the trailing edge -...

By NICK GIAMBRUNO

THE TRAILING EDGETHREE BOLD MOVES THAT COULD “FLIP” CRISIS INTO FORTUNE

BY NICK GIAMBRUNO

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THE TRAILING EDGECrisis Investing

List of InvestmentsInvestment No. 1 ....................................................................................EOG Resources (EOG)

Buy shares of EOG under $120 per share.

Investment No. 2 ................................................................. Franco-Nevada Corporation (FNV)

Buy shares of Franco-Nevada Corp. under $100.

Investment No. 3 ...................................................................................................Cameco (CCJ)

Buy shares of Cameco at market prices.

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Dear Investor,

A crisis often allows you to buy a dollar’s worth of assets for a dime or less. Spotting these bargains is my specialty.

In this report, I’ll show you how to profit from two unique crises: the death of the petrodollar and the (temporary) shunning of uranium.

I expect the dollar price of gold and oil to soar when the petrodollar system crumbles in the not-so-distant future. You don’t want to find yourself on the wrong side of history when that happens.

In the pages ahead, you’ll find two ways to profit from the death of the petrodollar.

You’ll also find a third, urgent recommendation… one I call “the ultimate crisis investment.” Simply put, it’s the best way to profit from the coming uranium bull market.

Nick Giambruno Chief Analyst, Crisis Investing

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The Number One Black Swan Event for This YearOn August 15, 1971, President Nixon killed the last remnants of the gold standard.

It was one of the most significant events in US history—on par with the 1929 stock market crash, JFK’s assassination, or the 9/11 attacks. Yet most people know nothing about it.

Here’s what happened…

After World War 2, the US had the largest gold reserves in the world, by far. Along with winning the war, this let the US reconstruct the global monetary system around the dollar.

The new system, created at the Bretton Woods Conference in 1944, tied the currencies of virtually every country in the world to the US dollar through a fixed exchange rate. It also tied the US dollar to gold at a fixed rate of $35 an ounce.

The Bretton Woods system made the US dollar the world’s premier reserve currency. It effectively forced other countries to store dollars for international trade, or to exchange with the US government for gold.

By the late 1960s, the number of dollars circulating had drastically increased relative to the amount of gold backing them. This encouraged foreign countries to exchange their dollars for gold, draining the US gold supply. It dropped from 574 million troy ounces at the end of World War 2 to around 261 million troy ounces in 1971.

To plug the drain, President Nixon “suspended” the dollar’s convertibility into gold on August 15. This ended the Bretton Woods system and severed the dollar’s last tie to gold.

Since then, the dollar has been a pure fiat currency, allowing the Fed to print as many dollars as it pleases.

Of course, Nixon said the suspension was only temporary. That was lie No. 1. It’s still in place decades later.

And he claimed the move was necessary to protect Americans from international speculators. That was lie No. 2. Money printing to finance out-of-control government spending was the real threat.

Nixon also said the suspension would stabilize the dollar. That was lie No. 3. Even by the govern-ment’s own rigged statistics, the US dollar has lost over 80% of its purchasing power since 1971.

Doug Casey: Inflation is one of the most misused words; few even think about its actual meaning. What is inflation? “Well, that’s prices going up.” No, it’s not. To say that is to confuse cause and effect. Inflation is an increase in the money supply. You inflate when the money supply is increased by more than real wealth increases.

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The death of the Bretton Woods system—which was really the US government defaulting on its promise to back the dollar with gold—had profound geopolitical consequences.

Most critically, it eliminated the main motivation for foreign countries to store large US dollar reserves and to use the US dollar for international trade.

At this point, demand for dollars was set to fall… along with the dollar’s purchasing power. So the US government concocted a new arrangement to give foreign countries another compelling reason to hold and use the dollar.

The new arrangement, called the petrodollar system, preserved the dollar’s special status as the world’s reserve currency. For President Nixon and Secretary of State Henry Kissinger, it was a geopolitical and financial masterstroke.

From Bretton Woods to the Petrodollar

From 1972 to 1974, the US government made a series of agreements with Saudi Arabia, which created the petrodollar system.

The US handpicked Saudi Arabia because of the kingdom’s vast petroleum reserves and its dominant position in OPEC—and because the Saudi royal family was (and is) easily corruptible.

The US also picked Saudi Arabia for geopolitical reasons. During the Yom Kippur War of 1973, OPEC’s Arab members started an oil embargo to punish the US for supporting Israel. Oil prices quadrupled, inflation soared, and the stock market crashed.

The US was in a vulnerable position. It needed to neutralize the Arab’s potent Oil Weapon. Turning a hostile Saudi Arabia into an ally was the key. The alliance would also help check Soviet influence in the region.

In essence, the petrodollar system was an agreement that the US would guarantee the House of Saud’s survival. In exchange, Saudi Arabia would:

1. Take the Oil Weapon off the table.

Prices go up as a result. People have forgotten about that. Today, inflation seems to come from out of nowhere, like a freak storm. No cause. Unless it’s blamed on the butcher, or the baker, or an evil oil company. Nobody ever thinks it’s a central bank—the Fed in the US—that actually creates more money and causes inflation.

You’ve heard that the Federal Reserve is trying to create a little bit of inflation because, they say, “A little bit of inflation is good.” No, even a little bit of inflation is deadly poisonous. For two reasons: It creates the business cycle. And it destroys the value of savings. Saving is the basis of capital creation. People who say that a little inflation is a good thing are dangerous fools.

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2. Use its dominant position in OPEC to ensure that all oil transactions would only happen in US dollars.

3. Invest billions of US dollars from oil revenue in US Treasuries. This let the US issue more debt and finance previously unimaginable budget deficits. By 1977, at least 20% of all Treasuries held abroad were in Saudi hands.

Oil is the world’s most traded and strategic commodity. If foreign countries need US dollars to trade oil, it creates a very compelling reason to hold large dollar reserves.

For example, if Italy wants to buy oil from Kuwait, it has to purchase US dollars on the foreign exchange market to pay for the oil first.

This creates an artificial market for US dollars. The dollar is just a middleman in countless transactions that have nothing to do with US products or services.

Ultimately, the arrangement boosts the US dollar’s purchasing power. It also creates a deeper, more liquid market for the dollar and US Treasuries.

Plus, the US has the unique privilege of buying imports, including oil, with its own currency… which it can print.

It’s hard to overstate how much the petrodollar system benefits the US dollar. It’s allowed the US government and many Americans to live beyond their means for decades. And it’s the reason the media and political elite give the Saudis special treatment.

In short, the petrodollar is the glue that holds the US–Saudi relationship together. But its bind is not permanent.

Bretton Woods lasted 27 years. So far, the petrodollar has lasted over 40 years. However, the glue is already starting to lose its stick.

I think we’re on the cusp of another paradigm shift in the international financial system, a change at least as fundamental as the end of Bretton Woods in 1971.

As I’ll explain, the relationship between Saudi Arabia and the US is at historic lows. I only expect it to get worse.

The death of the petrodollar system is the number one black swan event for this year.

During the 1974 negotiations that created the petrodollar system, the Saudis demanded strict secrecy about their Treasury holdings.

For decades, analysts wondered how much US debt Saudi Arabia actually owned. Now, after decades, we finally know.

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Recently—for the first time ever—the US Treasury revealed the full extent of Saudi Arabia’s Treasury holdings and acknowledged the kingdom as one of America’s largest foreign creditors.

The US government’s willingness to lift the veil of secrecy is a major sign that the petrodollar system is breaking down.

Additionally, the US government released 28 previously classified pages of the 9/11 Commission Report, which show Saudi government involvement in the attacks. And in 2016, Congress passed a law allowing 9/11 victims to sue the Saudi government.

These are major, unprecedented, irreparable blows to the petrodollar arrangement.

Even without these radical changes, the petrodollar could still bite the dust…

The Saudis could decide to sell their oil in Chinese renminbi, euros, IMF SDRs, gold, or many other non-dollar currencies. And they could influence most of OPEC to follow suit.

Or the House of Saud could implode. I think that’s inevitable anyway, given the colossal economic and military mistakes it’s made recently.

China’s Golden Alternative to the Petrodollar

China is the world’s largest producer and buyer of gold.

According to informed observers, it now has official reserves of over 160 million ounces. It also has 400 million ounces in the ground that it could potentially mine.

(The US, by contrast, claims it has official reserves of around 260 million ounces.)

Now we know why China has been building up its reserves so dramatically: On March 26, 2018, it launched a game-changing mechanism.

I call it China’s Golden Alternative to the petrodollar. It allows anyone in the world to trade oil for gold. It totally bypasses the US dollar and the US financial system. For many, it is much more attractive than the petrodollar system. The Golden Alternative is the beginning of the end of the international monetary system that has reigned since the early 1970s.

Here’s how it works...

The Shanghai International Energy Exchange (INE) launched a crude oil futures contract denominated in Chinese yuan. It allows oil producers to sell their oil for yuan.

Of course, most oil producers don’t want a large reserve of yuan. China knows this. That’s why it explicitly linked the crude futures contract with the ability to convert yuan into physical gold through gold exchanges in Shanghai and Hong Kong.

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The geopolitical sands of the Middle East are rapidly shifting.

Saudi Arabia’s regional position is weakening. Iran, which is notably not part of the petrodollar system, is on the rise. US military interventions are failing. And the emerging BRICS countries are creating potential alternatives to US-dominated economic/security arrangements. This all affects the stability of the petrodollar system.

Right now, the stars are aligning against the Saudi kingdom. This is its most vulnerable moment since its 1932 founding.

In a moment, I’ll share how to profit from the monumental changes I anticipate in the international monetary system.

I expect the dollar price of gold and oil to soar when the petrodollar system crumbles in the not-so-distant future. You don’t want to find yourself on the wrong side of history when that happens.

Ron Paul and the Petrodollar

Ron Paul called for the end of the petrodollar system in his classic speech “The End of Dollar Hegemony”:

The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.

In other words, we’ll know the dollar-centric monetary system is about to end when countries start trading oil for gold (not dollars) or its equivalent.

With China’s Golden Alternative, that’s starting to happen in a very big way.

Paul and I discussed this extensively at a Casey Research conference. He told me he stands by his assessment.

Nick Giambruno and Ron Paul

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Investment No. 1: EOG Resources (EOG)EOG Resources is the “best of breed” US shale oil company.

In recent years, technologies like fracking have unlocked billions of barrels of oil that were once impossible to extract from shale regions.

As you may know, EOG was at the forefront of the shale-drilling revolution. It’s been the leading shale oil producer, and it has a reputation as an excellent operator and cost-cutting innovator.

EOG has trophy assets in the major US shale basins. It has a solid balance sheet. And, unlike many of its peers, it didn’t overleverage itself during the last boom.

EOG is a cost leader and an efficient operator. Its profit margins are among the best in the industry. It has first-mover advantages. It is an innovator. And it has an exceptional management team that wisely allocates capital.

In short, EOG is a great business.

EOG is engaged in the exploration, development, and marketing of mainly crude oil (but also natural gas) in the US. It also operates in Canada, Trinidad, and the UK. Its primary focus is in US shale plays. Foreign operations only account for around 10% of revenue.

Trophy Assets

Proven reserves are petroleum quantities that companies can estimate with reasonable certainty (at least a 90% likelihood) to be commercially recoverable.

Source: EIA

US Shale Plays Large oil and natural gas deposits are some of the most valuable assets on the planet. EOG has proven reserves of 1.2 billion barrels of crude oil, 474 million barrels of natural gas liquids, and 5.3 billion cubic feet of natural gas.

Almost all of EOG’s proven reserves (97%) and production (90%) are located in the US, mostly concentrated in three major shale fields: the Eagle Ford, Bakken, and Permian basins.

EOG has been a first mover in all the main US shale basins. It was one of the first companies to drill in the Bakken and the Eagle Ford. This head start helped it acquire large acreage positions at a fraction of the cost latecomers paid.

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Innovation and Efficiency Leader

EOG is an innovative, cost-conscious company. It’s developed in-house efficient drilling and completion techniques.

Its technological ingenuity is a main reason why it’s one of the lowest-cost producers in the in-dustry, at cash costs of around $35 per barrel in certain regions of the Eagle Ford and the Bakken. By comparison, most shale oil producers aren’t even profitable when oil trades at $50 per barrel.

EOG knows how to adapt and cut costs. This is essential for surviving the storm in the oil markets and leading the industry going forward.

EOG recently developed new well-completion designs that have boosted its reserve potential.

Solid Balance Sheet

Another factor that separates EOG from its peers is its conservative use of debt. The company didn’t go crazy with leverage during the last boom, so it has some of the most attractive debt ratios in the industry.

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As you can see in the first chart on the following page, EOG is among the least-leveraged companies in the industry.

Debt isn’t a problem for EOG now, and I don’t expect it to be in the future.

EOG is still generating more than enough operating cash flow to cover its debt costs, as the chart below shows.

EOG is not a short-term trade on oil-price volatility. Instead, it’s a play on powerful geopolitical trends in the energy markets. It’s a chance to pick up the best company and some of the most valuable assets in the US for bargain prices.

Buy shares of EOG Resources (EOG) under $120 per share. Use a 50% hard stop minus any dividends received.

Please keep track of stop losses on stocks you own. If a stock hits its stop, we’ll write about it in our next monthly issue. However, we will not send out alerts between issues. It’s your responsibility to monitor your portfolio and follow the stop losses we provide.

Don’t bet the farm on any trade. You shouldn’t put your emergency expense funds, kids’ college tuition, or any other money needed to pay the bills in our recommendations, either. It would expose you to unnecessary risk. Limiting risk is key to success.Ultimately, it’s up to you to determine the exact allocation of our recommendations in your portfolio.Please, never invest money that you can’t afford to lose. Losing is always a possibility with all investments, including the investments in this report.

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Investment No. 2: Franco-Nevada Corp. (FNV) Franco-Nevada (FNV) is a leading gold-focused royalty and streaming company. Simply put, it’s the best and safest way for us to get leveraged exposure to the price of gold.

Franco-Nevada is a “mining company” that doesn’t mine. Here’s how the business works…

Franco-Nevada bankrolls traditional mining companies—everyone from explorers to producers.

With a streaming agreement, Franco-Nevada gets the right to purchase part of the mine’s output at a low, fixed price, which it can sell for a profit.

A royalty agreement is a little different. Franco-Nevada’s royalty interest is simply a percentage of the value of future production from the property.

The company’s most typical royalty arrangement is a 2% net smelter return (NSR) royalty. NSR is the net value the mining company receives for its concentrated product after it’s been processed at a smelter.

Franco-Nevada doesn’t do the hard work of operating the mine. It’s not responsible for any of its costs or liabilities. And an increase in operating costs won’t affect its bottom line.

Instead, it collects a stream—or royalty—of the mine’s production.

Franco-Nevada has a huge portfolio of these streaming and royalty agreements, 339 in total. This minimizes the company’s risk, while allowing it to capture the upside of rising gold prices.

The streaming/royalty model largely de-risks the situation while keeping the upside. It’s one of the best business models you can buy as an investor. And Franco-Nevada is one of the best operators of this model.

While Franco-Nevada focuses on gold, it also has streaming/royalty agreements with companies that produce other commodities. You can see the breakdown in the following chart.

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DIVIDEND

A Dividend Aristocrat is a company that’s increased its dividend for at least 25 consecutive years. Doing that requires a strong and sustainable advantage over your competitors. It also shows that a company can manage the ups and downs of the business cycle.

The easiest and fastest way to find the highest-quality, most elite businesses is to look for Dividend Aristocrats. They are the safest and strongest companies in the world.

A Dividend Aristocrat is a goose that lays an ever-increasing number of golden eggs. So they’re rarely cheap. Everyone knows they’re the best.

It usually takes a major crisis—like 1929 or 2008—to create bargains.

Franco-Nevada has raised its dividend for 10 consecutive years, so it’s not technically a Dividend Aristocrat. But it’s the closest thing to it in the precious metals streaming/royalty industry.

Doug Casey: I’ve been asked “What’s the secret of finding winning gold, silver, and other natural resource stocks?” more times than I can even begin to count. And for over 20 years, my answer has remained pretty much the same: the Nine Ps.

I used the 9 Ps, Doug Casey’s proprietary stock evaluation system, to take a closer look at Franco-Nevada.

As the name implies, the 9 Ps examine nine critical factors. It’s a simple yet proven way to find resource stocks with huge upside.

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People

Franco-Nevada has a highly experienced team with over a century of combined experience.

David Harquail is the president and CEO of Franco-Nevada. He led the company as it went public in 2007. Harquail previously held senior executive roles at Newmont Mining Corporation. He’s currently on the board of the World Gold Council and has served on many senior mining boards and industry associations.

Pierre Lassonde is the chairman of the board of Franco-Nevada. Lassonde has received numerous industry awards and is an established leader in the gold industry. He was president of Newmont Mining from 2002 to 2006. He was also the chairman of the World Gold Council.

Properties

Franco-Nevada is the largest and most diversified precious metals streaming/royalty company.

It has 339 streaming/royalty agreements.

Of those, 40 agreements are with companies that are already producing precious metals.

Precious Metals Asset ListUnited States Canada Latin America Rest of World

Goldstrike Sudbury Monument Bay Antapaccay MWS Perama Hill

Stillwater Detour Lake Red Mountain Antamina Sabodala Agi Dagi

Gold Quarry Golden Highway Cariboo Candelaria Karma Matilda (Wiluna)

Marigold Musselwhite New Prosperity Guad.-Palmarejo Duketon Agnew (Vivien)

Fire Creek/Midas Hemlo Cobre Panama Subika Bullabulling

Bald Mountain Kirkland Lake Cerro Moro Tasiast Yandal (Bronzewing)

South Arturo Timmins West Cerro San Pedro Edikan

Mesquite Canadian Malartic Gurupi Ity

Hollister Brucejack Calcatreu South Kalgoorlie

Stibnite Gold Hardrock San Jorge Cooke 4

Castle Mountain Dublin Gulch (Eagle) Volcan Red October

Sterling Red Lake (Phoenix) Pandora

Sandman Courageous Lake South Kalgoorlie (Lake Cowan)

Pinson Goldfields Henty

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Franco-Nevada has another 40 agreements in place with companies in the advanced pre-production stage. It also has 173 agreements with companies in the exploration stage.

On top of that, Franco-Nevada has 80 investments in oil and gas projects, 61 of which are producing.

These agreements only accounted for about 6% of the company’s revenue. So they’re not likely to become the company’s main focus. But, nonetheless, they give Franco-Nevada a diversified source of revenue.

Politics

A sizable chunk of Franco-Nevada’s revenue (36%) is sourced from the US and Canada. These are relatively safe mining jurisdictions.

The rest of the company’s exposure is well-diversified. So it doesn’t have a significant source of concentrated political risk.

Overall, Franco-Nevada’s political risk is low.

Paper/Phinancing

Franco-Nevada is a financially sound company. It has no debt and around $1.3 billion in cash.

The company pays a dividend that yields around 1.2% at current prices. (Investors who bought the IPO in 2007 are collecting an 8% yield on their capital.) That’s nothing to sneeze at in the current low-yield environment.

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Investors who get in at current prices could see double-digit yields on their capital as the petrodollar crumbles and the price of gold rises.

Top shareholders include BlackRock, Fidelity, and T. Rowe Price.

Promotion

Franco-Nevada is a well-known company. Nearly two dozen analysts currently cover it.

Price

Franco-Nevada is simply the best way for us to get leveraged exposure to the price of gold. The current price is a good entry point.

Push

The immediate push for higher gold prices comes from the crumbling of the petrodollar system.

Pitfalls

There could be political problems in some of the jurisdictions where Franco-Nevada has assets. Worst-case scenarios could include the nationalization of a mine, which would end any benefit the company had from a royalty agreement.

Also, the exploration assets in Franco-Nevada’s portfolio are inherently speculative. Many of them are unlikely to ever generate revenue for the company.

These risks are largely mitigated by the company’s large and diversified portfolio of royalty/streaming agreements.

THE TRADE

Buy Franco-Nevada (FNV) under $100 per share.

Plan on holding shares for at least a year.

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The Ultimate Crisis Investment“It was the single most important financial event of my career.”

That’s what my friend Rick Rule of Sprott Global recently told me of his experience in the uranium market. Rick was referring to Paladin Energy, a uranium company that leaped from one penny to $10 per share during uranium’s last bull market. That’s a 1,000-fold increase.

In other words, a $10,000 investment could have exploded into $10 million.

Even the worst-performing companies in the uranium sector delivered 20-to-1 returns.

Uranium can deliver these almost unbelievable returns because of unique supply-and-demand quirks that create colossal bull and bear markets.

Doug Casey: These wild imbalances in supply and demand, accompanied by equally wild swings in price, often surprise people who aren’t familiar with the resource business, but it is the very nature of the beast. It’s really only possible to raise money to discover deposits and build mines when prices are high, because that’s when the typical investor thinks he’ll make a killing. Of course the industry takes advantage of that window, resulting in an immense amount of new capacity. Meanwhile, the same high prices that encourage new production also start to discourage new consumption.

Which means by the time the new production hits the market after a time lag of several years, both prices and physical demand have collapsed—as have share prices of surviving companies. That is when professionals who understand the way these things work open up their checkbooks, because the resource business—oil, precious metals, grains, you name it—is as cyclical as the seasons of the year. It’s just that each commodity has its own peculiarities.

1950s Uranium Bull Market

Uranium cycled through its first bull market in the 1950s. This bull was mainly driven by the nu-clear arms race between the US and the Soviet Union. Back then, the only practical way an inves-tor could get exposure was through uranium exploration companies trading on small regional stock exchanges, like the one in Salt Lake City (which closed in 1986). Those who did made a bundle.

Doug Casey: I recall having seen, when I was a kid in the 50’s, an installment of I Love Lucy that had Ricky buying uranium mining stocks and buying a Geiger counter to go prospecting. The show obviously had a subtle effect on my future… Anyway, the first uranium boom was all over by 1960, when it became apparent the world’s militaries already had enough bombs to destroy the planet several times over.

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The Late 1970s Uranium Bull Market

The uranium price increased more than tenfold during this bull market… from $3 to $43. Some uranium stocks shot up by a factor of 100. Greater nuclear power use was the main driver. It was a cheap alternative to high-priced oil.

Disastrous power plant failures ended this bull market—first Three Mile Island and then Chernobyl, the final nail in the coffin. New production also came online and flooded the market just as demand was decreasing. The resulting bear market lasted for 20 years.

The 2001–2010 Uranium Bull Market

This bull market originated with the preceding 20-year bear market, where the uranium price decreased over 70%. It bottomed at $8 per pound in 2001.

For many companies, the cost of producing uranium was higher than the spot price. Miners were producing uranium for around $18 per pound, but they could only sell it for about $9 per pound. So there was little incentive to increase or maintain production.

Miners simply stopped producing. Production capacity plummeted. This sowed the seeds for another uranium bull market.

The market didn’t just settle into equilibrium. The supply destruction and increasing demand were so great that, eventually, uranium overshot the price needed to balance the market. After bottoming at $8 per pound in 2001, it skyrocketed to $130 in 2007.

That alone is impressive. But uranium stocks had an even greater meteoric rise. This is when Paladin Energy, the company Rick Rule was talking about, soared from one penny to $10.

Doug Casey: I wrote a very long (16 pages) and thorough article on uranium and nuclear power in October 1998 for International Speculator, where I recommended several uranium stocks, including Paladin, that subsequently—about two years later—exploded upwards in value. When the market wants into gold stocks it’s like trying to force the contents of Hoover Dam through a garden hose. In the case of uranium stocks, it’s more like a soda straw.

A nuclear catastrophe ushered in a new bear market, just as it had with previous uranium runs.

In 2011, a tsunami caused a nuclear meltdown at the Fukushima power plant in Japan. It was the worst nuclear disaster since Chernobyl. Afterward, Japan took all 54 of its nuclear reactors offline and switched to importing liquefied natural gas (LNG).

A major source of demand in the global uranium market was gone. And a global supply glut followed.

The uranium price crashed from around $85 to under $30.

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The current uranium supply/demand imbalance has a lot in common with the last market cycle. It’s setting the stage for the next uranium boom.

Now is the time to get positioned for the same kind of explosive returns we’ve seen in previous uranium bull markets.

Doug Casey: When commodities sell below production costs for long enough, the producers go bust, supplies drop, prices rise and production goes back up. At the peak of the last uranium bull market, in 2007, there were about 300 uranium exploration companies. Now there might be a dozen, mostly dormant.

Higher uranium prices will predictably switch investor sentiment from bearish to bullish. Then, as Wall Street belatedly reacquaints itself with uranium, companies will get value for assets which nobody could care less about today.

It’s an eternal cycle, and quite predictable—except for its timing.

THE NEXT URANIUM BULL RUN

I can’t think of a commodity with more upside and less downside than uranium right now. While many commodities have bounced off their lows, uranium hasn’t. It’s still at or near the moment of maximum pessimism.

The situation is screaming, “Bargain!”

Psychology plays a big part here…

People don’t like uranium. It’s yucky. It’s politically incorrect. Some hear “uranium” and think “cancer.” Many get emotional because of its association with Hiroshima, Nagasaki, Chernobyl, Three Mile Island, and of course Fukushima.

Besides that, investors are terrified that uranium prices have fallen over 85% from previous highs. It’s hard to think of a market where the sentiment is worse.

This is why we’re excited. Crises and extreme sentiment don’t scare us. They attract our interest.

The whole point of investing in crisis markets is to take advantage of the aberrations of mass psychology and pick up elite companies and assets for pennies on the dollar.

This describes the current opportunity in the uranium market perfectly.

Simply put, nuclear power delivers immense value to its users, there’s no substitute for uranium, and production is falling while demand rises.

This situation has only two possible outcomes…

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1. Uranium prices don’t go up. Miners have no incentive to produce. Nuclear power plants run out of uranium, and the lights go out for billions of people.

2. Uranium prices go up and incentivize enough production to meet the demand.

There are no other options. Which one do you think is more likely?

Doug Casey: I doubt, especially in view of the fundamentals, that this will be the first bear market in history that’s not followed by a bull market. As the price of the commodity rises, the shares of producers should rise disproportionately (by 10 times), and shares of exploration companies might increase exponentially.

I’m of the opinion that solar is—after 40 years of development—finally becoming economical, and will finally have its day in the sun, as it were. Solar finally makes practical sense. That said, nuclear will remain the safest, cheapest, and cleanest form of mass power generation for a long time. Most people know nothing about the technology other than what they hear in a two-minute TV rant. Despite Einstein having been quite correct when he said, “After hydrogen, stupidity is the most common thing in the universe,” reality will win out in the end. Nuclear is the way to go.

Demand

Nuclear power plants account for most of the demand for uranium. They are inseparably linked to the future of its price. Nuclear energy generates about 11% of the world’s electricity. There are currently 30 countries that use it and about 450 operable nuclear power reactors.

A nuclear power plant produces energy by splitting uranium atoms. The energy that’s released boils water, producing steam that drives turbine generators.

These plants use fuel made from uranium ore. Miners extract the ore from the ground. Then it’s enriched and made into fuel pellets.

Every year, the world’s nuclear plants need 68,000 tonnes of uranium to operate. This demand is inflexible… The power plants must buy uranium.

The cost of uranium is a sliver of a typical power plant’s operating cost, perhaps 2%. So the price of uranium could double, triple, or more and it wouldn’t significantly affect a plant’s total operating cost.

Worldwide, there are about 60 nuclear reactors under construction. Another 160 are planned and more than 300 proposed. The demand from these new plants alone all but guarantees the price of uranium will go up.

Most of the new plants are in China. Others are in India, Taiwan, and South Korea. Some Persian Gulf countries also have plants in the works. They figure, why burn oil when nuclear power is so much cheaper?

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China, which currently accounts for 8% of global uranium demand, is expected to overtake the US (29% of demand) as the world’s largest uranium consumer by 2030. The country sees nuclear power as the best way to reduce its huge air pollution problem. (Nuclear energy has essentially no carbon emissions.)

China should ensure that uranium prices rise, regardless of what Japan does.

Supply Crunch

Uranium is a naturally occurring element in the Earth’s crust. Though there are traces of it almost everywhere, the vast majority of uranium production happens in just a handful of countries.

As you can see in the chart below, uranium is mostly produced in countries friendly with Russia, like Kazakhstan. These are not exactly US allies.

Kazakhstan produces 41% of the world’s uranium. It is by far the world’s largest producer

Kazatomprom is the country’s government-owned uranium company. It controls all uranium exploration and mining in Kazakhstan.

Early in 2017, the Kazakh government announced it was cutting uranium production by 10%. That translates into a 3% reduction in the global uranium supply.

A few months later I put my boots on the ground in Kazakhstan to check things out for myself.

I met with a leading local investment banker who is intimately familiar with the uranium market. He told me he expected the government to stick to its 10% cut.

At the time, I wrote that “I wouldn’t be surprised if it reduced it further.” And that’s exactly what happened… in a huge way.

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In December 2017, Kazatomprom shocked the uranium market again. The company said it was reducing production by another 11,000 tonnes over the next three years.

Starting in January 2018, Kazatomprom began eliminating about 7.5% of global production.

This is the most dramatic supply shock I’ve ever heard of in the uranium market.

Other producers, like Niger, where France buys most of its uranium, are plagued by instability from Islamic insurgencies in neighboring countries.

This all adds up to a precarious supply situation in the face of growing demand. That’s bullish for uranium prices.

Inventory Depletion

Global production is around 50,000 tonnes and shrinking. With global demand at 68,000 tonnes, there’s an annual deficit of around 18,000 tonnes. In other words, current production only satisfies about 75% of current demand. Global inventories make up the rest.

It’s difficult to get accurate figures on global uranium inventories. Governments and companies keep it confidential. But they won’t allow inventories to get too low for energy security reasons. Most experts I’ve talked to expect reserves to drop into the danger zone very soon.

With supply shrinking and demand rising, uranium prices will inevitably go up. It’s simply a matter of when.

But, when the turnaround comes, I expect it to be as explosive as previous uranium bull markets. The price will likely overshoot, since it will take years for production to catch up to the increased demand.

We know the uranium price will go up. The key is to get positioned now in the companies best able to survive the rest of the downturn.

Doug Casey: The trick is to find companies that are cognizant of the opportunity and have the business plan, the knowledge, and the resources (both geological and financial) to exploit it. The type of company I want should now be buying marginal resources and have the ability to put them into production quickly, preferably using fixed price contracts. To do that, they must have knowledgeable, reputable uranium people in place now. Last, but not least, they must have the financial backing to allow them to survive until the inevitable becomes imminent.

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Investment No. 3: Cameco (CCJ)Cameco is the “best of breed” uranium company. It’s the premier play on higher uranium prices.

Based in Canada, Cameco is the world’s largest and lowest-cost uranium producer. It’s responsible for 16% of the world’s production.

The company controls two of the world’s largest high-grade uranium mines (100 times the global average). That means Cameco can produce uranium at a much lower cost than anyone else.

I have no doubt the company will survive this downturn and deliver huge profits to investors in the coming uranium bull.

Cameco has the upside of a junior exploration company—think 10-bagger or better. But it’s very low-risk. This is the kind of trade we look for in crisis markets, with the risk/reward skewed in our favor.

Cameco traded for $1.35 per share at the beginning of the last bull market. Then shares shot all the way up to $50, an increase of 3,600%. That’s a 10-bagger almost four times over.

I expect similar returns in the coming cycle.

Remember, this is not a junior exploration company. It’s a multibillion-dollar industry dominator.

This is a fantastic opportunity to pick up the premier uranium asset (and management team) in the world at an extreme discount from its previous high.

Despite the horrible uranium bear market we’re in now, Cameco isn’t only making a profit—it’s paying hefty dividends.

Cameco’s trophy assets—its ultra-high-grade uranium mines—are located in Canada. The risk of operating a profitable uranium mine is much lower there than in, say, Africa or the former Soviet Union.

Cameco has the capacity to ramp up production when uranium prices rise to bring in more profits.

Let’s take a look at Cameco’s Nine Ps.

People

CEO Tim Gitzel was born and raised in Saskatchewan, where Cameco’s trophy assets are located. So he’s intimately familiar with the area. Gitzel is an industry veteran with over 25 years of experience and success overseeing the world’s most important uranium projects. I expect the same positive results from him going forward.

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Property

Cameco controls two of the world’s largest high-grade uranium mines. They’re the company’s crown jewels. They allow it to produce uranium at a much lower cost than anyone else.

Promotion

When institutional investors think “uranium,” they think of Cameco and its trophy assets. The company is well known and covered by dozens of institutional investment research analysts.

Politics

Cameco’s trophy assets are in Canada, one of the world’s top mining and relatively low-risk jurisdictions.

Paper

Institutions hold about 70% of the outstanding paper. About three million shares change hands each day, so liquidity is not a concern. If the company needed to raise money it would issue debt. There’s little dilution risk.

Phinancing

Cameco has over $400 million in cash, with a total debt to equity ratio of 30%. That’s well below most of its peers, which hover around 60%.

Push

Cameco’s Push will come from higher uranium prices. Institutional investors should flood into Cameco in the next bull market. It will be their go-to uranium play.

Price

Cameco is trading near lows for this cycle.

Pitfalls

Another Fukushima-like nuclear disaster would derail the coming uranium bull market. Short of that, I think an increase in uranium prices is inevitable. However, inevitable doesn’t mean im-minent. It may take up to two years, but maybe much less, for uranium to turn around. I have no doubt that Cameco can make it through the current downturn and deliver explosive returns to investors on the other side.

THE TRADE

Buy Cameco (CCJ) at market prices. Plan on holding it for two years for a potential 10-bagger and possibly much higher returns.

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We’re not using a stop loss here. However, it’s still important to control risk.

If you’re a small investor, placing no more than $200–400 in a position is a good rule of thumb. If you’re a big investor, you can increase that up to $500–1,000.

We’d consider selling our shares if there’s another nuclear disaster or if something else alters the fundamental attractiveness of the long-term supply/ demand dynamics of the uranium market.

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List of InvestmentsInvestment No. 1 ....................................................................................EOG Resources (EOG)

Buy shares of EOG under $120 per share.

Investment No. 2 ................................................................. Franco-Nevada Corporation (FNV)

Buy shares of Franco-Nevada Corp. under $100.

Investment No. 3 ...................................................................................................Cameco (CCJ)

Buy shares of Cameco at market prices.

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