Uranium stocks – fundamentals rule again

Wednesday, October 15, 2008 by Andrew McCrea

The froth is off ASX and TSX listed uranium stocks in Australia and Canada.

 
Here are a few of the price falls since the glory days of 2007...

• Paladin Energy Limited (ASX/TSX:PDN) down 77.6%, or A$7.51, to A$2.16,
• Energy Resources of Australia Limited (ASX:ERA) has dropped 48.7%, or A$12.03 to A$12.68
• Cameco Corporation (TSX: CCO) shedding 65.5%, or C$35.39 to C$18.61.

Emerging uranium producers with sizeable uranium resources have fared much worse... 

 

• Alliance Resources Limited (ASX:AGS) has fallen 82.7%, or A$2.30, to A$0.48
• Wildhorse Energy Limited (ASX:WHE) a whopping 96.1%, or $3.45, to A$0.14
• PeniNini Minerals Limited (ASX: PNN) has lost 86.5%, or A$2.25, to A$0.35.

Typical bear market stuff?  Perhaps – but there might be more to it than writing off the sector, at first glance.

Falling uranium price fuelled by speculators

The large amounts of uranium sold in September by financial and hedge funds means utilities may now have sufficient supply and the pick-up in sales typical of October-November may not occur.
Uranium fund sentiment and speculative activity remain important factors in the outlook for the spot uranium price with holdings of around 20 M lb of U308.  Driven by the fall-out of the credit crisis with liquidation of spot uranium positions, most industry analysts have reduced their spot price uranium price forecasts to US$50-US$55.00.

In the past most of the uranium traded has been sold directly by uranium miners to utilities, but in recent years there had been a growing trend for speculative investment by “long-short” hedge funds.
This activity that drove the uranium price up to record highs in the US$136 to US$138 range, has also been responsible for the large fall in the uranium price as liquidity issues have forced those buyers to liquidate their positions.

Uranium-oxide spot prices, which reached a record $138 a pound in June last year, dropped $3 to US$46.00 in the week ended Oct. 13, the Ux Consulting Co. LLC said on its Web site.

Will new nuclear reactors planned be built?

According to our research, nuclear reactor construction and forward planning for new plants continues strongly in China and other major Asian countries - as well as in Russia.  Energy requirements for these markets have not suddenly gone away.  

Delayed somewhat – but it has not evaporated into dust.  How much may not be known for some months.  There is potential for the credit freeze to slow this nuclear power project development. However, uranium will be needed to fuel the energy needs of urbanizing and modernizing economies, so demand for uranium from these countries should therefore remain strong in the medium to long term.

In fact, there is potential for nuclear power growth to exceed industry forecasts mid-term, which have seen significant upward revision in recent years.

The supply side

Latest industry reports and our research indicates potential for significant new mine supply of uranium to come to market by 2010, in particular from Kazakhstan, Malawi and Namibia.  This could push the market into surplus and exert downward pressure on the uranium price.

How much is difficult to measure given the credit crunch and effect on development financing for these mines.

It would be logical to assume that the global credit crisis will delay or scupper some planned industry projects, cutting supplies of the nuclear fuel.   

Paladin Energy indicated, “the impact of the credit tightness on the supply side of the uranium business will probably cause the deferral or cancellation of some planned uranium projects.”

Spiralling cost pressures and potential delays variously relating to permitting, infrastructure development and commissioning will also hinder some emerging producers.  High up-front capital costs for nuclear power projects may slow the so-called nuclear development.  Nuclear power stations can cost between $1,400 and $3,500 per kilowatt-hour of installed capacity. 

 
Certainly, the U.S. financial crisis, one of the most severe since the Great Depression has made banks more reluctant to lend money, raising global borrowing costs.  This will also impact uranium exploration companies in Australia as equity funding will be difficult to source, which will only exacerbate the supply (and demand imbalance) in the future.

Uranium prices may get some support because as uranium mine developments are deferred as emerging project developers experience increasing difficulty in raising capital, it will reduce supply.
Good news

ERA’s Chief Financial Officer Chris Bateman, said this week, “demand for uranium was set to grow as concerns over climate change saw nuclear power play an increasing role in reducing greenhouse gas emissions. The fundamentals for uranium are incredibly strong."

Some stocks like ERA will be less affected from spot market price falls as it is “sells most of its yellowcake into long-term supply contracts to utilities.  ERA looks for a balanced portfolio and that means that with a rapidly rising price you won't get 100% of the benefit (but) when the market corrects like it has we are not 100% exposed to the downside.”

Better news is that some uranium companies with cash in the bank or earning net cash flows (after interest costs are paid) have fallen to attractive valuations.  There are some uranium stocks trading at, or under cash backing. Does this imply there is an effective “floor” under their share prices?  Sadly – not in this current market.  Nothing is a given.  

Attractive opportunities emerging

However, medium to long term, those sound stocks will recover.   For longer term investors with cash and holding power and an18-24 month time frame, there are opportunities emerging in uranium stocks for the first time in some years.  There could also be rationalization of some listed Australian uranium companies, leading to additional takeover arbitrage opportunities in these stocks.  

Larger companies and those with cash will be looking to pick up quality projects at attractive prices.  
Disregarding the uranium sector of the market completely is illogical as the over-selling in uranium stocks we are witnessing now.  While stock selection is always important – now it is paramount in these markets.  

Not all that is uranium will glow in the new financial dawn.

 

Here are eight juniors whose primary business activity is uranium. 

Key discriminators between them will be those who offer the best combination of geology/grade, management expertise, accessibility, and access to labour (particularly uranium specialists), water, electricity, and equipment. ISL mines need access to sulphur (whose price has rise 1000% in 3 years) and for all uranium companies the attitude of the local jurisdictions and communities is particularly crucial.  One commentator recommends checking the local media, noting that the opposition in Colorado, for example, is loud and fierce!

Strathmore Minerals [TSX.V:STM]  Strathmore is the longest established of the companies in the list.  Its primary goal is to become a leading uranium producer in the United States and to that end it has acquired a portfolio of a dozen projects in Wyoming, New Mexico and South Dakota all of which were previously discovered but then abandoned by the uranium majors in the lean years of the 1980s and 1990s.  The projects have historical resources (defined prior to the NI 43-101 requirements) and are located in important uranium districts; the Gas Hills district in Wyoming is historically the second largest producing district in the US while the Grant’s Mineral belt in New Mexico was at one time the largest uranium district in the world.  The plan is to bring the projects into production from as soon as 2010. 

Murchison United [ASX:MUR, AIM:MUU] Murchison is exploring for uranium in Mauritania and Guinea in West Africa.  It was attracted to these countries as it considered them highly prospective but under-exploited and so reasoned that it would be possible to secure large tracts of prospective exploration acreage. Sure enough the company was able to acquire permits in 14 areas covering an astonishing 11,700 square kilometres and it has already made significant uranium discoveries both at Bin En Nar in Mauritania and at Firawa in Guinea. At the end of June Murchison’s success was implicitly recognised when it signed a Cooperation Agreement with French nuclear giant Areva.  Among other things it means that Murchison will be able to access Areva’s data, technical expertise and funding to accelerate development at its projects. Murchison also owns two copper projects in Australia. 

Forum Uranium [TSX.V:FDC] Forum Uranium is a Canadian based uranium exploration company with a team of highly experienced uranium exploration geologists who between them have discovered over 300 million pounds of uranium over their careers.  The company is exploring on eight projects in the Athabasca Basin (which produces more than 30% of the world’s uranium) in Saskatchewan and in the Thelon basin in Nunavut, which Forum claim is the most underexplored region in Canada for world-class uranium deposits.  The strategy is to explore for near surface deposits near existing infrastructure on its 100% owned deposits, and on its strategic partnerships and Joint Ventures.  The company generates plenty of news flow and in the last month it has acquired a further two properties. 

Fission Energy [TSX.V:FIS] Fission Energy was spun off from Strathmore Minerals in June 2007 in order to unlock shareholder value.  It is exploring for uranium in eight Canadian properties (in the Athabasca Basin, Alberta and Quebec) and in one in Peru. The crown jewel of the portfolio is the Waterbury Lake Uranium Project Waterbury Lake, which surrounds the Areva-Denison Midwest deposit (which will has 41.2 million lbs of uranium and will begin production in 2010) and is next door to Hathor Exploration which announced an intersection of 11.9 metres at 5.29% uranium less than 100 metres away from the Fission boundary.  There have also been encouraging results from Fission’s Davy Lake property, where a 51 km long conductor was identified during the 2006 field season and at Dieter Lake in Quebec where a NI 43-101 inferred resource totalling 24 million pounds grading .057% U3O8 has been identified.

Thor Mining [ASX, AIM:THR] Thor Mining is an exploration and development company with a number of properties in the Northern Territory of Australia.  While its flagship property is a molybdenum/tungsten prospect at Molyhil, (and in May BGF Equities Research published a report citing Thor as the cheapest tungsten/molybdenum stock in the market), Thor also owns 4 uranium exploration properties.  These were selected for their prospectivity, previous history of exploration and proximity to existing discoveries.   


Abbastar Uranium [TSX.V:ABA]   Abbastar is exploring for uranium at it’s Doran property on the North Shore of the St Lawrence Gulf in Quebec, Canada. Quebec was rated the best place in the world for mining investment in the latest Fraser Institute Survey of Mining Companies, and for the most part the location of the project is indeed very favourable with uranium near the surface, power overhead, water on-site, a highway next door and civilisation reasonably close by. The winter snows will slow exploration progress however.  The property has been explored intermittently since the 1950s and since 2005 there has been a further 6,000 metres of drilling in 63 holes. Abbastar’s immediate objective is to define an N43-101 compliant resource which Abbastar hopes will match the non-compliant historical resource of 5 million pounds of uranium.  Ultimately its objective is to develop a near surface, large tonnage Rossing-style open pit uranium mine through a JV with one of the uranium majors.  If successful the potential gains could be huge.  Abbastar has recently raised $820,000 in private placements



Pencari Mining [TSX.V: PCI] strategic focus is on uranium and gold projects. Pencari has taken this focus to Madagascar, where there are abundant unexplored opportunities. Pencari controls 5 gold properties totalling 4,788.5 square kilometres and 8 uranium properties totalling 27,518.75 square kilometres. Pencari's total land position in the central, western, and southern regions of Madagascar that are prospective for gold and uranium is 32,307.25 square kilometres. Pencari continues to look for additional opportunities. In addition, Pencari has a 90% interest in a joint venture on the Pani property, Indonesia.
 

Xemplar Energy  (TSX.V: XE) through its wholly owned subsidiary Namura Minerals, has the exclusive prospecting licenses (EPL) to three large scale properties (Warmbad, Cape Cross and Aus) and pending EPL for two other properties (Engo Valley and Garub) in Namibia. Xemplar Energy has been drilling aggressively at the Warmbad project in 2008 and has commenced reconnaissance drilling at the Cape Cross project. The Company has been the subject of takeover speculation in 2007.