The Month in U Inventory: Inventory Purchases Accelerate in October

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The uranium spot price continued its upward march on the month as it advanced by nearly +2.0% to reach a quote of $74.25/lb to end the month of October. This represents a fresh fifteen year, post-Fukushima high. The month of October was particularly strong on the inventory front with SPUT (U.UN, U.U) adding +300,000 lbs and thus increasing its total number of purchased lbs to +3.0M lbs on a YTD basis. We note that SPUT purchasing in October alone already surpassed the total number purchased in Q3/2023. Since inception, total purchases have amounted to nearly ~44M lbs.

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

Valuation: Given current pricing, SPUT's discount to NAV narrowed from last month's -5.8% to the current -2.0%, now trading at a 0.98x P/NAVPU relative to its intrinsic value of $25.62. Note that following a slight valuation premium from earlier in September, the valuation discount has since been maintained as of October (though to a lower degree currently). 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 -2.0% 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:

We continue to stress that a narrower discount relative to Yellow Cake's P/NAV (-2.0% compared to -12.3%) 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. We would venture to suggest that the current relative discount spread of nearly 10% is likely stretched. We would entertain a short term long YCA, short SPUT pair trade until the spread narrows.

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

Not to be outdone by SPUT, Yellow Cake PLC (YCA) was also active this past month as it took receipt 1.35M lbs (technically on the last day of September) in a deal with Kazatomprom (KAP) which was finalized in 2022 at a price of $48.90/lb (representing a -34% discount to the current spot). Moreover, we highlight the fact that Yellow Cake completed an oversubscribed share placing on October 2, raising gross proceeds of ~$125M. These funds were used to purchase a further ~1.527M lbs from Kazatomprom at an agreed upon price of $65.50/lb (receipt is expected sometime in 1H/2024). 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. Now post-financing, the total number of voting shares in the company increased from 198,156,447 to 216,856,447, representing an increase of +9.4%.

Valuation: Given the most recent spot U3O8 quote at $74.25/lb (or £61.63/lb), YCA is trading at 0.88x P/NAVPU, or at a -12.3% discount given the current 1.0x NAVPU intrinsic value of £628.73. We note that unlike SPUT's discount which narrowed in October, Yellow Cake's discount increased in the same period, going from -9.0% to the current -12.3%. 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 discount is 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.