2024 January CAD

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1.74% MTD

1.74% YTD

Dear Partners,

In January, the Caravel Capital Fund returned +1.74%.

Overall, the fund had a solid month thanks to multiple positive contributors.  Returns were negatively impacted by a merger arbitrage deal that broke (and has since been exited), as well as the cost of systematic portfolio hedges that were put in place prior to the Taiwan election.  To highlight a few strategies on the positive side of the ledger, the fund generated gains in the high-yield portfolio and in certain mining-related equities.  Specifically, the fund currently has approximately 20% exposure to the mining sector, predominantly in uranium-related securities.

Here is where we throw on our teacher’s hat and try to enlighten our partners on what we think is our next great opportunity, and what we hope to talk about in the future as a substantial contributor to the fund’s overall returns.

The demand for uranium is primarily driven by global energy consumption and is accentuated by the growing interest in nuclear power as a cleaner alternative to traditional fossil fuels.  However, the supply of uranium has faced challenges due to various factors.  One significant aspect is the concentration of uranium production in a limited number of countries. A few countries including Kazakhstan, Canada, Australia, Uzbekistan, and Namibia dominate global uranium production.  This concentration creates geopolitical dependencies and exposes the industry to severe supply shocks and thus big movements (read: upwards) in the price of uranium.  Case in point – in the early 2000s, uranium went from $10/lb to over $135/lb by the time it peaked in 2007.

The factors above have been present for decades, so what’s changed? Many things, but we will focus on a few here:

1. Russia’s invasion of Ukraine and subsequent retaliatory sanctions highlighted many countries’ dependency on Russian exports.  This was most acutely felt in Europe, where many supply chains had become overly dependent on Russian natural gas.  This has caused political leaders the world over to rethink their energy supply and infrastructure, specifically how their grids are powered.
2. From an environmental perspective, nuclear fuel can generate significant energy with extremely low carbon emissions compared to fossil fuels, contributing to the global efforts to combat climate change.  Environmental concerns over nuclear energy are typically related to the risk of accidents and subsequent radiation leaks, which are infrequent but severe events that have been observed before.  We believe these risks are low and declining as reactor technology continues to improve.
3. The global supply of Uranium is approximately 140 million lbs/year, and the global demand is closer to 180 million lbs/year, good for a ~40-million-pound annual deficit.  The deficit is a function of an industry that has been starved for capital due to extended periods of depressed Uranium prices following the Fukushima tsunami and subsequent reactor meltdown in 2011.  As a result, very little capital has been put into finding new projects or expanding existing ones in the past decade.  Uranium mines also take much longer than traditional mines to be put into production due to regulatory scrutiny, complex licensing processes, and increased technical complexity.
4. In response to this supply shortfall, financial players have recently stepped into the market by raising billions of dollars for the express purpose of buying and holding raw uranium in the spot market.  These vehicles give investors like us the ability to get exposure to spot uranium prices without storing it in drums in our basements.  In response to these and other developments, spot uranium prices nearly doubled in 2023 and are currently trading over $100/lb.
5. The world’s largest producer of raw uranium is a Kazakhstan-based operator called Kazatomprom (LSE: KAP), and it accounts for approximately 40% of the world’s supply.  After telling investors in late 2023 that they would materially increase Uranium production in 2024/2025 to meet the increased demand (and take advantage of strengthening prices), they reversed course completely less than four months later, warning they would not be able to meet their guidance due to a shortage in sulphuric acid.  So KAP was thought to be able to help alleviate the supply deficit the world is facing, and instead of that now likely has to buy millions of pounds of uranium in the spot market to be able to meet their previously committed delivery obligations to counterparties.
6. Nuclear reactors can take ten years to permit and build, and often cost more than $10 Billion.  This makes them incredibly hard to just shut down once you have finally turned them on.  That’s where things get fun – when you are long a commodity with excellent supply/demand fundamentals and near-complete price Inelasticity (price can go up significantly without demand decreasing at all). We doubt Alfred Marshall had the uranium market in mind when he coined the term price inelastic in the late 1800s but we are sure he would share our excitement.

There are many more reasons to own uranium stocks and the commodity, but we will stop there for now.  We are excited about the structural supply shortfall that this market has over the next 5-10 years, and when combined with the price inelasticity we believe the commodity has substantially further upside from here.

If anyone wants to discuss this or any other strategy, as always, we are available any time.

At month end Glen redeemed $150k USD of his units.

We thank you for your confidence and capital.

Sincerely,

Jeff, Glen & Jack