foster brokers note ext price target $10.80

Uranium price increase creating opportunities in well placed exploration companies.

BUY EXT PT $10.80 (Price: $6.94; Market Cap: $1.68b)

-The recent rally in uranium stocks in the past few days is attributed, in our view, primarily to the sustained creeping of the uranium spot price since August 2010. The U308; price has increased 15% from US$42/lb in August 2010 to the current level of US$48.25/lb.

Spot Uranium Price
Source: Bloomberg

-China's latest official objective of achieving 5% of total electricity from nuclear power by 2020 has given rise to a significant ramp up of nuclear reactors. An estimated ~78 gigawatts of nuclear energy needs to built in the next ten years. The magnitude of the expansion in
nuclear power in China is enormous. Currently there are:

- 11 reactors in operation (8,602 MWe);
- 16 reactors under construction (15 GWe in new capacity);
- 250+ planned new reactors.

-No doubt there is a scramble to secure long term contracts for uranium oxide to fuel the reactors. However, with the spot uranium price below its long term average this provides, in our view, an attractive buying opportunity for the Chinese. According to Trade Statistics, Chinese uranium imports for the year up to August 2010 have been 2.5x higher than the same time the previous year (9,890tU vs 2,853tU).

China Reactor Forecast
Source: UxC

-The stocks we favour in the current environment are the uranium exploration companies,most notably Extract Resources (EXT), Peninsula Minerals (PEN) and UraniumSA (USA).

-Energy Resources of Australia (ERA) we continue to view as the laggard and Paladin Ltd (PDN)we have downgraded our recommendation from HOLD to SELL.

-Extract Resources (EXT) - Price $6.94; M Cap $1.68b; Buy (PT $10.80)

EXT, with its vast uranium reserve in Namibia, is poised to become one of the top producers of uranium oxide globally. The recent resource upgrade has allowed for more accurate mine planning and a more definitive and bankable feasibility study.

Our DCF based valuation for EXT is $10.22/share and our one year-forward valuation is $10.83/share. Our EXT valuation is derived using a DCF for Zones 1 & 2 of Rossing South where a 267mlb Resource exists and valuing the target resources by applying a multiple of US$5/lb of uranium in the ground (using the midpoint of the exploration target of 235mlb).

The catalysts remain the DFS due 4QCY11 and further resource upgrades expected 1QCY11.

http://www.fostock.com.au/talkingpoint/Uranium101019.pdf

With thanks to CEB2 on the Uranium thread.