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A lot of the #uranium bull thesis revolves around a return to significant long-term, price-protected contracting between end users and producers. Let’s take this at face value. Here are some different perspectives on the subject. /1
A long term uranium contact is a covenant between two parties that a supplier will deliver the agreed-to pounds on schedule and the buyer will pay for them. This sounds very simple, but it isn’t. /2
Depending on the contract’s pricing mechanism, using broad strokes, a contract will generally have minimum and maximum delivery prices. So a LT contract is a promise from the seller that they can deliver at the minimum price and from the buyer that they will pay the maximum. /3
Every contract will address damages- of the losses incurred by making a replacement sale or the extra cost to buy alternative supply- but the important question is whether the damages will even be collectible. Hard to sue a bankrupt corporation or a foreign state-owned entity. /4
From the sell side - the potential for delays and geologic surprises is going to add buffer to your lowest contract price (e.g. more than “all-in” cost). If you get this wrong and fail to deliver at the contract price or time, you’re in a huge hole. Debt, bankruptcy, etc. /5
From the buy side - you’re accepting a seller’s unique risk portfolio. You’ll never be made fully whole in the worst cases, so it’s a hard decision that goes beyond unit cost. /6
When price is far above production cost, price discount vs. higher risk becomes a more compelling question. In this price regime, however, it’s hard to be further discounted so flexibility of terms/conditions and low counterparty risk are the prime currencies. /7
Anyway - the rising tide of interest and capital inflows into the sector will lift all boats, but joining the club of producers (or developing and selling a top tier asset) is where the real magic happens. The graveyard is full of potential and half-finished projects. /8
Every #uranium CEO/MD will claim that they have a dinner reservation, but there aren’t enough tables in that restaurant. And sooner or later, investors in the sector will be rewarded from discriminating fact from fiction... /9
P.S. over the last 15 years, utilities, traders, and producers have backed away, cancelled, or otherwise failed to perform on agreements. This is a small industry with a long memory and deep experience. This asymmetrically alters risk perception in the space.
