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The Month in U Inventory: Capital Raising as the Spot Reaches New Fifteen Year Highs

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.

The uranium spot price had a phenomenal +19.9% increase during the month as TradeTech reported a $73.15/lb print to end the month of September. This represents a fresh 15 year, post-Fukushima high.

The month of September was one of the strongest on record for physical uranium and this run-up in price lead to certain days in which SPUT traded at a slight premium to NAV. We note that the term price has also firmed with three and five-year uranium contracts currently standing at ~$65.00/lb and ~$70.25/lb respectively. Additionally, we note that inventory levels at SPUT increased by ~260,000 lbs to reach a new level topping 62.0M lbs. Given the pricing surge, financing were announced from both SPUT and Yellow Cake PLC. Earlier in September SPUT announced an update to its at-the-market (ATM) equity program whereby an additional $125M in trust units may be issued. SPUT shares surged by +16.4% on the month.

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

Valuation: Given that the uranium spot ended the month of September nearly 20% higher m/m at $73.15/lb, SPUT is trading at 0.94x P/NAVPU, or at a -5.8% discount given the current 1.0x NAVPU intrinsic value of $24.62. Note that the slight valuation premium from earlier in September reverted back to a much more pronounced discount at month-end. The discount however currently remains well off to the largest YTD -15% spread from April. Given our LT $70/lb price objective for the spot and constant CAD/USD exchange rate, our 1.05x NAVPU valuation of $25.70 (rounded) remains. For context, the current -5.8% 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% discount. The corresponding sensitivities to FX and the spot price are below:

Following a slight premium to NAV valuation seen on several occasions in September, a month-end selloff reverted the valuation to a more pronounced discount. All that said, we stress that a narrower discount relative to Yellow Cake's P/NAV (-5.8% compared to -9.3%) continues to be warranted. In addition to higher liquidity and inventory, SPUT has much less direct exposure to uranium sourced from Kazakhstan, via option agreements with Kazatomprom.

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

At the end of September, Yellow Cake PLC (YCA) announced its intention to conduct a pre-emptive placing of new ordinary shares in order to raise gross proceeds of up to ~$125M (~£103M) at a fixed price of £5.50 per placing share. This financing is to be used to purchase up to 1.50M lbs of physical uranium via calendar year 2023 purchase agreement with Kazatomprom at a price of $65.50/lb (followed by delivery in 1H/2024). Note that the announced purchase price represented a ~7% discount to the at time spot price of $70.50/lb.

Recall that in 2021, Yellow Cake raised a total of $375.1M and inclusive of fully exercising its option under the Kazatomprom Framework Agreement (KFA), acquired a total of 8.35M lbs of U3O8. In February 2023, Yellow Cake raised approximately $75M and via partially exercising its 2022 option under the KFA, acquired a total of 1.35M lb of U3O8 (at $48.90/lb). Note that all of this material will be held in storage in Canada and France. Post-financing, the total number of voting shares in the company will increase to 216,856,447.

Valuation: Given the most recent spot U3O8 quote at $73.15/lb (or £60.00/lb), YCA is trading at 0.91x P/NAVPU, or at an -9.3% discount given the current 1.0x NAVPU intrinsic value of £617.07. 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). 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 (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).

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