Rudi's View | May 25 2007
By Rudi Filapek-Vandyck
Shares of Paladin Resources (PDN) rose from a low $0.04 in January 2004 to beyond $1.00 for the first time in February 2005, a gain of 2500% in a little over a year. By January 2006 they had crossed the $3.00 mark, a gain of another 200% in less than a year. By December of last year they were trading above $9, representing another gain of 200%.
Paladin shares peaked at $10.75 in February this year and then again at $10.80 in April, only to fall back below $8.50, from which point they’ve risen again to above $9.
For the first time in more than three years shareholders have not made any gains on their shares over a five month period.
A similar story applies to shareholders of Energy Resources of Australia (ERA), which is currently trading some 14.5% below its April peak, and to most of the 160 other ASX-listed uranium stocks. In Toronto and New York as well most share prices of uranium producers and developers have retreated in the past weeks.
What is happening with uranium stocks? Has anything fundamentally changed for the sector?
Not really. If anything more and more market insiders and close followers of the industry have come to realise the market is likely to remain much tighter for a much longer time. Taken from that perspective uranium is no different from the likes of iron ore, crude oil and nickel for which average price estimates in the market have been continuously on the rise this year.
Uranium’s spot price certainly has had the experts baffled since late last year. After entering calendar 2007 on an already higher than expected US$75/lb, spot uranium has made a few giant leaps to a preliminary peak of US$122/lb this week, up 62.6% in five months after doubling in price in each of the two previous calendar years.
If current market indications are any guide spot uranium will reach US$150/lb between now and December. If achieved, this would mean the weekly spot price has once again doubled within twelve months.
According to sources inside the industry, this scenario is likely to unfold sooner rather than later as spot uranium seems poised to record another leap forward in the next few weeks. This could possibly take the weekly spot price as high as US$140/lb in June.
Within this context, last week’s price increase by US$2 to US$122/lb would have come as a minor disappointment to participants in the industry. Apparently several offers in the US market at around US$125/lb failed to find a buyer while one small transaction was concluded at US$122/lb during the week.
Two public auctions in two weeks have the potential to push spot uranium to new record highs. Firstly there is the monthly auction of 100,000 lb U3O8 (yellow cake or uranium concentrate) by Corpus Christi, Texas based and privately held Mestena. It is believed this month all bids are due by May 30. The Mestena auctions have been responsible for solving several deadlock situations between buyers and sellers in the first months of 2007.
This month the Mestena auction is competing with an unnamed hedge fund which is believed to have approached a number of potential buyers and invited them to submit offers by June 1. The fund is auctioning 200,000 lb U3O8 and 100 metric tons UF6 (uranium hexafluoride).
The positive prospects for uranium producers were also highlighted at a Rio Tinto presentation to securities analysts in London this week. Both the slides and a webcast of the presentation are available on the RioTinto.com website.
The company reiterated its intention to potentially double its global production in the next five years while still expecting the market to remain in deficit until at least 2012.
A recent presentation by industry service provider Nukem goes even further. The industry experts believe market fundamentals have shifted even more in favour of uranium producers recently, a situation that may not change for another ten years.
Nukem sees increasing demand for uranium as the world’s focus on global warming and more efficient energy usage intensifies, while producers need time to ramp up new mines and extend their current programs. Delays and production shortfalls are more norm than exception, the experts at Nukem argue, pointing out the flooded Cigar Lake project could easily be delayed for three to five years (instead of the two years as stated by operator Cameco). This would have clear negative ramifications for buyers of uranium in the years ahead.
Cigar Lake is the single most important known new source of uranium in the world. The potential loss of production from the project in 2009 exceeds all current scheduled additional supply for the year, and not just in Canada but globally.
Nukem believes demand for uranium is likely to exceed the so-called high case projections by the World Nuclear Association whose estimates are used by securities analysts worldwide.
The presentation suggests supply and demand are unlikely to reach a balance for many years to come.
Whether all this means that share prices of every company with a vague connection to uranium will continue to soar is doubtful. Some market commentators believe part of the hot money has left the sector this year as momentum slowed and further appreciation of share prices had become less obvious.
Others believe investors have become more knowledgeable and they have started to differentiate between likely winners and losers in the sector. The fact that Cameco shares are trading near their all time high on the Toronto Stock Exchange could be interpreted as a sign of this.
Probably of equal importance has been the fact that mainstream stock brokers have sort of rediscovered the sector over the past nine months. Apart from revealing a wide variety in opinions and views, with corresponding large differences in price projections, reports issued by these experts have also shown investors further upside for share prices does come with limits.
As an example of this, Deutsche Bank analysts upgraded Paladin Resources to Buy this week with a price target of $9.73 arguing paying around 1.7 times Net Present Value seemed appropriate for a company such as Paladin.
Some commentators believe investors largely dismiss these NPV based calculations these days as the usage of long term product prices of around US$45/lb has become questionable with experts such as Nukem anticipating another ten years of global supply deficits.
But even looked upon from a pure price/earnings ratio point of view it is difficult to argue that Paladin shares are cheap these days. At Monday’s $8.76, Deutsche Bank believes the shares traded on an estimated FY08 P/E multiple of 31 (forecast EPS $0.36) and a FY09 multiple of 18 (forecast EPS $0.56).
All of a sudden, a share price of $15, or even $12, as widely speculated only a few months ago, seems a long way off. Many an explorer is trading at higher resource valuations than both Paladin and ERA.
It should come as no surprise to anyone if share prices of most uranium stocks will fail to keep pace with further rises in the spot price from here on. The real challenge will come when the weekly spot price stops rising, though that may not happen for a while still.
