See below AGS WHE UTO OMC get a mention as buy recommendations.
Weekly Insights From The FN Arena News Desk
Tuesday, 23 January 2007 Source: FN Arena Uranium Market Now Really Heating Up
By Rudi Filapek-Vandyck
Who knows something about remediation problems at Canada's Cigar Lake uranium project the rest of us have yet to find out?
On Monday the share price of the world's largest uranium miner, Cameco, also the responsible operator of the Cigar Lake project, lost 5% in value amidst unusually high and frenetic trading volumes. It would appear that market rumours about possible further delays in getting the Cigar Lake project up and running were responsible for the sudden mayhem.
For Cameco shareholders it proved to be the second worst experience -ever!- beaten only by the 23rd of October last year when management announced its most promising uranium venture for the foreseeable future had been flooded from the inside.
Market speculation about ongoing and deteriorating problems in fixing Cigar Lake has been rife ever since. Many an expert believes management's admission so far that production at Cigar Lake will only be delayed by twelve months is likely to be too optimistic. Some experts believe it is not inconceivable the project is already lost for ever.
The latter would be a minor disaster for nuclear utilities in the short term as producers are already struggling to keep up with growing demand - and growing interest from investors and speculators. The spot price for uranium oxide, U3O8, doubled throughout 2006 thanks to a few jumps late in the year as the consequences of the Cigar Lake accident sunk in.
Cigar Lake contains reserves of 232 million pounds of uranium with a gross market value of US$16.7bn, based on the current price of the raw material used in nuclear reactor fuel. The project was originally scheduled to open in early 2008 with Cameco predicting the mine would supply as much as 10% of the world's uranium once it reached full production in 2010.
No surprise thus that in the weeks following the announcement of the flooding spot uranium hit a record high of US$72/lb. However, the price hasn't moved in five weeks. This is predominantly so because willing buyers have difficulties in finding anyone who's prepared to sell. According to industry consultant TradeTech not one single transaction was recorded in the week that ended on Friday January 19.
Seems nobody believes Cameco management it will only take one year to solve all the problems at the Cigar Lake project. It certainly doesn't help that management had to issue a statement in December acknowledging "drilling through the Athabasca sandstone has been more challenging than anticipated" resulting in the remediation team drilling only one hole and nearly completing another one before the annual Christmas break.
About 18 holes in total are planned including four for mine dewatering. The company believes it will be in a better position to evaluate where it stands when the first phase of remediation is completed after the first concrete is poured into these holes.
On Monday, a spokesperson for the company tried to allay market concerns by stating: "We are drilling holes and pouring concrete into the underground areas there as we had planned." In other words, everything is still running according to schedule.
Cameco intends to update the market before the end of January about progress and status at Cigar Lake.
Meanwhile, speculation that the mine's development would be delayed indefinitely is "absolutely untrue", according to company spokesperson Lyle Krahn (as quoted by a Bloomberg journalist).
None of all this, however, explains why a company with the market size of Cameco -US$13bn- lost US$771m in market capitalisation in one single day - without any "news".
Uranium has been among the hottest topics of discussion on global message boards and investor chatrooms over the past few years and the past week has certainly been no exception. A joint investigation by FNArena and Stockinterview.com has led to the discovery of one posting that attracted our attention:
"Rumour out of Australia trading desk this morning (full disclosure - I am close to an institutional trader) that Cigar lake may be scratched all together. We know that Cameco is giving an update to the market in early Tuesday on the project."
The above message was posted on Monday on Canada's StockHouse.com message board. We have been unable to find any recent report issued by an institutional trader in Sydney. Instead, several brokerages picked up the news after the event, on Tuesday morning.
One of them summarised the situation as follows: "Cameco's Cigar Lake project was once again under the spotlight last night. The mine was flooded back in October and there is huge speculation that the recommencement will take longer than the year slated by management.
[...]
"The future of the project has to be seriously jeopardized post flooding. Mining is technical at best, highly radioactive environment and that is after they extract and treat the contaminated water and make sure that a disaster like this won't happen again.
"Demand side pressure is set to drive the uranium spot price further north in the medium term even before we consider the limitations of the supply side.
[...]
"In the short term the market will react to any supply side event and given that this mine is one of the world's biggest, expect a great deal more volatility in the short term. Buy ERA & PDN for cashflows, OMC, AGS, WHE & UTO for exploration upside."
Uranium sector analyst John Wilson at Resource Capital Research already stated in December: "Cameco indicates it is confident it will be able to complete development of the project, though industry sources suggest this is unlikely before 2010."
When asked about this in a telephone conversation on Tuesday, Wilson said he stands by his source and the information provided to him.
Following the 5% decline in Cameco's share price, shares of Australian uranium companies soared while the broader market struggled. Expect more of the same if Cameco fails to satisfy investor demand for some concrete guidelines on Cigar Lake over the next two weeks.
The company will issue a media release before the end of January. A market update on its December quarter performance, and operational matters, is scheduled for February 6 with a teleconference the following day.
Get your safety belts on!
(Story includes contributions by James Finch and Julie Ickes from Stockinterview.com and Greg Peel from FNArena)
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