Seemingly out of nowhere, Yellow Cake PLC (AIM:YCA) is now firmly on the radar of analysts who are watching closely to see how the uranium investment company will continue to benefit from surging prices.
The uranium investor has grabbed the attention of analysts at investment banks including Bank of America and Liberum Capital after carrying out one of the largest placings of shares on the AIM segment of the London Stock Exchange this year, raising £103 million.
Simple strategy
Liberum initiated coverage of Yellow Cake in its mining team, stating that its proposition of holding and storing uranium is the “simplest, cleanest exposure in the UK market to the upside in uranium”.
Over at BofA, the analysts reminded clients that Yellow Cake "is something of an unusual vehicle".
"It is a listed company that gives investors exposure to uranium price movements. It doesn’t mine or process uranium. Instead, it raises equity to buy and hold physical uranium, U308 (ASX:UTO), 'Yellowcake' which it stores at licensed facilities in Canada and France. That is it."
Based on its simple model, the BofA analysts expect Yellow Cake shares to "broadly track" the group’s implied NAV per share, which is driven mainly by moves in the spot uranium price.
Both Liberum and BofA expect the company’s share price to increase due to increasing recognition of the importance of nuclear as a low-carbon, baseload energy source.
Uranium prices
Uranium prices, helped by life extensions for existing nuclear reactors in France and North America, have risen by almost 40% since the start of the year and Liberum analyst Ben Davis forecasts they will rise a further 15% within the next year, adding that prices could go even higher.
The price of uranium “could spike significantly higher with the return of strategic stockpiling and continued investment purchases, that would drastically tighten the market”, Davis said in a note on Thursday.
BofA said it was "bullish on uranium", with nuclear power fast regaining acceptance as a solution to the twin challenges of decarbonisation and energy security.
In the medium-term, the US bank expects China to drive the demand for the radioactive metal as the country shifts its energy mix from coal, with the People's Republic currently, according to World Nuclear Association, building 23 reactors and with another 45 reactors planned. Since 2018, Yellow Cake has built up a holding of 20.2Mlbs of U3O8 at a cost of $707 million.
Last week, the uranium investment company's market capitalisation surpassed £1 billion, which it claims made it one of the best-performing metals and mining stocks on the stock exchange in the last year.
Since its initial public offering (IPO) secured £170 million in 2018, its share price has nearly tripled, including a rise of over 46% since the start of 2023.
Kazakhstan angle
A key boon for the company is that it has the option to purchase US$100 million of uranium from Kazakhstan’s national operator Kazatomprom, each year at ‘undisturbed’, or fixed spot prices.
While the company could face some disruption due to the fact Kazatomprom exports uranium through Russia, Yellow Cake stores uranium at facilities in Canada and France at market rate prices that are set annually and could source further supply through swaps and global inventories.
Canada is the second-biggest global producer of uranium and was only surpassed by Kazakhstan in 2020, according to the Canadian government.
It is home to the world's largest uranium producer, Cameco Corporation (TSX:CCO), as well as other big suppliers such as Orano Canada and Cosa Resources (CSE:COSA), with Toronto-listed uranium mining stocks also including Stallion Discoveries, listed as Stallion Gold Corp (TSX-V:STUD, OTCQB:SLLGF), Strathmore Plus Uranium Corp (TSX-V:SUU, OTC:SUUFF), and District Metals Corp. (TSX-V:DMX).
Yellow Cake plans to keep operating costs below 1% of holdings (expecting a 0.63% expense ratio in 2023), and further price rises should reduce its expense ratio, the Liberum analyst said.
As of Thursday, its stock is trading at a 6% discount to fair value, according to Davis, who set a maiden target price of 540p per share, while BofA kept its price objective at 610p.