The Importance of Liquidity and Transparency in the Uranium Market

Antonio Anselmo Brokerage and Advisory Services for the Nuclear Fuel Industry

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Content

I.  Liquidity and Transparency

II.  Market Price Action

III.  Measuring Market Liquidity

IV.  Conclusions

V.  Appendix

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Prolog: A Difficult Task at Hand

“When George Lowe and Chris Jones made the first ascent of the North Face of North Twin in 1974, they had no idea they were creating a monster. The psychological battleground of North American alpinists was no longer simply a matter of ascent.” – Barry Blanchard, Author and World Famous Alpinist

The Uranium Spot Market Is: •  Illiquid •  Opaque •  Fragile •  Remote Should We Create Something Better?

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I. Market Liquidity and Transparency

•  Liquidity The probability of selling a specific quantity at a specific price in a specific amount of time.

•  Transparency The ratio of public market information to all market information at a given time.

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Definitions of Market Efficiency

Efficient Market Hypothesis (EMH) •  Strong Form Market Efficiency

•  Prices immediately reflect all public and private information. Transparency is very high.

•  Semi Strong Form Market Efficiency •  Prices reflect publicly available information over

time. Transparency is high and fast

•  Weak Form Market Efficiency •  Prices in the future are not correlated to past

prices. Transparency is moderate and even

Sources: Bachelier, Fama, Samuelson

Market Microstructure Basics

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Price

Volume

Offers

Bids

Spread

Depth

Resilience

Housing Example: Inflation & Illiquidity

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Upper Corner: Collapse of Southwest and Florida

Data Point: Contours Represent Prices in 20 Markets

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II. Uranium Spot Market Price Action

Inference: One Escalation and Two Contractions

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Correlation Between BFV and Legacy

Data Points: Correlation ~ 92%, Delay ~ 1-2 Weeks

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BFV Daily Returns and Volatility

Data Point: Volatility In The Uranium Market ~ 76%

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Uranium Spot Market Price Action

•  Prices Action Sudden and Strong (Volatile) •  Prices Disseminated Slowly (Days) •  Transactions Costs Undefined and Opaque •  Fragile Supply Can Raise Prices Quickly •  Inventory Disgorgement Can Reduce Prices •  Buyers Can Boycott Market For Months Current Conditions: Uranium Spot Market Remains Illiquid,

Opaque, Fragile and Remote

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III. Uranium Trading Volume and Liquidity

Data Point: Liquidity Lost Summer 07 and Fall 08

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Spot Physical Uranium Liquidity Measure

Daily Cumulative Probability: 50% Volume ~ 90,000 lbs

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Financial Uranium Liquidity Measure

Daily Cumulative Probability: 50% Volume ~ 90,000 lbs

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Critical Trade Volume for BFV Uranium

Conclusion: Volume > 200,000 lbs Creates Large Moves

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Uranium Spot Market Liquidity

•  Equity Markets Trade Synthetically ~90,000 lbs/day. •  Price Reporters Claim Spot Trades ~90,000 lbs/day. •  UOL U3O8 Offer and Bids 10,000 to 100,000 lbs.

•  UOL UF6 Offer and Bids 10,000 to 30,000 kg.U. •  Offers More Common than Bids

•  Trades Above 100,000 lbs. Can Move Market Significantly

Question: Given These Numbers, How Do We Improve?"

What is the Right Institutional Strategy?

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IV. Creating The New Environment

•  One Limit Order Book A single, trusted entity acting as a market specialist matching buyers and sellers equitably with market and limits orders.

•  Standardized Contract A simple, concise and binding contract acceptable by at least 85% of participants.

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Creating The New Environment

•  Committed Participants In particular, end users (5 or more) and traders (3 or more) willing to declare support for the spot market.

•  e-Commerce Network

Institutional infrastructure supporting pre-trade, trading and post trade activity.

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V. Conclusions (#1)

Conclusion #1: Frequent, Small

Transactions Will Inject Liquidity Without Dislocating the Spot Market.

Challenge: Transaction Cost Must Be Well Defined ① Waiting Costs ②  Bid-Ask Spreads ③  Entry Costs ④  Ticket Cost

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V. Conclusions (#2)

Conclusion #2: Price Makers and

Price Takers Must Be Active at All Market Price Levels.

Challenge: Participants Must Be Openly Committed. ①  Utilities ②  Traders ③  Financials Institutions ④  Producers

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Coda: Choices and Desire Drive Success

One Of the Planet’s Most Difficult Mountain Climbs … “Steve House and Marko Prezelj have made the coveted third ascent of the North Face of North Twin in the Canadian Rockies—the third ascent in 30 years. The two overcame near-disaster after the plastic shell from House's right boot was dropped during their third bivouac, high on the vertical headwall of the face. They climbed the 4,500-foot wall over four days”

The Most Advanced Energy Source Should Have the Best Functioning Fuel Market. It Can Be Done.

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About Altametric

Altametric, LLC was started in 2005. The company serves customers in the financial services and energy sector. The company provides world class analysis, financial engineering and systems for middle market companies.

Principal: Antonio Anselmo A. P. Anselmo worked for 12 years at J.P. Morgan Chase in

the Financial Engineering and Electronic Commerce groups in the Investment Bank. Prior to this, he was a Scientist at Varian Associates for 4 years. He holds M.B.A. from the Amos Tuck School at Dartmouth College and a B.Sc., M. Eng. and Ph.D. from Cornell University. Dr. Anselmo was named and Edward Tuck Scholar at Dartmouth and was awarded a Teagle Fellowship for research while at Cornell.