A meltdown in uranium prices has left miners in the sector attractive for long-term investors, an analyst has argued.
The spot price for the radioactive metal has dropped by 22 per cent since May to around £25 a pound, but mining specialist RFC Ambrian has estimated that its price will hit a long-term average of more than £40 a pound by 2015.
‘This price compression merely serves to reinforce our two to five-year view of the strength in the sector,’ said Duncan Hughes, head of research at RFC Ambrian, ‘as development projects remain on hold waiting for an incentive from the spot price to continue development.’
He attributed the current depression to disappointment from the markets that Japan’s resumption of nuclear activities has not been as rapid as hoped, leading to the stockpiling of uranium.
However, Hughes maintained his faith in the basic supply and demand dynamics for the element. For him, growth from China will be key. ‘The chairman of China National Nuclear Corp has publicly stated that the company intends to speed up uranium exploration,’ noted Hughes. The conglomerate presently has 30 new reactors planned or under construction.
In addition, Hughes observed that the conclusion in 2013 of the ‘Megatons to Megawatts’ programme, under which weapons-grade uranium is diluted into nuclear fuel, would boost prices.
Of the listed uranium miners, Hughes tipped Deep Yellow (ASX:DYL) as ‘significantly undervalued’. Its enterprise value – which takes into account the firm’s debt – relative to its resource base is less than half that of its peer average.
‘Deep Yellow has been sold down heavily over the past 12 months on the back of the general malaise in the uranium sector and an expectation of a discounted equity raise,’ explained Hughes. ‘The equity raise is complete and secured a strong cornerstone investor.’
Hughes also pointed to the supportive attitude of Namibia’s government, where the miner’s operations are based, the inexpensively accessible nature of its deposits, and its proximity to water resources.
On the mining industry more broadly, Hughes expressed equal confidence. ‘The recent softening of commodity prices is merely a bump in the road and the so-called commodity super cycle is set to continue, albeit at a more subdued rate, for many years to come,’ he commented.
He pinned the slowdown this year on a supply glut, but warned that ‘this still creates much faster depletion of resources and a higher ongoing need for investment in the exploration and development of replacement resources each year’.
In contrast Henry Thornton, co-manager of the Establishment Investment Trust, has sounded a more cautious note. ‘Much slower economic growth in China and a collapse in the growth in demand for commodities - if not an outright decline - remains the base case,’ he remarked.
He drew on a study by Forensic Asia, a Hong Kong based researcher, of the 2011 published accounts of Chinese companies. This revealed their highly leveraged balance sheets and poor cash flow. ‘The normal reaction of management to this state of affairs is to improve cash flow, reduce liabilities and reduce or defer capital expenditure,’ said Thornton. ‘This has clear implications for an economy where gross fixed capital formation accounts for roughly half the gross domestic product.’
His investment trust favours investments in countries such as the Philippines and Thailand that are spending on infrastructure projects.
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