Prices of uranium have spiked this year to 12-year highs amid the rehabilitation of nuclear power. The Russian invasion of Ukraine and the actions of oil producers in limiting production to support crude prices have increased the pressure on global governments to prioritise energy security.

Nuclear, which had been tarnished by the 2011 Fukushima disaster in Japan, is now seen as a viable, low-carbon source of power which, crucially, is able to provide the kind of reliable baseload power lacking from renewables.

A recent report from the World Nuclear Association forecasts world reactor requirements for uranium to surge to almost 130,000 tonnes
in 2040, up from an estimate of 65,650 tonnes in 2023.

At nearly $70 per pound uranium prices are back at pre-Fukushima levels and a UK-listed stock which has followed prices all the way up is Yellow Cake (YCA:AIM). Named for the uranium oxide which is formed after initial processing of mined uranium before being enriched for use in nuclear energy, the company offers pure exposure to the uranium spot price.

It buys physical uranium oxide or U3O8 and holds it in storage. What really makes it stand out is an agreement with Kazakh uranium miner Kazatomprom, the world’s largest and one of world’s lowest cost producers of uranium.

HOW DOES YELLOW CAKE STAND OUT?

Traditionally when someone buys a large amount of a commodity on the open market, it can cause the market price to shoot up. Yellow Cake has a deal to buy directly from Kazatomprom privately and so transactions between the two parties do not disturb the market price.

Under the current terms of the agreement with Kazatomprom, Yellow Cake can purchase up to $100 million worth of uranium a year until 2027. Since 2018, it has built up a holding of 20.2 million pounds of U308 at a cost of $707 million.

Once it has bought the uranium from Kazatomprom a delivery date and location are agreed – the uranium oxide is then stored at Canadian uranium firm Cameco’s (CCJ:NYSE) facilities in Ontario or its state-owned counterpart Orano’s in France. Inventories are quality checked on admission and these parties are responsible for the full value of the uranium oxide held in storage in the event of any loss.

Yellow Cake aims to keep its operating costs below 1% of its holdings – in the 12 months to March 2023 this ratio stood at 0.63%. Helping with this, it has just two permanent employees in chief executive Andre Liebenberg and chief financial officer Carole Whittall. They are supported in procurement by uranium specialist company
308 Services.

RECENT INJECTION OF CASH

In September 2023 Yellow Cake raised $125 million at a placing price of 550p per share to fund the purchase of its full allocation from Kazatomprom at a price of $65 per pound – indicating that it continues to see value in the commodity, even at current elevated prices. Any money left over after buying from Kazatomprom will fund ‘opportunistic’ spot market purchases.

Berenberg analyst Richard Hatch says: ‘The demand picture remains attractive, not only with new reactors being built and planned (437 operable nuclear reactors globally, 57 under construction, over 100 on order or planned, and over 300 proposed), but also through additional demand coming through small modular reactors.

‘On the tight spot market, the Sprott Physical Uranium Trust (U.U:TSE) is starting to add volumes, albeit on a small scale, adding around 300,000 pounds in the last few weeks; we see clear scope for this to increase, adding more demand and pushing prices higher.’

Alternative exposure to uranium 

Most uranium miners are listed in either Canada and Australia so investing in their shares involves extra costs and complexity for UK investors and the risks associated with backing individual companies. On alternative is investment trust Geiger Counter (GCL) which has a portfolio of investments in uranium miners. It’s worth noting the high ongoing charge of 3.14% according to Association of Investment Companies data, it currently trades at a 21.4% discount to net asset value.

A ‘TINDERBOX’ MARKET

Canaccord Genuity analyst Alex Bedwany describes market conditions as a ‘tinderbox’ thanks to a lack of material available globally despite a recently flagged 6,000 tonne increase in production from Kazatomprom.

Bedwany notes: ‘We remain sceptical that Kazatomprom will be able to raise production at this pace due to logistical challenges (a view shared by many industry participants).’

One issue for Kazatomprom is it faces delays in moving its material due to the war in Ukraine. Geopolitical instability in Niger – which accounts for around 4% of global uranium output, is another factor acting as a support for the commodity price.

Supply of uranium comes from both mines and secondary sources including civil stockpiles held by utilities and governments, decommissioned military warheads, recycled material and re-enriched depleted uranium.

Liberum estimates the uranium oxide market will be in a small deficit in 2023 and 2024 before the market returns to balance or a modest surplus in 2025 as Cameco increases its production.

At 515p Yellow Cake’s shares are trading at a 13% discount to the last declared net asset value per share of 591p per share and at a more than 20% discount to Berenberg’s forecast March 2024 net asset value of 658p.

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