The Month in U Inventory: SPUT & Yellow Cake NAV Updates
Updated: Nov 30, 2022
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The month of October was an eventful one highlighted by a transformational proposed acquisition by Cameco, along with its continued progress on the contracting front. That said, the spot uranium price advanced by +8.40% and ended the month of October at $52.27/lb. The term price increased to near $50.00/lb. Given our LT $70/lb price objective for the spot and a constant CAD/USD exchange rate, our 1.05x NAVPU valuation of $25.70 remains for SPUT. For Yellow Cake, Assuming the same LT spot price and assuming a constant GBP/USD exchange rate, our 0.95x NAVPU valuation of £620 remains. The notable happenings impacting the industry during the last few weeks include:
Cameco (CCJ, CCO-T) Increasing its Value Proposition – Q3/2022 results exceeded expectations on both top and bottom lines however the real highlight was the announced “advanced contracting discussions” for an additional 27M lbs in LT contracts (along with approximately 7.5M kgU). It is hoped that the contracting for these new lbs will be finalized by year-end, at which point Cameco’s FY/2022 contracting book would have increased to 77M lbs U3O8 and 14.4M kgU. As such, note that Cameco’s spot volume purchase outlook for FY/2022 increased from the previously expected 14M-16M lbs to the currently expected 16M-18M lbs. The results were overshadowed by the proposed acquisition for 49% of Westinghouse Electric. Once the transaction concludes, a unified entity expanding and adding capabilities in the conversion and enrichment segments while also providing the required uranium and nuclear reactor technology (namely the AP1000) has already proven to be a winner given the latest news out of Poland (below). By vertically integrating and offering end-to-end bundled solutions (as in a one-stop-shop), Cameco/Westinghouse will benefit by offering a much more compelling value proposition.
Poland Goes Nuclear – Poland (aka the EU’s most coal dependent country) announced last week that it would build its very first nuclear power plant. Westinghouse was selected to build the first three AP1000 reactors in a deal which will eventually increase to six units. Not only does this signify early validation of the Cameco/Westinghouse tie-up but even more telling is the pivot away from Rosatom’s regional dominance in eastern Europe. The first Polish AP1000 is expected to become operational by 2033. Once the six reactors are operational, it is estimated that 54M tons of carbon dioxide emissions will be saved on an annual basis.
Nuclear Reactor License Extensions - Diablo Canyon in California was given a $1.4B loan enabling it to continue operating until 2030. Constellation Energy (CEG) announced that they are seeking approval to extend the lives of the Clinton and Dresden nuclear power plants by 20 years. Meanwhile in Mexico, the Laguna Verde nuclear power plant received a 30 year operating extension while in China, CGN announced that the Lufeng facility in Guangdong Province saw the official start of construction in late September. Lastly, Emirates Nuclear Energy Corporation reported in early October that unit 3 of the Barakah facility in Abu Dhabi, UAE, has been connected to the grid.
Sprott Physical Uranium Trust (U.UN-T, U.U-T):
Valuation: Given the uranium spot ended the month of October at $52.27/lb SPUT is trading at 0.98x P/NAVPU, or at a 1.5% discount given the current 1.0x NAVPU intrinsic value of $17.85. 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 (YCA-L):
Valuation: Given the most recent spot U3O8 quote at $52.27/lb (or £45.47/lb), YCA is trading at 0.90x P/NAVPU, or at an -10.0% discount given the current 1.0x NAVPU intrinsic value of £476.34. 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:
Now that Cameco has already released its quarterly financial figures, expect additional market color when the other uranium bellwether, Kazatomprom (KAP-L) releases its quarterly figures on November 24.