YLLXF - Yellow Cake: The Discount To NAV Is Now 17% While The Spot Price Is Climbing
2023-04-26 13:28:09 ET
Summary
- Yellow Cake released a quarterly update earlier today which confirmed the large discount to NAV.
- With the latest uranium purchase, Yellow Cake will have over 20Mlbs of uranium on the books.
- The stock has historically converged with the price of uranium, which I expect it will do once again over the coming year.
Investment Thesis
Yellow Cake is an investment company designed to track the price of uranium, with its primary listing in the UK. The stock also has an OTC ( YLLXF ) listing in the U.S. I have covered the company many times in the past and those articles can be found here .
In the chart below, we can see the performance of the price of uranium, the UK listing of Yellow Cake, and the OTC listing since the end of 2019. Over the long term, the stocks have tracked the price of uranium quite well. I would note that the OTC listing can be illiquid at times, which is why I prefer the UK listing.
Figure 1 - Source: Koyfin
The stock price will sometimes diverge slightly from the price of uranium, where it can trade with a discount to net asset value ("NAV"), and on occasions, it has even traded with a slight premium to NAV.
This year, Yellow Cake has underperformed the price of uranium, which has started to tick upwards lately, and yesterday closed at $53.5/lb. So, for a patient value investor, looking for a lower-risk bargain, Yellow Cake could be an interesting investment in the uranium industry.
Figure 2 - Source: TradingView
Net Asset Value
Earlier today, Yellow Cake released an operational update for March 2023, which confirmed a relatively large discount to NAV of 13% in the end of March. If we use the latest stock price, fx, and the uranium price of $53.5/lb, the discount to NAV is now as large as 17%.
Figure 3 - Source: Yellow Cake Quarterly Reports & TradingView
A 17% discount to NAV equals an implied uranium price of $44.1/lb, which is an attractive entry price when the spot price last traded at $53.5/lb, and the reported long-term contract price for March was $53/lb.
Figure 4 - Source: Cameco, Yellow Cake Quarterly Reports & TradingView
It is also worth keeping in mind that the reported long-term contract price does not fully reflect at what price some western contracts are being signed today. Most long-term contracts are not disclosed and some use floating rate prices with cap/floor features. However, Ur-Energy ( URG ) is a company which has recently signed a decent amount of contracts, where on page 52 in the 2022 10-Q we can easily deduce that fixed contract prices are above $60/lb. So, with that in mind, an implied uranium price of $44.1/lb for Yellow Cake looks attractive.
Figure 5 - Source: Ur-Energy 2022 10-Q
Yellow Cake did raise $74.3M earlier this year and that was used to purchase 1.35Mlbs or uranium from Kazatomprom, which is due to be delivered later this year. With those pounds, Yellow Cake now has more than 20Mlbs of uranium and total assets north of $1B. The company still has the option to purchase an additional $100M worth of uranium from Kazatomprom in 2023, but would need the stock price to trade closer to NAV before raising the funds.
Figure 6 - Source: Yellow Cake Quarterly Reports
Conclusion
I don't think there is much doubt Yellow Cake is attractive on an absolute level here, especially as the spot price of uranium appears to have come to life again.
However, if one zooms out a bit, we can see that uranium miners in general have underperformed the price of uranium even more than Yellow Cake. While I do think the correlation between Yellow Cake and the uranium spot price is much stronger than that for the miners. I simply think the miners are even more of a bargain than Yellow Cake at this level, which is why I am not long the stock.
Figure 7 - Source: Koyfin
For further details see:
Yellow Cake: The Discount To NAV Is Now 17% While The Spot Price Is Climbing