aus u explorers face meltdown

Australian Uranium-Explorer Stocks May Face Meltdown After IPOs

Australian Uranium-Explorer Stocks May Face Meltdown After IPOs

May 23 (Bloomberg) -- Investor Michael Birch says he fields calls every week from stockbrokers offering new shares in uranium explorers, most of which haven't found any of the metallic element used for nuclear fuel and wouldn't be allowed to mine it if they did.

``You've got a lot of new stocks making extraordinary gains very quickly,'' said Birch, who manages $120 million at Wallace Funds Management in Sydney and is avoiding the shares for the same reason he stayed clear of Internet-related companies in the late 1990s: a lack of earnings. ``There doesn't seem to be much to back up their performance. It's like the dot-com boom all over again.''

Toro Energy Ltd. and U308 Ltd. more than tripled soon after their initial public offerings on the Australian Stock Exchange in March and May. They are among six uranium explorers listed so far this year. Three pending IPOs will help double the number of uranium-related stocks in Australia from a year ago.

Australia has about 40 percent of the world's known uranium reserves and supplies about a fifth of all the metal mined. Exploration companies are gambling that soaring global energy costs and China's plan to expand nuclear energy fourfold by 2020 will attract investors, even though Australia's state governments limit mining of uranium to just three mines.

The Australian Labor Party, which governs in Australia's six states, bans the construction of new uranium mines beyond those three: BHP Billiton's Olympic Dam mine in South Australia, Energy Resources of Australia Ltd.'s Ranger mine in the Northern Territory; and Heathgate Resources' Beverley mine in South Australia. Heathgate is owned by San Diego-based General Atomics.

New Mines?

John Howard, the nation's Liberal-National prime minister, has urged states to end their bans on new mining, and there are signs that he's succeeding. The national opposition Labor Party's energy spokesman, Martin Ferguson, said March 31 the bans' removal should be considered, while South Australia's state Premier Mike Rann already advocates abolishing it.

Paladin Resources Ltd., Australia's biggest uranium explorer, has bypassed the new mining ban in Australia by building the Langer Heinrich mine in Namibia. It's due to begin operating in September. A A$1,000 ($778) investment in Paladin on Jan. 1, 2004, is now worth A$74,000.

Toro soared to A$1.40 three days after it was listed at 25 cents on March 24. U308, named after the uranium oxide that makes up the majority of processed uranium ore known as yellowcake, soared 240 percent on its May 9 debut. Encounter Resources Ltd. shares quadrupled three days after it listed on March 24. A-Cap Resources Ltd. leapt 80 percent on its May 19 listing, InterMet Resources Ltd. jumped 33 percent on its April 20 debut, while Primary Resources Ltd. rose 7.5 percent on its March 8 start.

Canada Too

Existing mining companies are also getting in on the act, further swelling the number or uranium-related companies. Great Western Exploration Ltd. jumped 146 percent on May 4, when it said it would change its name to Uran Ltd. and buy uranium assets in Eastern Europe. Polaris Metals NL and Washington Resources Ltd. gained 21 percent and 15 percent, respectively, on May 11, after saying they'll spin off their uranium assets to form a new company, Northern Uranium Ltd.

Canada has experienced a similar trend. The number of small- cap uranium stocks has doubled in the past year to 90, according to John Wilson, an analyst at Sydney-based Resource Capital Research, in a March quarterly review of the industry. That compares with 65 uranium stocks in Australia, up 96 percent in the past 12 months.

Ottawa-based Ur-Energy Inc., which explores in Nunavut in Canada and Wyoming in the U.S., has jumped 99 percent this year.

Sales to China

Uranium prices have surged almost fourfold in the past three years as countries turn to nuclear power generation. Higher coal, gas and oil prices and pressure to cut greenhouse gas emissions, blamed for global warming, are prompting the switch.

The spot price of uranium was $42.75 a pound on May 17, up from $11 on May 14, 2003, according to industry publication Metal Bulletin.

On April 3, Australia signed an agreement with China permitting uranium sales to the world's fastest-growing major economy and Asia's biggest energy consumer for the first time. Exports may begin within four years.

Still, investors such as Brian Eley are skeptical that the recent surge in uranium-related stocks is justified, given that many explorers have yet to earn a dollar from uranium-related activities.

``This is even worse than the technology bubble in 2000,'' said Sydney-based Eley, who manages about $385 million in small company shares, including mining stocks, at Eley Griffiths Group. ``Of all the uranium listings, I doubt that fewer than half a dozen will ever mine an ounce of uranium. These companies are getting extraordinary valuations based on pure speculation.''

Lap of the Gods

Neill Arthur, executive chairman of Uranium Exploration Australia Ltd., said last month that the timing of his company's first profit was ``in the lap of the geological gods.'' The company's shares are up 148 percent this year.

Barry Dawes, a director of Uranium Exploration, argues that some of the gains are justified given the potential for uranium finds close to existing deposits.

``You only need one significant discovery and the whole lot will take off,'' Dawes said. ``That's likely when you consider the vast tracts of prospective land that haven't been properly explored.''

Uranium Exploration is exploring within 50 kilometers (30 miles) of BHP's Olympic Dam, which holds the world's biggest known uranium deposit.

Serious Game

``It's a game, but a serious one at that,'' said Dawes, who is a founding principal of Martin Place Securities Pty Ltd. in Sydney, which has helped raise A$150 million in mining-related initial public offerings since 2000. ``There are a few ratbags out there, particularly among the later listings, so you have to be careful.''

Wallace Funds' Birch is sticking to existing producers, like Melbourne-based BHP, the world's biggest mining company, and Rio Tinto Group, which controls Energy Resources of Australia.

``The fundamentals for the uranium industry look enticing, but you still need to actually dig the stuff up to make a buck out of it,'' Birch said. ``I'm not so sure how many of these recently listed explorers will ever make it to that stage.''