CA - Yellow Cake: A Good Long-Term Investment

Summary

• I have recently sold my holdings in Yellow Cake due to the lack of buybacks to more aggressively close the discount to NAV.
• The stock has done reasonably well over the last year in an otherwise challenging market.
• My expectation is for Yellow Cake to continue to perform well over the next few years, while miners presently look to have the better risk-reward.

Investment Thesis

The investment case for uranium has over the last few years continued to strengthen, with more reactor constructions being announced , life extensions of existing reactors , and the sentiment towards nuclear energy is improving in many countries .

Over the last year, uranium equities have had lackluster returns, where Yellow Cake ( YLLXF ) has mostly been range bound with a marginally positive return. Many other uranium equities have done worse during the general market sell-off last year, but they have lately started to rebound.

I continue to think the investment case for uranium and Yellow Cake is strong and I have owned and covered the stock many times over the last 3 years. However, I have recently decided to liquidate my holding in the stock, specifically due to management's inability to close the discount to NAV. The below table illustrates the returns using the primary listing for all my articles covering the stock over the last few years.

Company Criticism

Yellow Cake is a passive investment vehicle that offers exposure to the spot price of uranium, it is very similar to the Uranium Trust ( SRUUF ). Operating costs are relatively similar between the two vehicles, and both will sometimes trade with a discount to net asset value. Yellow Cake has frequently traded with much more of a discount to NAV, which can be viewed as an opportunity to buy a greater bargain, which is partly true, and something I have frequently done over the last few years.

However, to realize that bargain price, the stock needs to go back to NAV as well, and that has happened very infrequently over the last year.

I have been invested in the uranium industry over the last 5 years and I like to scale in and out between the miners and the investment vehicles dependent on the risk-rewards. The chart below illustrates that behavior over the last 3 years, for which I have more precise data for.

The few times Yellow Cake has traded at NAV lately have also coincided with the miners having much more elevated valuations, which is when I need the liquidity the least. Yellow Cake's key advantage over the Uranium Trust is in my view the ability to sell small amounts of uranium to buy back the shares at a discounted price. In doing so, the company will both increase its exposure to uranium per share and decrease the discount. In the long run, this would naturally help to make sure the discount does not grow to the most extreme levels, as seen in figure 4 as well.

The company has, however, elected not to sell any uranium lately and has consequently not been able to do any buybacks of size. As far as I understand, this has been elected primarily due to fear of criticism from non-shareholders and the perception that this is counterproductive to reducing the uranium supply in the market. My view on this is simple though, you owe your allegiance to your shareholders and not the market. That is even more true when the market has consistently been valuing the company at a 10% to 25% discount.

Conclusion

The spot price of uranium has recently gone above $50/lb again and the long-term contract price has also established itself above $50/lb during 2022. While the price action is encouraging, we are still far from a uranium price that would incentivize new production.

So, my expectation is for a higher uranium price over the next few years, where I would expect Yellow Cake to do well as well. Presently, I like the risk-reward for uranium miners better even if they have rebounded very recently.

Among the investment vehicles, I have started to favor the Uranium Trust slightly more because it offers more liquidity and trades much more frequently at NAV.

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