Energy Resources Of Australia Ltd. (ERA.AU) Chief Financial Officer Chris Bateman said Tuesday the fundamentals of the uranium market remain strong and a sharp drop in uranium prices has been largely driven by speculators exiting the market.
ERA, a subsidiary of Rio Tinto Ltd. (RTP), released third quarter production figures showing uranium production from its Ranger mine in the Northern Territory of Australia fell 1% on year to 1,349 metric tons.

The miner said it is now accessing higher grade ore at the Ranger open pit, which has been drained after flooding in the first half, and uranium output for the full year is expected to approach the level achieved in 2007, which was 5,412 tons.
Bateman said 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," he told Dow Jones Newswires.

The spot uranium price surged to a record high of US$138 per pound in June last year but has since dropped to US$49 per pound.

Bateman said that in the past most of the uranium traded has been sold directly by miners to utilities, but that in recent years there had been a growing trend for speculative investment by financial players.

"We believe that activity drove the price up to record highs in the US$136 to US$138 range and has also been responsible for the precipitous fall in the uranium price as liquidity issues have forced those financial buyers to liquidate their positions," he said.

ERA will feel some impact from the falling uranium price, Bateman said, but is largely protected as it sells most of its yellowcake into long-term supply contracts to utilities.

"We look 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," he said.

The falling uranium prices have seen ERA's shares tumble from A$24.81 in early July to a low of A$9.36 Monday, although it ended up 18.8% at A$12 Tuesday as mining stocks rallied and the broader Australian market climbed 3.7%.

Macquarie analyst Brendan Harris said the stock looks cheap and is the best defensive uranium play on offer.

"It got sold off, I think, just in sympathy with the weakness that had been seen elsewhere and I think it has created an opportunity," he said.

Harris said ERA's guidance was roughly in line with Macquarie's forecast for 5,500 tons of uranium production in 2008 and that Tuesday's quarterly report also contained more promising drill results from the exploration program around the existing Ranger operation.

Bateman said that, while ERA is not ruling out opportunistic M&A, its focus is on adding tons to its resource through exploration around Ranger.

"We think, in terms of the dollars we are spending on our exploration and the resources that we have been converting, it is a significantly better investment than some of the uranium prices if you look at the juniors," he said.

UBS analysts said the quarterly production of 1,349 metric tons had come in below their forecast of 1,535 tons and the full year guidance was "slightly disappointing" but retained their buy rating and said the stock remains the pick of the uranium sector.