SOURCE: Resource Capital Research

Resource Capital Research

December 16, 2011 06:00 ET

Resource Capital Research -- December Quarter 2011: Global Uranium Companies

Equity Research Report

DENVER, CO--(Marketwire - Dec 16, 2011) -

Key Points

Uranium Market:

  • The uranium spot price is US$52.50/lb (Dec 9). The spot market has been trading in the range of US$51-53/lb, except for a short breakout in November.
  • The dynamics driving the near term outlook remain dominated by the flow-on effects of Fukushima, including Germany's decision to close reactors.
  • Uranium traders suggest caution going into 1H12, with potential for utility surplus inventory dispositions to remain a feature of the market. The spot uranium price is expected to trade around the low US$50s/lb 1Q12 and possibly dip below.
  • The long term uranium market fundamentals are considered solid, with growth in nuclear power reactors expected, particularly from China and India. The contract price is US$62.50/lb.
  • Over 84 new nuclear power reactors are expected to be commissioned globally by 2017, with 62 currently under construction and another 499 planned or proposed.

Uranium Companies:

  • The Merrill Lynch Uranium Equity Index (a global basket of uranium equities) is down 2% over the past month, down 7% over 3 months and down 54% over the past 12 months (to Dec 7).
  • The recent emergence of strong strategic investor support and acquisition activity in the uranium sector reinforces the midterm positive outlook, viz., Hathor, ERA and Extract.
  • There is potential for more M&A activity targeting high quality, strategic projects; eg, Cameco remains cashed up and an active suitor.

Analyst Comments:

"The sector themes have changed little in the past 6 months. There continues to be concerns over utility (Japanese and German) surplus uranium dispositions. Broader equity market concerns persist as well, in particular the economic outlook for the USA and sovereign debt issues in Europe. However, the recent emergence of strong strategic investor support and acquisition activity in the uranium sector reinforces the midterm positive outlook for high quality, strategic assets," said John Wilson, Managing Director of RCR.

"The key lesson from Japan's nuclear crisis points to the need for, and benefit of, greater transparency and accountability of democratic governments and their institutions, and stricter oversight of government agencies in general; in this case nuclear agencies specifically," said John Wilson.

Resource Capital Research ("RCR"), an equity research company which focuses on small and mid size resource companies, today launched its major quarterly research report covering 10 global uranium exploration and development companies, including Hathor Exploration Limited and Laramide Resources Limited.

To access the free summary report or to purchase the full comprehensive report, go to www.rcresearch.com.au/reports. RCR also publishes gold, iron ore, and copper sector reports.

Equity market performance

In the past month, the uranium majors have had mixed share price performance: Cameco (CCO) is down 13% (3 month performance -13%), Denison Mines (DML) is down 4% (3 month performance +1%), Uranium One (UUU) down 12% (3 month performance +6%), Energy Resources of Australia (ERA) down 22% (3 month performance -41%), Extract Resources (EXT) up 5% (3 month performance +3%), and Paladin (PDN) up 22% (3 month performance -6%) (performance to Dec 7).

The global uranium majors have significantly underperformed the broader share market over the past 12 months largely due to set backs following Fukushima. The Canadian majors are down around 50% in the past 12 months. In Australia, the worst performer has been ERA, down 82% over the past 12 months, the decline exacerbated by operational problems at Ranger (ERA). PDN is down 66%, its decline exacerbated by ramp-up delays and higher cost outlook, particularly at Kayelekera (PDN).

The Merrill Lynch Uranium Equity Index (a global basket of uranium equities) is down 2% over the past month, down 7% over 3 months and down 54% over the past 12 months. The sector has faced near term uranium price uncertainty since the March nuclear crisis in Japan. Sector performance has also been impacted by broader global equity market volatility resulting from slow US economic activity and ongoing sovereign debt issues in the advanced economies.

Uranium price and market outlook

The uranium spot price is US$52.50/lb.

Immediately prior to the Japanese earthquake on 11 March, the spot price had been trading at US$67.75/lb, a 12 month high.

The dynamics driving the near term sector outlook continue to be dominated by the aftermath of Fukushima, including Germany's decision to close reactors and the potential for disposal of surplus utility inventory. The spot market has been trading in the range of US$51-53/lb recently, except for a short breakout in November. Traders indicate they remain cautious going into 1H12.

Nonetheless, buying opportunities continue to emerge driven by perceptions of a floor to the uranium spot price holding at around US$50/lb, and the recent emergence of strong strategic investor support and acquisition activity at the large end of the market, viz.,

1. Rio Tinto investing around US$1bn, A$342m in the ERA rights issue and the acquisition of Hathor Exploration for around C$654m (assuming 100% acceptance). The HAT acquisition follows a bidding war with Cameco and coincides with a resource upgrade at Roughrider and release of the PFS.
2. There is also the anticipated bid for Extract Resources by CGNPC, which prompted Extract to enter into a trading halt (8 Dec). Extract received its mining licence for Husab Nov '11 and now has all permits in place to commence project development.

Sector fundamentals appear positive in the mid and long term. Over 84 new nuclear power reactors are expected to be commissioned globally by 2017, with 62 currently under construction. There are 499 new reactors planned or proposed (1 Dec, WNA), including 171 in China, 57 in India, 44 in Russia, 34 in the USA, and 13 in Ukraine.

The contract uranium price is US$62.50/lb (30 Nov). It has drifted down from US$64.50/lb (31 August), falling about US$0.50/lb per month. While it may trend a little weaker in the near term, we expect the contract price to remain around the US$60-70/lb mark. This level should support development decisions at a number of advanced uranium development projects, particularly in Namibia, eg the large scale Husab project of Extract Resources.

Events of the past 3 months include:

Olympic Dam is looking to expand production to 42mlbspa U3O8 by 2025. Australian state and federal government environment approvals for the expansion were received Oct '11 and BHP has subsequently approved US$1.2bn in pre-commitment expenditure for long-lead items ahead of a formal Board decision to approve the expansion expected mid 2012. Stage 1 expansion expected 2013 (to 5,000tpa U3O8, up 600tpa). BHP intends to increase uranium output at Olympic Dam from around 4.5ktpa to 17kt over 11 years, plus an additional 2kt of U3O8 to be extracted from copper concentrate (for a total of 19ktpa, 42mlbspa). WNA reference case projections indicate the mine could account for ~20% of global uranium mine supply by 2025.

December 2011: The Australian government approved the sale of Australian uranium to India reversing a long term ban, a move that paves the way for the sale of long term uranium contracts and should help underpin the development of Olympic Dam.

About Resource Capital Research

Resource Capital Research ("RCR") (www.rcresearch.com.au) was founded in 2004 and is based in Sydney. RCR provides investors with in-depth reports on current investment opportunities in the mining sector both in Australia and globally. The focus is on small and mid cap resource companies, within the gold and uranium sectors, ranging from exploration stage through development and production. John Wilson the principal of the firm and analyst has over twelve years' experience analysing mining companies in Sydney and on Wall Street including for major investment banks.

The report is available at www.rcresearch.com.au. The next Uranium Sector Review will be published in the March Quarter, 2012.

Abbreviations: WNA -- World Nuclear Association, ktpa -- thousand tonnes per annum, lb -- pound, Mlb pa -- million pounds per annum, U3O8 -- uranium oxide.

Contact Information

  • For further information please contact:
    John Wilson
    Analyst
    Resource Capital Research
    Phone: (+61- 2) 9252 9405
    Email: Email Contact