“If an investor found a company that was a leader in its field, witnessing strong price increases for its product and confident enough to buy back stock in the current environment they would probably not believe their luck, especially if they also discovered that the shares trade at a discount to net asset value. Yet AIM-quoted Yellow Cake, whose full-year results reveal all of these positives, may be little known and some investors may shy away even after they do their research, because it specialises in uranium oxide for the nuclear power industry,” says Russ Mould, AJ Bell Investment Director.
Source: Refinitiv data
“Uranium may be about to prove that the best cure for low prices is a low price. The commodity collapsed after the last boom in the nuclear industry came to an end, amid concerns over the safety of nuclear facilities and a surge in supply (itself brought on by soaring uranium prices), plunging from $140 a pound to less than $20 over a ten-year span.
“Since then spot prices have begun to recover as supply has been squeezed out and China, Russia and India in particular have begun to commission new nuclear power plants. Around 50 nuclear plants are under construction worldwide, with another 100 or so in the planning stage, to add to the current global fleet of 440, thanks to the fuel source’s low-carbon credentials. Throw in disruption to uranium mine production in Kazakhstan, Canada and Namibia owing to COVID-19 and the uranium price is starting to look a little happier.
“This is starting to have a knock-on effect upon Yellow Cake’s speciality, which 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 and its long-term supply deals with major suppliers Kazatomprom and Cameco also leave it in a potentially strong position.
“Yellow Cake currently owns around 9.3 million pounds of uranium oxide, to give the company a net asset value of some $319 million, or 291p a share, so at 227p the shares trade at a hefty discount to that level.
“This may reflect concern that prices could soften again if the COVID-enforced supply shutdowns come to an end, as well as scepticism over the long-term fortunes of the nuclear industry, especially if they are viewed through the lens of environmental, social and governance (ESG) criteria. After the 2011 accident at Fukushima, Japan remains committed to permanently decommissioning 24 of its 54 nuclear reactors. Only nine are back in operations nearly a decade after the disaster and just three new sites are under construction.
“Some investors may also be concerned that they have missed their chance after the surge in the price of U308 from $25 a pound to $32 since spring and COVID-19’s impact upon production.
“Yet production in 2019 was estimated to be running at barely 140 million pounds against demand of nearly 170 million. Utilities have stockpiles they can tap but this year’s mine shutdowns will tighten things further and uranium spot prices still trade below the cost of mining it, a situation which seems unlikely to last forever, especially as many utilities are coming to the end of long-term supply contracts and need to establish new ones. If supply and demand stay out of kilter for too long, then commodity prices could rocket, just as they did more than a decade ago.
Source: Refinitiv data
“Many investors will still turn away, given the risks involved. There could still be further pushback on nuclear power and it takes two years or so to turn uranium oxide into usable fuel rods, so any further upturn in Yellow Cake’s fortunes could be a slow-burning story.
“By contrast, intrepid small-cap investors may feel the 22% discount to net asset value per share gives them a little downside protection, especially as the company is running a $10 million share buyback programme, funded by the sale of 300,000 ounces of U308. Unlike many buyback schemes, this will be value accretive, given the prevailing discount to book value.”
