Thread by @PauloMacro

On Uranium equities, I’ve had a chance to think about some mechanics and flows involved here, and I fear people need to be much more cautious in the near term.

Note I am not talking about the U3O8 spot px - everyone including utilities, CCJ, KAP are short.

$URNM $URNJ $URA
1/21

For starters there is the $URNM and $URNJ ETF selling. This has to do with the PFIC status of underlying holdings (not just Sput but many of the miners like NXE and BOE are PFICs).
2/

Capital gains from index rebalancing (and selling massive holdings like $UEC in $URNJ recently) created an income tax liability which the fund needs to cover/pass through. In a year when the ETF is up big, the tax is sizable… a 4% “yield” to pass through.
3/

Sprott’s decision to surprise announce such a huge div the day before a major options expiry was **amateur hour pure and simple** especially considering this is largely a retail product, and retail+small HFs were playing calls in size (historically this div came at year end).
4/

So lots of technical damage from a mistimed div announcement. But it gets worse.

I was blown away when I saw it but it’s right there for all to see: $URNM and $URNJ are currently running a large negative cash balance. Here is $URNM: -$58mn in cash on a $1.6bn ETF (3.6%)
5/

And for $URNJ below

And mind you these are shots of 12/14 but the numbers didn’t change from Thursday to Friday. I will hear all about how this is already neutralized by arbs now - OK BRO. Negative cash is negative cash - you do you.
6/

So beyond the damage done to retail with options expiry and the initial rebalance smoking the largest ETF names, the Sprott ETFs haven’t even sold yet, and the pay date is this Thursday. A 4% effective redemption in a week is… a lot of selling.

It gets worse.
7/

Global X ETF URA (bigger at $2.5b) is about to do the same thing. At least they had the decency to tell you it’s coming, rather than “hey surprise! Today is ex date on an enormous 4% dividend, and NO we won’t consider it special nor adjust the options chain for opex tomorrow.”
8/

Judging by the performance, this $URA dividend is $75-100mm.

Only this one goes ex- 12/28 and pays Jan 8th, so they will be selling during the least liquid time of year and then right out of the gate in Jan.

It gets worse.

9/

The space is overrun with retail punters who have been yolo’ing ETF calls and crapco promotes already pricing $70+ run by mgts who don’t have a mine yet, but sponsor Formula One lmao 🤣

It gets worse.

10/

Retail has profits for the first time in a few years. January is their sale window - they won’t sell now for tax reasons.

But wait there’s more.

11/

The Dec call wall is there in January as well. Market makers who are short gamma will continue to drain that premium as they take deltas off and we work through the quiet holidays.

12/

And for those who care about seasonality, time is running out
13/

I don’t mean to disappoint anyone - none of this is a reflection of the unbelievably bullish setup in the physical commodity itself. Believe me I get the fundamental thesis. And spot is $2-3 wide - I know what comes next here when the market finally clears.
14/

So it will be sadly ironic if physical (and the handful of funds that own their own yellowcake in the can, hopefully not on swap) does well, yet retail gets screwed yet again by poorly constructed financial products.
15/

Mind you I am including SPUT in this. There is ZERO financial incentive for Sprott to set a redemption mechanism, and a 2/3 trustholder approval vote is impossible to coordinate given retail mostly owns it. The discount here will prove sticky absent a full-blown mania.
16/

I could easily see a world in June24 where spot is $100+, Sput trades a 10%+ discount, and other commodities do much better because positioning hasn’t warranted a U3O8 WSJ article where MS is calling it their best commodity and U believers pull their hair out.
17:

In all of this screwiness, I couldn’t help thinking of a passage from Seth Klarman’s book Margin of Safety, on page 18:
18/

Uranium equities are trading sardines. CCJ is overcontracted and a buyer of spot. KAP is missing production dreadfully. Most juniors are fairly/richly priced and years away from first production. And Sput is a challenged financial product to put it politely.

/19

Basically everyone in nuclear is short or horribly overvalued, and you are counting on a leveraged mania. The more you hate me for reading this, the more deep down you know there is a lot better use of money in 2024.
20/

I am in the trade for Sput which is as close as I can get to the phys without a license to own yellowcake, but I can see other trades doing better in 2024 than U equities, and also see many ways guys can tear their hair out wondering what went wrong for their destined riches.
Fin