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The Month in U Inventory: YCA to SPUT Discount Spread Overdone to the Downside

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.

Uranium spot prices staged a late month comeback as the May Numerco price ended at a quote of $54.63 per lb, representing an approximately +1.6% increase on the month. The term price was higher as well, settling at $54.60 per lb, to end the month. Despite a volatile month which prompted discount to NAV values to reach a high of -13% and a low of -6% (currently), recall that the SPUT discount to NAV reached a 2023 high of -15% during the last week of April. Inventory levels had no change m/m with SPUT (U.UN) and Yellow Cake PLC (YCA.LN) remaining flat. As of the end of May, SPUT's discount to NAV amounted to -6.1% while YCA's discount to NAV is -14.0%, a discount near the historic highs which we still view as overdone.

The latest production data from the US Energy Information Administration highlighted an anemic 2,511 lbs of domestically produced uranium over Q1/2023. This figure marks a 75% decline when compared to Q1/2022. Production during the quarter was solely ISR from Nichols Ranch (UUUU), Ross (PENMF) and Smith Ranch-Highland (CCJ). Note that the 2,511 lb figure excludes the 156 lbs captured via ion exchange resin (and processed through the dryer) at Lost Creek (URG). That said, both Peninsula Energy (PENMF) and Ur-Energy (URG) expect to re-start meaningful production operations in mid-2023. enCore Energy (EU) is on track to commence production from Rosita towards the end of the year.

In light of these weak domestic production numbers, a bill banning Russian uranium imports in the US gained some momentum earlier in May as it passed (18-12) in the House of Representatives - Subcommittee on Energy, Climate and Grid Security. The bill aims to wean the US off of Russian sourced uranium. Note that in FY/2021, Russian sourced uranium accounted for 14% of all domestic imports (Kazakhstan leading the way at 35%, followed by Canada at 15%). A similar bill has been referred to the Energy Committee in the US Senate. Before becoming law, the legislation would have to pass both chambers of Congress and be signed by President Joe Biden.

Overseas, as a further nod to encourage the production of nuclear power, Japan passed a law which would allow nuclear reactors to operate beyond 60 years. Operators would still require approval from Japan's nuclear safety watchdog, and the law also includes measures intended to strengthen safety checks at aging reactors. Though most of Japan's nuclear reactors remain offline post-Fukushima, the themes of energy independence coupled with climate targets have prompted a gradual re-start over the last few years.

Sprott Physical Uranium Trust (U.UN-T, U.U-T): 2-Yr Performance:

Valuation: Given the uranium spot ended the month of May slightly higher m/m at $54.63/lb, SPUT is trading at 0.94x P/NAVPU, or at a -6.1% discount given the current 1.0x NAVPU intrinsic value of $18.55. Note that the valuation premium from the end of January has reverted back to a much more pronounced discount, however currently off to the largest YTD -15% spread from last month. Given our LT $70/lb price objective for the spot and constant CAD/USD exchange rate, our 1.05x NAVPU valuation of $25.70 (rounded) remains. For context, the current -6.1% 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 -6.1% discount to NAV has been brought upon largely due to the May market volatility stemming from the on-going concerns pertaining to debt ceiling negotiations (now seemingly resolved), coupled with uncertainty on future Fed policy and a weak economic backdrop. Note that the discount to NAV reached -15.0% in late April, representing the highest discount of the year. Recall that as of the end of February, SPUT's discount to NAV was much narrower 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 $54.63/lb (or £44.25/lb), YCA is trading at 0.86x P/NAVPU, or at an -14.0% discount given the current 1.0x NAVPU intrinsic value of £457.08. 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 discount spread between both holding company's current valuations (-14.0% vs -6.1%) is overly skewed to the downside in Yellow Cake's case. This dynamic should normalize in the near term. 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 (rounded) 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 (KAP) 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).


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