CA - Yellow Cake Trades With A 12% Discount To NAV

2023-12-11 15:54:33 ET

Summary

• Uranium spot price has increased by 70% YTD, leading to attractive returns in the industry.
• The long-term contract price for uranium has lagged behind the spot price, potentially due to reporting lags and market-related pricing.
• Nuclear energy is experiencing a shift in sentiment, with more countries committing to tripling their nuclear energy capacity by 2050. The supply/demand picture for uranium looks positive.

Overview

Uranium has been a hot topic in 2023, as one of relatively few natural resource industries with very attractive returns during the year. The spot price of uranium has increased substantially and is up around 70% YTD. Yellow Cake ( YLLXF ), which is a passive uranium investment company, with its primary listing in London, is up around 60% in U.S. Dollars. This is a stock I have covered frequently over the last few years, and those articles can be found here .

In the chart below, we can see that both the spot price and long-term contract price for uranium are in a multi-year bull market. The spot price for uranium on Friday was reported at $82.50-$83/lb, depending on the source we use. The long-term contract price has lagged the spot price somewhat over the last few months, where the latest reported contract price was $66/lb at the end of November.

I would not read too much into the recent deviation between the two prices, as there are a few valid reasons for why the numbers are at least reported to be different.

• The monthly frequency of the contract prices and potential lags in the reporting can possibly explain part of why the contract price has been lower lately.
• It is also important to remember that not all contracts are reported.
• Another reason is that the reported price is usually the lowest bid, even if the price was made at a higher price point, with another supplier. So, you are not going to catch nuances and political risk consideration, which Utilities consider, in the contract price above.
• Lately, we have also heard of more companies preferring to use market related pricing on their uranium contracts, which naturally doesn't translate seamlessly to a fixed price as indicated in the chart above.

Nuclear Is Going Mainstream

Anyone that has been investing in uranium for very long, knows that while we have historically seen strong demand growth for nuclear power out of Asia, there was relatively little talk about growing the nuclear base by western countries.

However, over the last couple of years, we have seen 5–10 countries change their view in that regard, and at COP28, 22 countries announced a commitment to triple the nuclear energy capacity by 2050.

Whether the countries actually achieve that remains to be seen, but it is hard to overstate what a massive shift in sentiment nuclear energy has experienced over the last five years. Where the energy price spike experienced last year and a greater focus on non-fossil fuel energy sources have no doubt been important reasons for the recent change in sentiment for nuclear energy.

It is exceedingly difficult to predict very long-term supply and demand of any commodity, but it is fair to say the demand picture looks extremely good for uranium over the long term, and we are already in a deficit.

Net Asset Value

Yellow Cake has over the long term tracked the spot price of uranium relatively closely. When the sentiment is weaker in the industry, the stock has traded with a discount to net asset value ("NAV"), while it is usually closer to NAV when the sentiment is better.

So, it is a little bit surprising to see the stock now trading with an 11.9% discount to NAV, when the Sprott Physical Uranium Trust ( SRUUF ) is trading with a smaller discount, and we are seeing positive price momentum in the uranium industry overall. The current stock price in Yellow Cake translates to an implied uranium price of $72.7/lb for the company, which is a $10 discount per pound of uranium.

One possible reason for the discount to NAV is concerns that there will be delivery problems with the latest 1.5Mlbs of uranium from Kazatomprom. However, I don't doubt this could be the reason, but I find that rational overly simplistic to put it mildly.

First, I can't see the terms being anything but payment on delivery. So, if Kazatomprom fails to deliver, Yellow Cake would in the worst case have 7% less uranium than expected and cash instead, provided Kazatomprom would not be forced to buy the pounds in the spot market instead for delivery. Also, if in fact Kazatomprom fails to deliver, which is the largest uranium producer in the world, do you think the other uranium pounds that Yellow Cake owns and has stored in Canada & France are worth more or less? I think a "failure to deliver event" by the world's largest uranium producer would be extremely bullish for the price of uranium.

Conclusion

Yellow Cake is in my view a good low-risk investment in the uranium industry, presently trading with a larger discount to NAV than the Uranium Trust, which is a relatively comparable investment vehicle.

I would have preferred Yellow Cake to be more aggressive to close the discount to NAV, by selling small amounts of uranium, then use the proceeds to buy back uranium exposure cheaper with share buybacks in the market. However, I suspect we would need to see a substantially higher discount to NAV for that to materialize.

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