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Yellow Cake PLC: DEEP DIVE
OVERVIEW

Yellow Cake offers "cleanest way to play uranium market" as it amasses a big pile of the radioactive metal

The firm's boss remains "very confident in the long term fundamentals of the uranium market" given a combination of constrained supply, the run-off of long term contracts and growing demand outlook
Radiation signs
OVERVIEW: YCA The Big Picture
Yellow Cake currently owns around 9.62mln pounds of the radioactive metals, U3O8
  • Physical uranium trader tagged with nickname of the radioactive metal

  • Owns around 9.62mln pounds of uranium

  • Raised US$200mln (£151mln) from June 2019 IPO, plus additional £25.9mln in April 2019 placing

  • Contract to buy up to an additional US$100mln of U3O8 each year for the next nine years from Kazatomprom

 

What Yellow Cake does:

Yellow Cake PLC (LON:YCA) is a physical uranium trader with a moniker that is a nickname for the radioactive metal, U3O8.

The group floated on AIM in July 2018 after raising US$200mln (£151mln) from the sale of 76mln new shares at 200p apiece in an initial public offering.

The firm is backed by Bacchus Capital, the corporate finance boutique set up in 2016 by a group of senior bankers led by Peter Bacchus.

The cash raised was used to buy 8.1mln pounds of uranium from Kazakstan’s state-owned firm, NAC Kazatomprom JSC, one of the world’s largest uranium producers. Yellow Cake paid US$21.01/lb (per pound), a discount of about 8% to the then spot price.

A uranium pile of that size, which cost around US$170mln, was equal to one quarter of Kazatomprom's annual production and approximately 5% of 2016 global marketed production.

In addition, the Kazatomprom contract allows Yellow Cake to buy up to an additional US$100mln of U3O8 each year for the next nine years.

How is it doing:

On 1 June 2019, Yellow Cake announced that it had taken delivery of a further shipment of 1.175mln pounds of uranium from Kazatomprom, after exercising its existing option.

The group said the uranium was delivered on 31 May and transferred to Yellow Cake at Cameco Corporation's Port Hope/Blind River facility in Ontario, Canada, where the material will be held in storage.

The total cost of that U3O8 purchase amounted to just over US$30mln. Following completion of the transaction Yellow Cake now owns around 9.62mln pounds of uranium.

On 12 April, the company said it had raised a further £25.9mln in a placing to buy the 1.175mln lbs of uranium from Kazatomprom at a price of US$25.88/lb.

In a trading update on 26 April, Yellow Cake had pointed out that a recent pullback in spot prices for uranium presented a good buying opportunity as it remained confident in the long-term outlook for the radioactive metal.

The global spot uranium price softened over the first three months of 2019 to end the quarter at US$25.75 per pound of U3O8, from US$28.50/lb three months before.

The price decline came after the US Department of Commerce (DOC) submitted a report to the White House about the impact of the importation of foreign-source uranium.

The US government had 90 days from the report’s submission to respond to the DOC report and either take no action or legislate, which could take the form of tariffs or quotas.

What the boss says - chief executive Andre Liebenberg

“The recent pullback in the uranium price has provided us with an excellent window to add to our uranium inventory at an attractive price.

“We are very confident in the long term fundamentals of the uranium market, where a combination of constrained supply, the run-off of long term contracts and growing demand outlook means we remain confident on the outlook for the uranium price."

Blue Sky:

In a recent note to clients, analysts at Numis Securities pointed out that the uranium price was slightly down in May through June to date, as the market remains quiet in advance of the US DOC Section 232 decision with regards to US uranium imports.

They said: “We believe that the fundamentals remain in place for a uranium price recovery, driven by utility contracting. Until such time that utilities have clarity on potential structural changes to Government legislation, they cannot confirm their future supply arrangement and thus the Section 232 investigation has paused the market.”

The analysts said they remain high conviction in their uranium thesis and sees Yellow Cake “as the cleanest way to play uranium with direct price exposure, without the inherent operating, permitting and jurisdiction risks inherent in miners.”

Numis reiterated a ‘buy’ rating and 300p price target on the stock based on a valuation on 1.1x net asset value (NAV) and its one-year average spot uranium price forecast of US$35 per pound.

Yellow Cake’s estimated net asset value stood at 224p at the end of the first quarter – before the April placing and uranium acquisition - compared to 253p at the end of December.

Yellow Cake shares were trading at 211.50p on 6 June, giving the group a market cap of around £192mln.

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