Time To Consider Trimming Uranium Participation Corp. Due To Material NAV Premium
- Uranium Participation Corp. has seen recent strength after the agreement with Sprott to achieve a liquid U.S. listing.
- The company now trades materially above NAV (on my estimates by about 20%), compared to a discount for much of 2020.
- Though there are reasons to be constructive on uranium pricing going forward now may be a prudent time to trim exposure or explore substitute vehicles.
- Ironically, a Sprott fund may not be a way for the premium to NAV to persist, some Sprott funds trade at a discount to NAV as has Uranium Participation Corp. for much of its history.
Last summer, I wrote some bullish pieces on Uranium Participation Corp. (OTCPK:URPTF) due to a material NAV discount. Now, by way of an update, Uranium Participation Corp's meaningful premium to net asset value may present an opportunity to trim exposure at current levels. The catalyst is primarily the news announced last week that shareholders will become unitholders in the expected newly formed and U.S.-listed Sprott Physical Uranium Trust.
To be clear, this is good news and achieves what management had been targeting for months in reducing the NAV discount and even hitting a premium. However, closing a discount to NAV cuts both ways.
Whereas before Uranium Participation Corp traded at a material discount to NAV, now it appears to trade at a large premium. There are reasons why this premium may be warranted, but from a margin of safety standpoint an investment in Uranium Participation Corp now carries more risk.
Even if the uranium price were to increase from here, investors could lose money. It is notable that today the company announced a potential transaction to purchase shares but only at CAD $5.20 per share or 6% below the current price.
Recent Discount To NAV
Uranium Participation Corp had been focused on closing its discount to NAV for some time. It started selling uranium and purchasing its own shares last year as a way to close the gap, albeit on a fairly small scale. However, into last summer the discount to NAV remained relatively wide at 20% or so. The chart below shows the premium or discount to NAV of Uranium Participation Corp over recent months. Note the chart below excludes April's data which I expect to be released on Thursday this week showing around a 20% premium to NAV (subject to share price movements).
Source: Uranium Participation Corp reporting, author's analysis
Essentially, since late summer 2020, the spot price of uranium has fallen, while the shares of Uranium Participation Corp have risen. Hence the closing of the discount to NAV has more than offset some weakness in spot uranium pricing. It's an interesting outcome to make money while the underlying asset falls, and demonstrates the power of investing at NAV discounts.
An Increasing Premium To NAV
The problem is I calculate that the premium to NAV has increased even relative to the high premium we saw at the end of March. The company should report data on the end of April discount/premium to NAV this Thursday.
I calculate a premium to NAV today of 21% based on uranium spot of $28.8 and a U.S. share price of $4.50. There are other moving parts too such as a declining share count and FX rates depending on how you do your calculations. The share price has been volatile on the Sprott deal in recent days, so please do your own calculations before any trading. But still uranium spot is down 6% since the end of March and the share price is up around 4% at the time of writing. It's likely we'll see a greater premium in the company's calculations.
Company data also suggests that a 21% premium is at the high end of the historical range. We have seen greater premiums, but not for too long and they are not common.
source: Company Presentation
Still there are a few risks to unwinding positions in Uranium Participation Corp now. First off, spot uranium is fairly volatile. Most uranium trades on longer term contracts estimated at around $34 or so according to Cameco. Using that number Uranium Participation Corp is at closer to a 3% premium, so far less overvalued. Though spot pricing is informative too and what is typically used for NAV premium and discount calculations across commodities.
Also, the Sprott deal may well drive more liquidity to the shares and on recent estimates a similar UK-listed company (Yellowcake) traded at an at 11% premium to NAV as of April 2021. So for the new units to trade at a premium to NAV because there are few routes to invest in uranium, especially if uranium becomes a hot trade, is certainly not impossible. Though that would be more speculative trading, than value-based investing.
Finally, an perhaps most importantly, there are reasons to be bullish on uranium, so maybe it's ok to potentially lose some return in a premium to NAV in order to take advantage of a strengthening uranium market, should that occur. There is a good overview of uranium price dynamics here.
However, it also worth pointing out that Sprott offering a U.S.-listed vehicle is not guaranteed to close a discount to NAV, even though the market currently expects good things. As of March 31, per its most recent factsheet, Sprott's physical gold fund traded 4% below NAV. Hence, Sprott, or indeed any provider, launching a fund won't necessarily keep the uranium assets trading right at NAV. Premiums and discounts to NAV are a fact of investment life for many funds.
Also, Sprott's funds typically carry fees. While we don't know the details of the fee structure uranium fund yet, its reasonable that it trades at a slight discount to NAV to reflect the expected erosion of value from management fees over time.
Ironically, though Sprott's effective marketing of the fund may make big premiums and discounts less likely, hence buying in at 20% premium currently may carry more risk knowing that the entity will transition to a fully fledged U.S. fund listing and the band of pricing around NAV could well narrow.
At around a 20% premium to NAV, there is some downside risk that Uranium Participation Corp returns to a level closer to NAV. For example, on my estimates, theoretically uranium could rise to $35 from here and investors wouldn't see gains if the premium to NAV closed entirely.
Even though I am constructive on uranium for the longer term, I have trimmed and continue to trim, my position in Uranium Participation Corp at these levels, because, as we've seen historically the company, or it's successor Sprott entity, may revert to a NAV discount at some point in the future.
That eventuality could dilute returns to current investors, even in a bullish uranium market. I like uranium, but in the current market it appears Uranium Participation Corp has lost its margin of safety from my perspective. Due to the substantial discount from summer 2020, investors have benefited from the share price rising while spot uranium pricing has declined. That scenario is unlikely to persist, and I'm not convinced that the Sprott deal will alter that logic.
Written at URPTF price of $4.50 USD and uranium spot (est.) of $28.8 USD
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