Mr Market loves Yellow Cake
“…But Yellow Cake has the virtue of simplicity: direct exposure to the uranium price through a single holding company bearing no mining risk…”
Emerging solar, wind and battery technologies have attracted the most interest among investors backing the long transition to the green economy. But over the past few months a long established and rather overlooked source of low carbon energy, nuclear power, has at last caught the financial world’s imagination. The price of uranium oxide – the main fuel used to power nuclear reactors – is up from $30 to $40 this year, its highest level since 2014.
The trend has generated several new funds and ETFs, and a surge of interest in uranium holdings companies such as Yellow Cake (AIM:YCA), London’s only pure-play uranium option. The company offers direct exposure to the spot uranium price by buying and storing uranium oxide (U3O8), the ‘yellowcake’ used to fuel nuclear reactors.
Founded in 2018 by Bacchus Capital, Yellow Cake has a 10-year contract for the supply of uranium with the Republic of Kazakhstan’s majority owned Kazatomprom, the world’s largest producer. The agreement allows Yellow Cake to buy the element at a price agreed prior to the announcement of the purchase, enabling it to acquire substantial volumes of the oxide at undisturbed prices.
Yellow Cake, which undertakes no exploration, development, mining or processing, runs a lightweight operation led by Executive Director and Chief Executive Officer, Andre Liebenberg a non-executive director of natural resources companies Danakali Limited and Zeta Resources Limited, who has held senior roles within BHP Billiton and QKR Corporation, and Chairman Anthony St John, who sits in the House of Lords as Lord St John of Bletso, and serves as a director to companies including Smithson Investment Trust and Albion Ventures.
The company has thrived over the past year as the price of uranium has risen. Yellow Cake’s last set of annual results, for the year ended 31 March 2021, recorded a profit after tax of $29.9m, up from $12.5m for the previous year, and an increase in net asset value (NAV) to $421.4m, up from $267.1m. The NAV rally was facilitated by a major share buyback programme undertaken through 2020, in the course of which the company bought back $11.5m worth of shares.
Yellow Cake has undertaken two major placings this year to raise funds to take advantage of rising uranium prices and increase its holdings. A $138.5m raise – oversubscribed by $30m – in March was followed by a $86.9m placing in June. The company’s most recent quarterly update, to 30 June, reported a 35pc increase in holdings since 31 March from 9.86 to to 13.31 million pounds. The value of the company’s holdings has increased over the quarter from $302.1m to $427.1m as the price of uranium has risen by 41.4pc. CEO Andre Liebenberg expects its holding ‘to exceed 16 million pounds by the end of 2021’, equivalent to more than 10pc of current annual global uranium mine production. Yellow Cake’s share price has risen accordingly over the past 18 months, surging from 152p last March to 247p at the beginning of August, and to 345p at the time of writing.
The bull case
The price of uranium has risen as investors anticipate an extended period of high demand driven by a widening realisation that the world will need low-carbon nuclear power if it is to have any hope of meeting the Paris climate targets, and expectations of a prolonged squeeze in the supply of uranium.
The World Nuclear Association forecasts demand for the element will climb from about 162 million pounds this year to 206m pounds in 2030, and to 292 million pounds in 2040, an increase driven by Chinese investment in a new fleet of nuclear reactors. The increase in demand comes as the supply of uranium is expected to fall by 15pc over the next five years, and by 50pc by 2030 due to a lack of investment in new mines. The pandemic highlighted the world’s dependence on Kazatomprom and the other major supplier, Canadian miner Cameco, both of which were obliged to restrict operations.
Demand from holding companies like Yellow Cake has put significant further pressure on supply. The Sprott Physical Uranium Trust, currently listed on the Toronto Stock Exchange, and planning to list on the New York Stock Exchange next year, has bought six million pounds of the element this summer, bringing its total holding to 24 million pounds. To put that in context, by the end of the year Sprott and Yellow Cake will together hold some 40 million pounds of a global supply expected to total around 125 million pounds. ETFs tracking the global uranium mining index are also becoming more popular, the biggest of them, the North Shore Global Uranium ETF, surpassing $500m in assets this month.
A complex picture
It’s a compelling story that has enticed many investors this year. But the full picture is rather more complex. Uranium bulls are right to make the case that nuclear is here to stay. Despite abiding scepticism nuclear has long been established as the second-largest source of low-carbon electricity in the world behind hydropower. Renewables are becoming ever cheaper and more efficient, but still constitute a relatively small percentage of the total energy mix, and they are intermittent by nature, dependent on favourable weather conditions. Batteries allowing excess power from renewables to be stored and released promise to offer an elegant long term solution, but require significant long-term investment.
Nuclear power’s proven capacity to offer an energy-dense, low-carbon and reliable source of power is increasingly being acknowledged by politicians and environmental groups hitherto wary of public scepticism, or hostile on ideological grounds. Governments are finally showing urgency about the need to invest in the world’s ageing nuclear fleet. The International Energy Agency (IEA) forecasts that nuclear power output in advanced economies will decline by two-thirds over the next two decades unless new projects are approved, and the lifetime of existing nuclear power plants is extended. Nuclear supplied about a fifth of global electricity production in the 1990s, but only a tenth today. Most European and US reactors are nearly 40 years old, and a quarter of the current nuclear capacity in advanced economies is set to be shut down by 2025. The IEA forecasts that energy supplied by nuclear will have to nearly double over the next 30 years to prevent a disastrous turn to gas and coal to make up the shortfall.
There are positive signs. The world’s fleet of reactors is forecast to grow by 30pc over the next 20 years, spearheaded by China’s aggressive building programme. There is also progress elsewhere. Japan is beginning to re-engage with nuclear, reopening reactors closed after the Fukushima disaster. The Biden administration is incorporating nuclear into its green energy programme, making it a benchmark ‘clean energy standard’ fuel and offering tax credits to nuclear providers.
The UK, which like the US generates around a fifth of its electricity from nuclear, continues to explore options for revitalising its stations all but one of which are due to close over the next 10 years as they reach the end of their operational lives. It has been a tough road. Last year, Hitachi withdrew from plans to build stations in North Wales and Gloucestershire, and Toshiba scrapped its Cumbrian project three years ago. But the controversial Hinkley Point C project is going ahead, and two further power stations, Bradwell in Essex and Sizewell C in Suffolk, have been proposed. The government’s energy white paper, published last year, is vague projecting that the UK will have anywhere between 5 and 40 gigawatts of nuclear capacity by 2050. But it insists that ‘additional nuclear beyond Hinkley Point C will be needed in a low-cost 2050 electricity system of very low emissions’, and that at least one large-scale nuclear project will get the green light before the end of this Parliament.
The Hinkley C controversy highlights the fundamental problem for pro-nuclear governments everywhere: cost. The project’s budget has spiralled to £23bn, up £5bn already since it got underway five years ago. Nuclear’s opponents argue such vast sums could be more effectively deployed into energy efficiency and renewables. And of course nuclear. has its own environmental issues: the perennial challenge of radioactive waste disposal, and the possible dangers – vividly illustrated by Fukushima – inherent in locating stations dependent on vast reservoirs of water to act as a coolant by the sea.
But progress is being made on the cost front. China and South Korea have been evolving standardised processes for building plants rapidly and cheaply. And in the West blueprints have been developed for a new generation of ‘small modular reactors’ that can be assembled from pre-fabricated units. In the UK the government is designing new funding models for future large-scale projects that draw lessons from Hinkley. The blueprint for the proposed £20bn Sizewell C plant would allow operators to earn money before the site is up and running, allowing them to reduce borrowing costs and allow investors to reap returns much sooner.
A uranium shortage?
All in all, then nuclear seems here to stay, guaranteeing a long term demand for uranium. But the story regarding uranium’s future supply is also rather more nuanced than the fuel’s advocates might suggest. While the supply of uranium has indeed come under pressure over the past year there is no immediate threat of a shortage. The big miners have accumulated a surplus inventory since Japan and Germany suspended their nuclear programmes following Fukushima (in Germany’s case permanently). There is sufficient supply for four years worth future production, and Kazatomprom and Cameco have the capacity to step up production at relatively short notice by reopening mothballed mines. The price of uranium is not as cyclical as other commodities, certainly not as much as that of iron ore and copper, which has doubled over the past year.
That said, the likelihood of a long term requirement for uranium leaves the world rather dependent on very few suppliers. It is not easy to open new mines, as illustrated by the experience of two London-listed companies, Rio Tinto and Berkeley Energia. Rio is out of the uranium business after political pressures forced it to abandon its plans to open a new mine at Jabiluka in Australia. And Berkeley, as reported by TMS back in May, has spent years battling to open a uranium mine in Spain against fierce local opposition that has pressured the Spanish government into blocking further permits for the ‘exploitation of radioactive materials’.
Options for investing in nuclear
In summary, then, there are good grounds for considering uranium a good long term investment. We are going to need nuclear, for the foreseeable future and a reliable supply of uranium, probably from a somewhat more diverse set of suppliers than we have just now.
Investors have a few options. They can bet on prospective uranium miners: Cameco’s share price is up 92pc over the past year outstripping even Yellow Cake. For all its problems Berkeley Energia’s shares have more than doubled over the past year. Various new funds and ETFs also offer exposure. But Yellow Cake has the virtue of simplicity: direct exposure to the uranium price through a single holding company bearing no mining risk. Prospective investors should take the time to review each option carefully. And they should be wary of narratives that promise a quick return. But uranium certainly seems to offer the prospect of a rewarding long term investment, and Yellow Cake a low cost, reliable vehicle.