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The Month in U Inventory: SPUT & Yellow Cake NAV Updates - SPUT/YCA Discount Reverses

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.

TradeTech reported that the December month end uranium term price ended -1.00/lb to reach $51.00/lb, still representing nearly the highest term price since August 2013. As for the spot price, Numerco reported a November month-end price -$1.37/lb to reach $48.63/lb (TradeTech pricing being nearly similar). Note that during the month, both SPUT and YellowCake inventory remained constant 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 was a reversion from the near identical NAV discounts of near -9.0% as registered during the previous NAV update for the end of November. At the time we highlighted the disconnect and stressed that for a multitude of reasons, the SPUT discount in relation to Yellow Cake was overdone, unjustified and temporary. Fast forward to now and that disconnect has unwound given the current SPUT discount to NAV is -3.9% while the Yellow Cake discount to NAV is now -11.6%. All is back to being normal in valuation-land.

The notable happenings impacting the industry during the month of December was highlighted by the Department of Energy’s initial allocations for the $75.0M RFP as allocated by Congress in 2020. The initial purchases were for an estimated 1.0M lbs (385 tU) of domestically produced uranium. Those selected to provide initial inventory are displayed below, along with as much detail as was released by the respective company.

Note that all sales from the selected companies are expected to be completed in Q1/2023. What is also worth remembering is that though the initial contracted volumes are low, the larger, longer term goal of the US reserve is to revitalize and incentivize the domestic uranium mining and conversion industry. This is to be accomplished via a much larger purchasing program which is expected to encompass 10 years and total $1.50B over total contract life. This places a premium on US-sourced uranium in an effort to minimize the amount of foreign uranium (amounting to 60% of current US requirements) imported primarily from countries such as Kazakhstan and Russia.

Based on the prices and volume allocations as disclosed above, we can tell that volume discounts were justifiably given. The toe-hold initial contracts serve two purposes:

1) The DOE conducted enough due diligence to endorse and validate the various mine restart plans (or initial production plans) from the selected companies mining projects.

2) A relationship with the DOE has been established with the longer term goal from the individual companies being the demonstration for reliable and consistent production over the greater 10- year purchasing period.

Those companies which can prove to be reliable partners will certainly benefit from consistent, above market contracting with minimal variability. It is unlikely that all the above companies will be able to make the long-term cut so contract volumes can prove to be significant over the full 10-year purchase duration. Those that can prove reliable will benefit greatly.

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

Valuation: Given the uranium spot ended the month of December -2.7% m/m at $48.63/lb, SPUT is trading at 0.96x P/NAVPU, or at a -3.9% discount given the current 1.0x NAVPU intrinsic value of $16.48. 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 -3.9% discount to NAV is more justified than then -9.0% discount (putting it on par with Yellow Cake) as registered last month. 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 $48.63/lb (or £40.36/lb), YCA is trading at 0.88x P/NAVPU, or at a -11.6% discount given the current 1.0x NAVPU intrinsic value of £424.28. Yellow Cake should trade 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. 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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