Summary
- UPC’s shareholders are set to become unitholders of the newly created trust, provided this transaction is approved in the next few months.
- There are very few things to dislike about the transaction for both Sprott’s and UPC’s shareholders.
- Sprott has a great track record of managing and growing physical trusts, which bodes well for the future.
Investment Thesis
Uranium Participation Corp (OTCPK:URPTF), which I will refer to as UPC henceforth, and Sprott (SII) recently announced a relatively drastic change to the business structure of UPC, where the company is set to change to a trust and shareholders will be converted to unitholders of that trust.
Given the favorable characteristics of the trust, this has the potential to significantly increase the size of the trust and the demand for physical uranium, which will indirectly be beneficial to the price of uranium.
Business Structure Change
The announced transaction is set to close in late second or early third quarter of 2021, pending a shareholder vote at UPC. It definitely feels like a win-win transaction for both Sprott and UPC.
Sprott will reimburse UPC for the early termination fees that will be paid to Denison Mines of around C$5.3M and pay up to C$1M in transaction costs. UPC will also receive about C$6.7M upon closing of the transaction, which is about 1% of NAV, that might be used to purchase additional uranium.
The most obvious benefits from this transaction are the following:
- Operating costs will decline even though they are not excessive today.
- The trust will seek to list in the U.S. like the other Sprott Trusts. This will likely increase demand and liquidity significantly. Sprott will pay up to C$1.5M in associated cost for the listing.
- The structure of the trust will provide Sprott with the ability to buy pounds of uranium in the spot market from inflows to the trust. This will allow the trust to track the price of uranium much more closely than what UPC does today. Increasing investor inflows will automatically be converted into spot purchases.
- Sprott also has a good track record of growing the physical trusts, which bodes well for the future of the uranium trust.
The one minor negative impact of this transaction will be for some European retail clients that own UPC’s stock today. This is related to MIFID II and the fact that quite a few European brokers prevent their retail clients from purchasing North American ETFs or trusts. However, the increase in demand from the U.S. will very likely be much larger than any potential decrease in demand from Europe.
Sprott Physical Trusts
Sprott is an investment company focused on natural resources, primarily precious metals. The company did as of Q4-20 have $17.39B in assets under management. The trusts are the better part of the Exchange Listed Products segment.
Figure 1 – Source: Quarterly Reports
The combined value of the trusts was in Q4-20 $11.85B which has continued to grow in 2021 to $12.57B as of the end of April 2021. So, this is the largest part of Sprott’s business in terms of AUM, revenues, and EBITDA.
Figure 2 – Source: Quarterly Report and Sprott’s homepage
In 2020, AUM grew across the various segments for Sprott. We saw the $2.7B of inflows into the trust, which account for a significant part of the overall growth. Most of the inflows during 2020 were to the Physical Gold Trust, whereas we are seeing something very similar in 2021 for the Physical Silver Trust.
Figure 3 & 4 – Source: Q4-2020 Report & My Calculations
Given Sprott’s experience in the industry, managing and growing physical trusts. This transaction has the potential to see the inflows into the physical trust accelerate going forward.
Valuation
Sprott is presently trading with a relatively high valuation multiple but looks so far set to have a much stronger 2021 than its peers. I would however not chase the stock at this level, but it could be an attractive long-term investment if we see any pull-back from the current level.
Figure 5 & 6 – Source: Quarterly Report & Estimates from Koyfin
UPC is trading with a significant premium to net asset value which is likely set to disappear or at the very least decrease substantially once the transaction closes. However, an implied uranium price around $34/lb is still very cheap in my view.
Figure 7 – Source: Numerco
Overall Takeaways
I like many others think this transaction has the potential to be something very significant for the overall uranium market.
The trust will now provide more of a direct exposure to the price of uranium where inflows to the trust will automatically lead to spot market purchases by the trust. So, you could see retail investors and hedge funds look to leverage this trust to squeeze the market whenever we get a real bull market in the price of uranium.
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Source: Seeking Alpha