SOURCE: Resource Capital Research

Resource Capital Research

June 28, 2012 06:00 ET

Resource Capital Research - June Quarter 2012: Global Uranium Companies

Equity Research Report

NEW YORK, NY--(Marketwire - Jun 28, 2012) -

Key Points

Uranium Market:

  • The uranium spot price is US$50.75/lb (June 26).
  • A modest market surplus is expected in 2012 and 2013 and overall a balanced market is expected through 2015.
  • The contract price is US$61.25/lb (May 31) off its recent low of US$60/lb in Feb-Mar 2012.
  • Strong and increasing demand is expected for new nuclear power reactors, especially from China and India, but also the Middle East, Russia and Ukraine.
  • Planned and proposed reactors include 171 in China (new build moratorium lifted), 56 in India, 41 in Russia, 30 in the USA, and 13 in Ukraine.
  • Demand for uranium is expected to increase from around 166mlbspa U3O8 to 226mlbspa by 2020 and 280mlbspa by 2030 (WNA).

Uranium Companies:

  • The Merrill Lynch Uranium Equity Index is down 26% in the last 3 months reflecting general uncertainty in global equity markets.
  • The emergence of strong strategic investor support and acquisition activity in the uranium sector reinforces the midterm positive outlook, including the recent shelf filing by Cameco to raise C$1bn.
  • ERA is up 5% over the past month, and has had positive performance over the past 9 months (+18%). The company is rebuilding value through exploration, operational and corporate initiatives.

Analyst Comments:

"The contract uranium price has started moving up again, reflecting the fact nuclear remains a key aspect of energy policy for many countries including China, India, Russia and the USA. There are currently 489 nuclear energy reactors planned or proposed globally, 7 more than prior to Fukushima and this is expected to drive a large increase in uranium demand mid to long term," said John Wilson, Managing Director of RCR. 

"The near term market outlook for uranium remains finely balanced. While Japan has announced restarts at 2 of its 50 reactors, and more re-starts are anticipated over the next year or so, there remains the potential risk of utility surplus dispositions in the meantime keeping a cap on the spot price," said 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 8 global uranium exploration and development companies, including Canadian listed Paladin Energy Limited (ASX and TSX) and Laramide Resources Limited.

To access the free summary report or to purchase the full comprehensive report, go to www.rcresearch.com.au/reports.

Equity market performance

The Merrill Lynch Uranium Equity Index (a global basket of uranium equities) is down 26% in the past 3 months, and down 11% for the 6 months, having given up its gains earlier in the year.

ERA is up 5% over the past month, and has had positive performance over the past 9 months (+18%). The company is moving off a low base and rebuilding value through exploration, cost cutting and a renewed focus on environmental and social issues.

Paladin has been flat over the past month; the company is continuing to make good progress on operational cost reductions at LHM and KM, though overall performance remains leveraged to the low uranium price. It is a possible takeover candidate with speculation fuelled by Cameco's recent shelf registration to raise up to C$1bn.

Uranium price and market outlook

The uranium spot price is US$50.75/lb. The spot market has been trading in the range of US$50-55/lb over the past 12 months, except for a short upside breakout in November. Immediately prior to the Fukushima accident (11 March 2011), the spot price had been trading at US$67.75/lb (+20%), a 12 month high.

Japan announced 16 June 2012 the first restart of 2 nuclear reactors (one expected to come online July 1, the other July 24). Further restarts are anticipated from the fleet of 50 reactors (all of which had been shut down for maintenance or safety reviews) with additional restarts expected to occur over a 2 year timeframe -- from 2012 to 2014.

Despite the initial restarts, the spot price is expected to remain under pressure near term, reflecting the ongoing impact of reactor shutdowns and closures in Japan and Germany. While there is no active supply into the spot market reported at present, there remains the potential for utility surplus dispositions. The spot market is also impacted by Japanese renegotiation of ongoing delivery contracts for surplus supply.

As such, the demand outlook for the next 6 months appears quiet. The main potential to move the market is possible production delays that lead to producer on-market purchases to meet delivery commitments; to illustrate the point, we note Rio's production in 2011 was down 35% yoy (to 10.6mlbs U3O8) reflecting operational issues at Rossing and Ranger.

Sector fundamentals remain positive in the mid and long term. Over 80 new nuclear power reactors are expected to be commissioned globally by 2017, with 63 currently under construction. There are 489 new reactors planned or proposed (1 June 2012, WNA) which is 7 more than pre Fukushima (482, 2 March 2011). Strong and increasing demand is expected for new nuclear power reactors, especially from China and India, but also the Middle East, Russia and Ukraine. Current planned and proposed reactors include 171 in China (new build moratorium lifted), 56 in India, 41 in Russia, 30 in the USA, and 13 in Ukraine.

The long term contract uranium price is US$61.25/lb (May 31). It has increased from a recent low of US$60/lb in February and March 2012; however, it remains below its pre Fukushima price of US$73.00/lb (28 Feb '11). The recent price upturn represents a positive turning point in the contract market with mid-long term uranium market fundamentals considered sound. Indeed, with delays to new mine supply, and demand set to grow, a market deficit is becoming more likely in the mid to long term.

Demand for uranium is expected to increase from around 166mlbspa U3O8 to 226mlbspa by 2020 and 280mlbspa by 2030 (WNA). This compares with global mine supply of 139mlbs in 2011, and represents a significant gap for new mine supply to fill.

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 (e.g., the large scale Husab project of Extract Resources).

A modest market surplus is expected in 2012 and 2013 and overall a balanced market is expected through 2015. Key factors that could impact the balanced market outlook include disruption and delays to existing and new projects, and the extent of new commercial deals for secondary supply post HEU in 2013.

Buying opportunities continue to emerge driven by perceptions of a floor to the uranium spot price holding at around US$50/lb, and strong strategic investor support and acquisition activity at the large end of the market. Indeed, Cameco filed to raise up to C$1bn (May '12) over the next 25 months, and could see Paladin (and others -- e.g., small caps with large resources/reserves) as a potential target.

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 September Quarter, 2012. 

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

Contact Information

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