Rudi's View | Jun 28 2007
This story was first published two days ago in the form of an email sent to registered FNArena readers.
By Rudi Filapek-Vandyck
Last Friday something remarkable happened in Australia.
Uranium explorer Uranoz Ltd (URO) made its debut on the Australian stock exchange and its share price did not quadruple or even double in price. Uranoz shares closed lower on its first day of trading. The shares have been further losing value since, closing at $0.17 on Tuesday, 15% below their IPO price of $0.20.
Admittedly, the Australian share market as a whole has had a rough ride recently as surging bond yields caused havoc and with renewed fears that US lenders may face bigger than expected problems because of sub-prime woes.
But share prices of other uranium companies have been in steadfastly decline as well. Paladin Resources (PDN), the penultimate symbol of the new era for yellow cake, is back at $8.55 (some 21% below its peak of $10.80) and shares of Energy Resources of Australia (ERA) seem to have difficulties to stay above $20 (some 30% below its peak at $28.58).
It could be argued that both producers have had their own demons to deal with in recent times. Paladin’s share register had to absorb the heavy dilution from the part acquisition of Summit Resources (SMM) while initial production volumes have been impacted by some technical start-up problems.
Things fared worse for ERA whose production forecast is marred by a flooded open pit mine forcing the company to revert to treating piled up tailings instead.
However, it’s a similar story for share prices of Black Range Minerals (BLR), at $0.20 some 41% below its peak, Bannerman Resources (BMN), at $3.00 some 23% below its peak, and Toro Energy (TOE), at $0.975 some 28% below its peak.
The picture is similar for uranium stocks on other stock markets such as Toronto and London’s AIM.
The general retreat in share prices of uranium producers and explorers is even more remarkable when one considers that the spot price for U3O8 (uranium concentrate) has gone up 84% so far this year, from US$75/lb to US$138/lb, with experts predicting we could see US$150/lb and more in the months ahead.
So what’s the problem?
In short: too high, too fast. While the industry is sharply divided by producers who continue to see further upside and nuclear utilities who forecast a swift price reversal towards US$50/lb again, the key players in this story remain the professional investors whose role has become key in a tight market as small as uranium. And those investors prefer the sidelines right now as they believe the current pace of price appreciation is simply not sustainable.
One indication is the absence of any trading volume in the listed uranium futures with the last trade in the past week representing a small price retreat from US$137/lb to US$136/lb.
Another signal is the long term price indicator set by industry consultants TradeTech and Ux Consulting, the same ones that set a weekly spot price. While the weekly spot price so far has surged to US$138/lb (on TradeTech numbers) the longer term price indicators have not followed suit. At US$95/lb for both industry experts the gap between weekly spot prices and longer term indicators has never been as high. And that is not only a worry, it is also a sign.
Specialised energy expert Platts said its forward price indicator for the next weeks had actually fallen in the past week. Platts so-called midpoint forward uranium price indicator fell from US$140/lb to US$137.50/lb as industry contacts had indicated they were likely to bid between US$130-145/lb in the auctions that lay ahead.
But what will have caught every market watcher’s eye is that for the first time since March 2003, Platts now believes the spot uranium price may decline in the short term. This because, as Platts explains, “more and more sellers are trying to sell material in the near term, raising the possibility that there could be a short-term decline in the spot price”.
Platts report was preceded by an announcement from Canada-based investment company Uranium Participation Corp. UPC reported on June 12 it had purchased 200,000 lb U3O8, to be delivered before the end of this month, at a total price of US$26 million. The price paid in this transaction equals US$130/lb.
Another industry publication, FreshFuel, which calculates the value of uranium as determined by investors in publicly traded funds in Canada and the UK, this week pointed out its so-called Blended Financial Value (BFV) not only declined by US$1 but it is now some US$19 below the spot price indicator. Reports FreshFuel: “The value of the BFV should be about [US]$6 higher than spot U3O8 to account for the cost of underwriting and distributing the shares of the fund”. Instead there is a rather sizeable discount.
What this means, according to FreshFuel, is that publicly traded funds would no longer increase in value if they purchased uranium at current spot prices, they would in fact decrease in value. As such, the magazine speculates, “there may come a point at which selling uranium will add value to the stock price of the funds”.
The short term prospect of a possible fall in the U3O8 spot price does not, however, mean that the uranium boom is about to come to an end as some bearish market commentators have been speculating already. The uranium market will remain tight and prospects have recently even tightened further as producers such as Paladin and ERA had to scale back their production forecasts. As said before, it’s probably more a case of too high, too fast.
Spot uranium may still reach US$200/lb before the end of 2008, as suggested by analysts at Macquarie Bank. But for now it would seem the industry has lost its most obvious share price booster.
And so it is no surprise that the focus has shifted to M&A with speculation centered on Chinese and Russian investors scouring the globe in search of suitable assets. The major producers in the sector, however, such as Cameco, Rio Tinto (RIO) or BHP Billiton (BHP) have no intention to spend any money on what they regard as highly inflated asset prices. (They also have no shortage in projects that are being upsized and expanded.)
The latter point was recently repeated by Cameco directors at a presentation to securities analysts in Canada.