Nearly half of uranium production doesn't make money at the prevailing spot price. That's the startling statistic highlighted by Andre Liebenberg, the chief executive of Yellow Cake PLC (LON:YCA).
Yellow Cake has been set up to provide investors with a clean entry point into what has hitherto been a pretty opaque market. What really is the true price of uranium? There's the spot price, of course, but that really only tells half, or even less than half, the story.
Most uranium production is actually locked into long-term contracts, which is why it can afford to keep going even with the uranium price still trading at under US$30 per pound.
When those contracts are up, though, the chances are the production will be idled, and that in turn is likely to lead to an increase in price as supply dwindles.
It will be an interesting inflexion point, and one at which investors could stand to make a lot of money.
But even on that medium-term bullish outlook, there are still limited ways to play the uranium market. There are the majors of course, like Cameco (TSE:CCO), and there are junior explorers too, like Manhattan Corporation LTD (ASX:MHC). But both will be subject to the vagaries of sentiment in a market in which the supply-demand dynamic is likely to change rapidly.
But for a more straightforward long-only option there's Yellow Cake.
Yellow Cake was set up by veteran mining financier Pete Bacchus, the man who successfully defended Rio Tinto against a hostile takeover bid during the last boom. He's now set up on his own at Bacchus Capital Advisers and, amongst other things, has put together Yellow Cake for his clients.
The company listed on the London Stock Exchange in July of this year, and is the only vehicle of its kind in Europe. There is a similar vehicle in Canada, which was one of the inspirations behind Yellow Cake, but Liebenberg doesn't regard it as a competitor.
The more companies there are around stockpiling physical uranium, the tighter the supply becomes and the better it is for the spot price.
But is it enough to make a difference?
Liebenberg is a firm uranium bull. Worth noting for a start that since Yellow Cake listed, the price has risen from just over US$22 per pound to just over US$27 per pound, and that's a trend he thinks is set to continue.
"We think we're closer to the bottom than the top," he says.
"In uranium the demand side is actually very visible," he says. "The lead times are long and the build times are long. But the supply side hasn't been visible, particularly post Fukushima. And Yellow Cake is a vehicle that allows investors to take a view on the uranium price," says Liebenberg.
The company is long-only on uranium, so investors needn't worry about the value becoming tangled up in a complicated web of financial instruments.
In fact, it couldn't be more simple. Yellow Cake holds just under 8.45mln pounds of physical uranium in a warehouse owned by Cameco. As at 3rd October that uranium was worth 242p per Yellow Cake share, while the company itself was trading on the market at 240p. So the discount is running at about 1%, much narrower than most investment companies, and testament to the simplicity and transparency of the vehicle.
Down the line, there's even the possibility that Yellowcake could do some small royalty deals which would deliver enough cash flow to cover the running costs and allow the shares to trade at exactly par value, or even at a premium.
Why should Yellow Cake trade at a premium when it's benchmarked against spot? The answer is that if you are bullish uranium and you think the price is going to rise, taking a position early in a vehicle like Yellow Cake is one way to catch the upside early.
And of course, if the Yellow Cake share price does end up trading at a premium to net assets, that will create an opportunity for Liebenberg.
"If we were trading at a premium we could issue stock and buy uranium," says Liebenberg. "And if we were trading at a persistent discount we could consider selling uranium and buy stock."
The company has an agreement in place with Kazatomprom that allows for the purchase of up to US$100mln worth of uranium a year, and crucially that deal allows for the fixing of the amount and the price before Yellow Cake goes into the market for new money.
That allows the company to be precise about the nature of the deal it will put to existing and potentially new shareholders in the event of a future raise. Yellow Cake has big enough backers to allow it to be pretty confident of securing additional funding. The real question is whether or not it's right in its bullish call on uranium.
We'll find out soon enough.