Uranium still has a bright future
IT'S been a rollercoaster ride for uranium stocks in the past year.
In the heady days of the uranium boom, when the spot price rose to a record high of $US140 a pound last June, investors piling into heavily oversubscribed floats were nearly sure to turn a profit on the first day of trading.
No matter if the explorer didn't have a resource. Or if its tenements were in states which ban uranium mining. Or if none of the directors had any mining experience. Quick and easy profits looked practically guaranteed.
But how quickly things change.
In less than a year, the uranium spot price has more than halved to hit $US60 a pound this week. Add in a shaky equity market and uranium is clearly no longer the flavour of the month. Oil and coal stocks are deemed much better bets these days, and many uranium tiddlers are quickly running out of cash. Even rare producers like Paladin Energy and Energy Resources of Australia have experienced share price plunges.
But, according to the experts, the future for yellowcake isn't all gloom and doom.
The spot price may have plunged dramatically, but the spot market for uranium is actually quite small - less than 5 per cent of the total market. The vast majority of yellowcake is sold under long-term contracts and the contract price has held steady for nearly a year at $US95 a pound before recently dipping to $US90 a pound.
The Drum remains sceptical of a lot of uranium stocks in the market - particularly the ones floated in advantageous times with little prospect of ever entering production. But now that the sector is relatively unloved, it could be worth taking a second look.
Analysts still upbeat
In a long report last week, Merrill Lynch analysts said the spot price of uranium had now fallen close to the marginal cost of mine production, so it should stabilise around current levels.
"Uranium's outlook is robust," the investment bank said, citing growing global demand for nuclear power now that it's often seen as "green".
Goldman Sachs JBWere analyst Malcolm Southwood agreed the downside for spot prices in the near term was low, with a recovery expected in the second half - albeit not to last year's heady levels, which were in part driven by speculators rather than end users like nuclear power plants.
But he noted uranium production should rise steeply starting next year. And once BHP Billiton expands its Olympic Dam mine - the world's largest uranium resource - by the middle of the next decade, the market could be flooded with yellowcake, which is particularly cheap to produce, since it is a byproduct of copper and gold mining.
All eyes on EMA listing
As with any potential speculative exploration investment, the quality of the resource, the state laws regarding mining and the calibre of the board and management team is key. New float Energy & Minerals Australia (EMA) - scheduled to list on Friday - ticks two of those boxes and therefore has received huge interest from investors despite the downturn in the uranium market.
EMA owns all of the Mulga Rock project in Western Australia after last year winning a legal dispute with Uranium Equities over half the project. It doesn't get the tick for favourable state laws, since WA bans uranium mining. But its historical resource of 46,000 tonnes in three deposits, ranks it as the largest uranium deposit in Australia not controlled by BHP or Rio Tinto. To boot, it also contains nickel and cobalt.
Managing director Chris Davis - a mining engineer with over 35 years of experience - said the $5 million offering closed oversubscribed, with the majority being taken up by institutions and wealthy individuals. "For projects with value there is a definite market," he said.
EMA had raised another $5 million before issuing the public prospectus. But nearly 80 per cent of the shares remain in the hands of executive director Mike Fewster, a geologist and prospector who has long had faith in the project.
Big fans of Four Mile
In terms of promising Australian uranium projects, Far East Capital managing director Warwick Grigor recently placed Alliance Resources's Four Mile West project at the top of the list. Alliance owns 25 per cent of the project, with the rest held by Heathgate Resources, the US operator of the Beverley uranium mine in South Australia.
Four Mile not only contains at least 15,000 tonnes of uranium, but it is high-grade material. Alliance chief executive Steve Johnston has said there is the potential for 50,000 tonnes of uranium at the SA site, which is only four kilometres away from the Beverley plant. The partners are planning a staged development at Four Mile, with the first stage producing about 450 tonnes a year starting late next year.
Grigor - who owns shares in Alliance - estimated it would cost about $25 million to get Four Mile into production and it could produce uranium for just $US10 a pound in cash operating costs.
"[Alliance] is emerging as a real world-class, low-risk uranium stock selling on excellent fundamentals," he said. "We see Alliance as one of the lowest-risk ways to play the uranium market at the moment."