uranium still has a few bright spots

Uranium still has a few bright spots
Jamie Freed
February 22, 2009

WITH the heady days of the uranium boom of 2007 long gone, the market is not exactly awash with talk about yellowcake. There is more day-to-day interest in metals that are performing very well (gold) or those that are doing so poorly that miners are making losses (base metals).

But since the collapse of Lehman Brothers in September, uranium has been one of the better-performing commodities in terms of price.

The spot price is about $US47 a pound, but long-term contracts which account for the majority of sales are priced about $US70 a pound. Both of those prices, although far from the $US138 a pound reached in 2007, provide good margins for the relatively few listed uranium producers.

One consequence of the downturn in the prices of other metals - and the lack of financing - is that many planned uranium projects will be postponed.

BHP Billiton's proposed Olympic Dam expansion doesn't exactly look to be on the fast track in a time of low copper prices, and smaller companies with big dreams won't find it easy to fund construction.

With ABN Amro touting uranium's "defensive characteristics" as an investment relative to other metals, The Drum has examined the metal which these days is often overlooked.

Demand still weak
Uranium is defensive in a similar way to thermal coal, which has also performed better than most other commodities. Both are used by utilities to provide baseload power.

In a statement that sounds surprising at first, Canada's Cameco - the world's largest uranium miner - last week said demand for uranium had been "very low" so far this year.

Its marketing head, George Assie, said buyers were under instructions to minimise capital outlays as a result of the tight credit market and generally weak economic conditions.

"There's been little or no discretionary buying by utilities so far this year," he said. "So with that lower demand and adequate supply chasing the demand that is there, we've seen prices soften and … we believe that given the global financial situation spot prices are likely to remain quite volatile over 2009."

Cameco also noted that in tough times utilities tend to run nuclear plants at full capacity.

It has a positive outlook for the industry, as evidenced by its decision last week to raise up to $US460 million ($714 million) of equity, some of which it could put toward more acquisitions. Cameco bought Rio Tinto's undeveloped Kintrye deposit in Western Australia last year.

But outlook robust
For investors seeking exposure to uranium in the Australian market, there are a host of explorers with projects at varying stages but only two producers: Energy Resources of Australia and Paladin Energy.

Most of the explorers will find it difficult to raise the capital needed to develop a mine. Some of the more promising ones, such as Extract Resources, and potentially Energy and Minerals Australia, are likely takeover targets.

Rio has invested in Extract in recent months because the explorer's project adjoins its Rossing uranium mine in Namibia. Rio is also the controlling shareholder in ERA, which has garnered good reviews from analysts in recent weeks based on the potential for a major extension to its Ranger mine in the Northern Territory at the Ranger 3 Deeps underground project.

Like Cameco, ERA thinks conditions in the uranium market are more robust than for other commodities. At its results briefing, it noted there were more than 100 new nuclear reactors that were either under construction, on order, or planned around the world. Increasing concern about greenhouse gas emissions has helped fuel demand for nuclear power.

Rio has said it does not plan to sell its stake in ERA as part of its review of assets. But if its proposed investment deal with Chinalco falls through, it is possible those plans could change. If so, ERA would be relatively easy to sell at a good price, so analysts haven't written off the possibility it will change hands.

Predator or prey?
Paladin was the superstar of the uranium boom due to its excellent timing. Its faith in the strength of the uranium market meant it developed its Langer Heinrich mine in Namibia when uranium was unpopular and, by the time it was constructed, Paladin reaped the rewards of higher prices and a lack of old low-priced contracts that had hobbled companies like ERA and BHP.

Now Paladin is expanding Langer Heinrich and is nearly finished constructing its second mine, Kayelekera, in Malawi. It expects to produce about 1500 tonnes of uranium this year.

Like many others, Paladin overpaid for an acquisition during the boom - in its case, Summit Resources. It was forced to take a write-down on the value of those Mt Isa uranium deposits in tandem with its latest results. But Paladin's decision to use scrip rather than cash for the Summit bid helped to preserve its balance sheet.

Paladin, although so far the predator, has always been viewed as attractive prey. Macquarie Equities said it did not expect a takeover premium embedded in Paladin's share price to disappear soon, particularly since Cameco and Chinese and Japanese utilities have been acquisitive in recent months.

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