Deutsche Bank Sees Uranium Rising

This story features PALADIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: PDN

By Andrew Nelson

Following our story yesterday (Static Year Ahead For Uranium), Deutsche Bank has updated it’s  views on the outlook for the heavy metal. The broker has bucked the trend a bit and is expecting to see evidence of spot price strength during the March quarter due to lower levels of supply, which could be good news for both Paladin ((PDN)) and Energy Resources of Australia ((ERA)).

The broker notes the uranium spot price has declined a further US$2/lb to US$51/lb on thin volumes this week (on Ux Consulting’s assessment), but this is during a period of typically lower demand. However, note the analysts, with the uranium market looking a forecast deficit of 5Mlb in 2009, the price should soon stabilise and then head higher.

Where will this demand come from? Deutsche Bank expects that both increased spot buying and longer-term demand will increase from both India and China during the course of 2009.

This is good news for both of the Australian listed uranium majors, Paladin and ERA. The broker is expecting strong 4Q production results from both companies and this should see each outperform both the bulks and base metal producers in the near term.

The key near term driver for Paladin, notes Deutsche, is an expected improvement in operational performance at its Langer Heinrich operation. While the broker is expecting to see 4Q production and sales of around 690klb of U3O8, it notes production could be higher as the operation continues to get better and better at treating high grade ore. The broker notes ore throughputs are now above design, with only recoveries below target at between 82-85%.

Ahead of today’s Q4 production report release, Deutsche Bank analysts were also hopeful to see a much improved operating performance from ERA’s Ranger operation. While production at Ranger actually dropped 1% compared to 2007, the company said it had achieved full-year production of 5,339 tonnes, which was only slightly down on forecast.

The good news was that output during the December 2008 quarter was up 5% on the previous corresponding period and up 21% on the September quarter despite the adverse effects of monsoonal rains experienced in the quarter.

Another thing to look out for, notes Deutsche, is the initial resource estimate from ERA’s Ranger 3 Deeps, which is expected some time in early 2009. The broker thinks this could add up to 40kt of U3O8 to the company’s reserves. However, Deutsche’s pick is still Paladin on a relative value basis, given it is trading at 0.8x net tangible asset value versus ERA at 0.9x.

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