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The Month in U Inventory: SPUT Discount to NAV Reaches the Highest YTD Level

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.

Uranium spot prices staged a late month comeback as the April Broker Price Index ended at a quote of $53.75, representing an approximately +6.5% increase on the month. The term price was slightly higher as well on the month, settling just above $52.00 to end the month. Despite a volatile month which prompted discounts to NAV values to reach the highest level YTD, (SPUT reached a -15% discount to NAV during the last week of April), the month itself was characterized as yet another active one for adding uranium inventory. SPUT (U.UN) added +100,000 lbs to inventory while Yellow Cake PLC (YCA.LN) inventory remained flat.

On the earnings front, Cameco (CCJ) Q1/2023 results were largely inline with consensus expectations as revenues of C$687M were slightly below estimates while adjusted EPS of $0.27 was slightly above. During the quarter, the company produced 4.5M lbs of uranium and maintains the target goal for 20.3M lbs of uranium produced (both figures being Cameco’s share) during FY/2023. Long term contracting volumes increased and currently encompass 215M lbs of uranium along with 70M+ kgU of UF6 conversion services, with deliveries spanning over a decade. Note that beginning in 2024, the plan is to produce 18M lbs of uranium (100% basis) at both Cigar Lake and McArthur River/Key Lake. Recall that McArthur River/Key Lake is licensed for 25M lbs of annual production however additional contracting will be needed before the company will entertain the possibility for such a production ramp. As per Kazatomprom (KAP), in line with the previously announced reduced production levels (announced last year), the company released its Q1/2023 financial results highlighted by production of 4,744 tU or 12.37M lbs of uranium (100%). This being lower when compared to the 4,954 tU or 12.92M lbs as produced in Q1/2022. Apart from a well communicated 20% production cut, note as well that the production decrease was somewhat also associated to the delays in commissioning certain ISR wells, thus resulting in a shift/delay for certain material. That said, FY/2023 production guidance is seen between 20,500-21,500 tU or a midpoint of 54.78M lbs of uranium (100%) with the C1 and AISC expected between $12.00-$13.50/lb and $20.00-$21.50/lb respectively. Kazatomprom continues to target an inventory level equivalent to six-seven months of annual attributable production. Lastly, the company BOD recommended a dividend payment of KZT 774.88 which will be determined at the upcoming May 25 AGM. Note that this would equate to a dividend yield of ~7%.

On the supply/demand front, seven US Senators introduced a bipartisan bill to ban imports of Russian uranium. This bill is particularly aimed at prohibiting imports of low enriched uranium (LEU) from Russia, beginning no later than 90 days after enactment (with waivers available until January 1, 2028). On the European front, Poland, Latvia, Lithuania and Estonia proposed including Russia's nuclear energy sector in the European Union’s 11th package of sanctions. The specific aim would be to target Rosatom’s BOD, prevent new contracts and limit imports of Russian enriched uranium. Lastly, following the G7 meeting in Sapporo, the UK, the US, Canada, Japan and France agreed to form an alliance to undermine Russia's position on the nuclear fuel market. The alliance would allow for stronger cooperation among members while also allowing for additional sanctions against Rosatom.

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

Valuation: Given the uranium spot ended the month of April a shade lower at $53.75/lb, SPUT is trading at 0.89x P/NAVPU, or at a -11.5% discount given the current 1.0x NAVPU intrinsic value of $18.38. Note that the valuation premium from the end of January has reverted back to a much more pronounced discount currently equating to the largest spread YTD. 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 current -11.5% discount to NAVPU is relative to +26% premium in September 2021 and -18% discount from July 2022. At the peak 2022 spot price of $63.88/lb on April 13, units traded at a modest -5% discount. The corresponding sensitivities to FX and the spot price are below:

We continue to feel that SPUT's -11.5% discount to NAV has been brought upon largely due to the April market volatility stemming from the on-going concerns within the financial sector, coupled with uncertainty on future Fed policy and a weak economic backdrop. Note that the discount to NAV reached -15.0% in late April, representing the highest discount of the year. Recall that as of the end of February, SPUT's discount to NAV was much narrower at -2.1%. All that said, we stress that the narrower discount relative to Yellow Cake P/NAV is warranted. In addition to higher liquidity and inventory, SPUT stores all of its physical uranium inventory at facilities owned and operated by Cameco (Canada), ConverDyn (US) and Orano (France). Unlike Yellow Cake, SPUT has much less direct exposure to sourced uranium from Kazakhstan.

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

Valuation: Given the most recent spot U3O8 quote at $53.75/lb (or £43.00/lb), YCA is trading at 0.85x P/NAVPU, or at an -15.4% discount given the current 1.0x NAVPU intrinsic value of £444.28. 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. This dynamic is currently being reflected. 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:

Recall that Yellow Cake has a long term supply agreement with Kazatomprom with the right to purchase $100M worth of U3O8 every year (at spot). On back of Kazatomprom's recent production guidance reduction and logistical transport challenges which partly led to lower quarterly volumes, 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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