NVIDIA & Uranium … what’s going on? Investor Webinar 31 May 2023

 

NVIDIA & Uranium: what’s going on?

This week in our Investor Webinar we look at what happened to Uranium stocks on Tuesday.

We also dive deeper into NVIDIA … the first chip stock that reached a US$ 1trillion valuation!

Full transcription below.

 

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Transcription

 

Marc: Good morning on the final day of May 2023. This is the “Stocks Down Under’s” weekly investor webinar. Good morning, Stuart.

Stuart: Morning.

Marc: There’s a lot happening in uranium, especially yesterday. Something’s happening in Namibia. Talk us through that.

Stuart: So, you know, that we’re bulls on uranium here at “Stocks Down Under,” have been ever since 2020 when the price first rerated from about $20 a pound. It’s now up to around $50 a pound, and it’s been fielding [SP] a strong base there. So, when we call up the presentation, I’ll tell you why uranium is time…it’s time to look carefully right now. The little-known nation of Namibia in Southwest Africa… Let’s just pause that thought for a second. There’s the chart for uranium. Marc, it’s fair to say that chart is pointing pretty steadily upwards. Obviously, it went for a bit of a spike in 2022, then gave a lot of that back. But it’s now building a base slightly higher in the low $50s. I think it’s headed towards $60 a pound based on that experience.

So, the fundamentals of the commodity are looking pretty good at the moment. But go back to Namibia, one of the world’s biggest producers of uranium is the southwestern country of Namibia. The reason for that is they have got a very pro-uranium policy, have had since 1976 when the Rössing Uranium Mine came on stream. Their mines minister was quoted as saying on Monday that he was looking for the possibility of the state to take an interest in all the mines in the country. So, hold that thought there. We’ll look at the reason why you want to be in uranium right now, and then we’ll go to Namibia.

That’s a chart we’ve wheeled out more than once. And what it shows is that the world’s available stockpiles of uranium are running down very significantly. Just increases in uranium demand just for the nuclear reactors that are on stream, and increases in demand for uranium means by about the end of the decade the world will have run out of uranium. And the peak there you can see in that chart is the deficits. So, anyone who’s got a mine that they can bring into production in the very near future is looking valuable. Why do I like uranium? It’s carbon neutral. You don’t put a single ounce of carbon into the atmosphere when you’re producing electric power using nuclear energy. Marc, we talked about being woke last week. This sounds pretty woke, right?

Marc: Definitely. And it reminds me of sort of the ’80s. That’s how old we are, Stuart. But I remember all demonstrations in the Netherlands about nuclear energy, right? No one needed that. That was a leftish item, of course. But now, these days…

Stuart: How much power does the Netherlands get from France’s nuclear reactors these days?

Marc: Yeah, quite a lot, actually.

Stuart: Charles de Gaulle was smart. He wanted to lessen his country’s reliance on gas from Algeria way back in the ’60s. So, he insisted that the country go nuclear. And I reckon the Roman Catholic Church should canonize him, make him St. Charles de Gaulle because that was pretty far-sighted. And the countries that haven’t chosen to go down this path are in not the best shape at the moment, not only are they still putting too much carbon into the atmosphere, but they don’t have energy independence either.

So, that’s the long-term demand for uranium. It doesn’t matter whether it’s [inaudible 00:03:53] or Fukushima, demand just keeps going up, and there ain’t much marginal production left to take off the market. And that’s what you’re seeing going on in that chart we saw a couple of slides ago is the market’s forming a pretty strong base between $50 and $60. Eventually, when it goes past $60, that’s the no-go zone for a lot of projects that are on the drawing boards now, which will benefit the companies that have been true believers about uranium.

So, what’s gonna change this year? Well, I think it’s already changing. You’ve got public policy support gradually swinging around uranium in most jurisdictions. You’ve got reactors locking in multi-year supply contracts rather than by a spot. China and other countries are still bringing reactors on. And you’re beginning to see the price improvements I’ve been expecting for a while. So, that’s what’s going on fundamentally for uranium right now. And then we introduced Namibia into the mix. So, small, not very well-known country in southwestern Africa sits right next to South Africa from which it won its independence in 1990. Only 2.5 million people live in Namibia.

And because of the Rossing Uranium Mine, which came on stream during the apartheid years in 1976, and is still majority owned by Rio Tinto, this country is very uranium-friendly. There’s uranium all over the middle of northern part of this country. And there’s a number of ASX-listed companies pursuing those uranium riches. Now, some comments from the mines minister. He wants the country to own stakes in the nation’s mines. Now, this is all he said. There’s Tom Alweendo, there on the right of this slide, “We are making a case that local ownership must start with the state, which holds ownership of our natural resources.” Yeah, Tom has that in common with just about every country in the world. We saw Tanzania recently come outta the cold, in terms of foreign investment, after a deal in which…well, after a legislation was passed in which the state gets to take a 15% or 16% interest in every new mine in the country.

So now, people are free to come into Tanzania and start developing the natural resources of that country because there’s uncertainty as to how much you have to give to the government. I think Namibia is just thinking the same, as is a whole lot of other countries in the world. And all you’ve gotta do is work out a Tanzanian-style situation, and the uranium rush continues. But that’s not the way the market saw it yesterday. If you flip to the next slide, there’s Paladin Energy, which owns the Langer Heinrich or owns 75% of the Langer Heinrich mine in Namibia, that stock’s been trending down now for about six months. It came down about 20% yesterday, and the stock is now a trading halt. Thanks to this panic that the Namibian mines minister has created. Now, you can’t actually buy the stock. You’d wanna see it stabilizing before you’ve even thought about buying it, but that looks like a pretty good support level there. Would you agree, Marc?

Marc: Yeah, definitely. And I think, of course, you know, Namibia maybe sort of advocating now what other countries have been doing for a long time. But the point is especially with a drop like this, it’s not in the company’s models, right? So, they were all sort of working on the assumption that, you know, the status quo, the government there didn’t…or I’m not sure if they have a minor stake in there already or not, but the models of these companies are now changing. That’s, of course, why you get these massive share price drops. But I’d say, you know, once that’s all discounted into these models, and investors actually know what they’re dealing with in terms of lost sort of opportunity there, yeah, once those numbers have been crunched, it looks like it could be an interesting play at these levels. But like you said, you should let this consolidate, peter out, and just see where it goes from there because I don’t think you need to get back into stocks like this in a big rush given what’s happening at the moment.

Stuart: My sense is that it’s gonna create a great buying opportunity. Namibia is not Venezuela. This is a very mining-friendly jurisdiction in which you can get all of the resources you need, plus all the infrastructure to build mines in, and a very supportive fiscal framework. That may change slightly as a result of what the government’s thinking about. But nothing drastic. So, let’s just talk about Paladin for a second. Well, there’s a few other stocks to look at. Bannerman… Boss. Boss Energy’s interesting because it’s bringing a mine into production in South Australia called Honeymoon Well. And so, obviously, there’s no sovereign risk in South Australia.

As someone was joking to me, South Australia’s Labor government is the most liberal government in the country in terms of running a pretty tight ship fiscally and being pro-mining. So, Boss Energy’s probably one to watch. The Namibia one’s Deep Yellow and Paladin are very interesting because those projects have a lot of life to them. Lotus Resources is developing the Kayelekera mine in Malawi. Could be very interesting. Peninsula Energy’s got some uranium resources in the western part of the United States. They’re not the only uranium stocks on the ASX, but they’re the standouts that one should pay attention to.

Why is Paladin interesting? Langer Heinrich is only about 40 kilometers from the famous Rossing Uranium Mine. They own 75% of it. And a Chinese utility owns the other 25%. Paladin operated Langer Heinrich until 2018 when low uranium prices shut up the mine. So, went on care and maintenance at that time. Recently, the management ran the numbers on a mine restart. They figured it would only take another $118 million in capital costs to get that mine up and running again. With all the resources still intact, they model a 17-year mine life. Production cost only about $27 a pound. So, it mines quite economically at the current prices. And that restart was scheduled to go live probably early next year. This development I suspect won’t impact that too much.

And on some of the estimates I’ve seen now, Paladin’s already trading below fair value. Could go lower depending on how freaked out the market gets on this one. But you’ve got a mine that we know what it’s capable of in a pricing environment that’s good. And we suspect will get better, and they’ve got the resources to actually bring this mine into production now. So, this uranium stock should be on everyone’s radar screen to benefit from the perfect storm.

Marc: All right. It’s just a matter of letting that stock sort of consolidate, right?

Stuart: Right.

Marc: Seeing where the bottom is. All right, then we’ll talk about a stock now that had the entire world sort of in a frenzy last week when it reported insane guidance for the current quarter. We’re talking about NVIDIA, of course. You must have been living in a cave as a hermit if you haven’t gotten any whiff of this news because it was all over, including media that have no understanding of semiconductors at all like the AFR. They were talking about it for a couple of days. So, let’s jump in and see what’s going on here, and what all the fuss is about with NVIDIA. So, like I said, they reported big numbers last week. But before we talk about that, let’s see what NVIDIA actually is, and what they do.

So, NVIDIA is a chip design company. They design and sell graphic processing units, GPUs. And the cool thing about these chips is that unlike CPUs, which you have in every laptop and PC, and Intel’s been making those, like, forever, like, similar to AMD, GPUs can process data in parallel, unlike the CPUs, which has to do with one calculation at a time. So, GPUs are much faster and more energy efficient, which made them very suitable for graphics processing sort of 20 years ago and still do. But that’s how NVIDIA started out. So, especially high-end gaming computers had the most expensive Nvidia chips in them for rapid sort of processing of graphical data. But it turned out that Bitcoin miners had a good use for these chips as well because it turns out that NVIDIA GPUs were very well suited to Bitcoin mining as well. And this goes back about 10 years.

And more recently, say the last 5, 6, and 7 years, GPUs have been used increasingly in artificial intelligence applications. So, for training of models inference. Stuart, I’m not talking about fashion models, I’m talking about computer models here. And ChatGPT, of course, that’s the latest iteration that’s got everyone into a frenzy, and all these companies that you see there at the bottom, need these chips to put in their data centers, and to develop these artificial intelligence models with. On the right there, you see that the latest version of the…the fastest, most advanced version of NVIDIA’s AI chip it’s the H100 Tensor Core. So, the actual chip is the shiny thing in the middle there. And on the sides of it, you can see banks and banks of memory because these systems need a lot of memory as well.

The chips themselves are around 40,000K, but an entire system, a unit like this can go from multiples like that. And this one is built into a rack already that goes straight into a computer or into a data center. And remember, data centers need hundreds and thousands of these, right? So, there’s massive demand for these artificial intelligence chips. So, where does NVIDIA sit in the supply chain? So, what you see here is essentially a very dumb-down version of the semiconductor supply chain. Starts on the left with the equipment companies that provide equipment to make these chips, to the chip manufacturers at the top there. So, these are IDMs like the integrated device manufacturers like Intel, like Samsung, for instance, and the foundries.

So, foundries are companies like TSMC that manufacture chips for third parties. So, they buy the chip equipment, they manufacture these chips, and they sell it to their customers. And customers, there’s a whole range of customers for these chips. One of the categories is fabulous chip companies like NVIDIA. They design chips, but they don’t manufacture chips themselves. They outsource that to the foundries, mostly TSMC, Samsung, but there’s others as well, right? Electronics companies that need chips, you know, for cameras, for laptops, for printers, for coffee makers, whatever. In cars, automotive is increasingly a big market for chips. And these chips and [SP] the products get sold to the end customer, like, you know, iPhones or Teslas or whatever, you name it. Everything these days is got a chip in it, except pencils. So, that’s roughly the supply chains.

NVIDIA is one of those fabulous chip companies that uses foundries to get their chips manufactured. Now, if you look at the chart, this is a long-term chart going back to 2012. That first arrow there in 2013, that’s where Bitcoin mining sort of took off. And that’s where NVIDIA’s chips increasingly became popular for Bitcoin mining. So, you can see that from that moment, the share price is on an upward trajectory. Then a couple of years later, you see where AI comes into the mix, and all of a sudden the share price takes off because it is obvious at that point that NVIDIA’s got a very bright future with the specific calculations that chips can do, right? And that’s kept on going right into covid when you see that spike there in late 2021 when the entire chip sector was doing well before it came tumbling down just in a year or so based on the interest rates hikes.

So, that’s the longer-term history of NVIDIA share prize. Looking or zooming in, I should say, on the last year or so, you can see that the peak on the left there, late 2021, came all the way down. Stuart, remember that webinar that we did late October…? I mean, November we did a few, actually. Calling the bottom in the NASDAQ. Well, that’s right there that I circled there at the bottom.

Stuart: So, Marc, give yourself a pay raise. You called it at the very bottom.

Marc: Yeah, I did that already, Stuart, last week. Now, well, we’ve been calling for the bottom in technology for a while now. And I think right there, NVIDIA sort of bottomed at the same time. And it’s been going up quite nicely back into the long-term trading range, as you can see there with an upward trajectory. And then circled there all the way on the right is the spike from last week, which was triggered by their announcement saying that for the first quarter that ended in April, they had strong revenue, increased 19% to more than $7 billion. But what blew the market away was the guidance. So, instead of what the market was expecting, $7.2 billion in revenues for the current quarter, they were saying, “Yeah, it looks like it’s probably more around $11 billion.”

And so, yeah, the share price took off 24% on the day and has been going up in the last two days as well. Even yesterday when the NASDAQ was down overnight, NVIDIA still was up at 2.5%. And this is all driven by, you know, chips like the H100 that, you know, data centers need thousands and thousands of. So, that’s what triggered it last week. Now, if you look at the valuation on the right there, so what we’ve done, we’ve looked at the estimates for NVIDIA in the market, and so, what you can see is a massive jump in EBITDA for the current financial year, 2024. And so, you see EBITDA growth, 225%, but in the years thereafter, on the current estimate, and, of course, this can change quickly, but you see that the EBITDA growth is a lot lower, you know, 10%, 15% for the years thereafter.

And if you then look at the EV/EBITDA, it’s currently valued for the current year at 53 times, next year 48, and then 42. For this year, actually, believe it or not, it seems a bit cheap given the massive growth that we’re seeing in EBITDA. So, our beloved EV/EBITDA to EBITDA growth metric is signaling 0.24 for the current financial year, which is really low. But if we look at one year, you can see that…and this fund, 2025 starts February 1st next year, right? So, we’re talking about eight, nine months away. The EV/EBITDA to EBITDA growth metric is 4.8, which is really massive. It’s probably too expensive for now unless you get a massive increase in estimates for EBITDA growth by the market. So, it remains to be seen if that’s going to happen. But for now, we think it’s probably fairly valued, and I expect actually that we’ll see some sort of cooling off in the near term because unless you get massive increase in growth for next year and the year after, like more than 20% at least, it’s just too expensive in my book.

And even if you look at, you know, more traditional companies, it’s massively overvalued. But, hey, NVIDIA’s not a traditional company. It’s very much a non-traditional company. Growth is massive. It’s catering to a new wave of chips that frankly… This is going to be around for a long time. But it all depends in terms of share price for the near term, what will happen to estimates next year and the year after. So, in a nutshell, that’s NVIDIA, that’s what happened there. And it’s definitely worth watching because if you look at the share price chart that we showed you, if this falls back to levels that are more acceptable in terms of valuation, this is definitely a stock you wanna own, but not at the levels that we’re seeing right now, Stuart.

Stuart: Right. So, that’s all we’ve got time for. But can I encourage the viewers to go take a look at some of the other videos that we’ve got available at stocksdownunder.com? I’ve been recording a fair few of them just lately. Very interesting one from Gabriel Chiappini, who is the managing director of Black Dragon Gold, ASX:BDG. That’ll give you a lot of background. We talk not necessarily about Black Dragon, but other companies that Gabriel’s been involved in, including Black Rock Mining, ASX:BKT, which Marc and I both own, and we’re quite bullish on, and there’s some research out on that one. So, good wide-ranging discussion, and potentially very interesting opportunity in Black Dragon Gold. So, take a look at that video.

Marc: All right, that’s all we have time for. Thanks for watching. I’ll see you next week.

Stuart: See you next week.