HERE’S a strange thing: investors have reaped huge windfalls this year on punting energy stocks, but those pinning their faith on uranium have generally been burnt. The Metal Detective, by Stephen Bell
The nuclear fuel has definitely been the poor cousin of the energy patch in 2008.
At around $US59 per pound, spot uranium prices are less than half their peak levels from June 2007, a rapid deflation that has taken the wind out of quite a few uranium rock kickers listed on the Australian Securities Exchange.
The hot energy money has moved into oil, gas (especially those molecules derived from coal seams) and thermal coal.
The Metal Detective always felt that uranium was in bubble territory last year.
But the pace and extent of the uranium price plunge took him by surprise, given that the world is supposedly being gripped by an energy crisis that has put a rocket under fossil fuel prices.
Mind you, perhaps we shouldn’t really be shocked, as spot uranium is still a thinly traded market, so it doesn’t take much to tip over the apple cart.
Ironically in this instance, it is the activities of an emerging Australian miner, Perth-based Paladin Resources, which have contributed to uranium’s woes.
Deutsche Bank notes that Paladin’s successful ramp-up of its Langer Heinrich mine in Namibia helped ease short-term supply fears, forcing the spot price lower.
“The shorter-term market appears to be relatively well-supplied,” the bank says in its latest uranium sector report.
“This has been achieved through lower-than-expected spot procurement, the success of Paladin and other new entrants to the market.”
But DB believes there is a light at the end of the tunnel for uranium true believers, namely the current spot price should be the low point of the current downturn.
The bank notes reports that two power utilities are seeking uranium in the spot market (one for 100,000 pounds and the other for 300,000 pounds), and that they may “have found suppliers only willing to offer at or above the $60 level”.
“We believe that continual supply issues and the likelihood of increased demand from utilities should drive the spot price higher in 3Q 2008.”
All very well, but will that firmer price rise be sustained in the longer term?
In such a thin market won’t better spot prices suck out more mine supply and cap price increases?
Probably, thinks MD.
But bullish Deutsche Bank has several arguments to explain away that possibility, most of them demand-driven.
“We believe that the world is on the verge of a uranium renaissance, and in our opinion, the financial markets continue to underestimate the potential for a rapid increase in uranium demand going forward,” the bank says.
Much of its optimism stems from an International Energy Agency report from June 6 that outlined “desired energy mix scenarios” for 2050.
The report has the objective of reducing carbon emissions to 2005 levels (ACT scenario), with an upside target of reducing 2050 emissions to half current levels (BLUE Scenario).
According to DB, the IEA estimates that between 24 and 32 new 100MW nuclear reactors will need to be built each year between 2010 and 2050.
This equates to between 960 and 1280 new reactors, in addition to the 448 reactors in operation.
Using the IEA’s targets, DB estimates that uranium demand could increase by 215% under the ACT Scenario, and by 290% under the BLUE scenario, to 243,000 tonnes per annum and 300,000tpa of uranium oxide respectively, versus current demand of around 77,000tpa.
In the broker’s opinion, the biggest impediment to achieving the IEA’s targets is the “potential inability of uranium supply to respond to a likely spike in demand from 2015 onwards”.
Hang on, cries MD.
Isn’t 2015 about when BHP Billiton’s long-mooted Olympic Dam expansion hits the market, supposed trebling its uranium output?
The expansion, if it finally proceeds, may deliver an additional 15,000tpa or around 20% of new supply.
But DB reckons that, under the IEA’s more drastic BLUE scenario, “another 15 Olympic Dam sized mines would be required by 2050”.
So the nugget of good news for all those uranium rock kickers is that supply will lag demand in the long term.
Mind you, it does require a few leaps of faith.
The IEA said that is mindful of the “numerous issues” that need to be overcome in meeting its emission targets, such as the NIMBY (not in my backyard) attitude; the need to boost the numbers of technical graduates; and resolving questions on the availability of “geologically stable sites for nuclear reactors or waste storage”.
If you can live with those caveats, maybe the next few months will be a good time to stock up on uranium shares.
Aside from Paladin and ERA (both rated as buys), DB believes a “handful of advanced explorers may benefit from a potential price increase”.
These are: Marathon Resources and Uranex (both buys); while un-rated stocks mentioned are A-Cap Resources, Alliance Resources, Bannerman Resources, Extract Resources, and Mantra Resources.
Going through this list is an interesting exercise.
The worst performers this year are DB’s two buys, Marathon and Uranex, which are down roughly 30% and 50% respectively.
Mantra, in contrast, is a surprise bolter: up roughly 50% for the year.
The moral of the story: if you want to punt uranium, make sure you pick the right stock.
EXT Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
(20min delay)