Yellow Cake Exists To Allow Speculation On The Uranium Price

Mar. 10, 2022 2:12 PM ETYellow Cake plc (YLLXF)5 Comments

Summary

  • We can look at Yellow Cake in terms of what it does, sure we can.
  • A better evaluation would come from why the company exists at all.
  • The aim to to enable speculation upon the uranium price, that's the whole of the thing.

Homemade classic vanilla sponge cake or biscuit sprinkled with powdered sugar and fresh berries on top on a white plate on a light wooden background.

Irina Taskova/iStock via Getty Images

Yellow Cake (OTCPK: YLLXF)

Yellow cake - no, not the type in the picture - is a mixture of uranium oxides and it's the form in which the material is generally traded. Or even, the form in which uranium is usually stored.

The industry works along the lines of we have miners, who produce a concentrate or perhaps that yellow cake, we have processors - who might take the concentrate and make yellow cake - and at the other end we've the nuclear reactors which are the major consumers. In between the yellow cake and the reactor we need an isotope separation - or enrichment - plant and those are actually the grossly expensive part of the whole system. These things cost billions upon billions.

The yellow cake is the thing that gets traded. Mines, or concentrators, might sell to a reactor company, which would then organize for the processing into actual fuel rods and so on.

A complication

As it happens we'd rather than random economic actors - you know, speculators, folk like us - didn't get their hands on piles of uranium. We're all a bit funny that way. So, to trade anything in this world you need to have a license. I actually had one once and it took about 6 months to get. Never used it but I just want to point out that it's not something easily handed out.

This requirement for a license means that there are no terminal markets. It's not like aluminum, or nickel, where you can sell a future, deliver into warehouse and that's it, you're paid. The transaction has to go to the actual user, that end user - they're the only people with licenses to be able to buy.

There are brokers in this market but they tend to be working on commission rather than taking ownership.

So, we've no terminal market, no futures- how could we have physical delivery if you must have a license? and if only the few hundred people with a license could take physical delivery then how can you have a futures market? - so price discovery is pretty hazy. We have guidance as to what prices are but every actual deal is large and individually priced.

So, you can't speculate in the uranium price

This means that it's not possible to speculate in the uranium price. We can do so indirectly, through stock in miners, or processors (Energy Fuels being an obvious candidate). There are several ETFs which hold baskets of exactly these sorts of companies. That's great, but that's always indirect. Energy fuels might be driven either way by its adventures in rare earths for example, rather than by the uranium price. Indirect proxies for prices are, well, they're indirect and thus not perfect.

It's possible that you might want to be able to hedge against the uranium price. If you were a reactor company, for example. But the real thing is that many speculators - sorry, investors - would like to be able to play that uranium price. But as above, that's difficult.

So, Yellow Cake

This is what Yellow Cake PLC (the company) is about. The whole of the thing is to have a structure that allows people to speculate on the uranium price. If a company owns a pile of that yellow cake then the company valuation will vary as does the yellow cake price. Folk can buy and sell shares in the company and there we are, we've our desired ability to speculate on the uranium price.

This is why the company was created. They've got the necessary licenses to be able to sit on a pile of uranium. We don't need a license to be able to trade the stock. Great there we are, the job's done.

Now, yes, they do a little more than this. They raise capital occasionally in order to be able to increase their stock. They sell material on at times and then buy in again to replace it. Their supply contract is with Kazatomprom in Kazakhstan. But this turnover of stock is really just good stock management, it's not the point nor purpose of the company.

The aim, the reason for existence, is to act rather like an ETF directly holding uranium. Although because uranium is a market that works in large chunks - you don't go out and buy a few hundred kg at a time - it's not open ended, like an ETF, rather it's a closed end fund. Well, a closed end fund with occasional capital raises.

The purpose of all of this is simply so that you have a convenient and attractive place to go and speculate on the price of uranium. That's the reason for the whole structure. Which does mean that if you're not interested in speculating on the uranium price then Yellow Cake, as I've said elsewhere, is of no interest at all to you. If, on the other hand, you do wish to so speculate, then this is perhaps the cleanest method available for you to do so.

And that, really, is it. If you want the most direct exposure to the global uranium price that you can get, bull or bear, then Yellow Cake is where you're going to get it.

Yes, you can play in miners and so on, you'll get greater gearing on price movements that way, but they will also be weighted with whatever operational difficulties or costs they've got too.

One more little thing

Liquidity in Yellow Cake (OTCQX:YLLXF) looks tiny, handfuls of thousands of stock each day. The London main listing (LON: YCA) is hugely more liquid, 7 million shares a day perhaps. It might well be worth looking at whether the ADR trading is so illiquid that price disparities open up.

In a perfectly efficient market then of course the two prices would move exactly in lockstep, different only by the exchange rate. But markets aren't perfectly efficient and illiquidity is one of the major reasons why. Now I don't say this is going to be true, only that it might be.

That the market makers in YLLXF aren't monitoring that London market price closely enough, so that if there's a major movement there it will take time for the ADR price to react. Anyone who tried to move thousands of shares through the ADR will of course make the market maker wake up and change their price. But it might be possible to slide a hundred or three shares past the 'bots. Maybe.

To do this sort of arbitrage you'd need an account with direct access to London as well as something in the US for the ADR. But I offer that as a possibility - nothing more - for something that might earn a little beer money. Given current volatility - the London price is up 10% today - it would only take a couple of days of checking the relative prices to see whether the prices do diverge enough, for long enough, for an arbitrage to be made.

I'm not suggesting the double leg, buying London and converting into the ADR (or vice versa) rather, looking at London, seeing if the price changes, then seeing if it's possible to buy ahead of the ADR price moving.

Yes, yes, I know, this should not be possible. But that liquidity is the very thing that makes it not so, therefore the very low liquidity in the ADR might make it so.

My view

I've deliberately left out most of the internal workings of Yellow Cake. Simply because they're not, to my mind, relevant to the investment opportunity here. The whole set up is to make it possible for the private investor to speculate on the uranium price. So, view it as that.

The investor view

As the point here is speculation on the uranium price if that's not a speculation you want to make then Yellow Cake will be of no interest to you. If you do want to be able to play that price - either way - then this is the most direct option available to you.

That's what it's for, the entire corporate structure. So, use it that way.

This article was written by

Tim Worstall profile picture
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Tim Worstall is a wholesaler of rare earth metals and one of the global experts in the metal scandium. He is also a Fellow at the Adam Smith Inst in London and an writer for a number of media outlets, including The Times (London), Telegraph, The Register and even, very occasionally indeed, for the WSJ. This account is linked with that of Mohamad Machine-Chian: https://seekingalpha.com/user/52914142/comments

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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