This uranium company will keep on glowing

That might not sound special, given Canada is the second largest miner of uranium globally. But this uranium came from Kazakhstan, the world’s biggest miner and exporter of U3O8 (the stable compound form that is most widely traded). As well as conjuring images of heavily guarded convoys and fortress-like storage facilities, the numbers behind the deal itself were also impressive. 

The price of the new material, $48.90 (£39) per lb, was agreed last year. Uranium now trades at $70, meaning Yellow Cake effectively paid $66mn for uranium that is now worth over $90mn. 

The gains have been driven by both supply worries connected to Russia’s invasion of Ukraine and rising demand expectations. Yellow Cake also cited “increasing investor confidence in the emerging role of nuclear power as a clean energy source” – of which it is a part – as another price driver.

Emboldened by this firmer outlook, the company last month tapped investors for another £103mn, which will be largely put towards fully exercising its annual purchase option with Kazatomprom to buy 1.5mn pounds of uranium, this time at a discounted price of $65.50 per lb.

Although shares in Yellow Cake have followed its market higher, there are sound reasons to believe they have further to run.

The structure

Yellow Cake’s business model offers direct exposure to uranium. In a financial sense, of course. When management thinks prices are attractive, it buys, often paying via fresh equity. The company has also traded at a discount to net asset value (NAV) in recent years, triggering buybacks, although the discount has largely been eroded by a rising share price and bullishness around uranium prices.

Organisationally, that’s about it, given the payroll consists of just two employees: chief executive Andre Liebenberg and chief financial officer Carole Whittall. Beyond questions of key person risk, Yellow Cake is a tight ship, with a structure unchanged since its 2018 listing, and founded on the purchase agreement with Kazatomprom that allows it to buy up to $100mn-worth of uranium every year until 2027.

To date, there have been no sales of physical holdings – which cost around $3mn to store in the most recent financial year, and which have more than doubled to 20.2mn lbs in three years.

The industry makes the argument that uranium is unlike other industrial commodities, where prices are dictated by a much broader range of buyers and demand profiles. Compare this with uranium’s dominant consumer, the nuclear industry, where the consistency of long-term supply trumps all concerns. In the words of Cameco chief executive Tim Gitzel, customers want “supply solutions today that guarantee their reactors run well into the next decade without a costly risk of interruption.” 

Uranium prices are dictated by two markets: the long-term contracted sector, where major producers such as Cameco and Kazatomprom sell yellow cake (aka U3O8) at a fixed price for what can be years at a time, and the spot market. These don’t always move precisely in tandem; given the long-term nature of the purchase agreements, buying at spot has been cheaper at times in recent years. 

The usual drivers of price – demand from power stations and the amount of mined supply – are present. But the scale and growth of Yellow Cake and North American equivalent Sprott Physical Uranium (US:U.UN) has started to influence the uranium price. Sprott entered the market in 2021 and immediately eclipsed its peer by buying 20mn lbs of uranium. It now holds 62mn lbs, equal to six months of global supply, as per data from the World Nuclear Association. 

The pair has been able to buy so much in recent years because large stockpiles have hit demand. But volumes have now become significant enough to kick the price up, especially after Cameco and Kazatomprom cut production in the face of sub-$20 prices. At the same time, global U3O8 supply has fallen over a fifth since 2017, when it hit 74,000 tonnes (or 164mn lbs).

The potential

Opinion on the outlook varies. On the one hand, spot markets are tight and sanctions on Russia are unlikely to disappear in the short term. On the one hand, Cameco and Kazatomprom will be keen to preserve market share by upping supply. Cameco’s annual production went from 6mn lbs to 10mn lbs between 2021 and 2022, and mine restarts mean this will double again this year. Even more supply will come from Kazatomprom, which aims to boost production by a quarter, and restart the 6mn-lb-a-year Langer Heinrich mine in Namibia. Liberum believes this wall of supply will serve to hold prices at the $70 level.

Berenberg analyst Richard Hatch is less bearish. “We would note that the majority of the additional volumes will be sold into term contracts, and we remain of the view that utilities, particularly US utilities, need to step into the market to contract medium-term volumes,” he said, forecasting a price of $80 per lb for 2024. A more fractured global trade picture supports this; the US has introduced new limits on uranium exports to China, Kazatomprom is having a tougher time exporting its product while Niger – which supplies a quarter of Europe’s uranium – has stopped selling to France.

What is clear, however, is that demand from new reactors is rising: from 162mn lbs in 2021 to 180mn lbs in 2025, according to Liberum. Mine supply will remain below that, at around 140mn lbs in the same year. But secondary supply, which means stockpiles and even U3O8 sourced from nuclear weapons, should make up the deficit. Add to this splintered trade routes, which could bring on spikes in the price in European and North America, where Yellow Cake’s product is stored. 

Why go direct? 

Although various funds have made direct exposure to commodities more accessible, most commodities investors tend to prefer producers to physical investment vehicles. As well as offering income, miners provide leveraged exposure to rising prices – assuming costs don’t blow out.

When it comes to uranium, however, the mining options are limited. There is the Sprott Global Uranium Miners (URNM)* ETF, which has Kazatomprom and Cameco (US:CCJ) as its largest holdings, and currently trades at just a 2 per cent discount to NAV. 

Geiger Counter (GCL), a fund that has been listed since 2006 and which holds miners and developers, trades at around a 25 per cent discount. Cameco itself – also a Geiger Counter holding, whose cash profits analysts expect to more than double to $452mn this year – is another option, although its forward price/earnings ratio of 29 is more than three times that of a diversified, high-yielding major such as Rio Tinto (RIO). By contrast, Yellow Cake’s current discount to forward NAV – itself grounded in a tangible asset, with no exposure to project risk – offers a more compelling entry point for those betting on further price rises in the commodity.

Whether those rises are capped by new supply, or if we are still at the foothills of spiking prices in the years ahead, is the big question. But while a long-term holding in Yellow Cake means the odd share placing dilution, the company’s managers have proved the sagacity of their long-term thesis, and rewarded investors with well-timed buybacks whenever pessimism has been in the ascendancy.

Of course, the bigger the vehicle gets, the trickier it may become to eventually sell back the stockpiled uranium at competitive prices. But for now, Yellow Cake also appears a rarity in a market where investor support for illiquid, non-yielding assets is on the floor. Little about its current fundraising activity suggests it can’t repeat the trick over the coming years.

*A previous version of this story incorrectly said Sprott Global Uranium Miners (URNM) was closing. That is not the case; the closure relates to an unrelated HanETF product.