Merger and acquisition speculation in the resources sector continued overnight with Cameco, the world's no.1 uranium supplier, rumoured (in the AFR) to be preparing a takeover bid for Paladin Resources to boost it's sources of supply. This follows Cameco's announcement last week that their Cigar Lake mine, expected to produce 10% of global uranium production early next year, will now be delayed out until 2011 due to flooding. Shares in PDN raced up 7% in early trade on the back of the news, however have fallen back to be up only 2% after announcing to the ASX that company has ‘had no approach from Cameco’. Irrespective of the rumoured bid, Macquarie Research equities (MRE) remain very bullish on the outlook for uranium in 2007/08 and retain Paladin Resources (PDN) as their top pick in the sector. With the market expected to remain in significant deficit in 2007/08 and significant downside risks to supply side, MRE believe it is hard to see what will stop spot prices going higher. Read on to learn about why the drivers of uranium prices (The uranium spot price hit $125/lb in mid May, its highest nominal and real level on record, up more than twelve-fold from $10/lb in early 2003.) will continue
MRE highlight the three main drivers of this uranium bull market: 1. Supply Between the late 1980s and early this decade secondary supplies hung over the market, resulting in very low prices and inducing little to no investment in uranium exploration and output capacity. Since the late 1980s primary mine supply has not been sufficient to meet demand and so large quantities of non-recyclable secondary supplies were ‘used up’ in filling this gap over this period.
2. Demand The drying up of secondary supply sources and tight uranium market has driven the massive increase in demand for future primary mine supply over the past three years, evidenced by a massive increase in long-term contracting in recent years. Current supply shortage is being exacerbated by speculators/hedge funds entering the market and holding large quantities of uranium (roughly 8-10,000tU is estimated be held off the market). Unlike other metals, the initial boom in the uranium price was not directly tied to China (actual demand from China to date is reportedly negligible), it is more of a traditional underinvestment / tight market related cyclical price boom.
3. Speculative activity Has been playing a big role in the boom in spot prices. On and off-market uranium futures began trading on NYME on 7 May (no physical delivery) - the June 2007 contract is trading at $134.9/lb and the February 2008 contract last traded at $150.0/lb.
Reasons to Buy into the Uranium Story… • Concerns over future supply fuelled by the delays at Cameco’s massive 18mlbpa capacity Cigar Lake project, will keep reactor demand for future mine supply at very high levels in the coming year. • Recent flooding at ERA’s Ranger mine - the world’s second highest producing mine – will reduce supply from the mine significantly in 2008, taking much-needed supply off a market already in deficit. • High levels of reactor procurement of future mine supply is likely to continue to spill over to the spot market • Uranium held by speculators/hedge funds appears to be in tight hands (at current prices). • Producer, consumer and (strategic) government inventory building (China in particular), is likely to keep the market tight in the coming years. • Uranium futures (no physical delivery) are giving bullish guidance as to uranium prices going forward – with the June 2007 contract trading around $135/lb and the early 2008 contracts at $150.0/lb.
Getting Exposure in Australia MRE currently cover two Australian uranium miners - Paladin and ERA - of which MRE currently view Paladin as the preferred exposure to uranium, owing to its exposure to spot price upside.
MLS Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
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