Trader’s Narrative

It would seem that the stealth uranium bull market is over. After spending the past few years levitating non-stop into the stratosphere, uranium (U₃O₈) prices finally succumbed to gravity in June, topping out around $135/lb.

Since then prices have dropped to $90/lb (not shown on graph above). The effect on uranium stocks has been nothing short of devastating.

The Uranium Participation Units (TSE:U) traded on the Toronto Stock Exchange have dropped from almost $19 to $10. And whereas it used to trade at a premium to uranium spot price (sometimes as high as 50%!), not it is trading below NAV.

The last net asset value was July 31st at $14.04 - the August 31st numbers are still to come but I estimate them to be lower than July’s.

And while before it had bounced off it’s 50 day moving average, now it is below both the 50 day and the long term, 200 day moving average.

So what happened? I have no idea really. But I suspect it has something to do with demand and supply

Also, we had a rare contrarian indicator occur in early summer. At the beginning of May 2007, NYMEX started trading a new futures contract. Here’s what I wrote back then:

Historically, the introduction of a new contract has usually meant an intermediate high in prices…If you’re long uranium or uranium stocks though, we could be in for a rough patch as this is a reliable contrarian indicator.

As you can see on the chart, that coincides almost exactly with the top in Uranium Participation. Uranium itself hovered in thin air territory for another month or so:

I don’t like how most uranium stocks have cratered below their short term and long term moving averages. This sort of damage, especially when wrought over a short period of time isn’t at all conducive to the health of a bull market.

The only good thing I can see on the charts is that they are back at support (as you can see with the chart of Uranium Participation Units above).

Here’s a trading opportunity you don’t see every day!

On March 31st 2007 Uranium Participation Corp. (U) had a NAV of $12.38, while it traded for $16.00 on the Toronto Stock Exchange. After a spike up to a high of $18.76, it is now back to $16 a share (all amounts Canadian). That represents a premium of approximately 23% to the underlying commodity.

Since Uranium Participation represents actual uranium (the commodity), I’ll be going short the Uranium Participation Units and long the upcoming NYMEX UxC Uranium futures to arb out this premium. My only risk will be currency exposure between the US and Canadian dollar but since this should be a short term trade, that’s acceptable to me.

As of April 13th 2007, the short position of U on Toronto Stock Exchange, was 2,479,300 shares. This was a reduction from the 3,416,000 sold short on March 30th, 2007. I wish the exchanges would release this info with less time lag!

This trade is a great example of a non-directional trade. Although both positions are in uranium, the actual price of uranium doesn’t have to move for the position to be profitable. All that has to happen is a collapse of the NAV premium in Uranium Participation Units (U) to reflect the real uranium prices on the NYMEX.

By the way, this happened before when Central Fund of Canada Limited (CEF.A) - a closed-end fund in Canada investing in gold and silver - had its premium collapse after the introduction of the streetTRACKS Gold Trust ETF (GLD) and the iShares Silver Trust ETF (SIL).

Watch Out!
Historically, the introduction of a new contract has usually meant an intermediate high in prices. But since this is non-directional, it won’t affect me. If you’re long uranium or uranium stocks though, we could be in for a rough patch as this is a reliable contrarian indicator.

The other dark cloud on the horizon is that according to inflation adjusted prices, we are almost at the previous high (~$115/lb) last seen in the late 1970’s. After a parabolic move up within a few short years, I won’t blame anyone for being nervous to see prices at previous resistance levels.

Cheatsheet for the upcoming NYMEX UxC Uranium futures contract:

• U₃O₈ (yellowcake) is concentrated uranium oxide produced from uranium ore and is the most actively traded uranium-related commodity. Its primary use is as fuel for nuclear reactors.
• NYMEX UxC Uranium U₃O₈ futures will be launched at 6:00 pm May 6, 2007 (Sunday) for the trade date of May 7, 2007 (Monday).
• Contract symbol will be UX
• Contract size is 250 pounds of uranium U₃O₈ (currently spot price: $113/lb.)
• Minimum tick size is $0.05
• It will be a financially settled contract with each month settling on the corresponding spot month-end U₃O₈ price published by The Ux Consulting Company.
• Trading hours are 6:00 PM through 5:15 PM, New York time, Sunday thru Friday, with a 45 minute break each day between 5:15 PM and 6:00 PM.
• Initially, 36 consecutive months will be listed. The first listed month will be June 2007.