uranium price rally at risk of petering out

Uranium price rally at risk of petering out

PUBLISHED 14 Jan 2011
Angela Macdonald-Smith

Uranium spot prices climbed again last week to about $US65 per pound after an unusually active start to the trading year, but Deutsche Bank has warned that prices are being driven by a short-term squeeze and the rally may peter out beyond $US75 per pound.

Deutsche is forecasting average term prices this year of just $US65 per pound, signalling limited upside from current levels. It expects a supply surplus of 10 million pounds in 2011, falling only slightly to 8 million pounds next year, with the market remaining in excess until 2014.

"We see limited upside beyond $US75 per pound as we expect selling to emerge from investors, producers and potentially the US Department of Energy," Deutsche analysts Paul Young and Ben Wilson said in a note to clients.

The analysts favour Energy Resources of Australia as their top pick among uranium stocks, ahead of Paladin Energy and Extract. Rio Tinto-controlled ERA is trading at just 0.7 times net present value and 19 times estimated 2011 earnings per share, declining to 10 times in 2012, Deutsche estimates.

Deutsche rates ERA a "buy", but has a "hold" on Extract and a "sell" on Paladin, whose 2011 production guidance of 7 million pounds "appears a stretched target".

The 50 per cent gain in uranium oxide spot prices in the second half of 2010 has led to several analysts raising their forecasts for 2011 prices, but many still expect only limited, if any, increases from current levels.

Deutsche said the global market should tighten in 2013-14 with the expiry of the HEU agreement on uranium supply between the US's USEC Inc and Russia's Tekhsnabexport (Tenex), which will coincide with a big lift in Chinese generating capacity.

As a result, it is forecasting an increase in the term price to $US75 per pound by 2013 but expects a surplus to return from 2015 onwards as big projects such as Cameco's Cigar Lake venture, Extract Resources' Husab project in Namibia and Areva's Imouaren project in Niger reach full production.

Deutsche is also expecting BHP Billiton's Olympic Dam expansion to ramp up around 2019-2020, reaching design capacity of about 40 million pounds per year by 2025.

The Australian Financial Review

http://www.afr.com/p/business/resources/uranium_price_rally_at_risk_of_petering_ypGSG8TVZPxXD6IQ9z93lI?hl