Tuesday 11 April 2006
The Australian
by Tim Boreham

THE current valuations being ascribed to even the most rag-tag uranium hopefuls might look reasonable in a decade's time. But it's just as likely that we've solved the Middle East's woes and sent a man to Mars by then as well. The truth is: even if another ripper uranium resource is proved up, there's bugger-all prospect of an Australian mine being built (and approvals granted) in that period.

While the world will clamour for more uranium, shorter-term demand is likely to be satisfied by known new mines and existing projects, such as BHP Billiton's Olympic Dam.

Even Rio Tinto's Leigh Clifford - who's now known for pontificating on commodity prices - warns the current $US40 a pound uranium price - which has almost doubled in the past year - cannot be sustained.

He notes the planned new nuclear power plants - such as the 40 slated by the Chinese - could take a decade to fire up.

Clifford's salient warning is supported by the Australian Bureau of Agricultural & Resource Economics, which forecasts a modest 1 per cent per annum uptick in uranium demand over the next five years.

ABARE forecasts that the value of Australia's uranium exports will decline to $521 million by 2010-11, compared with $712 million in 2005-06.

"Despite recent significant increases in expenditure on uranium exploration, uranium production over the outlook period is expected to be largely dictated by production from existing operations," ABARE says.

While there's a big global supply/demand gap, the void is filled by recycling material from decommissioned bombs and reprocessing spent fuel.

There's also new production this year: Paladin Resources' Langer Heinrich project in Namibia (1180 tonnes per year) and the Zarechnoye mine in Kazakhstan (590 tonnes).

Next year, it's Southern Cross Resources' Dominion project in South Africa (1800 tonnes), while Cameco (the world's biggest producer) is expanding output at its existing Cigar Lake operation in Canada.

As with all manias, investors are spoiled for choice in terms of options to do their dough. At least 40 listed miners claim a uranium exposure. Dozens have packaged up their uranium tenements (or, strictly speaking, patches of dirt where uranium might reside) and flogged them off.

Oxiana, for instance, spun off Toro Resources (TOE) at 20c on March 24. Toro only yesterday announced the start of its drilling program, but that didn't stop the stock leaping to a high of $1.60 in late March. TOE stock yesterday closed 5.5c better at $1.22.

The uranium mania has been fuelled by political developments which look promising, but might be red herrings more than anything.

First, Labor's likely rethink on its "three mines" stance could remove a 20-year impediment to the sector's development. Labor governs in the relevant states of South Australia, Western Australia and Queensland, but expect them to handpass the hot potato into the calloused hands of their federal comrades.

Criterion suspects Labor's policy will change, given Australia has $32 billion of current uranium reserves. Alternatively, Labor is likely to be voted out of office in at least one of these states over the next decade, with Queensland looking the most vulnerable.

In the shorter term, it's more important for miners to prove up a resource for the politicians and greenies to argue over.

Uranium enthusiasts have also been heartened by the feds' agreement with China, to allow the Chinese to buy yellowcake and explore for the stuff here.

Hmm, very promising. But once again, the existing mines will fill the short-term demand. China did sign an exploration deal with Uranium Exploration (UNX), but there's more than a sneaking suspicion it's more interested in Uranex's Tanzanian ground.

Criterion ascribes a SELL recommendation to a whole sector: uranium explorers with no proven resources and little hope of achieving production.

It's a bit tough to tar all the players with the "overvalued" brush, but the valuations look crazy. At the very least, there's no way of knowing whether they're ridiculous or not.

Examples are Toro, UNX (38.5c), Nova Energy (NEL, $1.74), Encounter Resources (ENR, 60.5C) and Globe Uranium (GBE, 55c).

Paladin (PDN) should make good money from Langer Heinrich and its Malawi project will probably get off the ground.

But Paladin's market cap stands at $2.1 billion: more than the value ascribed to the Seven Network, Unitab, Dyno Nobel or the soon-to-be-producing Bendigo Mining.

A handful are worthy of a SPECULATIVE BUY. Summit Resources (SMM) has a proven ore body at its Mt Isa project: 22,100 tonnes of "measured and indicated resources". It's the local deposit most likely to be developed.

Marathon Resources (MTN, $1.07) has 33,000 tonnes of inferred resources at its Mt Gee tenement in the Flinders Ranges.

"Marathon Resources appears to be in the right place at the right time," says stock-picker Fat Prophets.

Another investor says: "Marathon has run ahead of itself. Needs to do more work."

Compass Resources (CMR, $2.35) also earns Brownie points for looking in the right place: the Rum Jungle field in the Northern Territory, which supplied Cold War uranium to the British and Americans before being forgotten for four decades.

Monaro Resources (MRO $1.06) is taking a different tack and looking to the Kyrgyz Republic, Russia's traditional source of uranium.

Monaro is still setting up, but boasts the biggest acreage in the consonant-rich republic. As well as being deficient in vowels, Kyrgyz also lacks the usual pesky environmental standards and red tape.

Alternatively, investors could forget about the blue sky and stick with ERA, the only dedicated uranium producer.

The trouble is, ERA's output is subject to long-term contracts well below current spot prices. Over time, these contracts will be rewritten at higher prices, so uranium's old-timer will be able to join the party.

ERA shares look fully valued at $15 but we rate them a LONG-TERM BUY.

Criterion subscribes to uranium watcher (and Monaro chairman) Warwick Grigor's view that investors should hold back for more drilling results.

His rule of thumb is that anyone with a 1000-tonne plus resource is worth a look at.

Grigor believes uranium is not just a cyclical play, but will benefit from sustained long-term energy demand.

The world certainly can't rely on wind farms if those orange-bellied parrots keep flying in the way.

Grigor adds: "I think the sector needs to play it cool for a little while."

Indeed.