article on alliance resources

IT is not an ideal to be a uranium producer. In fact, it has not been ideal since March 11, 2011, when a large earthquake triggered a 15m tsunami that caused Japan’s ­Fukushima nuclear power plant to melt down.

The tsunami-triggered meltdown took uranium prices down with it, and they are yet to ­recover. Pre-tsunami, uranium was trading at more than $US70 a pound.

Last week the spot price for the radioactive material was looking friendless at $US33.90 a pound. But with nuclear power still covering more than 11 per cent of the world’s electricity demand (more than 20 per cent in OECD countries, according to the World Nuclear Association), the shortfall between supply and demand — currently met by drawdowns on reprocessed weapons-grade material and stockpiles — means uranium will again have its day in the sun.

The new and growing imperative behind the broad agreement that long-term average for uranium is going to be somewhere north of $US60 a pound is the building of new nuclear capacity in China.

China has a real problem with pollution, which sort of comes with its annual burning of 3.5 billion tonnes of coal in support of its urbanisation and industrialisation drive. To put that in context, and to make that point that the environmental attacks on the Australian coal industry are missing the main target, Australia produces about 420 million tonnes of the black stuff, which is mostly exported.

There have been plenty of mumblings out of Beijing that improving air quality is right up there with all of its long-term plans. Apart from anything else, China’s choking air quality has become an international embarrassment.

Nuclear power is part of the solution, thanks to its super-low life cycle carbon emissions, which almost put it on par with wind and hydro-electric power.

And that is why, as mentioned earlier, the long-term uranium price assumption is a multiple of the current spot price.

Prices are not expected to pop any time soon, but sometime in the next three to five years is not an unreasonable expectation.

It is against that backdrop that Alliance Resources, owned 25.8 per cent by Ian Gandel’s Abbotsleigh, is nicely positioned.

It is a 25 per cent partner in Australia’s newest uranium mine — the Four Mile project in South Australia, owned 75 per cent and managed by a subsidiary of California’s General Atomics, Heathgate.

The operation is of the in-situ leach type and when it hits its straps, it will rank as the world’s 15th biggest uranium mine of any description.

First production is due this month, subject to final regulatory approval of Heathgate’s monitoring plans for the project.

Shares in Alliance have been dragged higher in recent months in anticipation of all that, moving from 13c a share at the start of the year to 23c yesterday, giving it a market capitalisation of $78m.

Four Mile is no earnings bonanza, not initially at least. Total costs have been put at $40.13 a pound against what Heathgate reckons will be a $49.36 a pound sales price on forecast sales of 1.5m pounds in the period up to December 21 this year.

Positive cash flow is forecast in the first half of 2015, which is about when the first signs of a rebound in uranium prices should be taking hold.

Given the slow start to earnings from Four Mile, it has to be assumed that there have been other factors behind Alliance’s 77 per cent price appreciation so far this year.

And there is. First up is the misleading and deceptive legal action by Alliance against Heathgate.

Alliance is seeking damages and the restitution of the 75 per cent of Four Mile now held by Heathgate, with a five-week trial due to kick off on June 30.

Needless to say, a win by ­Alliance would be transfor­mational.

But punting on the outcome of court cases is not a recommended investment strategy.

More certainty exists about the potential for a game-changing increase in resources at Four Mile, now all the more interesting with the start to production.

The Four Mile resource currently stands at 71 million pounds of uranium. That is globally significant in itself.

But back in February Alliance itself announced a “conceptual’’ exploration target for 41-78 million pounds of uranium in an area to the northeast of Four Mile. There is again disagreement between the joint venture ­partners on whether the exploration cost of proving up that sort of ­potential should be categorised as a development cost — under which Alliance would pay its share — or as an exploration cost which Heathgate needs to cover.

Either way, the latest high-grade exploration results from Four Mile northeast have continued to point to the broader Four Mile area in outback South Australia being one of the “Australia’s great uranium provinces’’.


http://www.theaustralian.com.au/business/opinion/sun-will-rise-on-uranium/story-fnciil7d-1226877138562#