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The Month in U Inventory: Yellowcake P/NAV Discount too Narrow in Relation to SPUT

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 ended flat on the month as the July BPI spot price ended at a quote of $56.38 per lb, representing a -0.1% decrease on the month. The term price was slightly higher, settling at $56.20 per lb, representing a +0.3% gain to end the month. The month of July was hardly as volatile as June, though SPUT's P/NAV discount was in the double digits for much of the time. A political coup in Niger prompted renewed buying interest over the last few days of July as the discount narrowed to -7.6% to end the month. For context, 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 July, SPUT's discount to NAV amounted to -7.6% while YCA's discount to NAV narrowed to -4.9%. Though we feel that YCA's discount to NAV should be at a higher spread to that of SPUT, we note that an end-of-month surge of nearly +4.0% did much to create this dynamic. That said, it was a bullish month-end for uranium, all prompted by potential production disruptions from Niger coupled with further legislative support for nuclear in the US.

On the macro front, much focus was directed towards the potential ramifications of the events in Niger. To recap, on July 26th Nigeria’s Presidential Guards seized power in a political coup which ended with General Omar Tchiani claiming to be Head of State. Though the regime change is still in the early days, the EU, the UN, West African Regional groups and Western partners have condemned the action and have called both it unconstitutional and illegitimate. Though regime change and military coups are hardly a new phenomenon in Africa (this is Niger's fifth coup since independence in 1960), we note that FY/2022 uranium production from Niger amounted to 5.2M lbs, representing ~3.7% of the global primary output. The impact of the coup was a big end-of-week driver for the spot uranium price amid talk of an immediate cessation of uranium exports.

Domestically, last week the US senate voted 96-3 to approve legislation which would strengthen domestic nuclear fuel production while also ensuring security of supply during the advancement of advanced reactors. The bipartisan amendment to the National Defence Authorization Act will look to establish a Nuclear fuel Security Program while also establishing a HALEU for advanced reactor projects. The legislation requires the DOE begin acquiring at least 20 tonnes per year of HALEU by the end of 2027. On the corporate front, it is worth noting that Westinghouse announced that on July 31, the first third generation AP1000 reactor entered service at Southern Nuclear’s Vogtle Plant in Georgia. Unit 4 is now prepping for initial fuel load after completing hot functional testing (in record time) in May. The Gen III AP1000 reactors at Vogtle are pressurized water reactors. These reactors represent the first new US nuclear build projects in over thirty years.

On the domestic production front, due to Uranium Energy's (UEC) surprise decision to suddenly cancel a long standing toll milling contract with Peninsula Energy (PENMF), initial ISR production from Lance has been pushed out to 2025 (our estimate). This comes as Peninsula now looks to fast-track and in-house all the critical infrastructure needed to be self reliant for yellowcake production. Full details can be seen from our note, found at this link.

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

Valuation: Given the uranium spot ended the month of June slightly higher m/m at $56.38/lb, SPUT is trading at 0.92x P/NAVPU, or at a -7.6% discount given the current 1.0x NAVPU intrinsic value of $18.56. Note that the valuation premium from the end of January has reverted back to a much more pronounced discount, however it is currently off to the largest YTD -15% spread from April. 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 -7.6% 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:

Though SPUT's discount to NAV has been narrowing (it was -9.6% last month), we continue to feel that a component of the current discount still stems from the early June market volatility. Markets have since firmed on back of increasing evidence of an underlying healthy economy (strong labor numbers, healthy consumer balance sheets, inflation moderating and a housing market rebound). The soft landing narrative may yet prove to be accurate. Following a slight premium to NAV valuation in January, as of the end of February, SPUT's discount to NAV was much narrower at -2.1% and has since remained in discount territory. All that said, we stress that a narrower discount relative to Yellow Cake's P/NAV is warranted, though not currently seen. For that reason, we expect near term SPUT outperformance and/or Yellowcake underperformance. 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 $56.38/lb (or £43.97/lb), YCA is trading at 0.95x P/NAVPU, or at an -4.9% discount given the current 1.0x NAVPU intrinsic value of £453.97. 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 Yellowcake's current relative spread to NAV discount is overly skewed to the upside at -4.9% vs SPUT's current -7.6%. 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). 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).


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