Uranium explodes Date: Monday, 29 January 2007 Adam Schwab writes:
It has only been six years since the dot.com boom but investors seem to have forgotten all the lessons taught, with rumors and market chatter seemingly having a more profound effect on share valuations than earnings and cash flow. The latest investing fad is uranium stocks, with the previously unloved nuclear ingredient suddenly becoming the flavour of the month.
Australia’s only independent uranium producer, ERA (which is 69% owned by Rio Tinto), has seen its shares increase from $2.00 to $21.60 in three years – a classic ten-bagger (ERA would be even higher had it not unwisely sold a significant amount of its output in long-term contracts at a level well below the current spot price). Paladin has been even more impressive, rising from $2.00 to $8.95 in just 12 months. Advertisement
ERA's and Paladin’s rocketing has come on the back of a burgeoning uranium spot price, which has increased from an average of US$28 per pound in 2005 to US$72.50 per pound now.
Analysts forecast that the uranium price could hit US$100 per pound this year, with growing demand from China and a lack of supply. Little production is coming online in the short term following chronic underinvestment over the past two decades (while the uranium price sat in the doldrums).
To top it off, flooding late last year at Cameco’s huge Cigar Lake project in Canada (which was set to commence operations in 2008) put further upwards pressure on the spot price.
While uranium bulls have some justification for their optimistic forecasts, the enthusiasm for small uranium stocks which are nowhere near production gives the impression that there a lot of investors who might end up feeling the same way about uranium as Peter Garrett did during the Midnight Oil days.
Last Wednesday, uranium explorer Uranium King announced that it had completed staking 112 prospective claims in the US state of New Mexico. Uranium King leapt further on Friday, finishing the week at 76 cents (up more than 65%).
In response to an ASX speeding ticket, Uranium King noted that “the company is…actively pursuing additional ground acquisition within the East Grants belt as has been detailed in recent releases to the ASX. Investors may be purchasing shares in anticipation of results.”
The East Grants belt is an area where Uranium King has staked its claims. The area in question was originally discovered by Uranium King director, Karl Myers, back in 1968. It was sold to Kerr McGee, who drilled more than 2,300 holes but eventually abandoned the project in the 1980s.
It should be stressed that so far, the company has announced that it has merely staked potential claims in the area – no uranium has been discovered, proved or heaven forbid, actually produced.
Uranium King’s rocketing share price is reminiscent of the early 1970s, when nickel miners would double in price after announcing they had staked a claim near Kambalda. That ended even worse than the dot.com boom – just ask the bloke who paid $280 for Poseidon.
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