Gold & Uranium Updates with John Ciampaglia

September 16, 2024 | 23 mins 08 secs 

John Ciampaglia, CEO of Sprott Asset Management, and Jimmy Connor of Bloor Street Capital discuss the flows into the Sprott Physical Gold Trust on the back of higher gold prices and the Sprott Physical Uranium Trust on the news of lower production from Kazatoprom.

Video Transcript

James Connor: John, thank you very much for joining us today. Given the recent news in the resource sector, I want to discuss a few things with you, including gold and uranium.

Given that gold is the best-performing commodity year to date, up over 20%, I want to start with this one first. Much of this move we're seeing in gold and gold equities has to do with this expectation of interest rates or cuts in the interest rate. We've been talking about this for a year now, but after Powell's comments in Jackson Hole, it looks inevitable at the next Fed meeting in September. What are you seeing in the Sprott Physical Gold Trust in terms of flows?

John Ciampaglia: It's good to be back. Thankfully, we're seeing the inflows again. That's exciting for us because we had a period where many investors were indifferent to the rally we were seeing in gold. It was a stealth rally, where the price kept hitting new highs, and people were like, "Oh, whatever."

Things have changed clearly in the last 16 weeks. We've seen institutional investors come back into gold via futures contracts. Their net long positioning is at a four-year high, so I think it is very bullish. Gold ETF sales for the last six weeks have been very strong after hemorrhaging assets for a good chunk of the first half of the year, so that tells you that many institutional investors and advisors are returning to gold.

It's the final signal around the shift in Fed policy, but I think many other underlying factors are driving the price of gold. Central banks around the world are starting to buy more and more gold. This is part of a strategic shift where they're moving assets out of US dollars and US treasuries and recycling those dollars into gold as an alternative. Much talk has been about China and the Chinese Central Bank doing this. Yes, they've been the biggest buyer of gold of late, but we have a whole host of other central banks that have been very active, including Turkey, India, Poland, Singapore and Russia.

This is part of a broader trend. We think banks are starting to increase their allocation of gold as part of their foreign reserve mix. We also think this is directly tied to changing geopolitical concerns. When the U.S. and the European Union froze several hundred billion dollars of Russian assets after the invasion of Ukraine, it was a real wake-up call that their assets were not safe. Gold stored in your country is a very effective way to insulate you from those geopolitical actions.

A whole bunch of factors are underpinning gold. As I said, it's been quietly rallying, and we know we're at $2,500 an ounce. From a purely technical perspective, our market strategist, Paul Wong, thinks the next mark is $2,600, and ultimately, he believes we will hit $3,000 gold in the next one to two years.

James Connor: $2,600 is not nearly bullish enough. That's a chip shot.

John Ciampaglia: That's his target for the next few months, and I think that's a good next milestone. We've had a big move here in the last few months where we've hit $2500 and held it more importantly. He's looking for $2600 near-term and then the intermediate-term; he's thinking $3,000 is the next target.

James Connor: You see some good flows into the physical gold trust. What about the gold equity? We've seen massive moves there. NICO is up over 50% this year. Kinross is up 50%. IAMGOLD is up over 100%. Are you seeing a lot of flows going into your equity products?

John Ciampaglia: We've seen, I'd say, better relative results on the gold mining equities, but relative to the flows we're seeing in the physical gold funds, it's still lagging big time. It's one of the most frustrating things for us, as well as investors in our funds, around why the gold stocks are just not providing that kind of operating leverage that you would expect them to provide when the gold price has increased as much as it has. It's a function of institutional investors who view physical gold for very specific reasons in their portfolio as a hedge against whether it's equity or geopolitical risks.

Gold mining stocks are very different creatures. They have more inherent equity risk. We don't see institutional investors returning to gold stocks after the last cycle. They've returned to uranium, they've returned to copper, and they've been investing in lithium, but gold stocks seem to be the one category where they're dragging their feet a little bit.

I attributed it to maybe scar tissue from the last cycle. They seem a little bit reluctant to get back involved in these names. As you said, some of the companies have done incredibly well, and that's because they've cleaned up their operations, they've cleaned up their balance sheets, and they've made a lot smarter acquisitions that are more strategic in nature versus just buying more ounces in the ground for the sake of getting bigger. I think there's been a lot of improvement in the operations, and that's playing out.

The one knock has been the cost inflation at the mining companies. It has been very significant over the last few years. That is starting to level out, but it's not just been raw materials and labor costs. We see this all the time. The miners are constantly threatening to go on strike. They want more wages, so there has been a lot of cost inflation in the mining sector, which has put some pressure on margins. The worst is behind us, and more profitability will fall to the bottom line.

James Connor: Yes, it will be interesting to see how things transpire in the coming year because the last cycle peaked in 2011, and then it bottomed. It took ten years, give or take, for it to bottom. Now, we're starting to move up, and it will be interesting to see if this is another 10-year move like we saw back in the early part of the century.

John Ciampaglia: That would be great. I think gold is going to lead the charge. It sets the tone. Gold is the first to move, and we hope the miners follow suit and start attracting more capital like the physical gold ETFs have so far in the last few months.

James Connor: Let's move on now and discuss uranium because this is another sector. It's been under pressure all year, but we had some positive news last week out of Kazatomprom. It's positive that they're cutting production, which will tighten supply, but the whole sector caught a bid last week. Could you give us an overview of what you see in SPUT and your equity products?

John Ciampaglia: We've just come through another summer air pocket when the uranium sector is traditionally quiet on the news. This summer, everybody was waiting for Kazatomprom to provide us with the long-awaited 2025 guidance we got last week.

The same scenario played out last year and the summer before. If I go back to 2022, we had an air pocket in uranium. It was dead in terms of news flow. I remember very specifically that we were trading around $48 a pound for most of August of 2022. Then, out of the blue, the Japanese said they would accelerate the restarts of their nuclear power stations. SPUT at that time, I think, was at a 10% discount to NAV and went right back to NAV. We started issuing new units in buying.

Last summer, we had another washout of sentiment, and sure enough, in the first week of September, Cameco announced they were having some production in mill processing issues. The WNA released their new forecast that showed much more robust uranium demand going out to 2040, and it was game on again.

Last week's Kazatomprom news is another similar situation in terms of a catalyst that will kick-start the sector. The reason for that is simple. Kazatomprom is such an important producer in the world. 40% of global production comes from the country. They've been very mixed in their messages for the last ten months. We're going to increase production by 10%; we're going to increase by 20%. No, we can't anymore. We'll tell you in six months what we're going to do.

Last week's announcement was not a surprise to us whatsoever. We were not expecting Kazatomprom to be able to fulfill the very lofty guidance they put out last October after WNA about getting back to 100% of subsoil-licensed capacity in 2025. We did not think they could because of the lingering sulfuric acid shortages. They've also had ongoing construction delays, which are worsening matters.

Investors must pay close attention to what was disclosed and said on that conference call. I listened to it, and I did not get any warm, fuzzy feeling that production was going up next year, meaningfully, or the year after, for that matter.

That's so important because, in every bull market, you expect a supply response as the commodity price goes up. That supply response has been happening for two years. It kicked off with MacArthur River restarting, but we've had a whole host of different mines restarting from Paladin and Boss Energy, et cetera. Still, it was really the Kazakhs because they have such big deposits. They have a lower cost structure than many of the mines in Canada, the U.S., and Australia, and they have the greatest ability to flex up production as they did in the last cycle.

It's clear that they told us that wouldn't happen, and they're unwilling to do it. To us, that means the bull market is going to be prolonged. Everybody has a vested interest in having higher uranium prices for longer. That's very simple because the sector needs to figure out how to double primary production between now and 2040, a very big task for the industry.

The only way to solve it is through new mines, expansions of existing mines, and all the brownfields that have been shut off for a number of years. That's all happening. It's all exciting. It's very positive for the industry and the companies.

If I think about the SPUT price of uranium right now at $80, I think it's ridiculously low. I think it's been mainly suppressed because utilities have vanished from the market this year as they've tried to hold in the price as it popped through $100 and $106. They've clearly walked away from the market, not just the SPUT market but the term market.

They've been very quiet, hoping, "Hey, if we don't buy, the price is going to come in. " They've been effective at doing that. Still, as Cameco says, "You can defer and delay for a period of time, but ultimately, the demand is just going to pent up, and the market is going to take off on you."

James Connor: All very good points. You raise a very interesting point about the negativity we saw last summer. I remember it so well because I was overwhelmed by the negativity on Twitter. We're seeing the same thing again this year. You can measure the level of negativity not only by looking at the uranium price in the stocks but also by looking at what you see in terms of the comments on Twitter. One of the comments I've seen lately on Twitter is that there are a lot of rumors going around that spot inventory can be loaned out or it might be sold at some point. Can you speak to this?

John Ciampaglia: We've been tackling this for two and a half years. For some reason, some utilities think the uranium inventory that spot holds is mobile, meaning it could be loaned to them or sold to them. I've been consistently telling them this since day one, and I've even gone to industry conferences and got on stage with hundreds of fuel buyers and told them, "This is not how the vehicle works."

Please go and buy your own uranium. I don't know why they cling to this notion. We have never lent out a single pound. Our shareholders have no interest in doing that. We've not sold a single pound. The only scenario by which we would sell any of the uranium is if we didn't have any cash and needed to pay for the management of the trust, the storage expenses, etc.

We've prevented that by always holding some cash. Right now, we're holding about $20 million. That's our cash buffer. We've been very effective at managing that issue. I'm going to keep hammering home this point. I've heard indirectly from third parties that utilities have told them they're not worried about buying uranium because they've got all this inventory from Sprott that will be available to them one day.

This is unlike the 2008 and 2009 playbook, where hedge funds bought a lot of physical uranium and sold it to utilities after the financial crisis. This is a perpetual trust. We do not have a redemption mechanism, and we don't have any plans whatsoever to loan material to people.

James Connor: You have a number of other physical trust products. Have you ever loaned or sold from any of them?

John Ciampaglia: We've never loaned material from our commodity funds for over 14 years. It's not something that we generally entertain. In our Uranium Trust, we've done some location exchanges and origin swaps, and that's basically exchanging piles of uranium in one location for another for a fee that we generate for the trust, but that's something we don't do.

In our physical gold and silver funds, we do have a monthly redemption option. Those markets are very different, and it's easy to ship gold bars or silver bars to somebody. Uranium is obviously a very different animal in terms of the complexity and the number of eligible parties that would even be able to hold title to it.

James Connor: UX Consulting recently came out with a new report, the Global Nuclear Fuel Report. It only comes out once every two years, and you and your team had a good look at this report. What takeaways?

John Ciampaglia: Getting a peek into an opaque industry is always fascinating. This report just came out, and we had a good look at it. What was amazing to me is how the inventory levels held by the various utilities worldwide vary so much. To give you some color. The report says that U.S. utilities have increased their inventory levels by two million pounds in the last two years. EU utilities were less than two million pounds, and Chinese utilities added 85 million pounds of uranium to their stockpile in two years.

Other countries were at minus 15, and Japan was at about minus nine million pounds. I sit there and say, "Hey, what's happened in the world in the last two years?" Well, a whole lot. If you think about the uranium price moving, the war in Ukraine, the impact of the conversion and enrichment market, and the related sanctions that have followed, utilities have barely added any inventory.

That tells me that they're dragging their feet. Other data this year supports this idea. Looking at long-term contracts entered into by utilities for the first half of 2024, it's just under 35 million pounds. That might sound like a lot of pounds, but remember, the annual replacement rate is about 150 million pounds. The rate at which they're purchasing uranium so far this year is 50% of the replacement rate.

What that means is that you're drawing down your inventory. Now, why they're doing it? I have no idea. Maybe you think the price is going down. Perhaps you'll be able to find magically some material from increased production. It's fair to say that this deferral and delay tactic is just building up. Future demand is going to be pent-up. Last year, there was a lot of excitement about the industry purchasing 160 million pounds. Still, if you take out that one-time Ukrainian purchase, the number was closer to 100 million, which is not at a replacement rate.

These inventories are being drawn down at the utilities. We also notice inventories being drawn down across the major producers. Kazatomprom on Friday said that its inventories are down to four months' equivalent production. That, to us, is a very low number.

We have heard from industry contacts that producers typically like to hold at least six months of inventory on hand, just in case there's any hiccup with production or shipping where they hit a lower-grade spot in their deposit. That tells us that producers have also run down their inventory levels and are slightly more at risk of potential disruption.

James Connor: Nothing but positive news from you, John.

John Ciampaglia: We're very bullish, and the market has been asleep at the switch. The market signals and the price signals have been ignored. Some parties in this market believe hope is a strategy in terms of procurement and think that the uranium price will come down and that there will be plentiful amounts of uranium for everyone. I don't think that's the case.

The Chinese behave very differently. In two years, they added 85 million pounds to their stockpile, while the rest of the utilities have been flat. I think that says a lot. The Chinese are building between four and six new reactors yearly, so they have a growing need. I think they view uranium as a much more strategic investment. They take the security supply more seriously than some of their counterparts.

James Connor: There are many tailwinds when you look at all these elements. You're going to London next week for the World Nuclear Symposium. I want to get a sense of how many clients you will meet with and what the demand to see you is like versus last year.

John Ciampaglia: I would say demand last year was very strong. Last year, there was a shift in our institutional shareholder base from smaller family offices and hedge funds in the Uranium Trust to larger and more generalist funds. That started last September, and it has not slowed down. We continue to have inbound calls from institutions around the globe that are just starting to research uranium or have just spent the last few months building a position.

Next week, I'm booked from morning to evening for the whole week. Interest is good. We're meeting with many existing clients, but we continue to meet prospective clients for the first time, and that's good because it tells us that new shareholders are learning about the thesis. They're intrigued by this, and they're starting to allocate capital.

To me, this is an evolution of the shareholder base as we move through this bull market. Larger institutions, I think, are getting involved. We're optimistic. We've had this extended air pocket of uncertainty around Kazatomprom, and the reality is out in the market around some of their challenges. Their messaging is valued over volume, which means we won't flood the market. We want to maximize the value, not just this year but for many years to come.

James Connor: When I reviewed the list of attendees who will attend the conference next week, it seemed that there are a lot more buy-side clients.

John Ciampaglia: Yes, I agree. There were many more names than last year. Last year and the year before, there was a very small number of the usual suspects that you know. The dedicated hedge fund guys that manage money in this area. What we've noticed this year is exactly that. There are a lot of new names, a lot more generalist names. Remember, not everybody has signed up to go to the conference.

It tends to be a bit of a beacon for anyone interested in uranium and nuclear. They go to London around that week, and many meetings are happening outside the conference doors. We spend most of our time outside the conference meeting with institutions in their offices or other locations where they'd like to meet and discuss the sector.

James Connor: John, that was a great overview of what's happening in the gold and uranium sectors, and I want to thank you very much for spending time with us today. If somebody would like to learn more about Sprott and its various products, where can they go?

John Ciampaglia: The best place to start would be sprott.com. We've got a monthly uranium report, which is rich in information. We do a lot of podcasts on uranium and gold as well. We have a precious metals report as well. We've got all kinds of content there. You can read and listen. Please educate yourself. We've got a great education section. We spend much time working on this content to help investors be educated and understand what they're getting involved in.

James Connor: Once again, John, thank you.

John Ciampaglia: Thanks for having me. I look forward to seeing you in London.