According to latest (2 July) figures from the Financial Conduct Authority, Yellow Cake‘s (LSE:YCA) the most shorted FTSE stock. Eight investors have borrowed 6.92% of the company’s shares in the hope that they fall in value.
This could indicate concerns. But in this instance, I think it reflects the nature of the company’s activities. It buys uranium and then seeks to hold it for the long term.
At 30 September 2024, the group owned nearly 10,000 tonnes. Most of this has been acquired via an agreement with Kazatomprom, Kazakhstan’s national atomic company.
Although Yellow Cake’s not concerned about the spot price of uranium, day-to-day fluctuations do influence the company’s market-cap. This is evidenced by its five-year share price performance, which has followed a similar pattern to the uranium price.
And I think this explains its popularity with short-sellers. In effect, they are using the company to speculate on short-term price movements in the uranium market.
A quick overview
Currently, it costs around $16m a year to run the company. Most of this is accounted for by storage costs. At 30 September 2024, the group had $26m in the bank. Assuming it doesn’t want to raise more money, it’ll soon have to sell some of its inventory to cover its operating costs. But with over $1.7bn of uranium on its balance sheet, there’s plenty of headroom.
The company has a very simple business model. It’s not exposed to the considerable risks associated with mining uranium. As long as its principal asset is stored securely and adequately insured, there should be little that disrupts its business.
However, there are only three regulated uranium storage facilities in OECD countries, so the company could be at the mercy of price gouging.
Also, Kazatomprom transports some of its product through Russia and has business relationships with the country’s state-owned nuclear authority. If it were to be sanctioned, this could affect Yellow Cake’s ability to buy additional supplies.
Impressively though, the group has no debt.
Taking a long-term view
On balance, I think the investment case is a relatively simple one. If uranium prices rise over the longer term, then the group’s share price should follow. Otherwise, there could be trouble ahead. Therefore, in my opinion, whether to invest or not boils down to an individual’s assessment of the uranium market.
Here, its directors are bullish. Although acknowledging that mid-term prices have dropped nearly 40% since their 2024 peak, they claim the long-term price has remained stable. And despite recent market turbulence, they say “uranium stands out as an example of resilience amid uncertainty”.
Future demand’s expected to come from additional nuclear power generation. In particular, from small modular reactors. The International Energy Agency reckons these could have 40GW of capacity by 2050. Under a ‘high-growth’ scenario, this might be 120GW. Either way, it’s likely to push uranium prices higher.
But I don’t want to invest in Yellow Cake. Although I think the fundamentals of the uranium market are strong and support the group’s long-term strategy, I’m too old to wait two decades (or more) before seeing a return. It might start to offload its uranium earlier but the timing will be dictated by unpredictable market conditions that are beyond its control.
However, younger investors could consider taking a stake.
