In late May – I wrote an article highlighting why I believed the uranium sector finally hit a bottom. And that I was looking for potential plays with significant positive asymmetry (low risk – high reward). 

Now – just in-case you didn’t read my previous article – here’s some context:

Due to the collapsing uranium prices since 2011 (after the ‘Fukushima crisis‘ in Japan) – global uranium producers tried to survive the storm by ramping up their uranium output.

Why? Because when prices fall – producers will increase production so that they can make up for the lower prices. (For example – if a pound of uranium drops from $50 to $25 – producers must more than double their output just to make up for the lost revenue).

But – the problem is that when all producers do this at once – it creates excess uranium supplies (aka a ‘supply glut’). Thus pushing prices even further down (repeating the cycle).

This nasty feedback loop continued on until finally – by early 2017 – roughly 95% of all global uranium producers found themselves operating at a loss.

That’s when major uranium producers – such as Cameco and Kazatomprom – threw in the towel. . .

They decided that they would rather hold onto their uranium assets – instead of mining it at a loss – and began cutting uranium output. (Waiting for prices to begin rising).

This kicked off a trend of divestment, marginal mine closures, and exploration budget cuts (aka the ‘consolidation’ phase).

Thus – since then (2016) – global uranium production has dropped to roughly 135 million from a global peak of 162 million (a ~16% decline).

Now – keep in mind that this is already a significant drop in the annual uranium supply.

But – flash forward to today – there’s even more uranium supply cuts happening. . .

For instance: Kazakhstan – the world’s leading uranium producing country (accounting for 25% of global output) – just announced that they’re extending their 20% output cuts through 2021. . .

(Remember: because of the oversupplies in the uranium market causing lower prices – Kazakhstan first announced production cuts by 10% in January 2017. And then increased it to 20% in December 2017).

This extends the 20% output cuts by another two full years (27 months) – which means that overall annual output will average roughly 59 million pounds of uranium.

Or – putting it another way – roughly 14 million pounds of uranium will be cut from global supplies.

This will push the global uranium market 8% further into deficit by 2021 (meaning more demand compared to supply).

This is very important. Because according to capital-cycle analysis – major declines in global supplies are the beginning stages of a supply-side bull market.

To give you some perspective – years of low returns on investment and overproduction led to uranium supply guts and negative returns. Thus capital fled to other higher yielding sectors.

But – eventually – the supply cuts will rid the market of excess supplies. Pushing uranium prices higher.

And as prices rise – return on investment and margins will also. Causing capital to flow back in (kicking off the ‘boom’ phase).

Just take a look at the graph below of a generic capital cycle. . .

What’s important to remember is that this process always plays out in cycles.

Or – otherwise said – bull markets create bear markets, and bear markets create bull markets (study the chart above).

So – in summary – the 27 month output cut extension from the largest uranium producer in the world signals further supply-destruction ahead.

As the Kazatomprom CEO – Galymzhan Pirmatov – said: “The decision to extend production curtailment reflects the fact that the uranium market is still recovering from a period of oversupply…” (Meaning: there must be further supply cuts for the uranium prices to recover enough for capital to flood back into the sector).

Now – if you remember from my previous article – I wrote that I still wanted to see continued supply cuts.

But – since news broke about these further cuts – I only feel more confident that the uranium market is in the early stages of a supply-side bull market.

Thus – because of this – I have opened a large position via buying long dated, out-of-the-money call options on Cameco Corp (NYSE: $CCJ).

I hope as uranium prices rise later this year (fall and winter) – these $CCJ calls will outperform.

I will continue monitoring the uranium sector and writing about any meaningful events. I will also fill readers in if my ‘long uranium’ position changes (i.e. if uranium loses its positive asymmetry).

But for now – I believe the potential reward significantly outweighs the risk.

Stay tuned.

PS – my favorite book about the capital cycle and ‘capital-cycle analysis’ is Edward Chancellor’s book ‘Capital Returns’. It’s a must-read in the Speculators Anonymous Reading List.

AS A DISCLOSURE: Because of the positive asymmetry (low risk – high reward). I recently opened a position in my own portfolio on the Jan17’20 $10 Calls @ an average cost of $0.35.