sorting the uranium winners

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Sorting the uranium winners

Wed, 26 Jul 2006 18:00 | © Moneyweb

It’s not easy, chopping the global uranium oxide story into a clear picture, but it’s a story catching the imagination of increasing numbers of investors. After years of squatting in the doldrums, uranium oxide, destined for eventual use in nuclear power reactors, has taken off on the back of the crude oil crisis.

In the next few decades, dozens of new reactors are going to be built to reduce dependence on crude oil. Over the past five years or so, investors have already taken the spot price of uranium oxide from $5 a pound to close to $50 a pound. But for investors seeking exposure to the uranium oxide story via listed stocks, the choices are far from simple.

The scramble to invest in the sector is well underway. Alongside the established producers, there are many potential emerging uranium oxide producers, and some potential deposits that the market has hardly heard of, such as those in the Democratic Republic of the Congo. For the meantime, investors need to start by chopping the established producers into some kind of a recognisable table.

The world’s No 1 producer of uranium oxide is Canada-based Cameco, with 19% of global output. Cameco’s principal interests comprise Canada’s McArthur River and Cigar Lake, Inkai in Kazakhstan, and the US’s Crow Butte and Smith Ranch/Highland operations. Rio Tinto, one of the world’s biggest diversified resources entities, along with BHP Billiton and Anglo American, rates as No 2 world producer of uranium oxide, thanks to its stake in Energy Resources of Australia (ERA), and its 69% interest in the Rossing mine in Namibia.

France-based Areva is No 3, and like Cameco, has interests in Canada’s McArthur River and Cigar Lake. KazAtomProm rates as No 4 producer, thanks to its interest, like Cameco, in Inkai. BHP Billiton is next on the list, followed by TVEL (Russia), Navoi (Uzbekistan), Vostgok (Ukraine), Nufcor (South Africa) and CNNC (China). There are also lesser-known producers of uranium oxide, such as AngloGold Ashanti, which produces about 1000 tons a year as a by-product from its gold mines in the Vaal River district in South Africa.

For comparison, ERA’s Ranger Mine rates as the world’s third largest uranium oxide producer, pushing out 6000 tons a year. Among the heavyweights, BHP Billiton deserves special mention due to its huge Olympic Dam operation in Australia, which is run primarily as a copper producer. Olympic Dam is also owner of by far the biggest uranium oxide reserves in the world.

BHP Billiton, however, ranks as the world’s biggest diversified resources stock; its profits from uranium oxide tend to be heavily “diluted” by its other interests. Some of the other big producers are simply not listed. However, Cameco, the world’s No 1 producer of uranium oxide, is not only focused, but is also listed, in Toronto. The stock, currently quoted close to C$44 a share, could be worth up to C$55 within 12 months, according to recent analysis by RBC Capital Markets, and could be trading as high as C$90 within three years.

Australia holds about one-third of the world’s known uranium oxide reserves, and will remain a big focus for investors. The country maintains a “three only” mine policy in respect of uranium operations, but this is widely expected to be relaxed during 2007, in order to satisfy growing demand for uranium oxide from China and India. After Olympic Dam and ERA’s Ranger, Australia’s third existing producer is the Beverly Mine, owned by Heathgate Resources.

Nascent producers of uranium oxide include sxr Uranium One (listed in Johannesburg and Toronto), UrAsia, International Uranium Corp, Paladin, Aurora Energy, Uranium Power Corp, and Western Prospector. A number of these companies have compelling stories and have become darlings on certain stock exchanges.

In a recent presentation, sxr Uranium One said it holds some 62m pounds of uranium oxide reserves at its interests in South Africa and Australia. To put that in perspective, Olympic Dam holds about 1 billion pounds of uranium oxide reserves. Specialist investors have also started to focus on Australian-listed companies holding interests in uranium oxide reserves, which may be freed up for mining next year.

Here, the names include Paladin (with interests in Africa and Australia), Berkeley (Spain), Valhalla Uranium (Australia), Summit (multiple deposits in Australia), Nova Energy (Australia and Guinea), Redport (Western Australia) and Marathon Resources (South Australia).

There have already been flurries of merger & acquisition activity within the sector; in the past week alone, Canada-listed Mega Uranium (which already acquired Hindmarsh Resources earlier this year), returned for Redport. Crosby Partners, the investment bank which missed out on Tethyan Copper, made an offer for Marathon Resources; and now Paladin Resources is bidding for Valhalla Uranium (a recent spin-off from Resolute Mining). In South Africa, various junior stocks are also highlighting uranium oxide potential, not least Simmer & Jack.

For investors who want it all, earlier this month Geiger Counter, an investment company initially focused on uranium oxide and nuclear markets, was admitted to the international board of the London Stock Exchange.