Commodities | Jul 17 2006
By Greg Peel
I said it last week – the uranium debate has slipped off the front page lately. If anything focus has swung to the other side of the debate, that is, away from energy and back to bombs. Right at the moment there’s a bit of concern about nuclear capable and blindly aggressive Israel, along with nuclear capable India blaming old enemy Pakistan for the Mumbai bombings, and Iran and North Korea probably looking toward nuclear capability.
Such tensions only serve to cement belief in a higher long term oil price of course, and that brings us back to nuclear energy once more. But let’s take a moment to consider a more peaceful world, and a world in which environmental concerns have been brought to the table by an increasingly vocal electorate.
Global nuclear reactor construction is picking up. Merrill Lynch notes that the 23 reactors planned across the globe not ten months ago have grown to 27, across eleven different countries. Japan and Korea are committed to nuclear energy (having little energy resources of their own) and China is planning a big nuclear push to achieve at least some offset to high pollution coal-burning power plants.
In the UK, which is suffering from North Sea oil being all but exhausted, Tony Blair is tipped to announce 6 new reactors and the possible replacement of 18 of the 23 scheduled for decommissioning in the next ten years.
The Kyoto Agreement has also encouraged new markets for nuclear energy, with India having the most potential.
Further developments on the demand side include investor interest – that which has pushed metal markets to higher levels – and the unusual concept that some of the biggest buyers of uranium at the moment are uranium producers.
That brings us to the supply side. The reason producers have become buyers is due to, again, a similar story to that pervading the metals markets. Merrill Lynch notes rising costs, labour shortages and project delays have meant producer shortfalls on long term contracts. Some 40 million pounds worth of 2009 contracts on offer have been left unfilled at this stage.
UBS highlights the fact that of all uranium consumed, only 55% comes out of the ground. The other 45% is sourced from a long-standing arrangement between the US and Russia in which both have been dismantling nuclear warheads. The highly-enriched uranium (HEU) therein is then reassigned. The US has been madly buying up Russia’s HEU but the 20 year deal is set to expire in 2013 and Russia has indicated it won’t be renewing.
Merrill Lynch suggests this will amount to a 25 million pound uranium oxide shortfall, and the flagging of Russian’s intentions will only force utilities to scramble to ensure long term supply ahead of the 2013 cut off. In the meantime, suppliers represent the biggest buying group so far this year.
As far as mines are concerned, they’re not the sorts of things that open every other day. Australia has enormous amounts of uranium, but a very restrictive mining policy. Two other big sources are Canada and Kazakhstan, but they have problems too.
Canada’s Cigar Lake is either bigger than, or second biggest to, Olympic Dam depending on whose PR you believe. Production had been expected in 2007, until the lake flooded recently. That has put the frighteners through a few utilities who had eyed off Cigar Lake as their saviour.
Similarly Kazakhstan has made all sorts of claims about its uranium reserves which analysts are finding hard to swallow. Imagine Borag conducting the investor briefings. Merrill Lynch, for one, is assuming lower than claimed production in a longer than claimed time frame, but warns that if the Kazaks are not actually taking the Mick there might well be a flood of uranium onto the market in the next few years.
Merrills further believes that increasing cost bases and lengthening construction tables could well result in smaller miners in, for example the US, having overstated their production targets as well. While such targets fall demand picks up. The US has now formed the Global Nuclear Energy Partnership between itself and the UK, France, Russia, Japan and China as part of the push to reduce US fossil fuel dependence.
Merrills is forecasting likely uranium deficits for the next three years with the gap widening, not contracting. There is no great hope pinned on supply injections in any short time frame. UBS notes that the uranium oxide "spot" price has increased from US$7/lb in 2002 to US$46/lb today.
How might an investor exploit opportunities in uranium? Well that is a problem that only serves to exacerbate the supply-demand situation. Pure-play uranium producing companies are hard to find.
The world’s biggest uranium producer is Canada’s Cameco, but the company also services all facets of nuclear energy production, as Merrill Lynch notes. Another biggie is France’s AREVA (Cameco and AREVA jointly own Cigar Lake) but it is 94% owned by the French government.
Energy Resources Australia (ERA) is the second biggest producer, but is 68% owned and managed by Rio Tinto (RIO). Uranium represents only 1.3% of Rio’s earnings. BHP Billiton (BHP) owns Olympic Dam, but uranium earnings represent less than 1%. Paladin Resources (PDN) has seen its share price rocket in recent years but hasn’t yet produced any uranium.
Merrills considers Paladin a high price/resource company, although it has recently announced a merger with low price/resource company Valhalla Uranium. The analysts suggest low price/targets are an opportunity for investors. It cites Nova Energy (NEL) as one such opportunity.
All other companies recommended by Merrills are Canadian-based. The analysts like SXR Uranium One, Uex Corp, Strathmore Minerals and Uranium Power Corp.
That leaves ERA as the obvious Australian investment, with Merrills planning to initiate coverage on the stock soon. This would follow JP Morgan’s initiation last week. Of the three major brokers covering ERA at present, only one – UBS – is calling it a Buy from here.
There are a plethora of small Australian uranium companies – some with actual reserves (but no licence), others with exploration tenements, and yet others with a lot of grandiose talk and not much else. Since the uranium price began to jump a couple of years ago, many of these stocks have been in play and may represent hot air.
FN Arena recommends potential investors weigh up targets carefully with stockbroker supervision. Take note of the fortunes of CuDeco (AUM), which highlights the possibilities and pitfalls of resource stock trading.