DISCLAIMER: Any written content contained herein should be viewed strictly as analysis & opinion and not in any way as investment advice. No compensation was received for this report. Visitors to this site are encouraged to conduct their own due diligence.
The uranium spot ended the month of June lower given a monthly decline of -4.5% and settling at $85.50 per lb. That said, the monthly range was between $89.50-$83.50 per lb, with a end of month rally boosting the spot to $85.50 (Numerco). The highlight of the month was the Department of Energy (DOE) issuing a $3.40B RFP specifically for the purchase of low-enriched uranium (LEU), needed to run the nation's 94 currently operating nuclear power plants. For context, this comes after the Prohibiting Russian Uranium Imports Act which was enacted into law just a short few months ago. The recently announced RFP stems from the Nuclear Fuel Security Act which calls on the DOE to establish a strategic stockpile reserve of low-enriched uranium (LEU) and High Assay LEU (HALEU). The act also looks to jumpstart domestic U3O8 mining in order to ensure security and reliability of supply. Among others, the RFP may be taken up by numerous players, highlighted by Urenco and Centrus Energy (LEU). Stockpiled LEU would be sold to domestic utilities at fair market value.
On the M&A front, Paladin Energy (PDN) announced an all-stock takeover bid for Fission Uranium (FCU) at an implied value of C$1.30 per share. We value the offer as fair as it equates to the current value we ascribe for the PLS project (Triple R deposit) at the current uranium spot rate of $85.00/lb. We continue to note that at a capex estimate ~$860M, the PLS project is one of the more expensive one in the Athabasca Basin when factoring in estimated LOM production of 78.0M lbs. Additionally, when looking at precedent Athabasca Basin project M&A valuations, Paladin's current bid equating to $8.75 per global resource lb ranks on the higher side dating back to 2013. We don't foresee another bidder entering the scene. More information here:
Sprott Physical Uranium Trust (U.UN-T, U.U-T): 2-Yr Performance:
Valuation: Given current pricing, SPUT's discount to NAV increased from last month's -7.0% to the current -12.1% with the Trust now trading at a 0.88x P/NAVPU relative to its intrinsic value of $28.87. Note that following a slight valuation premium in September 2023, the valuation discount has largely been maintained since. The -12.1% discount has increased however and ranks near the -15.0% discount last seen in February 2023. Given our LT $120/lb price objective for the spot and a constant CAD/USD exchange rate, our 1.05x NAVPU valuation of $43.30 (rounded) is being maintained. For context, the current -12.1% discount to NAVPU is relative to +26% premium in September 2021 and -18.1% discount from July 2022. YTD shares in U.UN have declined by -10.3%. The corresponding sensitivities to FX and the spot price are below:
We continue to stress that a narrower discount relative to Yellow Cake's P/NAV (-12.1% compared to -15.2%) continues to be warranted, however the spread to NAV seems to be overdone. In addition to higher liquidity and inventory, SPUT has much less direct exposure to uranium sourced from Kazakhstan, via option agreements with Kazatomprom (KAP).
Yellow Cake PLC (YCA-L): 2-Yr Performance:
Valuation: Given the most recent spot U3O8 quote at $85.50/lb (or £67.55/lb), YCA is trading at 0.85x P/NAVPU, or at a -15.2% discount given the current 1.0x NAVPU intrinsic value of £686.46. Though Yellow Cake normally trades at a larger discount to intrinsic value relative to SPUT (justifiably reflecting the smaller size, liquidity and larger perceived delivery risk associated with Kazakh sourced uranium), we feel that the current relative discount to NAV is overdone. Given our LT $120/lb price objective for the spot and a constant GBP/USD foreign exchange rate, our 0.95x NAVPU valuation of £1,040 (rounded) is maintained. We note that the pro-forma 21.68M lbs in inventory has been our carrying figure for a while already - the actual delivery of the most recent 1.53M lb purchase from Kazatomprom (brokered last year at $65.50/lb) was delivered in June. As per YTD performance, shares of the Yellow Cake (YCA.L) have declined by -5.5%. The corresponding sensitivities to FX and the spot price are below:
Recall that under the Kazatomprom Framework Agreement (KFA), Yellow Cake maintains the option to purchase up to $100M of U3O8 each year for a period of nine years, starting from the company's IPO in 2018. That said, it is our view that geo-politics will continue to weigh on Kazakh sourced uranium, and in general on all companies with exposure to Kazakhstan, (despite transport routes which completely bypass Russia). Recall that as announced on February 1, Kazatomprom stated that production is expected to remain 20% below the level stipulated in the subsoil use agreement, similarly as to in 2023. This comes amid the current environment in which the procurement of the needed production materials (notably sufficient levels of sulfuric acid) is challenging.
Comments