Yellow Cake (LSE:YCA) dipped 0.7pc to 222.5pc in morning trading today after announcing the acquisition of a large shipment of uranium from a Kazakhstan-based rare metals importer and exporter for c.$8.2m. The long-term resources investor – named after a nickname for uranium – has bought 350,000lb of uranium from NAC Kazatomprom JSC at a price of US$23.30 /lb.
The uranium will transfer into Yellow Cake’s name later this month, and it will store it at Cameco Corporation’s facility in Ontario, Canada. Following this transaction, YellowCake will own 8.44mmlb or uranium, giving it a net asset value on a pro-forma basis of 227.99p a share.
The firm said that its closing share price on 9 August of 225p per share represents a 1.8pc discount to its net asset value. Yellow Cake listed in London last month, raising around £151m by placing shares at 200p each.
Andre Liebenberg, chief executive of the firm, said: ‘The purchase of the additional uranium is consistent with Yellow Cake’s stated intention of not holding additional cash on the balance sheet which is surplus to the company’s working capital needs. We would like to thank Kazatomprom for its continued strong support as a reliable long-term strategic supplier to Yellow Cake.’
Yellow Cake was created by Bacchus Capital Advisers to hold long-term physical uranium. The company said this approach offers exposure to the uranium price without the risks associated with investing in firms that explore for, develop, mine, or process the metal.
The thinking behind the timing of Yellow Cake’s entry to AIM is that uranium is ‘fundamentally and structurally mispriced’, and one of the few resources yet to recover from the commodities bear market. It hopes to use a long-term supply contract with Kazatomprom to offer exposure to a potential resurgence in the uranium price to investors. It believes that a recent emerging theme of supply-side discipline in the uranium market and the industry structure will support costs going forward.
Uranium prices were severely hit in 2011 when an earthquake and tsunami triggered the worst nuclear accident since Chernobyl at the Fukushima Daiichi nuclear power station in Japan. Three of the six reactors at the plant sustained severe core damage and released hydrogen and radioactive materials. Despite no workers dying from radiation positioning, the disaster was enough to significantly damage global attitudes towards uranium and nuclear power, and prices fell off a cliff.
Although prices have failed to recover from the disaster, they appear to have bottomed around the $20/lb mark, where they have more or less remained for some time. With nuclear power capacity ‘increasingly steadily’ worldwide, according to the World Nuclear Authority, and uranium supplies running thin thanks to low prices, many believe that a re-rate is on the cards for the metal. This dynamic is helped along by the fact that it takes a very long time to get a uranium mine into production – once the stockpiles that have built up since the Fukushima disaster start to run low, it may be hard to quickly replace them.
As we wrote when Yellow Cake listed, it remains difficult to know when (or if) the uranium market will start to positively react now these favourable supply/demand dynamics are in place. With that in mind, it may be worth considering how long your investment timeline is before you look at buying Yellow Cake- the most prominent beneficiaries may turn out to be those who are willing to wait and hold.
Author: Daniel Flynn
The author of this piece does not hold a position in the company covered in this article