Yellow Cake benefits from Sprott price hike

Imitation is the sincerest form of flattery. The second half of that Oscar Wilde quote ("...that mediocrity can pay to greatness") is not so useful in Yellow Cake’s (YCA) case, given the outperformance of the Toronto-listed uranium vehicle the Sprott Physical Uranium Trust (Can:U.UN), which launched this year.

Yellow Cake, which holds 13.9m pounds (lb) of physical uranium - soon to climb to 18.8m lbs - is doing fine but has recently been overtaken in terms of size and value by the Sprott trust, which has a market capitalisation of C$1.9bn (£1.2bn) and holds 40m lbs of uranium. 

But far from eating Yellow Cake’s lunch, this is a positive for the uranium market and spot price of an illiquid commodity. At the end of November, the Sprott trust announced it would issue up to $3.5bn (£2.65bn) in new shares in the next two years. Taking this amount of uranium off the market (global annual demand is around 180m lbs) could seriously jack up prices. BMO Capital Markets analyst Colin Hamilton said the “upsizing” of the Sprott trust would “accelerate the reduction of the inventory overhang currently present in the uranium market”. 

Uranium has already jumped from around $30 a lb at the end of last year to $45/lb this week. Yellow Cake chief executive Andre Liebenberg said “considerable” supply constraints remained in the uranium market, which is dominated by Kazakhstan state player Kazatomprom and Canada's Cameco (Can:CCO). 

In the past 12 months, Yellow Cake has certainly shifted to a more aggressive strategy, from selling uranium to fund buybacks to raising over £270m since March to buy uranium. We are bullish too. Buy.

Last IC View: Buy, 219p, 02 Mar 2021