Uranium bucking the trend
Monday, 9 October, 2006
by Jo Clarke
Australian Financial Review
The proposed expansion of the nuclear industry has forced uranium prices higher and bodes well for miners and explorers with genuine uranium mining projects that are achievable in the short to medium term.
The number of nuclear reactors is set to increase by 40 per cent. There are 180 new power stations planned worldwide and more are expected to be proposed as global warming fears increase.
The spot price for uranium has increased 30 per cent in the past three months to $US53.25 a pound and is set to continue to increase for at least the next two years, according to Resource Capital Research analyst John Wilson.
This week Deutsche Bank increased its spot uranium forecast for the period of 2007 to 2011 to peak at $US76 a pound in 2008 before declining to a long-term average of $US46 a pound by 2015.
In 2001 the uranium price was about $US6 a pound.
Several of the existing uranium producers are locked into long-term contracts and will not benefit from rising spot prices for several years. For example BHP Billiton has all of the uranium stocks from its Olympic Dam mine in South Australia committed under long-term contracts until 2010.
The companies that will most benefit from the higher spot price are those that are due to come into production in the next couple of years and those existing producers that do not have long-term fixed-price sales contracts.
But all uranium companies are receiving a boost from improved sentiment for the rising price, particularly at a time when the outlook for other commodities is uncertain.
Resource Capital Research found that the market valuation of its selection of 69 Australian uranium juniors is up 25 per cent over the last three months and 47 per cent over the year. Australian companies have outperformed their Canadian counterparts in recent months but are still behind over the year, with the Canadians up 85 per cent.
Of the larger companies, Energy Resources of Australia and Paladin Resources are set to gain from higher spot prices.
ERA, which operates the Ranger Mine in the Northern Territory, is the third largest uranium miner in the world. Its major shareholder is Rio Tinto with 68 per cent of the issued shares. Deutsche last week increased its forecast earnings for ERA by 14 per cent and increased its target share price by 31¢ to
$16.72 with a buy recommendation.
"The company is debt free and with strongly rising spot prices has the potential to increase mine life by several years through a further lowering of the cut-off grade at Ranger 3," Deutsche analyst Scott Finlay said in a note to clients.
ERA's share price is down about 24 per cent from its mid-April peak, closing at $12.37 on Friday, after a small rally in the last week.
ERA trades at around 24 times its 2007 earnings forecasts, while Paladin trades at about 48 times. Paladin is commissioning its Langer Heinrich mine in Namibia and will ramp up production to full 2.6 million-pound capacity over the next year. Its share price has increased 175 per cent in the last year to around $5, but is still shy of its $5.30 peak in late August.
"In Australia, Paladin remains the most exposed company to changes in the uranium prices as well as having the highest potential for resource expansion," Mr Finlay said. Paladin has been upgraded to a buy with a target share price of $6.07 following revisions to Deutsche's spot price forecast.
Paladin recently bought into Valhalla Uranium in the Northern Territory, which will be developed only if the government alters its policy on uranium mining in Australia.
The federal Labor Party has said it wants to review its no new mine policy, but this has yet to filter through to the state level where the policy is implemented.
The easing of restrictions is essential for the majority of Australian juniors, but this hurdle has not stopped share price appreciation, indicating that the market believes more mines will be allowed.
The share price of Energy Metals has soared 162 per cent in the last year to $1.95 on Friday, although it is short of its $2.60 peak in late March and has underperformed some of its higher profile peers, according to Stock Resource analyst Stephen Bartrop. It owns 53.3 per cent of the Bigrlyi project in the Northern Territory.
"Near term news flow will improve for the company with the commencement of drilling at Bigrlyi, followed by a likely expansion of the resource,"said Mr Bartrop who has a buy recommendation on the stock.
Another junior flying high at the moment is Alliance Resources, which has jumped 230 per cent since the start of August to 93.5¢ a share on Friday thanks to drilling results at the Beverley 4 Mile deposit, in which it holds a 25 per cent stake.
"We believe there is increased likelihood of a takeover [of Alliance] from its joint-venture partner given its status as a current uranium producer at the nearby Beverley operation and the ultimate ownership of Heathgate Resources by United States-based nuclear technology multi-national General Atomics," Lonsec analyst Terry Burns said.