Investing in Physical Uranium: Spot Upside Without the Associated Mining Risks
Updated: Oct 30, 2022
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Both the Sprott Physical Uranium Trust (U-UN) and Yellow Cake PLC (YCA) act as a low-risk investment vehicles offering exposure directly tied to the macro theme of uranium investing. Both vehicles offer investors unlevered exposure to uranium price appreciation given extensive physical U3O8 holdings in inventory, along with uranium based financing initiatives potentially available through royalty, streaming or warehouse optimization strategies associated with trading and holding the commodity. The business model offers very straightforward exposure to uranium, (via the holding of physical uranium inventory) without the related mining risks (exploration, development, processing, etc.) associated with ownership in mining stocks.
Without getting into the macro fundamentals (those by now are well understood), the specifics are straightforward. Following the acquisition and subsequent re-organization of Uranium Participation Trust, the Sprott Physical Uranium Trust began trading on the TSX in July 2021 and has since become the world’s largest physical uranium fund. In the 15 months since, the Trust has grown it’s physical uranium holdings from 18.2M lbs to the current 58.57M lbs. On the way, as a testament to investor demand an amended shelf allowing the Trust to issue $1.3B worth of units was increased to $3.5B while the Trust’s ATM facility was increased from $1.3B to $2.5B. With all that available capital, note that SPUT accounted for 40% of all spot market transactions in 2021. All physical inventory is stored at facilities owned and operated by Cameco (Canada), ConverDyn (US) and Orano (France).
Valuation: Given the most recent spot U3O8 quote at $48.22/lb, SPUT is trading at 0.98x P/NAVPU, or at a 2.4% discount given the current 1.0x NAVPU intrinsic value of $16.59. Note that the valuation discount has remained consistent since the significant spot pull back from the April 13 high of $63.88/lb. Given our LT $70/lb price objective for the spot and constant CAD/USD exchange rate, our 1.05x NAVPU valuation of $25.70 remains. For context, the moderate current discount to NAVPU is relative to +26% premium in September 2021 and -18% discount from July 2022. At the peak 2022 spot price of $64.88/lb on April 13, units traded at a modest -5% discount. The corresponding sensitivities to FX and the spot price are below:
Yellow Cake PLC was listed on AIM in July 2018 with 8.1M lbs of physical U3O8. The company has a long term supply agreement with Kazatomprom with the right to purchase $100M worth of U3O8 every year (at spot). Since the initial 8.1M lbs, the current inventory has grown to 18.8M lbs, all securely stored at storage facilities owned by Cameco and Orano. The most recent delivery from Kazatomprom occurred this past June when Yellow Cake took delivery of 0.95M lbs of U3O8. This latest shipment from Kazatomprom was received on schedule and did not suffer any setbacks through the Black Sea as part of any potential problems stemming from possible transport from Kazakhstan, through Russia and then to the storage facilities located in France and Canada. Of note, last month Kazatomprom’s Chief Commercial Officer, Askar Batyrbayev issued a statement that the company now has an alternative shipping route completely bypassing Russian. This alternative route starts at the Kazakh seaport on the Caspian, reaches Baku the capital of Azerbaijan then gets to a seaport on the Black Sea in Georgia.
Valuation: Given the most recent spot U3O8 quote at $48.22/lb (or £43.40/lb), YCA is trading at 0.91x P/NAVPU, or at an -8.7% discount given the current 1.0x NAVPU intrinsic value of £454.70. Compared to SPUT, the larger discount to intrinsic value justifiably reflects the smaller size, liquidity and larger perceived delivery risk associated with Kazakh sourced uranium. Given our LT $70/lb price objective for the spot and a constant GBP/USD foreign exchange rate, our 0.95x NAVPU valuation of £620 remains. The corresponding sensitivities to FX and the spot price are below:
In summation, for those desiring exposure to the uranium price however are unwilling to take on the associated operating risk and financial gearing of a uranium producer, SPUT and Yellow Cake PLC are by far two of the most liquid pure play uranium vehicles. As both vehicles gradually and opportunistically increase inventory levels, so to will the liquidity levels and investor interest. The supply-demand fundamentals of mined uranium oxide, coupled with the current tightness across the rest of the nuclear fuel cycle (enrichment and conversion) point to significantly higher U3O8 prices over the medium to long term.