CA - Yellow Cake: A Way To Play The Uranium Bull Market With A Discount To Net Asset Value

2023-10-03 11:32:41 ET

Summary

• Yellow Cake is an investment vehicle focused on uranium, currently trading at a 12% discount to net asset value.
• Uranium has performed well in 2023 due to a shift in sentiment towards nuclear energy and a tight spot market.
• Yellow Cake recently conducted an equity placing to purchase uranium at a discount to spot prices, benefiting the uranium market.

Investment Thesis

Yellow Cake (YLLXF) is an investment vehicle focused on uranium, with its primary listing in the UK. I have covered the stock many times in the past, and those articles can be found here .

The stock together with other uranium equities, represented by the Sprott Uranium Miners ETF (URNM) in the chart below, had an excellent year. They have outperformed most broad equity indices by a wide margin.

Yellow Cake has recently seen a slight retracement, while the uranium spot price has mostly been unaffected by the weakness in the market. So, the stock is at the time of this writing trading with an attractive 12% discount to net asset value ("NAV"), which has led me to add the company back to my portfolio. In comparison, the Sprott Physical Uranium Trust (SRUUF) closed yesterday with a discount to NAV of 8.5% .

Recent Developments

Uranium has been one of the best-performing commodities over the last five years, but it has also performed well in 2023. The strong long-term performance is at least partly due to having been extremely oversold back in 2018 following an extended bear market.

Over the years, we have seen a very drastic sentiment shift towards nuclear energy again, where more and more countries are coming to the realization that nuclear energy is one of the best sources of electricity generation when factors like price, reliability, safety, security of supply, and land use are considered.

Now, there are still countries like Germany that oppose nuclear energy, but the list of opposing countries has decreased significantly over the last few years.

The near-term demand situation hasn't changed that much for uranium in 2023, even if a long-term deficit now seems to be a much more commonly held view. Potential factors that have caused the recent strong performance in the industry are things like:

• The uranium spot market appears to be extremely tight, with very few sources of supply. Compare that to 2021 when the Sprott Physical Uranium Trust and other uranium developers were able to buy a few million pounds of uranium on a weekly basis.
• The execution of long-term contracts has also picked up substantially over the last couple of years.
• Another important factor is that much of uranium production comes from countries like Russia, Niger, and Kazakhstan, where the geopolitical risks have increased lately. More so with regard to the risk of transportation and delivery in the case of Kazakhstan.

Yellow Cake Equity Placing

Last week, Yellow Cake did announce and execute an equity placing for about $125M at a stock price of £5.50 in order to purchase approximately 1.5Mlb of uranium from Kazatomprom at a price of $65.50/lb. The uranium is expected to be delivered in H1-2024.

The placing was done at a discount to NAV at the time. However, the purchase price for the uranium was also at a discount to spot prices, which is why the deal was not dilutive to existing shareholders. Overall, the transaction is of relatively little importance to Yellow Cake, even if it is of course positive for the uranium market that now another 1.5Mlbs will end up in storage rather than spot delivery, depending on your point of view of course.

Conclusion

Yellow Cake, the Uranium Trust, and the miners have had a relatively similar performance over the last year, as seen in the chart below. Where today I have a higher weight to the miners than the investment vehicles.

With that said, my overweight is not as extreme as a few months ago, and I do think some exposure to either the Sprott Physical Uranium Trust or Yellow Cake is a prudent approach. Because, the miners might outperform if we continue to see the uranium spot price climb rapidly, as we saw in September of this year. The miners are likely much more exposed to the downside if we see either the overall market or energy related stocks experience a more pronounced decline. That is at least the behavior we have seen over the last few years.

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