The Month in U Inventory: SPUT & Yellow Cake NAV Updates -Large Discounts Amid the March Volatility
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Numerco reported that the March month-end uranium term price ended slightly lower m/m at $50.35/lb, representing a slight decline from the highest levels since August 2013. As per the spot price, Numerco reported a March month-end price decline of -$0.10/lb to reach $50.75/lb. Despite a volatile month, March was characterized as yet another active month for adding uranium inventory as SPUT (U.UN) added +100,000 lbs to inventory while Yellow Cake PLC (YCA.LN) inventory remained flat. We note that the banking led turmoil brought on by the collapse of Silicon Valley Bank and Signature Bank along with the liquidity problems experienced at both First Republic Bank (FRC) and Credit Suisse (CS) trickled into the capital markets as well. In mid-March, SPUT’s discount to NAV hit -14.2% representing the largest discount since September 2021.
On the macro front, the UK’s Chancellor Jeremy Hunt announced that nuclear will be re-classified as “environmentally sustainable” as part of the country’s green taxonomy. As announced in mid-March, this reclassification follows the EU’s similar re-classification last year. In line with a vision to increase nuclear capacity in order to meet the current net-zero obligations, an initiative was also launched with the private sector to co-fund small-modular reactors (SMRs).
Elsewhere, as announced at the end of March, Canada’s 2023 Federal Budget was released. It included the introduction of a new 15% refundable Clean Electricity Investment Tax Credit. Both large scale and small scale (SMRs) are eligible for this new credit which can be applied to new projects or for the refurbishment of existing facilities. Moreover, in a March 24 visit to Ottawa, President Joe Biden together with Canadian PM Justin Trudeau announced pledges to bolster nuclear supply chains and to build partnerships to ensure access to low-enriched uranium.
Lastly of note, The Czech Republic officially announced that it would discontinue orders for Russian made fuel elements for its nuclear power plants, Beginning in 2024, Westinghouse will become the official fuel supplier for the two Czech nuclear plants which involve 4x 510MW and 2x 1,082MW in installed power output. The Czech government hopes to increase its share of electricity generated from nuclear power from the current 40% to 50%+ by 2040. Elsewhere, Bulgaria also signed agreements with both Westinghouse and EDF for a pre-project engineering study for the construction of two AP1000 reactors.
Sprott Physical Uranium Trust (U.UN-T, U.U-T): 2-Yr Performance:
Valuation: Given the uranium spot ended the month of March a shade lower at $50.75/lb, SPUT is trading at 0.92x P/NAVPU, or at a -7.7% discount given the current 1.0x NAVPU intrinsic value of $17.12. Note that the valuation premium from the end of January has reverted back to a more pronounced discount currently. 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 -7.7% 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 -7.7% discount to NAV has been brought upon largely due to the March market volatility stemming from concerns within the financial sector. Though seemingly contained after concerted efforts from regulators and from the private sector, note that the discount reached -14.2% in mid March, representing the highest discount since September 2021. Recall that as of the end of February, SPUT's discount to NAV was much lower 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 $50.75/lb (or £41.11/lb), YCA is trading at 0.86x P/NAVPU, or at an -13.7% discount given the current 1.0x NAVPU intrinsic value of £427.46. Yellow Cake normally trades at a 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).