The Uranium Upside

Summary

• Recent news on uranium and the evolving macro backdrop leave us bullish on the heavy metal.
• Biden is considering banning Russian uranium, and Bill Gates’ nuclear energy company is refusing to purchase from Russia.
• Meanwhile, several countries are clinging to nuclear for their power needs.

Market Implications

• To express this view, investors might consider SPUT and Yellow Cake Plc. The latter in particular looks to be trading at a discount and has an attractive risk-reward profile.

Biden to Ban Russian Uranium?

The Biden administration is considering banning Russian uranium imports, and the Senate has launched legislation.

On Thursday evening, four Senators introduced a bill to ban imports of Russian uranium. Russia’s Rosatom accounts for roughly 35% of the world’s enriched uranium supply. In an already tight spot market, this news only accelerates the likely rise in spot prices.

New investments in Russian conversion, enrichment fabrication and purchase are already banned. As Rosatom is directly involved in taking control of Ukrainian reactors, it is highly likely Russian uranium will be sanctioned.

Bill Gates to Back Out Too

Bill Gates’s nuclear energy company, TerraPower, said over the weekend it will not use Russian uranium in its Wyoming reactor. They now have six years to secure another supplier.

The one US enrichment facility authorized to make the fuel TerraPower needs is Centrus Energy (LEU). Nuclear fuel prices for uranium conversion rose dramatically at the end of last week with UF6 +21%, Conversion +53% and SWU +12.5%.

Several Countries Cling to Nuclear

Also last week, Belgium delayed its nuclear exit by 10 years. South Korea elected a pro-nuclear president. Japanese policymakers called for a faster reactor restart. And Czechoslovakia opened tenders for an atomic plant.

Meanwhile, the UK is looking to create a state-owned nuclear company as Boris Johnson meets executives from the nuclear industry today (Westinghouse & Rolls Royce). Kevin Bambrough, who has one of the largest commodity followings, Tweeted this yesterday: ‘Uranium is the best commodity story of all time, ever, by far.’ He thinks uranium will be up 2-3x within weeks.

How to Trade the View

We see two direct ways to express the view, through SPUT and Yellow Cake Plc. Yellow Cake (YCA) finished the week trading at an 11.86% discount to NAV. YCA exists to allow investors to speculate on the uranium price. For every unit investors buy, they are essentially purchasing physical uranium.

While some investors might seek greater gearing through miners and discovery companies, they are at the mercy of higher operational risk. The risk-reward of YCA is very attractive at this level for a company with minimal operating risk.

The emergence of both YCA and Sprott Physical Uranium Trust (SPUT) has brought about price discovery and greater liquidity to a notoriously opaque and illiquid sector. YCA have a $100mn annual supply contract with Kazatomprom for the purchase of uranium. Last year, the company exercised the full amount plus an additional $64.5mn worth of uranium.

Avoiding Russian Risk

Kazatomprom have new trans-Caspian routes that will allow them to diversify their supply chain away from St Petersburg. So the Russian risk here is minimal. The derivative liability for this contract is valued at £6mn, so it adds 3p to the NAV if YCA lost the off-take agreement.

Why Is YCA Trading at a Discount?

As to why YCA continues to trade at a discount, we are at a loss. With this in mind, we see a value differential trade based on the expectation that the shares catch up with the company’s NAV. All YCA drums are in the same warehouse as SPUT. Neither have open risk to Russia or Kazakhstan, yet investors pay $56/lb to buy a SPUT drum and $48/lb for a YCA drum!

In addition, multi-billion-dollar hedge fund Caxton has purchased about $250mn of physical uranium, adding further fuel to the fire. As institutional money continues to pour into the sector, coverage improves, and companies like YCA will benefit from greater investor exposure.

Our thesis for this company has only strengthened considering recent events. A tight spot market, more institutional capital and analyst coverage, and minimal operating risk highlight that this is a company that should continue to trade higher and close the gap on its NAV dislocation.