CCJ - Yellow Cake: Still A Dependable Low-Risk Investment In The Uranium Industry

2023-07-05 11:27:39 ET

Summary

• Yellow Cake currently trades with a 13.2% discount to net asset value.
• Both the spot and long-term contract price for uranium has been climbing lately.
• Yellow Cake appears to be a consistent low-risk alternative in the uranium industry.

Investment Thesis

Yellow Cake (YLLXF) is an investment company that invests in physical uranium. The company has its primary listing in the UK, and it has an OTC listing in the U.S. I have owned the stock in the past and I have covered the company several times before at Seeking Alpha. Those articles can be found here .

The stock price has tracked the price of uranium relatively closely over the last five years, even if it has lagged slightly. The operating costs are very low, so much of the underperformance is because the stock has been trading with a discount to net asset value ("NAV") lately. Yellow Cake is in my view a good low-risk investment alternative in the uranium industry, which has delivered a consistent performance.

I believe the uranium industry is a great long-term investment alternative due to underinvestment during the last decade, the fact that uranium prices are still trading below the marginal cost of production, and a rapidly improving sentiment for nuclear power in most countries.

The equities in the industry can in the short term be very correlated to the overall market, liquidity conditions, and energy prices. However, longer term, the spot and long-term contract price are likely to be the main determinants of the stock price performance.

We can see in the chart above that both the spot price and long-term contract price for uranium have been in a strong uptrend over the last few years, further upside is likely required to balance supply and demand.

Industry Commentary

I started to invest in the uranium industry during 2018 and my first article here on Seeking Alpha was actually about the reduced supply from the biggest uranium miners in the industry, that article can be found here .

We have since then seen the reduced supply have the desired effect of higher uranium prices and Cameco ( CCJ ), among others, has more recently started to increase its production again. Despite the increased production in 2023 and onwards, we are likely to be in a deficit going forward, partly due to healthy demand.

For those not involved in the industry in 2018-2019, it is hard to convey how much the sentiment has changed since then. We have seen uranium investing become much more popular as the price has started to confirm the investment thesis, but the biggest change, in my view, happened with the acceptance of nuclear energy by the public across many countries. The below charts illustrate the public's view on nuclear in the U.S. and Finland, but it looks similar in many other countries.

That is primarily due to two factors in my view. A lot of people got to learn the painful way what energy security means during the 2022 energy crisis, when heating and electricity bills went up multiples compared to prior years. This was especially noticeable in Europe, but impacted countries around the world. Another factor is that more countries seem to have come to the realization that wind and solar energy are unlikely to solve the problem of transitioning from (or at least decrease) the use of fossil fuels.

More developing counties in Asia and Eastern Europe have seen the value of nuclear power for some time, and the sentiment has likely improved there as well. However, the biggest shift over the last few years has been in developed countries. Sweden is now the latest country, like the UK, France, Japan, and South Korea which looks to be committed to the nuclear u-turn, where the plan has gone from phasing out nuclear to now actively planning new reactor constructions or restarts.

I think more countries are likely to come to the same realization over the next few years, which will in turn mean current demand projections for uranium will turn out to be overly conservative. Permitting, financing, and constructing new uranium mines is still a relatively slow process in most countries. So, I wouldn't count on an immediate supply reaction either.

Valuation & Conclusion

Yellow Cake is unlikely to have the best return in the industry if we see substantially higher uranium prices from here. It is on the other hand a relatively dependable stock, which can be a good low-risk alternative in the portfolio. The stock, together with the Sprott Physical Uranium Trust (SRUUF), outperformed most uranium equities over the last 18 months, where uranium equities have been more range-bound.

The stock price of Yellow Cake is presently trading with a 13.2% discount to NAV, which in turn implies a uranium price of $49.80/lb. I do think a relatively conservative estimate for uranium is somewhere around $75/lb in the next few years. That would in turn imply a 50% upside for an investment in Yellow Cake, which in my view has relatively little downside from here. I hold some Uranium Trust units in my portfolio but would be open to add back Yellow Cake if the discount to NAV between the two companies were to deviate more.

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