- There’s a reasonable argument that Yellow Cake is currently undervalued
- There’s another, equally valid, that they’re not
- Trading positions depend upon which argument is believed
- Yellow Cake Up Another 10% – How Far Will It Go?
Yellow Cake (LON: YCA) shares are an oddity really. For the company itself, YCA, doesn’t particularly do anything. But then that’s rather the point of the company itself, not to do anything but simply to be.
The background here is that yellow cake is the traded form of uranium. This isn’t what is put into reactors, it’s earlier in the process than that. It’s actually the output from the normal mining and processing system. This is then what is traded around within the nuclear business. It’s only once an actual reactor is ready for refueling that the yellow cake (uranium oxides) is sent through the isotopic separation plant to become actual reactor fuel. Different reactors require different styles of fuel, but all of them start with yellow cake.
The uranium price is highly variable but it’s very difficult to speculate upon. At which point we could say bully for that but what it does mean is that the miners and reactors have to carry the risks of price changes. In an economic sense, the speculators take on the risk by speculating using futures, options and so on. But, obviously enough, the world doesn’t allow just anyone to take delivery of physical uranium. So, those futures and options markets don’t really exist. Not in any volume at least.
The solution is Yellow Cake the company. This simply owns a pile of uranium. Has all the licences to be allowed to trade, take physical delivery, and so on. Those who wish to speculate on the uranium price can therefore do so in Yellow Cake, YCA, shares.
What this means is that the Yellow Cake share price should mimic the uranium price. Which it’s not obvious that it does. This provides a trading opportunity of course but that does depend upon views about the market as a whole.
Yellow Cake has announced that it has added to its uranium stockpile. It paid $43.25.lb for it and has taken delivery. Well, that’s OK. Except the spot price seems to be approaching $60/lb at times. Then there’s the valuation (fair value) that Yellow Cake is putting on its uranium stocks, $47.40/lb.
This then gives a slightly complex calculation. If Yellow Cake is doing what it’s supposed to it should, in its enterprise valuation, closely mimic the uranium price time stockpile plus cash holdings. Significant or long-term moves away from that price indicate that not enough people are trading it on that basis.
Then there’s the uranium price itself. Trade in this market is “lumpy” in the sense that you never do sell a tonne or three here and there. Sales are generally of a reactor full at a time and there just isn’t one of those every day. So it’s not quite the spot price that is the valuation, it’s what can you sell that reactor full at the time that you do?
So, the current yellow cake price is buoyed by worries over possible sanctions on Russian uranium – sanctions that may or may not appear. There’s also the obvious trend – Germany and so on – of people realising that wind and solar aren’t going to do it, nuclear needs to be retained. How long will these effects last?
It does seem to be that judging by the uranium sport price Yellow Cake is undervalued. But whether the share price rises to meet stock value rather depends upon longer-term views of the price and also how many people trade the shares.