FYI | Jul 26 2006
Nothing is easy and straightforward when it comes to Australia and uranium. Take the official three mines policy, for instance, which has so far been kept in place by all subsequent federal governments since it came into place in 1984.
Yet if the Canadian owner of the Honeymoon project in South Australia decides to open the mine and start production, as it is expected to do in the months ahead, the country with officially a three mines policy will have four uranium mines producing contentious yellow cake.
This number could grow one unit larger if Rio Tinto (RIO) controlled Energy Resources of Australia (ERA) will bring its Jabiluka project in the Northern Territories into production, as it is widely expected to do over the next few years.
This anomaly is a result of the Australian government issuing three more permits in 1996 as one of the original three allowed uranium mines, Nabarlek, closed. Another member of the original three, Ranger, is not expected to last that much longer either.
The remaining one is, of course, Olympic Dam, nowadays owned and operated by the world’s largest resources company BHP Billiton (BHP). It seems like a logical combination with Olympic Dam being the world’s largest deposit of uranium.
If BHP’s plan to triple output at Olympic Dam, at a cost of circa $6bn, receives the go ahead from the South Australian authorities, Australia is likely to become the world’s largest exporter of uranium. We’re probably talking 2012 by then.
More than anything else, it was the bilateral uranium treaty with China, signed in April this year, that sparked the enthusiasm of investors. Have a look at the share price graphs for most of Australia’s listed uranium explorers. See how they all jumped up post the China treaty frenzy and fell down like a rock shortly afterwards?
If your personal appetite includes uranium miners and explorers, you better get used to this.
Truth is the treaty with China is not going to change anything in the short term. It might in the longer run. Selling uranium to China will always remain a hot potato (anyone who genuinely believes the Chinese will refrain from using it for military means because they promised us is way too goodhearted for this world). A fact that is often lost in the public debate is we haven’t sold them anything yet.
Why is that?
Because uranium is mostly sold via long running supply contracts. Everything that comes out of the ground in Australia today is already under contract. The first of these contracts are expected to come up for renewal in 2010. That’s still four years away.
In the meantime it is far more exciting to be an Australian uranium explorer than an actual producer. As witnessed by the events at Australia’s sole listed pure uranium play Energy Resources of Australia recently, when you are actually producing you are susceptible to all the factors that make life a bitch for every miner in the industry, whether it is copper, mineral sands or uranium. Costs are running up, experienced staff is demanding and difficult to find – don’t even talk about finding replacement tyres – and production delays and shortfalls are constantly looming around the corner.
If you’re an explorer all the market seems to be looking at is the trend for the uranium spot price – to value your assets accordingly.
To put it bluntly: the uranium frenzy in the smaller corners of the Australian mining sector has all the ingredients to end in tears for many an investor – and it most certainly will do so.
As my good friend, and experienced market watcher, Markus always says: "It always ends in tears, simply because it always does".
The vast majority of today’s explorers will never become a producer.
I know this may be difficult to grasp for a sector which appears to be readying itself for a good old fashioned boom. Takeover activity inside the uranium sector in Australia has probably never been higher as over the past few weeks. There’s talk about Canadian suitors travelling around the country. There’s talk about Chinese interest. Company directors are giving presentations at international conferences…
Not a day goes by without some gold and copper explorer announcing it has also found what could be a sizeable uranium reserve, or it wants to spin-off the uranium assets, or it is seeking a partner for its uranium assets.
And now the Labor opposition party leader Kim Beazley is in favour of changing the official three mines policy.
Still, the majority of what must be over 100 listed exploration companies with uranium reserves in Australia will never progress into the producing stage.
Even if a changing policy landscape towards the mining of uranium in Australia would result in a free for all situation, which is far from certain and possibly even unlikely, uranium is in essence ruled by the same cycle and dynamics that rule all other commodity markets.
This means that, how ever inconceivable it yet may be today, supply and demand will swap places at one stage and prices will come down.
According to the more bullish assumptions, the current cycle for commodities still has another 10-15 years to go. This will not be long enough for most of today’s exploration hopefuls.
In the meantime, it is hope alone that is driving both investors and miners in the sector. There’s not much else to depend upon. It doesn’t take too much imagination to forecast what will happen when sentiment turns within the sector.
"It always ends in tears because it always does."
Till next week,
Your glowing editor,
Rudi Filapek-Vandyck
(supported by the Brilliant Four: Greg, Chris, Terry and Rob)