Yellow Cake (LON: YCA) shares have been on something of a tear recently. 10% up just this morning, 30% over the past few days. Which, for a company that doesn’t seem to do very much – Yellow Cake doesn’t produce anything, nor, really, do very much – might seem a little odd. Except this is really the purpose of Yellow Cake existing at all.
Yellow cake itself – that is, lower case yellow cake – is the form of mixed uranium oxides that is traded. In the supply chain of the nuclear reactor industry, the uranium miners go mining, their output is generally this mixture of uranium oxides. That is what is then shipped to the separation plants who split the material into the different isotopes. We want the radioactive type to go into the nuclear plants, the non-radioactive (“depleted” in the jargon) goes off to other uses like armour piercing shells, weights for helicopter rotors and even, at times, gold clubs (nope, not kidding).
As the nuclear power generation industry either ramps up or down the price of uranium follows. Yellow Cake – the company, with the capitals there – is an attempt to solve a problem in this industrial chain. There’s no real possibility of creating a futures or options market because we can’t have contracts where just anybody can take delivery of the physical item – that uranium oxide. You’ve got to have a licence to trade in uranium, quite rightly too.
So, we’ve got a market that doesn’t really have a decent market structure. It’s difficult to speculate on the uranium price. It’s very difficult to hedge against a change in the uranium price. Which is the reason for the existence of Yellow Cake. Effectively, the company is a pile of yellow cake. Almost like an ETF for uranium. As the uranium price changes the value of the stockpile changes, we can track this by buying or selling Yellow Cake shares as we wish.
Yes, there are other ways of doing this, we might buy or sell uranium miners, or processors. But that comes with other investment attributes, like the management performance, historical debt burdens and so on. Yellow Cake the company is simply there as a method for the individual investor to gain exposure to price changes in yellow cake. As yellow cake, the uranium oxide, is going up in value then so too are Yellow Cake shares. When the uranium price stops going up then so too, presumably, will Yellow Cake shares. That’s what the company exists to do, allow the private investor exposure to this price change.
It’s true, Yellow Cake does do a little more than this. They rotate the stockpile, for example, sell some off to the processors, then replace with new material (they have a contract with Kazatomprom in Kazakhstan). But the point and purpose of Yellow Cake’s very existence is to produce some manner for the private investor to speculate in the uranium price. If that’s what a private investor wants to do then that’s where to go to do it.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.