Australia | Jun 27 2006
By Chris Shaw
Despite continued strength in the uranium price, share prices of exploration focused companies have suffered during the recent equity and commodity market correction.
In its latest report on the uranium sector, smaller resource company research specialist Resource Capital Research suggests that if the current uncertainty in global markets continues the smaller stocks are likely to continue to suffer disproportionately, which is a reflection of the lack of earnings they generate.
This is despite a continued healthy outlook for the uranium price, the report forecasting prices to continue to rise from a current spot price of about US$45/lb to US$54/lb by year’s end and US$60/lb by May next year. The long-term price forecast is US$30/lb, but the analysts suggests there is upside risk to this estimate given as many as 180 new reactors are proposed to be built globally and delays to production increases remain likely.
While the pricing outlook for the metal remains positive, the report suggests the key for investors is to focus on companies with near-term news flow and sufficient cash to fund their development and exploration programs, as while uncertainty breeds volatility, news flow can push prices higher and generate returns for investors.
Relating its expected developments to the Australian market and companies fitting the bill as likely providers of near-term news flow sees several junior players come in for mention. These include both Equinox Resources (EQN) and Omega Corp (OMC), both of which are currently undertaking developing in Zambia. Another is Berkeley Resources (BKY), though its exploration areas are primarily in Spain, while both Redport (RPT) and Nova (NEL) have what the report suggests are interesting prospects in Western Australia.
The report also highlights the significance of the recent Australian-Chinese agreement to free up uranium sales between the two countries given the likely impact of this on the industry in this country. As the report points out, the Chinese are desperate for power to fuel their growth, so supply of energy is going to prove to be of more importance than the price they have to pay to receive the supply.
This is good news for the industry in Australia, as it increases the likelihood of Chinese investment in junior explorers in Australia. There is already evidence of this, with China National Nuclear Corp and Uranex (URX) signing a letter of intent to form a strategic alliance.
The report points out it is not only the Chinese who see potential in the Australian market, with Canadian companies also moving to increase their exploration exposure in Australia. Again there is evidence of this occurring already, with Hindmarsh Resources (HMR) being acquired by Canadian group Mega Uranium.
One impediment to uranium mining in Australia is the three mine policy, but the report indicates there may yet be progress here also. It suggests the Labor party is close to voting to overturn its opposition to new mining as early as next year, adding to the potential for the junior players in the industry to take advantage of the strong current uranium prices on offer.