VANCOUVER — Uranium Participation’s (TSX: U) business model is simple: own uranium.
Owning stores of physical uranium oxide (U3O8) and uranium hexafluoride (UF6) give the company two ways to make money for its shareholders: through exposure to a rising uranium price, and by adding to its uranium holdings when the price is right.
In the nearly three years since the disaster at Japan’s Fukushima nuclear facility, both of those avenues have been blocked. Now, in a sign that investors expect uranium prices to improve, the pricing stars have aligned: Uranium Participation’s share price has climbed enough that the implied price per pound of its uranium holdings is above the spot price.
When that happens, the company can sell shares based on the higher implied uranium price and use the money to buy uranium on the less expensive spot market. It’s arbitrage in action and, after almost three years of inactivity, Uranium Participation is jumping on the opportunity.
The company has announced a $50-million bought-deal financing that will see 9.15 million shares sold at $5.47 apiece. It will use the money to buy uranium. Such a transaction takes advantage of higher-than-expected uranium prices — made tangible through a strengthened share price — to buy uranium that is still cheap and should grow in value when the uranium market stages a comeback.
The uranium spot price fell in the wake of the March 2011 Fukushima disaster, dropping from above US$70 per lb. U3O8 to near US$50 per lb. There it remained from mid-2011 to mid-2012, before sliding further to its current price near US$35 per lb.
The price deterioration means Uranium Participation’s holdings have been losing value. So too has the company’s share price, which is based mostly on the uranium price, but partly on what the market thinks will happen to that price.
Perception comes into play because shares in Uranium Participation are one of the few ways investors can gain direct exposure to the uranium price. From the investor’s standpoint, it makes sense to buy shares if one believes uranium prices will climb. When enough people do so, Uranium Participation’s share price rises.
The flip side is also true, which is that investors sell their Uranium Participation holdings if they believe the outlook for uranium is weak. Such has been the case for the last few years, and the result has been that the implied value of each pound of uranium in Uranium Participation’s stores has been less than the spot price.
To determine the implied per-pound value of the company’s uranium holdings involves dividing the company’s market capitalization by the size of its uranium inventory. Since Uranium Participation holds uranium as both U3O8 and UF6 the exact calculations involve stoichiometry, but that’s the broad concept.
For most of the last three years, the calculation has yielded an implied price that is 10–25% below the uranium spot price. In November the gap closed, and then reversed. On Jan. 15, the day before the financing was announced, the implied price for each pound of uranium in Uranium Participation’s holdings was US$39.58, or 13% above the US$35 per lb. spot price.
The financing is selling at a small discount to U’s share price, which means it is based on an implied uranium price of US$37.77 per lb. This still represents an 8% premium to the spot price, and according to Haywood analyst Colin Healey, it is a deal that makes sense.
“Although the deal does raise cash at a discount to the latest closing price, proceeds will be used to add to the fund’s physical uranium inventory, likely below the fund-implied price of uranium at the [$5.47-per-share] deal price, which we estimate at US$37.77 per lb. U3O8,” Healey wrote. “We consider this a logical and predictable move for the company.
“This transaction essentially epitomizes the business model for [a physical uranium holding] fund,” Healey continued. “When the market implied price of the fund’s physical inventory, based on the share price, trades at a sustained premium to the commodity’s spot price, the fund takes advantage of the premium valuation of its shares versus the commodity to add to its inventory through spot-market purchases. This serves to close the virtual arbitrage between its fund-implied price and the spot price.”
Uranium Participation holds 7.57 million lb. U3O8. The company holds another 4.96 million lb. uranium as UF6.
On news of the financing deal Uranium Participation’s share price lost 27¢ to close at $5.46, in line with the financing price. The company has 106 million shares outstanding.
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