- Uranium moves back toward $100 per pound as yet another commodity price surges
- Yellow Cake holds 23 million pounds of uranium oxide in its specialist warehouses
- Share price of AIM-quoted company is rising again, but now trades at a premium to asset value
“Stunning increases in the prices of gold, silver, platinum, tin and copper may be grabbing all of the headlines, but another raw material is making strong gains too, and that is uranium,” says AJ Bell investment director Russ Mould.
“Uranium is moving rapidly back toward the $100-per-pound level and if it breaks above, and then stays above, that mark, it will be interesting to see if it tries to dash toward the all-time high of around $140 reached back in 2007.
Source: LSEG Refinitiv data
“Any further gains in the price of uranium could be a boon for AIM-quoted Yellow Cake. Its speciality is uranium oxide (U3O8), a middle stage between mining and production of the commodity and its enrichment so it can be used as fuel. This expertise means Yellow Cake does not offer the risks that come with the mining process. A supply deal with major supplier Kazatomprom, which allows Yellow Cake to purchase up to $100 million of U3O8 a year, puts it in a potentially strong position, even if that agreement is due to expire in 2027.
“Uranium prices were weak going into Japan’s nuclear accident at Fukushima in 2011 and collapsed after the incident. A shift toward renewable sources of energy left nuclear energy well and truly out in the cold, and uranium with it.
“But a reassessment of nuclear power, thanks in part to rising energy demands worldwide and a review of its potential to act as a source power on a low-carbon basis, now seems to be underway. Japan is slowly reopening the reactors shut down some 15 years ago, and China and India in particular are pressing ahead with new reactors, as are the USA, South Korea and UK.
“Small-modular reactors (SMRs) are part of these plans, but they will also require uranium if, as and when they are built and put into operation, in theory by the turn of the decade.
“This is all well and good but the low uranium prices of the 2010s mean little or no mining capacity was added. The supply-demand equation remains very tight as a result. Utilities have long-term contracts in place, but they are gradually unwinding and if plans for new reactors fall into place, then they may need to source fresh supply, especially once their own stockpiles start to dwindle.
“Many investors who focus on environmental, social and governance (ESG) criteria may still find backing nuclear power a step too far, and the risks remain considerable, as the UK’s travails with Hinkley Point C and Sizewell C suggest, while the SMR technology is yet to be fully proven in the field.
“Even so, the prospect of rising demand and limited supply could yet play out across the uranium market and in that scenario Yellow Cake’s U3O8 holdings could prove to be highly valuable. But investors must assess the stock’s valuation, since Yellow Cake’s shares already trade above the net asset, or book, value of its holdings.
Source: Company accounts, Ocean Wall Ltd
“Yellow Cake’s shares trade at a premium of some 7% to NAV, and the company has historically taken advantage of prior premia to issue new shares with which to buy more U3O8.
“Investors who are researching the commodities asset class more widely therefore need to think carefully about where they think uranium could go before committing any capital, and the risk of any fresh regulatory, financial or technical delays when it comes to the roll-out of new reactor fleets.
“Equally, a return to uranium’s prior peak of $140 per pound would take the company’s NAV to 978p a share, all other things being equal – more than a third above the current share price.”
