Who Will Fill the 24 Million Pound Uranium Supply Gap?: David...

Who Will Fill the 24 Million Pound Uranium Supply Gap?: David Talbot
The Energy Report | Aug. 14, 2012, 4:00 AM | 477 |

........The current supply deficit should put upward pressure on prices, eventually making projects like Kintyre more feasible. We'll be lucky if annual uranium production reaches 180 Mlb by 2020. And that would require sustained spot prices of $70-80/lb. Our current forecasts for next year and 2014 are $70/lb and $67/lb, with a long-term forecast is $65/lb.
TER: How have the uranium stocks performed this year?
DT: Equities in general have really dropped off since the beginning of the year. As a group, uranium stocks are down about 30% year-to-date and much of the downward action occurring within the last 3-months. These companies have been under the same pressure as the broader market, with low liquidity and European debt worries. In the long term, I think the producers will outperform developers. But over the past few weeks we've seen some movement in the smaller stocks, with no clear winner between producers, developers or explorers. But however harsh the market is, you have to pick good stories, and right now we have a couple of suggestions for each of those categories.
TER: Paladin Energy has been showing some pretty exciting production results, but the stock has continued to languish and now there are some takeover rumors floating around. What's the situation there?
DT: Paladin is our top producer pick. We have a Buy rating on the stock with a $2.65 target price. Right now, we like what we see. We think the company has really turned the corner with good production numbers, a strong outlook, resource growth, advancement of the pipeline, asset sales and strategic alliances that are expected shortly. Those alliances could not only improve the balance sheet, but it could also add value to the projects that are still in the pipeline.
A Bloomberg article last month suggested that Paladin is a takeover target at these levels. We think that potential acquirers could include Cameco, Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK), Uranium One Inc. (UUU:TSX) or other senior miners looking to get into the uranium space. We have a Buy rating on Uranium One and a $4.50 target price. But I think that Paladin is going to make the first move with strategic alliances before anything else happens.
TER: What do you think is the most likely strategic alliance?
DT: There is probably going to be a JV at Mount Isa in Queensland, Australia. That's a potentially large operation that could produce about 5 Mlb annually but it's going to have a big price tag, probably well over $500M. I could see Paladin selling a minority position in this project to raise upwards of $350M, bringing in a partner that's responsible for its share of capex. That would help decrease financing risks and the cash generated could really take a bite out of Paladin's debt. The other possibility here is a strategic alliance to tap some value at the mine level. Kayelekera and Langer Heinrich are two of the very few uranium mines built anywhere in the world over the last 20 years and are now running at or near capacity. I'm sure there's an Asian utility somewhere that would jump at the opportunity to share ownership of one of these mines through an offtake agreement and have access to production over the next 25-30 years.......