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Following the near sixteen-year, post-Fukushima spot price highs of $102/lb to end the month of January, the uranium spot price gave up some ground in February, retreating by -7.4% to reach $94.50/lb at month-end. That said, inventory levels remained constant at both holding companies. SPUT buying thus far in 2024 has totaled 400,000 lbs as booked earlier in January.
Earlier in February, the focus was on Cameco's (CCJ, CCO) Q4/2023 earnings and guidance outlook. Though much anticipation was built into the share price pre-earnings, unlike Kazatomprom (KAP) announcing lower levels of production guidance due to the lack of raw input (mostly sulfuric acid) availability, Cameco offered a more balanced outlook. Underpinned by strong financial performance driven by high volumes and realized prices, FY/2024 production is expected to be 18.0M lbs (100%) at both Cigar Lake and McArthur River/Key Lake. Moreover, 12,000 tonnes of UF6 is expected to be produced at the Port hope conversion facility. With the long term in mind, the necessary work will begin later this year to extend the Cigar Lake LOM to 2036 while at McArthur/Key Lake, an evaluation will begin to assess the feasibility of increasing the annual licensed capacity to 25.0M lbs (100%) per year. Additional LT contracts are expected to be signed with floor/ceilings of $70-$120/lb. Lastly, management provided five-year CAGR guidance for Westingouse in which between 6%-10% is expected to be reached.
Sprott Physical Uranium Trust (U.UN-T, U.U-T): 2-Yr Performance:
Valuation: Given current pricing, SPUT's discount to NAV increased from last month's -7.3% to the current -10.8% with the Trust now trading at a 0.89x P/NAVPU relative to its intrinsic value of $31.82. Note that following a slight valuation premium in September 2023, the valuation discount has largely been maintained since. The discount however currently remains well off the largest YTD -15% spread from April 2023. Given our LT $120/lb price objective for the spot and a constant CAD/USD exchange rate, our 1.05x NAVPU valuation of $43.30 (rounded) is being maintained. For context, the current -10.8% discount to NAVPU is relative to +26% premium in September 2021 and -18% discount from July 2022. We note that as per YTD performance, shares of the Trust (U.UN) are flat at -0.3%. The corresponding sensitivities to FX and the spot price are below:
We continue to stress that a narrower discount relative to Yellow Cake's P/NAV (-10.8% compared to -17.4%) continues to be warranted, however the spread may be overdone. In addition to higher liquidity and inventory, SPUT has much less direct exposure to uranium sourced from Kazakhstan, via option agreements with Kazatomprom.
Yellow Cake PLC (YCA-L): 2-Yr Performance:
Valuation: Given the most recent spot U3O8 quote at $94.50/lb (or £74.66/lb), YCA is trading at 0.83x P/NAVPU, or at a -17.4% discount given the current 1.0x NAVPU intrinsic value of £758.38. We note that YCA's discount increased from last month's -13.8%. Though 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), we feel that the current relative discount of nearly ~8% may be somewhat overdone. Given our revised LT $120/lb price objective for the spot and a constant GBP/USD foreign exchange rate, our 0.95x NAVPU valuation of £1,040 (rounded) is maintained. We note that as per YTD performance, shares of the Yellow Cake (YCA.L) have advanced by +1.2%. The corresponding sensitivities to FX and the spot price are below:
Recall that under the Kazatomprom Framework Agreement (KFA), Yellow Cake maintains the option to purchase up to $100M of U3O8 each year for a period of nine years, starting from the company's IPO in 2018. That said, it is our view that 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). Recall that as announced on February 1, Kazatomprom stated that production is expected to remain 20% below the level stipulated in the subsoil use agreement, similarly as to in 2023. This comes amid the current environment in which the procurement of the needed production materials (notably sufficient levels of sulfuric acid) is challenging.