For the past two months, the uranium spot market has been structurally mis-priced. Rising global (and especially Chinese) demand and little mine investment has caused supply and stockpiles to tighten. In turn, long-term contracts are starting to make a comeback. And yet at just over $20 per pound, most mine output is lossmaking. The result has been mothballed operations and massive production cuts.
To commodity bulls, these are near-enough perfect fundamentals to go long. Into this space steps Yellow Cake, which plans to raise up to $200m in an initial public offering on the Alternative Investment Market (Aim). The group, which is set to begin trading on 5 July, has signed an agreement with Kazatomprom to buy up to $170m (£129m) of uranium at $21.01 per pound, which it will then store in Canada. The agreement also gives Yellow Cake the right to purchase up to $100m of uranium from the Kazakh state-owned group for each of the next nine years.
Unlike other commodities, uranium trades through private contracts rather than an open market. As such, it is difficult to read the short-term effect of removing supply equivalent to 5 per cent of global production. Although one commentator described Yellow Cake’s looming trading position as one of the largest in the market, the deal had previously been flagged by Kazatomprom, and as such hasn't resulted in a major movement in prices since.
For Kazatomprom, the sale provides two functions: to reduce the cost of capital that would be involved in stockpiling its own production, and to kick-start a languid market ahead of its own IPO aspirations.
As to how Yellow Cake should be valued on listing, shareholders have a precedent in the shape of Uranium Participation Corporation (TSX:UPC), on which Yellow Cake’s business model has been based. For potential investors in the London-based stock, the parallel is enticing: UPC trades at a 17 per cent premium to its net asset value – itself largely the function of the spot price value of uranium. One might easily expect Yellow Cake’s shares to jump on its debut, particularly once you note that the spot market price has already climbed 10 per cent since the deal with Kazatomprom was struck. Storage costs are also expected to be cheaper than UPC’s.
If this all sounds too good to be true, tempted investors should bear in mind several caveats. First, Yellow Cake has signed up to pay a chunky fee to its Jersey-based adviser, 308 Services, which will broker any uranium transactions on the company's behalf. This amounts to a base payment of $275,000 per year, a variable fee of 0.275 per cent on all assets under management above $100m, and other various purchase commissions and incentive fees.
Second, Kazatomprom has the option to buy back 25 per cent of the initial purchase material after three years, assuming prices jump above $37.50 a pound. In return, Yellow Cake will receive the spot price, less a discount of approximately $3.50 a pound.
Third, the fund-like structure provides less leverage to a rise in uranium prices than an investment in a uranium miner. Investors convinced that the market is unsustainable and that prices can only rise might therefore want to put their cash into fellow Aim-listed Berkeley Energia (BKY), developer of the Salamanca mine in Spain, or Geiger Counter (GCL), which spreads its capital between a wider range of uranium mining equities.
