Uranium holding companies offer alternative to investors

The uranium spot price has hovered around US$25 per lb. over the better part of the last year and long-term pricing is at the US$32 per lb level. The prolonged bear market and weak macro-environment continue to erode investor confidence in the primary uranium producers, which in some cases have been forced to curtail output to trim operating costs and stem losses.

Market stresses on uranium producers have boosted the popularity of investment alternatives in the energy metal space, specifically physical uranium holding companies such as Uranium Participation (TSX: U) and Yellow Cake (LSE: YCA, US-OTC: YLLXF).

These companies offer investors exposure to the physical commodity — uranium oxide concentrates (U3O8) — through their direct purchase of material from primary producers and the holding of it in inventory for future resale. These companies are leveraged to the uranium price without taking on the risks associated with mining the commodity including permitting, resource and reserve development, and operations.

Uranium Participation is the leader in the niche sector. Upon listing through a $90-million initial public offering in 2005, the company appointed Denison Mines (TSX: DML) as manager to handle and arrange its U3O8 purchasing and sales with a mandate to allocate a minimum of 85% of its aggregate gross proceeds towards uranium purchases.

The company undertook initial purchase agreements for 1.85 million lb. U3O8 at an average price of US$27.87 per lb. and secured licensed storage facilities for its physical holdings in Canada, France, the United Kingdom and the United States.

Uranium Participation now reports 18.1 million lb. U3O8 equivalent in its holdings for a net asset value of $587 million at current uranium prices. Nearly 94% of its gross proceeds are invested in uranium.

The newest player in the uranium holding company space is Yellow Cake, which launched mid-2018 through a US$200-million IPO in London that was anchored by a 9.9% lead order from Uranium Royalty (TSXV: URC). The company added a further US$34 million to its coffers in mid-2019 in a subsequent financing.

Yellow Cake’s launch was based on securing a long-term strategic supply agreement to purchase U3O8 from Kazakhstan-producer Kazatomprom (LSE: KAP), the world’s largest uranium producer. Following its IPO, Yellow Cake bought 8.4 million lb. U3O8 from the Central Asian miner at an average cost of US$21.10 per pound. The purchase represented about one-quarter of Kazatomprom’s annual output in 2018.

The agreement with Kazatomprom gives Yellow Cake the right to purchase up to US$100 million of U3O8 at the spot price each year from 2019 to 2027.

In its latest reporting, Yellow Cake’s holdings are tabled at just over 9.6 million lb. U3O8 that are stored at Cameco‘s (TSX: CCO) Port Hope/Blind River facility in Ontario.

Uranium Participation and Yellow Cake are not the only companies actively purchasing U3O8 in the spot market. Some primary producers are buying supply to offset production closures and deferrals at their mines due to weak commodity prices.

Cameco has been an active U3O8 buyer since its closure of the McArthur River mine and Key Lake processing plant in early 2018, and the suspension of operations at its Rabbit Lake, Crow Butte and Smith Ranch-Highland mines in 2016. The company said it would make spot market purchases of 21 million to 23 million lb. in 2019 to meet sales commitments and maintain working inventory, and would likely continue the program in 2020.

The sector has seen other major producers take significant production offline in reaction to the weak uranium price.

At the end of 2017, Kazatomprom announced it would reduce its uranium production by 20% for three years to address oversupply. It recently extended its production curtailment through 2021. Even with these cutbacks, the company will maintain its top producer status with annual output of about 45-50 million lb. U3O8.

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