Yellow Cake still fertile

First, a recap on the investment case. Last July, Yellow Cake listed on London’s junior market, raising $200m (£151m) and agreeing to pay $170m for 8.1m pounds of uranium from Kazatomprom, the world’s largest producer. The agreement, struck at $21 per pound, also gave Yellow Cake the right to buy up to $100m of uranium from the Kazakh miner for each of the next nine years. An additional 350,000 pounds was acquired, again at a discount to the spot price, in August.

The purchased uranium was then stored in a secure Canadian warehouse, removing 5 per cent of annual global output in the process. Yellow Cake hoped to accelerate a market deficit, boost uranium prices, and the value of its holding.

At first, and helped by supply cuts from Kazatomprom and fellow uranium giant Cameco, the move appeared to work. By December, the uranium price rose to $28.50 per pound, marking the value of Yellow Cake’s 8.44 million pounds of uranium at $240.5m. Together with $9m in cash and a $3m derivative liability, and based on the prevailing dollar-pound exchange rate, the group’s NAV stood at 253p.

Since then, market consultants UxC and TradeTech reckon the uranium spot price has softened to around $26 per pound, while the pound has strengthened to $1.31. On a mark-to-market basis, Yellow Cake’s NAV now stands at 226p a share, which some would argue is fairly reflected in the shares’ slight discount. After all, the group does not pay a dividend, and many investors will conclude that there are better short-term opportunities for their capital. Plus, until the uranium market corrects, bullishness is the only real reason for a share price premium.

However, it is clear from ongoing supply cuts that prices are unsustainable for miners. In the long term, that’s also bad for utilities, which prefer price stability to volatility.

On that front, investors in Yellow Cake have two reasons for optimism. First, Cameco’s long-term price – which better reflects utilities’ off-take contracts – has held firm at $32 a pound regardless of the spot market. Second, US utilities’ contracted supplies start to collapse from 2021, meaning a wall of long-term agreements are coming. However, these utilities are waiting for a Department of Commerce (DoC) review to conclude whether quotas or tariffs will be imposed on uranium imports, and signal where the cheapest long-term supplies are coming from. Meanwhile, global demand continues to rise. Numis calculates there are 57 nuclear reactors being built around the world, with a further nine reactors approved for restart in Japan.