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The Month in U Inventory: Uranium Spot Continues Higher; Now Tops $80/lb.

DISCLAIMER: Any written content contained herein should be viewed strictly as analysis & opinion and not in any way as investment advice. No compensation was received for this report. Visitors to this site are encouraged to conduct their own due diligence.

This past week EDF announced during the World Nuclear Exhibition in Paris that it has plans to build at least one large nuclear reactor per year during the 2030s. This ambitious target is a marked increase from the current one or two built per decade. Elsewhere, Belgium's PM announced his support for the doubling of the current 10-year life extensions for Doel 4 and Tihange 3 nuclear reactors. It is his hope that the next government will have his same doubling of life extension view. The need for European utilities to secure the needed uranium supply for future needs was also noted. This all comes amid the COP28 conference in the UAE which was already highlighted by the US' pledge to triple its power output from nuclear sources in order to achieve their net zero goals by 2050.

The uranium spot price continued its upward march on the month as it advanced by nearly +9.1% to reach a quote of $81.00/lb to end the month of November. This represents the latest fifteen year, post-Fukushima high. The month of November was particularly strong on the inventory front with SPUT (U.UN, U.U) adding +600,000 lbs and thus increasing its total number of purchased lbs to +3.6M lbs on a YTD basis. Since inception, total purchases have amounted to nearly ~45M lbs.

Sprott Physical Uranium Trust (U.UN-T, U.U-T): 2-Yr Performance:

Valuation: Given current pricing, SPUT's discount to NAV increased from last month's -2.0% to the current -4.8%, now trading at a 0.95x P/NAVPU relative to its intrinsic value of $27.19. Note that following a slight valuation premium from earlier in September, the valuation discount has since been maintained as of October. The discount however currently remains well off the largest YTD -15% spread from April. Given our LT $80/lb price objective for the spot and constant CAD/USD exchange rate, our 1.05x NAVPU valuation of $29.00 (rounded) remains. For context, the current -4.8% discount to NAVPU is relative to +26% premium in September 2021 and -18% discount from July 2022. At the previous spot price high of $63.88/lb on April 13 2022, units traded at a modest -5.0% discount. The corresponding sensitivities to FX and the spot price are below:

We continue to stress that a narrower discount relative to Yellow Cake's P/NAV (-4.8% compared to -12.4%) continues to be warranted, however may be overdone. In addition to higher liquidity and inventory, SPUT has much less direct exposure to uranium sourced from Kazakhstan, via option agreements with Kazatomprom (KAP). We would venture to suggest that the current relative discount spread of nearly 8% is likely stretched.

Yellow Cake PLC (YCA-L): 2-Yr Performance:

Valuation: Given the most recent spot U3O8 quote at $81.00/lb (or £63.99/lb), YCA is trading at 0.88x P/NAVPU, or at a -12.4% discount given the current 1.0x NAVPU intrinsic value of £648.11. We note that unlike SPUT's discount which increased in November, Yellow Cake's discount remained constant in the same period, going from -12.3% to the current -12.4%. Though Yellow Cake normally trades at a larger discount to intrinsic value relative to SPUT (justifiably reflecting the smaller size, liquidity and larger perceived delivery risk associated with Kazakh sourced uranium), we feel that the current relative discount remains overdone. Given our LT $80/lb price objective for the spot and a constant GBP/USD foreign exchange rate, our 0.95x NAVPU valuation of £690 (rounded) remains. The corresponding sensitivities to FX and the spot price are below:

Recall that under the Kazatomprom Framework Agreement (KFA), Yellow Cake maintains the option to purchase up to $100M of U3O8 each year for a period of nine years, starting from the company's IPO in 2018. That said, it is our view that geo-politics will continue to weigh on Kazakh sourced uranium, and in general on all companies with exposure to Kazakhstan, (despite transport routes which completely bypass Russia). Recall that in September, Kazatomprom stated plans to increase production in 2025 to 100% of subsoil agreements, thus producing a total of ~79.3M-81.9M lbs U3O8. This ambitious target represents an increase of +28M lbs compared to FY/2023 planned production between 55.3M-55.9M lbs U3O8. This production is already committed under LT contracts.

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