is uranium down for the count?, page-12

URANIUM SECTOR COVERAGE

August 25, 2011

Industry Update


FOCUS POINTS

Outside of general market weakness, what is the worst that could reasonably happen to the global uranium market?

Nothing.


This year we have had the most powerful earthquake to ever hit Japan (9.0 on the Richter scale) and subsequent
tsunami waves of up to 15m in height trigger the largest nuclear accident since the 1986 Chernobyl disaster. A
disaster so great, the International Atomic Energy Agency (IAEA) applied the highest rating of 7 on its
International Nuclear and Radiological Event Scale.



SUPPLY AND DEMAND REMAIN UNBALANCED.



Currently the 440 nuclear reactors in operation require approximately 179 million lbs of U3O8 on an annual basis. However, 2010 production was only 139.5 million lbs of U3O8. The 39.5 million lbs shortfall is largely being made up by the U.S.-Russian Highly Enriched Uranium agreement that downblends highly enriched uranium from Russian nuclear weapons into low enriched uranium used as nuclear fuel. However, given the high cost of this program, it is
widely expected that the program will not be renewed at the end of its 2013 term.

In just over two years time the bulk of the secondary supply will disappear while 62 new nuclear reactors will begin coming online and demand uranium feed. New mine start-ups like Camecos (CCO-TSX) Cigar Lake and mine
expansions like BHP Billitons (BHP-NYSE) Olympic Dam are planned to address the global demand for uranium. However, development delays, suboptimal production results, labour issues or any one of a number of typical supply-side delays could create an unexpected shortage.



VALUES ABOUND IN THE URANIUM SPACE.


With strong fundamentals supporting the case for higher uranium prices and coupled with the fact that there are no reasonable sector-specific negative catalysts on the horizon, there are several values available in the uranium space.



IMPLIED EV/LB VALUATION.


Applying the concept of mean reversion, a market-implied valuation can be derived by applying the average EV/Lb value to the valuation of each constituent company to determine its value if it reverted to the mean.

For example, for 32 company exploration category, the average EV/Lb value is $1.46/lb of U3O8. U3O8 Corp (UWE-TSXV), which is a constituent of the uranium exploration peer group, currently trades at an EV/Lb valuation of
$0.32/lb. Applying the exploration peer average of $1.46/lb to UWEs company-specific metrics yields a market implied, mean-reverting valuation of $0.98/share a significant increase from its last trade of $0.25/share.


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