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The Month in U Inventory: SPUT & Yellow Cake NAV Updates

Updated: Dec 1, 2022

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.

UxC reported that the November month end uranium term price ended +2.00/lb to reach $51.00/lb representing the highest term price since August 2013. Term offers below $50/lb are reportedly no longer available. Switching to the spot price, UxC reported a November month-end price -$2.30/lb to reach $50.00/lb (TradeTech pricing being just a shade lower). Though the spot lagged this month, conversion prices remain at all-time highs of $40/kgU while enrichment prices increased by +$30/SWU to reach $125/SWU. Note that during the month, SPUT added +200k lbs to inventory while YellowCake inventory remained at the same level. 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. Of particular note is the fact that both SPUT and Yellow Cake ended the month of November with almost identical discounts to NAV, each registering near -9.0%. We feel that in that context, SPUT's discount to NAV is overdone. The notable happenings impacting the industry during the last few weeks include:

Kansai Electric Power announced last week that it will be applying for regulatory approval in order to extend the operating life of Takahama Units 3 and 4 by a further 20 years. Kansai has already carried out the needed inspection and evaluations of the units and has not found any reason to prevent the operating period to be extended to 60 years in total. For context, note that in the month ahead of the March 2011 Fukushima Daiichi accident, Japan relied on nuclear power for approximately 30% of its electricity needs. In 2021, nuclear power accounted for just 7.2% of Japan’s electricity needs. With 33 Japanese nuclear reactors classified as operable (following the stricter regulatory standards), only 10 have thus far received clearance from the NRA to restart. A total of 17 plants have applied for re-starts. Takahama 3 restarted commercial operation in 2016, while unit 4 restarted 2017. Built in the 1980s, the four Takahama units have a combined gross generating capacity of 3.39GW.

In Europe, the submission of bids has officially kicked off the Czech Republic’s new reactor build process at Dukovany. Pressurized water reactor designs from Westinghouse (AP1000), Korea Hydro & Nuclear Power (APR-1400) and EDF (EPR1200) have been submitted. Note that across Europe, the larger EPR design (1650 MWe) is under construction in France and the UK while also being commissioned in Finland. Meanwhile, the AP1000 and APR-1400 were both recently selected for construction in Poland.

On the corporate front, Peninsula Energy (PENMF) announced an official re-start decision on back of a A$35M equity raise. Production activities are expected to commence in Q1/2023 with deliveries already earmarked for Q4/2023. With meaningful ISR production expected in FY/2024, we foresee over 14.0M lbs of uranium produced over a current stage 1 only LOM of 14 years. Denison Mines (DNN) announced results from the FFT leaching phase with results that far surpassed those assumptions envisioned in the PFS. Specifically, the maximum head grade of the uranium bearing solution recovered was 43 g/L, representing a figure +300% higher than the 10 g/L assumed in the 2018 PFS. The FFT testing phase will conclude later in 2023 with the neutralization phase and the recovered solution phase. Lastly, Ur-Energy (URG) announced the successful results from the Phase 1 field test at Lost Creek’s Mine Unit 2. Cost reductions averaging $3.00 per lb of recovered uranium are envisioned given the mechanical integrity of the injection wells installed using a new cost effective technology.

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

Valuation: Given the uranium spot ended the month of November -4.3% m/m at $50.00/lb, SPUT is trading at 0.90x P/NAVPU, or at a -9.8% discount given the current 1.0x NAVPU intrinsic value of $16.82. Note that the valuation discount has expanded considerably 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 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:

We feel that SPUT's -9.8% discount to NAV is unjustified, in light of the (almost) identical P/NAV discount seen with Yellow Cake. We stress that in addition to higher liquidity and inventory (when compared to Yellow Cake), 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):

Valuation: Given the most recent spot U3O8 quote at $50.00/lb (or £41.50/lb), YCA is trading at 0.91x P/NAVPU, or at a -9.2% discount given the current 1.0x NAVPU intrinsic value of £435.96. Yellow Cake normally trades at a larger discount to intrinsic value when compared to SPUT, justifiably reflecting the smaller size, liquidity and larger perceived delivery risk associated with Kazakh sourced uranium. The fact that both holding firms currently trade at an almost identical discount is surprising. 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 (KAP-L) with the right to purchase $100M worth of U3O8 every year (at spot). Kazatomprom released its blowout Q3/2022 financial results earlier in November. Though the operational numbers were pre-released, the Group has reiterated the fact that it has permission to transit uranium bypassing Russia via the Trans-Caspian International Transport Route. Several quarters of transit have already been completed. Volumes may even increase from the current ~3.5ktU, however jurisdiction transport reviews may create delays.

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