As Christopher Nolan’s biopic Oppenheimer swept all before it like an atomic shockwave, The Armchair Trader takes a look at Yellow Cake LON:YCA, the AIM-listed uranium trading company. Yellow Cake has been on our tip list for some time.
The Jersey-headquartered firm offers investors exposure to uranium as a commodity, buying and holding the material. It has a long-standing arrangement with Kazatomprom, the national uranium production company of Kazakhstan, and world’s largest producer of raw uranium, and storage facilities in Canada and France.
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The firm acts like a specialist uranium fund, with physical uranium as its asset. Unlike other uranium plays, Yellow Cake isn’t a miner, it is a commodity buyer and as such it doesn’t come with exposure risk to the mining cycle – exploration, development and mining – and all the cost and time delays that entails. Instead the firm has negotiated the ability to buy raw uranium at spot price with producers, letting them carry the cost and time pressures of the supply chain. In the case of Kazatomprom, Yellow Cake can purchase up to USD100m of uranium from the parastatal miner.
As the world moves towards decarbonisation, global interest in nuclear power has started to rise, only to be knocked-back by events like the Fukushima nuclear accident in 2011 and the market can be described as complex, giving off mixed signals.
Demand for uranium is expected to rise in the next decade, as European and North American governments are forced into a position where they have to retire their existing nuclear power plant fleet and developing countries jump straight to nuclear; and as population and energy demands rise, build new nuclear reactors. The nuclear lobby – widely supported by governments – see nuclear power as a low-carbon solution to energy production and energy independence. The biggest buyer of uranium at the moment is China.
However, governments, including the UK government, are still kicking around the decision on whether to build new reactors – mostly based on the potential costs to taxpayers (and voters), and this creates uncertainty.
Unbalanced supply and demand for uranium
The supply side is also imbalanced. Uranium isn’t a widely distributed resource; production is dominated by a few countries and the end-users (often Western governments) are nervous about potential supply disruptions caused by geopolitical tensions and environmental lobbies. The level of new exploration and development of new mines currently isn’t keeping apace with the potential future demand, as it will take (as with most new mining ventures) many years to prove and develop new mines, or even restart dormant mines.
This scenario is good for the price of uranium and the tightening of supply and expansion of demand bodes well for people who have exposure (financially) to the commodity, with the important subtext that this depends on technology – the technology of new reactors in terms of material, yield and safety and the technology behind the disposal of nuclear waste.
It is still a volatile market.
Yellow Cake is probably one of the best bets to make if you believe in the nuclear story, as it is well positioned to benefit from the market trends discussed above. The company has secured over 21.6 million pounds (Mlb) of uranium and has a secure supply agreement with Kazatomprom allowing up to USD100m more of supply a year.
Increased value of assets
In its last published reports, for the six months to the end-September 2023, the company reported holdings of 20.16Mlb, up 7.2% from the year before. This uranium went up in value by 55.5% since 31st March to USD1.48bn as a result to the spot price of uranium increasing. Over the same period Yellow Cake’s net asset value was 1.49bn, up 44.3% with the net asset value of a share being GBP5.23/share an increase of 23.6%.
Profit after tax for the half-year was USD458.8m, a significant uptick of 415% from a loss of USD145.5m as of 30th September 2022. At the end of September Yellow Cake received 1.35Mlb of uranium in Canada from Kazakhstan, funded by an over-subscribed placement of around GBP60m made in February. Yellow Cake followed this up with another share placement of GBP103m in October, which funded another USD100m tranche of 1.5Mlb of uranium from Kazatomprom, to deliver in 1H24 increasing holdings to 21.68Mlb. Currently (19th February) the price per pound of uranium is around USD101/lb, a 95% increase in price from this time in 2023.
The company has been a stellar investment over the past 12 months – triple your average UK stock – and there are no signs of it slowing down with governments across the world scrambling to attain energy independence in a low-carbon way. The share price opened the week at 691.62p up nearly 64% in a year with shares ranging between 352.2p and 749.5p with a market cap of GBP1.5bn.
Yellow Cake is certainly worth of a nomination for the AIM Oscars, whether it cleans up like Oppenheimer remains to be seen, but this stock is definitely ‘one to watch’.
