Monday, 2 July, 2007

by Rudi Filapek-Vandyck
FN Arena

What only a few weeks ago seemed but a distant possibility is now official: the uranium spot price has pulled back. TradeTech, one of two industry consultants that determine a benchmark price setting on a weekly basis, has decided to cut US$3 off its previous US$138/lb benchmark figure to send ripples through the industry with a first price fall in 47 months.

The cause behind this development is as clear as sunshine: professional speculators have grown more cautious about entering the market for U3O8 (uranium concentrate or yellowcake) and pushing up prices indefinitely. For a more in-depth explanation, we happily refer to our weekly analysis from June 26 (“Can The U3O8 Spot Price Fall?”).

FNArena has received several bearish market comments over the past few weeks, mostly sent to us by our readers, with some commentators predicting spot uranium has peaked and is on its way down.

We believe these predictions are likely to be proven wrong as demand for uranium continues to grow and supply is not readily available to satisfy all buyers at this point in time. It remains very unlikely this situation will change in the short term.

Analysts at Deutsche Bank seem to share this view as they increased their average price forecasts for the next three years - and quite significantly so. Deutsche Bank now forecasts an average U3O8 spot price for 2007 of US$122.1/lb (up by 31% from previous forecast) with prices expected to rise further in the two following years.

The average price forecast for 2008 is now US$156.3/lb (up by 56%) and for 2009 the figure is US$175/lb (up 67%). Deutsche Bank has penciled in a noticeable supply response from 2010 onwards with the average price anticipated to decline to US$95/lb in the year.

We do agree with the view that an era has come to an end: the era of no matter what you buy, as long as it has the tag uranium attached to it. Again, we find a similar view in Deutsche Bank’s latest industry update as the broker preaches caution towards Energy Resources of Australia (ERA) because of the production challenges that lay ahead. The broker advocates ERA shares should trade at a discount to other producers until the problems with its flooded pit 3 in the Northern Territory have been resolved.

Deutsche Bank remains positive about the prospects for junior producer Paladin Resources (PDN) rating the shares a buy with a $10 price target for the year ahead.

No doubt, close followers of the industry will argue that the era of “everything uranium is gold” already ended some three months ago.

And they are correct.