Materials Risk

Implicit in any forecast of commodity prices is an assumption of how technology could evolve and how its adoption will affect commodity prices. Commodity prices provide the incentive for new technology, yet also influence commodity production and consumption. Innovations, once introduced, may lead to higher yields from agriculture, more oil being extracted from offshore wells and deeper mines to extract more metals and minerals – all of which could eventually lead to rising commodity supplies.

High commodity prices may also lead to innovation on the demand side too. High energy prices, for example, may discourage consumers from using a particular energy inefficient product. This acts as an incentive for companies to redesign their products to become more energy efficient and less resource intensive. However, just because a technology might appear to be negative for demand doesn’t mean it has to be bad for prices, at least not in the short to medium term. For example, if oil producers are worried about the growth in electric vehicles they may decide to postpone large scale, multi-decade, multi-billion dollar investments. If they get it wrong and electric vehicles don’t take off as fast as they expect, then oil prices may rise sharply if there isn’t enough supply to meet demand.

And remember, don’t forget about rebound effects. If an innovation results in a energy intensive product (transportation for example) becoming cheaper or more accessible consumers are likely to want to consume more of it. Every improvement in technology has a rebound effect.

It’s the uncertainty over how current technology can be utilised and how technology could evolve that makes forecasting so difficult. Technological developments of all sorts involve a large dose of serendipity. The philosopher Karl Popper perhaps best describes the struggle to anticipate future innovations: “The course of human history is strongly influenced by the growth of human knowledge.” Popper also wrote:

But it’s impossible to “predict”, by rational or scientific methods, the future growth of our scientific knowledge because doing so would require us to know that future knowledge and, if we did, it would be present knowledge, not future knowledge.

Yet to forecast the price of oil, lead or cobalt into the next decade we need to make some assumption about how technology will make it easier to extract these commodities and how technology will change the demand for these commodities. Note that no one predicted the invention of pig iron or imagined how it would affect the nickel market, neither did anyone anticipate the introduction of hydraulic fracking and how it would turn the market for oil on its head.

Some commodity markets are tiny in comparison to the more conventional markets like oil, copper and iron ore. Minor metals for example include tungsten, indium, rare earth metals (REM) as well as a multitude of others with complex, exotic names. Unlike larger commodity markets, these metals are typically mined on a small scale and/or their production is a by-product of other much larger mining deposits. Macro-forces like urbanisation, consumer adoption of technology and the decarbonisation of economies are bringing many of these minor metals to the fore, as business models are re-shaped around a more sustainable and circular form of economic growth.

The opaqueness of these markets means that they are particularly prone to speculative excess. The apparent unpredictability of future technological innovations (just think how mobile phones have developed over the past ten years) creates a problem for mining executives trying to match supply of minerals with anticipated demand many years into the future. The allure of many of the mining companies operating in this area is that the pace of innovation and therefore our demand for minor metals (such as REMs, lithium and cobalt) could increase at a much far faster pace than those planning and building mines can supply.

Meanwhile, understanding the supply of these metals is difficult to say the least because it is often hidden behind a corporate or state veil of secrecy. This can be the case for many commodities, but particularly for those minor metals that are considered to be of high geopolitical importance. For example, when one private organisation dominates the market, as Companhia Brasileira de Metalurgia e Mineração (CBMM) does for niobium (~85% of global supply), critical market data is missing to outside investors.

In addition, since most minor metals exist as by-products next to more established commodities such as copper, they don’t necessarily respond neatly to the laws of supply and demand. For example, tellurium (a metal four times scarcer in the Earth’s crust than gold) is nearly always found in copper mine waste. However, unless copper miners have supplies of easy to access tellurium-laden copper waste lying around, a higher price for tellurium doesn’t provide enough incentive for copper producers to produce more of it. Due to the high cost of separating these minor metals from other commodities, prices often need to cross a certain threshold to encourage a new and more expensive method of production – this results in a kind of stepped cost curve, where supply only responds if prices rise sharply enough.

One person that is at the forefront of this trend is Chris Berry, founder of House Mountain Partners. Chris focuses on those minor metals that are essential to powering the economies of the future, those that enable the generation of renewable energy, its storage and its use in applications like electric vehicles.

When I interviewed Chris for my book, he explained that the biggest challenge facing investors in minor metals like lithium, cobalt and graphite is that their supply chains are just so much more complex than more conventional commodities:

These markets are characterized by opaque pricing structures and very demanding specifications from end users. It’s not enough to just mine lithium and produce lithium hydroxide. A mining company needs to do this in addition to securing binding off-take agreements which specify price and quantity for a specific length of time. Each section of the supply chain (mining, chemical conversion, end uses such as batteries or aerospace) is an investment opportunity in and of itself.

As an investor, you also need to factor in what the potential substitutes are (if any) and whether, just like for producers, there is a particular price point at which manufacturers also say enough is enough, we need to look for substitutes or reduce the amount of this metal in our product. The rapidly evolving technological innovation in batteries, for example, makes this particularly challenging.

The markets are small, pricing is opaque and can vary widely, and as technology continues to evolve, it becomes difficult to accurately forecast demand as it could increase or decrease for certain metals. As an example, there is a big move among battery scientists to remove cobalt from various lithium ion chemistries. This has been accomplished at bench scale, but typically when you remove or substitute one raw material in an end use, you end up using more of another. As cobalt use decreases in certain lithium ion chemistries, more nickel is typically required. How this affects economics really needs to be examined on a case by case basis.

Chris admits, though, that forecasting the price of these minor metals is little better than guesswork, which can potentially have costly implications for investors who are taken in by the narrative of ever-rising prices:

Stockpiles, recycling, scrap, new products, and geopolitical tumult are some of the main issues that need to be factored in when forecasting prices for metals and equities. While discounted cash flow models (DCFs) are a widely used tool to determine valuations, I happen to think they’re almost totally useless for most resource equities. This is especially true for assets such as resource deposits that have no operating history and hence no history of revenue, cash flow generation, or operating income. There are just way too many assumptions being made to reliably forecast prices or asset valuations.

This article is based on an extract from my recent book, Crude Forecasts: Predictions, Pundits & Profits In The Commodity Casino

Yesterday you received Part 1 of my interview. In this part you’ll learn more about Mike Alkin’s views on geopolitics in the uranium market, that some uranium mines also produce a valuable by-product and finally Mike’s view on future careers in finance.

How should investors think about the risk of resource nationalism affecting their investments, particularly in places like West Africa?

In the world of uranium there is so much geopolitical risk and opportunity. If I just step back and look at the US, the US is an example of a country that has been asleep at the switch in terms of their nuclear program. Around 20% of the lightbulbs in America are powered by nuclear power but here’s a country that has allowed itself to go from being self-sufficient in uranium in the 1980’s to today where 95% of its uranium needs are imported. Who do they import it from? They import about 40% from the Russians, the Kazakhs and the Uzbeks. Countries that don’t necessarily have America’s best interests at heart.

I look at that and I say my goodness there are a handful of US miners and their market caps are too small to notice. But is there anything political that’s taking place under foot? I find it absolutely stunning that a nuclear super power and the leader of a nuclear power doesn’t have a nuclear fuel cycle. There’s been a lot in the press recently about Trump not liking the enrichment program that Iran has which says that you can only use low enriched uranium for nuclear power. At least the Iranians have the ability to enrich uranium. The US doesn’t.

So if I look at the enrichment cycle, uranium comes out of the ground and it gets crushed into yellow cake, and then it gets put into a barrel to be turned into a liquid gas called US6. It then gets sent to an enricher where it gets enriched so it can either be used for nuclear power or as a nuclear weapon. It gets fabricated into pellets and then gets sold to the utility.

When you look at the US nuclear fuel cycle the mining industry is on its knees. They can’t make money, many of them have shutdown. We own none of our own enrichment and the only thing that matters to that process is enriching it as coming out of the ground uranium can’t power anything, it has to be enriched. The US does not own any new nuclear technology. They are completely dependent on outside enrichers of which there’s the Russians of which control over half of that. So they are really at the mercy of others when it comes to energy security in terms of nuclear power but also energy security when it comes to nuclear weaponry. They do have stockpiles but for some of the important elements of those stockpiles they have to depend on others and they only have a limited life of it. So that’s a geopolitical risk to the US and I like to say their playing chess with the Russians and in the game of nuclear power and nuclear weaponry that’s a game I would rather not be playing against them.

Then you start to look elsewhere and as your thinking about uranium there’s three ways to look at it; there are exploration companies, there’s near term producers and then producers. There are only a couple of producers, the rest are on care and standby ready for prices to go back up or many are in the exploration stage. And then geographically there’s not a lot of choice for investors either. There’s a handful of US ones, there’s those in that Athabasca Basin, there’s mines in Australia and then you go over to Africa.

There are those that say you don’t want to own anything in the AK-47 countries where there’s bad guys right, and there’s some validity to that. However, Africa is a big continent; Africa is comprised of many countries, different rulers with democracies and autocracies. I think you have to look at each case in particular.

When you look at the uranium mining landscape there’s Namibia, which if you look on the world terrorism list its very low and its relatively safe. There’s lots of uranium production that takes place there and has done for years. And then you move to West Africa, it’s a tough neighbourhood, you have Mail and Niger, your dealing with Boko Haram and other terrorist factions.

If you take Niger, it produces uranium that powers one out of three light bulbs in France, its a former French colony. In Niger you do have those terrorist groups but it’s also the size of Texas, a huge landmass. Uranium accounts for a big proportion of their exports and so it’s an important revenue source for the country and so you have help from the Niger government.  The French, because they’re so dependent on nuclear power have two big uranium mines there and so they keep French military presence there. The US has been beefing up its military presence in the region also for many reasons.

So to say that broad brush West Africa is bad and full of terrorism, it’s really not that simple. You have to drill down further, what are the economic impact of uranium for that country, therefore how motivated is that country to provide military support, what other countries are depending on it and are they willing to provide military support? I don’t like the broad brush AK-47 rule that some people come out with. And actually that produces some stunning risk-reward for some people.

And then when you look down to Australia, it is the country with the biggest uranium reserves in the world. Kazakhstan is the largest producer, but Australia has the biggest reserves by a country mile. You can’t get it out of the ground though in some parts of the country for political reasons as there is lots of government resistance in parts of the country.

There’s value all over, you just have to know what you’re looking for.

What is your view on the future balance between renewables and nuclear power?

Its very easy to say when the wind doesn’t blow and the sun doesn’t shine, that’s when you need nuclear. As you get to grid scale storage they can store this electricity, and that day is coming when it won’t be cost prohibitive. Nuclear Power, because of the carbon free nature, because of the always on power there is no question.

When Westinghouse or Areva build a reactor its way over budget and over deadline, but when the Russians or Chinese build them they are on budget and on time. So you can build those where they are cost competitive. The Chinese are building their renewable capacity, just as they are nuclear.

So I think people get caught up in the debate between renewables versus nuclear where instead they should take a step back and ask is there a place for all of these to grow? Yes, and then it comes down to supply and demand for this particular commodity so those who get engrossed in the debate between renewables versus solar are not seeing the forest for the trees. For as far as the eye can see nuclear is not going anywhere. Those nuclear plants need uranium, but there’s not enough of it at anywhere near these low prices.

Another thing I think people overlook is that for grid scale storage adoption to take hold you really need better storage. One of the big technologies is vanadium batteries and they have been shown to have a number of advantages. And it just so happens that vanadium is a by-product of uranium. You’ve seen the price of vanadium go up from a couple of dollars to 12-13 dollars per lb, and while that’s also because the Chinese have introduced environmental restrictions on the manufacture of steel (vanadium is used to strengthen steel) the next level is grid scale electricity storage adoption and that’s where vanadium comes into mix.

There’s very few pure vanadium plays out there and the next level down you get the uranium miners and for those miners that have the commodity as a by-product that helps to drive your cost of production down. So for those investors that have the time and inclination to drill down further and understand uranium and then think who has vanadium and is it economical to mine, they are often surprised at what value they are getting in those deposits.

Is vanadium a by-product of all uranium mines?

No, only certain ones so you have to go line by line and look at them. But it can have stunning implications for the economics of the uranium mine especially as the cost of vanadium keeps going up that keeps driving down the cost of producing uranium. The revenue that you get from selling the vanadium drives down your cash cost of producing uranium.

What was your biggest mistake in the markets and what timeless lesson did you learn from it?

That’s a great question. I’ve made a lot of mistakes in my investing career. It depends on how you size them, and I think this is important for individual investors. I’ve had some long positions that have gone to zero but I’ve sized them appropriately where I’ve thought that if I’m right my return could be 100 X but there’s a good chance that I’m wrong and if I’m wrong how much am I willing to lose? And that’s pure speculation and sometimes you will be wrong. When you make mistakes, if you’ve sized them appropriately and you understand what your risks are then so be it.

The biggest lessons I’ve learnt on the short side are, and thankfully I learnt this very early on in my career when I worked for a legendary hedge fund manager, a guy by the name of Joe Dimenna. I was very fortunate to have great exposure to him early on and to learn from him. I learned early on that I can’t be the arbiter of value; I can’t decide what somebody is willing to pay for a stock. So when you are shorting something you are betting against something and it’s trading at a valuation that makes no sense. It’s arrogant of me to even think that because without any decline in the market fundamentals people might not continue to pay higher and higher prices. What’s the saying?, “The market can stay irrational longer than you can stay solvent.”

I think early on in my career I would look at valuation and that would help guide my investment decisions, whereas now valuation is secondary. If I see the fundamentals improving, either long or short I have to see that first before I get around to what the valuation should be.

The other thing is that trends can go on longer than you can imagine. You can be early but if you don’t identify a catalyst, or a handful of catalysts you are sitting on dead money for a long time. As I said if you are ok with that that’s fine, but if you are managing professional money you’ve got to be more aware of time.

Another thing is trusting management teams. Probably early in my career I learnt not to believe what management teams tell you. It’s not that they are bad guys, there are many nice people there but you don’t get to the level of CEO or CFO without being a fabulous salesman. They are very good at telling their story; they are not in the business of talking down their stock. It’s what a Russian writer said to Ronald Reagan – trust but verify.

I’ve also made mistakes when you think you know something, when you think the thesis is so easy and repeatable and you start to sound like a broken record. I test myself on my uranium thesis all the time. When I talk to hedge fund guys about it they come at me with all these arguments as to why its not going to work. I can’t tell you how superficial their arguments are as they have just spent an hour on it. Nothing gives me more comfort because I know as soon as it turns they’re going to be rushing to get in.

One final question. If you were going to give some career advice to a forward thinking kid looking several years into the future what would it be?

In terms of finance I think the glory days of the hedge fund industry are behind us. There was a period between the late 1980’s and the early 2000’s when the hedge fund industry was a place where you make lots of money for yourself and your investors. But for all of those reasons I mentioned earlier, like the institutionalisation of hedge funds it’s made it very difficult with both hedge funds and mutual funds under-performing. And that causes fee compression and people lose their jobs. So I personally don’t steer people into being a hedge fund analyst or manager. The financial markets are a tough place to make a living going forward. Many of the jobs are being disintermediated by electronic trading. So these jobs are fleeting.

Study maths, study science, become an engineer. That would be my advice.

A great answer. Where can people follow you and find out more about what you’re doing?

The best place for people to get in touch is on Twitter @FootnotesFirst. I’ve also recently started doing a weekly podcast called The Mike Alkin Show: Talking Stocks Over a Beer.

Thanks for your time today Mike, I really enjoyed our conversation.

I recently had the opportunity to talk with Mike Alkin. Mike is the founder and Chief Investment officer of Sachem Cove Partners, a hedge fund that invests solely in uranium and nuclear fuel cycle companies, a newsletter writer and someone who has spent 20+ years in the hedge fund business as an analyst, portfolio manager and partner. Below you’ll find the first part or our two-part interview series.

In this part you’ll learn how to manage a commodity investment over a long cycle, factors to look for when a commodity market is turning and why the uranium market is so unusual.

Part 2 of the interview is published tomorrow.

What got you first involved in commodity markets? 

I love commodities because its a play on human nature. The narrative gets extended one way or another at the peaks and troughs. Complacency sets in. I find it as a useful way to pick off human psychology sometimes.

Most of my career in the hedge fund industry I was a short seller. By that very calling it means you are a contrarian in that you are betting against conventional wisdom. When you are looking for short selling opportunities you can looking for businesses that are slowing down yet the market hasn’t figured it out yet.

People want stocks to go up but not all the fundamentals warrant that. So when you are thinking about commodities you are looking to find inflexion points. The commodities business is one where you tend to find highs and lows, its cyclical. I believe there are very few businesses that are not cyclical in nature. When prices are really good they bring on more capacity, and conversely when they can’t make money they are shutting off capacity. But it’s hard to see that at the time when the trend is going one way, it’s easier to adopt the narrative of that trend. The trend is your friend as they say. But I find the longer a cycle runs on the more complacency sets in.

That’s what attracts me to commodities itself. Then of course within commodities there are cycles that are more elongated than others, we tend to see in uranium there are deep cycles with peak troughs and peaks.

As markets become dominated by algorithms is taking the long term view and focusing on niche markets the only way that human investors can compete?

Having spent as many years as I did in the professional hedge fund environment you see how the tools that the professional investor has are far superior to what an average investor has. A Bloomberg terminal may cost $25,000 per year, Capital IQ $10,000, experts to speak to may cost you $50,000-$200,000 per year. So all those great tools don’t substitute for the one thing that average investors have. And that’s time.

There is such great pressure for hedge funds to perform on a daily, weekly monthly basis that it takes away their ability to arbitrage time. If you identify a market that’s going to turn and you’ve got time on your side that’s a nice luxury to have. But running a professional fund you don’t just need to know if it’s going to turn but when. And sometimes you have to overlook great value because you [the hedge fund manager] don’t have the time.

Twenty years ago when I started in the hedge fund business most investors were high net worth individuals and you used to send out a letter to them maybe quarterly, definitely every half year and you might tell them about the positions you held. Fast forward to the Asian financial crisis and after the Internet bubble hedge funds outperformed very nicely as they had short exposure. It saw a wave of money coming into the sector, pension funds, endowments and they hired experts to go analyse these hedge funds. They have to do all their due diligence and they have to put you in a box – large cap, small cap, value investor. But there’s a lot of granularity that goes on, sometimes weekly performance reviews. If you are down 10% now in a month all hell breaks loose.

As dollars can walk out the door tomorrow it really compresses your time horizon. You’re really going for what’s working now. And what’s working now is what everyone knows is working now, it’s already priced in, and so asymmetries are hard to find. I find commodity cycles you can find asymmetry in that risk-reward. People have quit a sector and its left for dead, or conversely its going gang busters and everyone wants in and so it’s all priced in to the market

How do you maintain that patience over long cycles?

I think sizing is important. If you imagine a portfolio as a pie, how much the pie do I devote to any one sector or stock? I want to diversify that pie so not only do you need to identify your risk-reward but you also need to know the catalysts that are going to come to fruition. If I have a fabulous risk-reward but the ‘when’ portion of it is a little elongated I might have less exposure to that sector and this way it gives me the opportunity that if there is weakness I can buy the dips. For individual investors it’s very important how much you want to devote to equities, fixed income etc. How much am I comfortable to lose? It’s so individual and that’s what drives the market, its human emotions. Being a hero can hurt.

What factors do you look to say hey people are starting to take interest, time is getting close?

What I like to see is that a number of the sell-side firms have abandoned a sector; relating it to uranium, investment banks have cut their trading desks, they have reduced the amount of research analysts since their not generating commissions and so it’s not a good investment for them. So, I find when there is reduced exposure from the City or Wall Street that’s when it gets exciting.

When the number of companies involved in the sector starts to shrink, when we get bankruptcies, when we start to see companies just giving up that is also a good sign. And I love to see supply discipline. Until you start to see that there is no reason for the commodity price to turn.

Thinking about uranium, we’ve seen Cameco and Kazatomprom shut in production and yet the price of uranium has barely budged. If you introduced that same scenario to other commodity markets you would have expected a much stronger reaction. Why has the price reaction been so muted?

In all the commodity markets I’ve never seen one like uranium. There are so many factors. The first is that it’s hated. The end market – nuclear power – is a pariah. I think there is a misunderstanding in the role nuclear power plays in the world, for instance it is the safest form of electricity generation, and nothing is even close; coal, natural gas, renewables etc. But we hear about Fukushima, Chernobyl and Three Mile Island.

I do what I call the BBQ test. This past summer when we had BBQ’s at our house, I asked people what percentage do you think the US has in nuclear power generation? And the response is, “I don’t know, do we even do nuclear power even more?” In the US 20 percent of homes are powered by nuclear power so I think there is a general disdain for it, misunderstood also.

The reality is that it’s growing 2-3 percent per year and that it is a developing world story. I don’t say this proudly but a large percentage of Congress don’t have passports and so many Americans don’t tend to think outside of their borders. If you haven’t travelled much then you might not be familiar with the air quality issues that affect many countries such as China. That’s the demand side, there’s a lot of misunderstanding.

On the supply side it’s very opaque. And markets that are more opaque than not tend to create opportunity. So with the sell-side having abandoned the sector with the exception of a couple and most of these guys have been barking to own a part of the sector and they have been wrong

In an opaque market it’s hard to get data – new mines, nuclear power plants. When you think about it the largest uranium supplier in the world, Kazakhstan they are not public so they don’t have to give you a lot of information. Its opaque, it takes a lot of time. Time that professional investors don’t have. If you’re a professional investor your normal course of action will be to go to the sell-side and say show me the reports you have, your research, can I see your model? By this point you will be thinking this is going to take a lot of time to get up to speed, I’m going to look at another sector. And I think this is what makes the uranium sector unique as it does take an awful long time to understand supply and demand.

I also think that the long-term nature of the contracts play a big role. Most contracts between the power plants and uranium miners are 7-10 years. So, despite the commodity falling off in price dramatically, many of the miners were able to produce at much higher prices-for years. This led to what I like to call “supply-side” complacency”. The miners assumed Japan would come on-line much sooner, and that enrichment underfeeding (which adds secondary supply to the market) wouldn’t be nearly as bad as it is, so they figured by the time the contracts roll-off pricing will be much higher.

And here we are. 7 years-on from the beak, mired in a horrific downturn, the price is at $22 per lb and it costs most of the miners $50 per lb all-in to pull it out of the ground. It doesn’t require an MBA in business for a CEO to know that math doesn’t work.

And here we are, supply discipline is finally entering the equation.

The utilities that have needed supply have been able to rely on the spot market to top off their needs. That’s about to change as 30% of their contracts roll-off in 2020. And it takes two years to get uranium as a fuel form the time it is ordered.

I think this year is the inflection point. The combination of supply cuts and uranium demand form utilities i think should drive the price markedly higher.

That’s a barrier to the average investor though also isnt it? They might hear what you’re seeing and recognise the potential for opportunity. But then the next obstacle is who do I talk to, who isn’t just selling me a hole in the ground?

The mining business itself isn’t a good business. Most of them are consumers of capital. If they’re exploration companies 1 in every 3000 holes turns into something. I always say biotech companies are in the business of finding cures, but they are also in the business of issuing equity to stay in business. Many mining companies including the majors do the same thing.

Being able to understand supply and demand is just fourth-grade mathematics. If someone has the time and inclination they will go to the various sources of data. Now here’s where it breaks down for many people. Thinking about the formula for supply and demand, on the supply side I need to know how many mines are producing something, what’s their cost of producing it, where is the price versus the cost to produce, is there enough incentive for them to continue to do so and then I want to know whether there is secondary sources of supply? I also need to know what the inventory levels are.  In the case of uranium it’s just going round to each of the companies that produce it, searching for industry data, figuring out secondary  supply, examining inventories at the global utilities,  and just reading and then putting those numbers into a spreadsheet. It’s doable, but a lot of work.

Prospective supply is the final thing to understand. If you are drilling for natural gas for example, and there’s a shortage and the price rises, how long does it take for new supply to come on? In the case of natural gas not very long. In the case of a commodity, and using uranium as an example I go to everyone to the websites of every uranium mining company and I look at what their prospective projects are. When these companies publish their technical reports as part of their investor relations they list all the projects, here is where we are in our licensing permitting, here’s what it costs to pull it out of the ground and here’s how long it will take. None of that is high finance.

On the demand side you can just look on the internet and see how many reactors there are in the world – the size and how much they use per year. And then I want to know what plans they have for new reactors, what’s in the pipeline? Again, the data is out there, it’s very simple. It just takes time. Which countries are reducing their reliance on nuclear power? We know its France, the USA, Germany. And then taking those reactors out of the model in the years to come.

All very time consuming. It took me a couple years to build that, but that gives me a comfort to know what’s going on. In the case of an opaque market like uranium people take snippets of information, and I see it on Twitter all the time, and they run with it. But in reality it may not be meaningful at all, very interesting but probably already priced into the market.

If people are doing their own investing the thing people have to be careful of is many-newsletters. Many newsletters are written by people who want to sell newsletters, not all are like that, but many. When something is hot that’s what they’re going to sell. When the cycle’s turning their going to come out with it. But what’s that based on? I’m very suspicious of sell-side research. I operate off of what are their financial incentives? Why did most of the sell-side cut most of their exposure to uranium research? It’s because they can’t generate banking fees, there are no mergers, there’s no trading commissions.

That’s the premise of my book!

The power of incentives right!

I watch this a lot with uranium and nuclear power. The US is 30% of all nuclear power in the world, there are 99 reactors and some of them are not economical with gas prices as low as they are. The fuel buyers of nuclear power plants in the US hear about these closures in the papers every day and all they’re thinking about is hoping to get to the end of their careers. The question I ask is what is the financial incentive for that individual to walk over to his boss and say we need to buy uranium because I think its bottomed and here is the work I’ve done to support this view. If he’s right does he participate in the upside of that in any meaningful way? No. If he’s wrong could he look like a fool and lose his job? Yes, he could. There is comfort in crowds, so what’s the incentive for that person to pull the trigger and make a decision?

Remember back in the 1980’s there was the saying, back when IBM was relevant that a chief technology officer never got fired if he bought IBM. If it didn’t work he wouldn’t get fired since everyone else was doing it.

I’ve done a good amount of work in understanding the psyche of these buyers in talking to them and going through my analysis of the market with them. They don’t do the same analysis, they use consulting firms and they pay a great deal of money to understand what is going on in the market.

Let’s take that power of incentives one step further. If I’m one of the two consulting firms that advise the nuclear power industry I could get subscribers from either the nuclear power plants or the miners. Well, the miners can’t afford to pay them, so who pays them? The nuclear power plants.

So much of this is stepping back and understanding human nature. In industries where you have a very elongated cycle it’s very easy to capture the narrative and run with it. I’ve gone to so many idea dinners as an investor where six or eight hedge fund guys will get together and chat about what’s going on. And I call it the ‘head-bob’ when someone is pitching an idea and everyone at the table is nodding saying that makes sense. Everyone is feeling good about that investment. Well, that’s because everyone knows about it! Who’s not heard about it? What’s my risk-reward? Probably not great as everyone’s heard about it.

When you go and pitch an idea and everyone’s like you’re out of your mind that’s when things start to get interesting. Taking uranium as an example I drill down a couple layers and I can quickly start to tell that they’re headline reading. And that gets me excited.