Company: CGN Mining Co Ltd
Ticker:
1164.HK (Hong Kong stock exchange)
CGN MINING CO.LTD HD-,01 (Frankfurt stock exchange)
Market Cap: 4.5bn HKD ( 586mm USD) May 2nd 2021
I recently published a blog post covering the annual report of CGN mining. Today I am publishing the deeper dive into the uranium thesis and why I think CGN mining offers an asymmetric opportunity to gain access to the fastest and highest growing nuclear energy market. I also have other uranium stocks in my portfolio, those are listed on the bottom of this article.
The uranium thesis - a macro view on the industry
Among the wide variety of investment themes I cover on this blog, uranium/nuclear energy is by far the most asymmetric bet. A reason for this asymmetry (with huge upside potential) lies in the fact that there are many misconceptions about nuclear energy floating around in the public and uranium equities have been in a decade long bear market, following the Fukushima accident. However, times are changing and uranium has entered the start of something that could very well be a bull market of epic proportions.
There have been many false starts in the past. With the news of Sprott taking over management of Uranium Participation Corporation (UPC) on April 28th 2021, the bull market seems to have officially been kicked off. I am linking a blog post by @GrovenGjermund explaining the relevance of this event here.
Nuclear energy = clean energy
To most readers the above statement will look very wrong. Is it a typo? Should it not read "is not equal to" instead of "equals"?
The answer to both questions is "no". Let me explain.
Roughly 10% of the world's electricity is provided by nuclear energy today (IEA) and the USA producing close to 20 percent, which makes it an important source of baseload power. To be clear, I am a proponent of an energy mix containing renewable and nuclear energy alongside each other. However, even renewable energy activist Michael Shellenberger changed his opinion of nuclear energy, when he analyzed the data and realized the limitations solar and wind have on their own. In 2018 he held a TED talk called "why I changed my mind about nuclear power". A fun fact is that the Ted talk was held in Germany. I am German and I know how anti nuclear energy people in Germany are. People from my generation grew up in the 80's seeing below stickers everywhere (translation "nuclear power? No thanks"). In addition, notice that Germany is one of the few countries where not the direct translation "Kernkraft" or "nukleare Energie" is commonly used but rather "Atomkraft" which by itself also then has the negative connections to "atom-bomb".
So this talk is a must watch, as he went into the lions den with an unpopular opinion and even brought up the fact, that our politicians nonsensical decision to shut down our nuclear reactors lead to extreme high electricity prices and still didn't reduce CO2 emissions. Some data points from his presentation:
Germany installed 4% more solar panels in 2016 but generate 3% less electricity from solar.
Germany Installed 11% more wind turbines in 2016 but generated 2 % less electricity from wind. find the talk below
(Source: YouTube)
With the danger of climate change looming over all our shoulders, more and more countries took a data based approach, to evaluate the best energy mix options.
An important breakthrough for nuclear energy was achieved in March 2021. Based on an assessment conducted by the JRC, the EU commission’s scientific expert arm, whether the EU should label nuclear energy as a green investment. It was concluded that the fuel does no more harm to human health or to the environment than other energy sources already included in the bloc’s taxonomy. The European commission now announced that it will include nuclear power in the EU’s sustainable taxonomy (most likely by September 2021), confirming nuclear energy is as sustainable as other taxonomy-compliant power technologies.
An often used argument against nuclear is the radioactive waste. While it certainly is important to control the waste responsibly, it is also important to put things into perspective. According to the EIA, U.S. power plants produce nearly 2,000 metric tons of solid spent fuel per annum, while in contrast emitting more than 5 billion metric tons of energy-related carbon dioxide from non-nuclear energy generation sources per year.
The 83,000 metric tons of used nuclear fuel generated since the 1950s could fit within a single football field. In addition, CO2 emissions are just released into the air, while the storage of nuclear waste in deep geologic formations is safe, examples of such underground storage locations can be found in Finland.
Finally, the problem with renewables is, that it is unclear how to recycle them (photovoltaic panels & wind turbine blades) and thus they create landfill waste as well. How ironic: What makes people scared of nuclear, is actually one of the main arguments for nuclear, when compared to other electricity generation sources.
Supply side
Because of the bad image and certain narratives pushed by renewables lobbyists, the uranium industry spiraled into a decade long bear market, leading to complete price depression, which in turn lead to no new mines being commissioned.
The price for uranium is so depressed, that its current level is a complete anomaly in time. This is only visible, when looking at it on a ratio basis. Relative to gold, uranium has never been this cheap. See graph below: The current price does not even fit on the chart and is marked by the blue star. However, at the current long term price level, it is not economic to bring new mines online or upgrade production capacity at current producing mines, as the pounds are more valuable in the ground.
(Source: Finding Value Finance)
In typical market dynamic fashion, over time a growing supply deficit developed, which was worsened by the opaqueness of the uranium market. The main consumers of uranium supply are the utilities across the globe. They usually have long-term contracts in order to ensure their supply. However, following Fukushima there was an oversupply of uranium, the prices went to the bottom and the utility buyers could easily fill their orders through the spot market. Traders could offer to buy uranium for them now and deliver up to 4 years in the future. Utilities now did have planning ability for the next 4 years and did not have to worry about long-term contracts. The missing long-term contracts and under investment in the sector lead to zero new mines being brought online. The projected supply deficit is depicted in the graph below provided by Brandon Munro from Bannerman Resources.
(Source: World Nuclear Association, The Nuclear Fuel Report: Global Scenarios for Demand & Supply Availability 2019-2020. Bannerman annotations.)
Demand side
The EU recently announced the European climate law, which sets forth the goal to achieve climate neutrality by 2050:
"This act writes into law the goal set out in the European Green Deal – for Europe’s economy and society to become climate-neutral by 2050."
With the EU climate law, the USA and other governments overbidding each other with bold CO2 emissions reductions goals, it becomes clearer every day that nuclear energy is an important building block to reach those goals.
Demand overtaking supply is a great setup for a bull market, as all market participants are forced to act. Looking at history can help to speculate on future outcomes. History doesn't always repeats itself, but often it rhymes with the future. When it comes to uranium, this is not the first bull market. The last one started in 2006. In their book "Investing in the great uranium bull market" Bambrough & Miller (2006) mention an anecdote about Everett Lee DeGolyer, who was one of the world's leading geologists. He led a delegation in 1943 that should investigate Saudi Arabia's potential oil resources. Based on his findings DeGolyer predicted that the center of gravity for oil production would shift from the American-Carribean area to the Middle East-Persian Gulf area. It took the world until 1973 (the OPEC oil embargo), to realize what DeGolyer had forecast many years earlier. A similar dynamic is unfolding before our eyes with an other energy source and an other geographic area, namely Asia and more specific - China.
The thesis discussed in this blog post was already sound during the 2006 uranium bull market, but was disrupted and delayed by Fukushima and the following oversupply from Kazakhstan. In 2006 apart from the practical reasons like the threat of global warming & air emissions, "the uranium bull market has begun because China, India and many other countries want the cleaner, more efficient, less expensive and more reliable energy offered by nuclear power. Those seeds were planted by the US and other world leaders in the 1950s. Now, those seeds have sprouted and taken root. This shift in energy is also a signal that the Petroleum Age is waning while the Nuclear Age is waxing. Those who dominate this industry will hold the keys to wealth and power. Again, wealth follows energy, into whichever energy source it may lead." (2006, Bambrough & Miller).
However, time has not stood still and the demand for cleaner, more efficient energy has only grown. The fundamentals are now even stronger with China posting Q1 2021 GDP growth of 18.3%, the strongest since China began keeping records in 1992.
This is even more significant for the uranium thesis, when taking into account that for every percent of GDP growth, a country needs one percent growth in electricity supply to sustain the economic momentum. (2006, Gene Clark, TradeTech LLC)
This demand clearly shows in the data on existing and new reactors worldwide:
In China's 14th Five Year Plan a specific target of 70GWe of nuclear energy capacity by 2025 was set. This is a substantial increase on the current capacity of approximately 48GWe. Targets for 2035 are predicted by China’s NEA to be at 200GWe in production or construction (2021, Brandon Munro).
That is why China is a very attractive market for uranium equity speculators like myself. CGN Mining is the only publicly listed company that offers direct exposure to the China uranium demand. One could of course speculate on which projects CGN will acquire next, but the odds are not in your favor:
Public projects: game of chance, if you pick the right ones
Private projects: They could acquire private projects that you don't have access to
They could acquire assets from diversified miners that want to focus on other commodities
A direct investment in CGN Mining ensures certainty of exposure to the Asian market.
To conclude, there is a rapidly growing demand for nuclear energy but the uranium supply is depleted. No new mines have been coming into production and the uranium price won't incentivize producers to start additional production. All this should lead to a squeeze in uranium price, until the supply demand deficit is normalized.
CGN Mining Overview
Company overview
There are two major nuclear power companies in China. China National Nuclear Corporation (CNNC) is operating mainly in north-east China, is not publicly listed and not as focused on commercial activities as China General Nuclear Power Group (CGN Group), which is operating mainly in south-east China. CGN Group is the largest nuclear power company in China and the third largest in the world. CGN Mining is part of the group:
(Source: CGN Mining investor presentation)
This makes CGN Mining the only listed pure uranium company backed by a nuclear power group globally and the sole listed pure uranium company in East Asia.
CGN Mining's vision is "to become the global leading uranium producer" and its main business is uranium resources investment and trading.
(Source: CGN Mining investor presentation)
China has no quality uranium projects locally and that's why they have to find uranium assets outside of China. They strategically initiated CGN Mining as an unique platform to develop overseas uranium for the group. The assets were developed in 2015 through a JV with Kazatomprom and the acquisition of a stake in Fission Uranium.
CGN Global Uranium (CGU)
CGN's management anticipated that they will have access to uranium supply in the future and will in addition to selling it to CGN Group, sell it to international markets. This was the reason they acquired a trading house. This strategic acquisition led to them having more debt on the balance sheet (see 2020 results below) during the 2020 fiscal year period. CGU's main business is uranium trading and they are the exclusive agent of the Husab mine in the international market. CGU benefited from the low inventory cost and the rising uranium price in the first half of 2020. They seized the market opportunity, increased the total number of contracts signed and this contributed to more profits. The committed contracts have secured a future trading gross profit of HK$290 million at the end of H1 2020.
(Source: CGN Mining 2020 Annual Result Investor Conference)
Uranium projects
Currently supply is exclusively sold to their group, as the supply covers only one eight of the groups demand. Through the strong relationship with Kazakhstan, CGN has exclusive access to acquire great uranium assets. In contrast to other uranium producers, CGN Mining does not have to wait for the uranium price to increase before they produce, because of their JV around the world. As an example take Semizbay: CGN makes profits through the JV side and through the off take sales agreements. In the first half of 2020 they realized a selling price of $36 per pound. Their operating cost is only $16, so they realized a huge margin.
CGN also sell to western utilities, if they offer a good price.
(Source: CGN Mining 2020 Annual Result Investor Conference)
Among investor circles CGN mining is still under the radar, even though they are an attractive business in an highly asymmetric market. This is mainly due to them not having much proactive PR/investor relations and investors' caution of CGN Mining's low assets number. Both points will change, as they plan to do more proactive investor outreach and they closed the transaction with Ortalyk. An additional transaction is planned to close in June 2021. The Ortalyk project has 30% lower operating cost than Semizbay. CGN Mining is expected to receive off-take products of 3.50mm lbs. U3O8/year upon the completion of acquisition.
Strategic positioning
Above I shared forecasts of the Chinese demand. CGN Group is the main beneficiary of this growing demand. 3 years ago china stopped approval of new reactors and waited until CGN Group could guarantee safety. Since 2019/2020 new reactors have been approved regularly and CGN Group will always receive one half of these contracts, as they are one of only two nuclear power groups in China that own/operate the reactors.
Lastly, the Five Year Plan also includes the goal to reach carbon emission peak until 2030. In order to reach this goal, China needs many new nuclear reactors. The construction time for a reactor is 16 months. In order to reach the carbon emission peaking goal they need to start construction of new reactors in 2025 latest.
Estimation of new reactors to be approved and constructed will be 6-8 reactors each year. One has to also consider the nuclear fuel cycle. 18 months in advance, before a reactor is completed, you have to send uranium to the conversion centers. The first loading of the reactor amounts to 3 years demand. China's current consumption is 10K annually and this will grow by 50%. Things are looking bright for CGN Mining.
Financials
A historic look at CGN Mining's numbers shows a very stable growing business.
(Source: CGN Mining investor presentation)
Latest results from the 2020 annual report:
(Source: CGN Mining 2020 Annual Result Investor Conference)
Share structure
Number of shares: 6,600,682,645
Major ownership:
CGN Group 64%
Fushin group - largest private holding in China 9.99%
Public free float 20%
North shore etf & global X also have high percent
CGN Mining's stock currently is only listed on the Hong Kong stock exchange (some shares are floated on the Frankfurt stock exchange and US OTC market). This means, from a Chinese point of view, that their shares are only accessible to Hong Kong based investors at the moment, but not to investors from mainland China. This has to do with requirements in regards to daily trading volumes. The good news is that the CGN Mining stock has had daily trading volumes of +1mm for multiple months now and will soon be able to be listed on the Shanghai Stock Exchange. This in turn means major money flows will enter the stock and (most likely) drive the stock price up.
Risks
When investing in uranium stocks, one important factor to consider is the high volatility of the equities. One can expect draw downs of 30-50% at certain times. Please consider, if you can stomach this type volatility.
Additional risk factors:
Nuclear accident
Political risk
This is a cyclical business: You have to prepare an exit strategy over time, as it is tough to time the peak of the market.
Conclusion
The news about Sprott taking over management of UPC solidified the kick off of the 2021 uranium bull market
The uranium thesis is an asymmetric bet with low downside but high upside:
Supply is limited and demand is increasing, while price spikes don't matter as much to the utilities buyers as security of supply
Growth dynamics of the nuclear energy market will mainly come from China
China invests most in nuclear and announces new reactor builds nearly every week
CGN Mining is the only listed pure uranium company globally which
is backed by a nuclear power group
has their own trading house
sole listed pure uranium company in East Asia.
For CGN the Uranium price is good either way:
Price down: Can buy more projects
Price up: Have higher margin
Low public share float plus future catalyst of being listed in Shanghai, which will lead to more money flowing into CGN stock
In conclusion, I want to leave you with a fun fact. Dogecoin which has no intrinsic value whatsoever and consumes electricity to be generated on May 2nd 2021 has a market cap of $48.92 billion. CGN mining, one of the companies directly and indirectly involved in electricity generation for one of the nations with the highest growing energy demand has a market cap of $586 million! At what time will the re-rating start?
P.S.: As this company is listed on the Hong Kong stock exchange, most readers will ask how to invest in the stock. I have bought it on the Frankfurt stock exchange and believe it is also tradeable on the OTC markets. However, I would suggest using a broker that has either access to the Hong Kong stock exchange or Frankfurt stock exchange.
There are also other uranium stocks I hold in my portfolio. I will release articles about my uranium portfolio in the future.
You are thinking about investing in a micro/small cap stock but missing the final piece of the puzzle? You might benefit from me researching the stock and writing a report about it specifically for you, that you will have exclusive access to? Check out my new custom made equity research service.
Sources:
"Investing in the great uranium bull market", Stockinterview.com Kevin Bambrough, David Miller, 22006
EU certified that it is clean energy: https://www.nucnet.org/news/commission-announces-plans-to-include-nuclear-energy-4-3-2021
Kyle Hill does a great job of summarizing the case for nuclear in one of his latest videos: https://youtu.be/J3znG6_vla0
Nuclear waste vs fossil fuel waste: https://www.power-eng.com/nuclear/just-the-stats-volume-of-u-s-spent-nuclear-totals-85k-metric-tons-since-1968/
Disclaimer: This blog post is purely my personal opinion and is not financial advice. Please do your own research, before taking investment decisions. I am long CGN mining.