the industry is clearly still in some turmoil, but I may end up talking about an MLP buy or two before the summer’s out if they keep dropping. (Pembina, PBA, though not an MLP, is on that list of possibles too — I’ve written about it for many years but never owned it… but the one that jumps out at me most right now is giant Enterprise Products Partners (EPD), which is, for the first time in four years, finally getting close to the 6% yield neighborhood where it begins to look really appealing.
And I do have one small add-on buy to share with you — I added to my position in Coresite (COR) today, following their most recent quarterly results. COR is a data center REIT, they own strategically important colocation data centers in some core areas, including LA and NY and Chicago. There are a lot of things to like about COR, including their fantastic trend of dividend increases in recent years, but one of the most important metrics is that — unlike a lot of traditional REITs — their cash flow is so impressive that they are able to fund a lot of their development without large amounts of debt or new equity offerings. They have increased their share count by about 10%, and their debt by about 20% over the last four years in the process of quadrupling their revenue. That kind of leverage and reinvestment is difficult for REITs to come by. Analysts expect COR to continue to grow funds from operations (that’s what REITs use instead of earnings, usually, so they can report their cash flow without depreciation) at 15% a year, which should allow them to continue to grow the dividend by double digits — the yield, at 3.5%, is not overwhelming large, but the dividend is easily covered by FFO so it can grow nicely and still not overly hamper their ability to grow.
Coresite is still small, with a market cap of about $1 billion, and there are now several other interesting data center REITs that are young and appealing as well, and CyrusOne (CONE) and QTS (QTS) have been impressive growers that might be worth some attention (both are a bit cheaper than COR by most measures). It might also be that DuPont Fabros (DFT) is finally turning things around, though that’s been the underperforming stock in this group for a long time (DFT is also one of the few that, like COR, has managed to avoid issuing a lot of new equity over the past couple years). I had been waiting for interest rate panic to drive the shares down a bit more, but after an