ENERGY Resources of Australia has announced a 5 per cent increase in uranium oxide production from last year.

One of the world's largest uranium producers,  which operates the Northern Territory Ranger mine, said in its latest quarterly report that full-year production for 2008, of 5339 tonnes, was the third-highest annual result on record.

The strong production result for ERA and a similarly robust performance from its rival, Paladin, prompted analysts to predict that Australia's uranium plays would outperform the bulk and base metals sector.

ERA said its full-year production output was 1 per cent lower than the previous year but the result reflected the return of access to high-grade ore in the second quarter and strong operational performance.

"ERA met all delivery commitments for the 2008 year resulting in sales of 5272 tonnes," the company said.

"ERA's average contractual sales price is only partly influenced by the spot market due to the portfolio of contracts containing a range of pricing mechanisms."

The company said work on Ranger 3 Deeps to define a possible extension of the current open-pit mine, or to establish underground mining at the site, had been halted.

"While studies continue on the Ranger 3 Deeps target, work has been halted on the further open pit extension study," the company said.

"It is likely that the high-grade mineralisation targeted in the open pit extension study may be recovered through underground mining."

In a note to clients yesterday, Deutsche Bank uranium analysts Paul Young and Brendan Fitzpatrick forecast that the uranium spot price would rally during March.

The spot price of uranium fell a further $US2 to $US51 a pound during the new year period, which was characterised by typically lower demand.

"However, with the uranium market in a forecast deficit of 5 million pounds in 2009 we expect the spot price to stabilise and head higher during the March quarter," the note says.

The term price for the resource remains firm at $US70 a pound, with current demand of between 20 million and 25 million pounds.

Increases in both spot and term demand from energy-hungry nations, particularly India and China, are expected throughout 2009, the analysts say.

"Coupled with strong fourth-quarter 2008 production results from both ERA and Paladin, we believe both stocks should outperform the bulk and base metal sectors in the near term," they say.

"However, we currently prefer Paladin over ERA on a relative value basis."

The note forecasts a "much improved" performance of ERA's Ranger mine during the fourth quarter of 2008, driven by an increase in mill throughput and higher grades.

"The next catalyst appears to be an initial resource from Ranger 3 Deeps in early 2009, which we believe could contain up to 40kt of U308," the analysts say.

The key near-term driver for Paladin would be better operational performance at its Langer Heinrich operation.

Shares in ERA rose 36c to close at $18.28, while shares in Paladin rose 17c to close at $3.01.