Chronicle - Nov 26, 2023
How to (not) Ride the Uranium Bull
A uranium-backed token was introduced last week. Each token is backed by a pound of real uranium (U3O8). Owning the token gives you a 1:1 exposure to the uranium price. The issuer intends to make uranium investing available to the general public; previously, it was only available to institutions. It sounds fishy, doesn't it?
Sanmiguel Capital Investments, a Bahamas financial advisory firm, launched a token that is 'backed by uranium'. The token can be traded on Uniswap. A few days after its launch, everything looks okay. There are hundreds of transactions, and the token price is quite similar to the real uranium price. At the time of this writing, the $U token is traded at $80.3, while the U3O8 spot price, according to Numerco, is $80.75.
What could go wrong? Many.
The main actor behind this token is Madison Metals, a publicly listed (GREN.CN) uranium exploration company with projects in Canada and Namibia. Madison signed a 10-year uranium forward sales agreement with Sanmiguel, where Madison commits deliveries of the first 20 million pounds of U3O8 from its ground resources. The sale price will be determined by Sanmiguel in the future 'within the context of the market', with the floor price determined at $45 per pound. In connection with this sales agreement, Madison will issue up to 3,000,000 shares to "an arm's length party" who facilitates this transaction.
From the token sale (there are 20 million tokens created), Madison will receive 50% of the proceeds. Assuming all tokens are sold to the public at the current Uniswap price of $80, Madison will receive $800 million. But that's very unlikely. According to the token whitepaper, initial token sales are expected to be 1 million tokens.
Here is our understanding of the transaction, which is basically a financing scheme for Madison. It receives money from token sales, and in return, it agrees to a forward sale agreement and to issue some common shares. To be clear, Madison receives money when its tokens are sold, and it will only deliver the U3O8 when a token holder asks for delivery.
The real problem is that Madison Metals doesn't have and doesn't produce uranium. We can't find any production plan timelines in all their filings. It is, however, acquiring more mining concessions in Namibia, a country rich for metal mining. Madison boasts 200 million pounds of U3O8 potential, but so far, it's only got 9 million resources in Namibia.
So, if some token holders ask for 20 million pounds of delivery, Madison is likely to need to buy the U3O8 from the spot market at whatever price. Recall that Madison currently has no physical uranium inventory at hand.
Buyers of this token should also be aware of counterparty risk. Madison has received the money from the token sale now. But it will only deliver U3O8 when a token holder asks for delivery in the future. If the price of uranium increases significantly in the future and Madison still doesn't have uranium inventory ready at hand, Madison has to buy on the future spot market at a higher price. It means Madison could bear heavy losses. In an unwanted situation, the potential losses could be big enough to incentivize bankruptcy, leaving the token holders with nothing but a digital record.
Hopefully, crypto token traders will not ask for U3O8 delivery. And Madison knows this.
A crypto token trader is unlikely to ask for U3O8 delivery. And if they do ask, there are some barriers for them. The whitepaper itself said, "Redemption is managed by Madison and requires stringent regulatory compliance." To be eligible for delivery, one must have 20,000 tokens, implying 20,000 pounds of deliverable uranium. They must also be subject to regulatory requirements such as obtaining licenses, ensuring appropriate storage, handling, transportation, security, insurance, and disposal. It is a long list, and Madison itself doesn't even experience it because it doesn't have a physical inventory.
The token price is also problematic. At the time of this writing, the token price at Uniswap is around $80, similar to the real-world uranium price. Since the uranium that is backed by the token is still below the ground, why did some token traders agree to transact it at $80? That is the price of ready-to-deliver uranium. Madison still needs to drill a hole, dig the ore, refine the ore, extract the uranium, store it in the warehouse, and deliver it to any buyer. All these activities are costly. The Uniswap price is supposed to be much lower than the real spot price.
It is unfortunate that a scheme like this, if it goes horribly wrong, may discourage people from investing in uranium and the crypto business. These are the sectors that should be nurtured rather than tainted.
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