YELLOW CAKE (LON:YCA), an "Alternative Investment"?

Monday, Jul 23 2018 by

I've always been interested in "alternative investment" propositions such as catastrophe insurance, litigation finance, etc. where returns can be expected to be uncorrelated with economic activity and general equity markets. I may have found another example in YCA.

Demand for uranium has been depressed since the Fukushima disaster of 2011, and the so-called spot price of U3O8 oxide ("yellowcake") has fallen fairly steadily to a current value of around US$23/lb. However, there are signs that we might see a reversal of this. China and (surprisingly) Japan are building reactors, and some large mines have ceased production. Many in the business, though talking their own book no doubt, are positive for 2019 onwards. Demand is expected to permanently outstrip supply from about 2022. [1]

It should be said that this spot price isn't really trustworthy, being thinly traded and allegedly manipulated. Contracts for large supplies are made off market and some expect these to be agreed at more than double the published spot price this year. [2]

The IPO of YCA this month is intended to take advantage of this. It has raised £144.4m net and bought 8.1 mmlb of U3O8 from the world's largest producer in Kazakhstan at $21.01/lb (a 9% discount to spot) to be shipped to Canada for storage. It also has the right to further purchases subject of course to having funds. There were 76.2m shares issued at 200p, with my estimate of an initial NAV of around 185p. Storage costs are low.

So, buy the shares at 200p-ish, sit back and wait? Well, sort of, that would be the idea, and the documentation stresses the "long term". What possible downsides? Here are a few:

• It looks to be in a pretty unregulated market.

• The uranium price could fall. Of course!

• Running costs look reasonable, but I may not have considered them thoroughly enough.

• Trump has threatened to apply tariffs to imported uranium. These might, of course, be selective and in any case, I'm unsure whether these would affect overall supply/demand (hence price) or just displace it.

So the investment case is that they have bought an asset and are sitting on it and using it for trading purposes. It really looks fairly simple and has none of the complexities involved in buying a miner or explorer. Whether it will prove a good investment…

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6 Posts on this Thread show/hide all

bwakem 23rd Jul '18 1 of 6

What is the advantage over buying an already existing uranium ETF?

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JohnWigg 23rd Jul '18 2 of 6

In reply to post #384254

From my limited knowledge, the ETFs invest in miners. Personally, I avoid this sector (apart from an investment trust) but, yes, that would be an alternative.

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cig 23rd Jul '18 3 of 6

In reply to post #384254

Narrow thematic ETFs often have trouble finding enough equally narrow stocks to make a portfolio and thus end up padding the portfolio with large caps only tangentially involved with the theme (eg URA has Rio Tinto...) greatly diluting the exposure.

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JohnWigg 26th Jul '18 4 of 6

Is the supply squeeze beginning already?

"Production at world’s biggest uranium mine suspended indefinitely" -

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aston_22 27th Jul '18 5 of 6

Geiger counter GCL is a pure uranium investment trust on the LSE. Primary equity exposure with physical assets under uranium participation in the US. Experienced management. Should do well. IMHO asymmetric risk presently. I have a position.

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JohnWigg 27th Jul '18 6 of 6

In reply to post #386089

@ aston 22 - many thanks, I hadn't heard of that one. I see a small MCap, which might make it hard to get much of a position.

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