Happy Christmas Uranium

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED, and other companies. For more info SHARE ANALYSIS: ERA

By Andrew Nelson

From July 2011 to July this year the uranium spot price range traded between US$55-US$50 per pound with no real signs of life. And just when everyone thought the price was about to head higher, it dropped below US$50 and headed steadily lower from July to November. Then the unexpected happened, the spot price started pushing higher towards the end of November. It may not be back up to US$50 yet and no one’s brave enough to call a recovery, but at least the price is headed in the right direction for producers to feel at least a tiny bit of holiday joy.

As always, the price started heading higher about the same time brokers started downgrading forecasts for both uranium and uranium producers. Last week saw the run continue, with BA-Merrill Lynch turning more cautious on the uranium market. Here’s the elevator summary from the report: headwinds in the near term will prove challenging for the sector.

BA-ML noted that the will they-wont they talk about Japan’s nuclear reactor re-starts have been the main driver of the uranium spot price for more than a year now. Well, BA-ML now reckons only 70% of Japan’s nuclear capacity will eventually come back on line. This compares to 87% previously. The revision sees the broker lower its 2012-14 price forecasts, with 2013 coming down from US$58 to US$53 per pound, while 2014 is expected to be at US$73, which is down US$2 from the previous forecast. Term price forecasts were also adjusted, with 2013 US$4 lower at US$59, while 2014 is down US$2 to US$71 per pound.

While the broker downgraded Energy Resources of Australia ((ERA)) to Neutral from Buy last week on lower prices and less favourable FX assumptions, the stock remains BA-ML’s key pick in the sector. The analysts' rationale was interesting, noting the stock offers investors exposure to potential catalysts that are unrelated to the commodity price, namely the extension of the mine life. The broker also noted that Paladin Energy ((PDN)) will be dropped off the S&P 100 index in the next index rebalance, providing another unneeded headwind for the company.

Conversely, UBS upgraded their call on Paladin to Buy this morning, noting the pro nuke Liberal Democratic Party is now running Japan, with a steady ramp up of reactors now expected as a result. The broker notes the news should help improve uranium demand, and should also allay fears of Japan dumping stock into the market, both clear positives for Paladin.

Meanwhile, Industry consultant TradeTech’s spot price keeps inching higher, last week jumping another US$1.50 to US$45.00 per pound, dispelling all expectations that December would be a quiet month on the spot market. The week got off to a busy start, with offers due early for a non-US utility that was looking for 1.4 million pounds of U308. Then things took off from there. By Friday, ten deals had been done in the spot market, with approximately 1.3 million pounds of uranium changing hands.

Uranium was trading as high as US$45.50 last week, but then pulled back a little to see the bulk of stock sold at or near the current spot price. The buyers were utilities, but more so traders and financial entities, while traders and financial entities were also the sellers for the most part.

There was also one transaction reported in the term uranium market last week, with TradeTech reporting a utility selected a preferred supplier, but only for delivery of less than 1 million pounds over a 5-year period. There are quite a few more utilities that are still out there in the term market looking for more than 8 million pounds for delivery between 2015 and 2025. However, the little blip in term market did little to change prices, with TradeTech’s Mid-Term U3O8 Price Indicator standing pat at US$47 per pound, while the Long-Term Indicator was unchanged at US $59.00 per pound.
 

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