Commodities | Jun 06 2007
By Greg Peel
On Monday, Macquarie led the charge on uranium price upgrades, suggesting U3O8 would peak at a spot price of US$150/lb by year end to provide a 2007 average price of US$125/lb. The last reported weekly spot price indicator was at US$138/lb late last week.
Thereafter Macquarie sees a 2008 price of US$135/lb and US$100/lb in 2009 on the basis that exploration and production ramp-ups in the industry will begin to ease the supply/demand imbalance. However, these numbers represent typical analyst conservatism and Macquarie concedes that a US$200/lb spot is not beyond the realms next year. This is the oft quoted price at which nuclear power reaches its economic viability limit.
Macquarie may be exuberant about spot uranium, but not so about Energy Resources of Australia (ERA). The broker initiated coverage on the stock last month with an Underperform rating.
The analysts’ main problem is disclosure, which is a common source of frustration across town. ERA is locked into low price legacy contracts of undisclosed quantity, meaning the company is not fully leveraged to recent extraordinary movements in the spot uranium price. Macquarie has thus stuck simply to its best-guess discounted cash flow valuation, which thus provides an uninspiring target of $17.41 (last close $23.20). By contrast, top marker JP Morgan has set a target of $32.00. Macquarie suggests Paladin (PDN) is a better bet.
Ironically, it used to be JP Morgan who stubbornly dragged the chain on ERA valuation for exactly the same reasons. As the share price went sailing over $20.00, JPM was sticking to a target of $11.11. But then the analysts’ US counterparts had a sudden epiphany about uranium prices, and the local team jumped its target to $30.00 overnight. Strange days indeed.
Strange, too, that respected Citi commodity analyst Alan “I’ll just sit here while the world goes by” Heap has also upgraded his 2007 uranium price forecast. The strange part is that while Macquarie is signalling US$125/lb, and the last price indication is US$138/lb, Heap has moved his 2007 forecast average up from US$76.80/lb to US$79.70/lb. Wow.
Okay, it’s now June, and the average uranium price for 2007 is already US$120/lb. In order for Heap’s forecast to be met, the uranium price would need to average about US$40/lb in the second half of 2007. That’s either being very conservative or very something else.
Citi’s price upgrade came amidst a series of commodity price upgrades from the analysts, particularly in bulks, that have affected a target price increase for ERA’s two-thirds owner Rio Tinto (RIO) from $94 to $103. The analysts do however suggest that “Uranium is arguably where there is the greatest potential uplift in valuation”. Go on.
“Taken to its extreme, we can generate values of US$50-70b for BHPB’s (BHP) Olympic Dam operation and US$20-30b for RIO’s interest in ERA, Rossing, Kintyre and Sweetwater, based on reserve/resource multiples implied by the market capitalization of Paladin. Using more reasonable production multiples based on ERA’s and Paladin’s expected production in 2009 we still generate uranium valuations for BHPB and RIO significantly above our NPV that are based on a long-term uranium price of US$20/lb.”
So let’s just leave it that Citi thinks there may be some upside in uranium.
Patersons Stockbroking (rumoured to be in talks with Credit Lyonais) has been less conservative however, reviewing its own commodity price forecasts and shifting its uranium price to an average of US$90/lb out to 2012. As a result, Patersons’ target for ERA jumps to $31.66, putting it just below JP Morgan and well above the FNArena average target of $24.00.
While not having shifted its price forecasts this time, UBS has suggested that the US$138/lb trade is “significantly higher” than the analysts current forecasts and that, more importantly, Paladin is obviously locking in contracts at much higher than a current long term forecast of US$27/lb.
UBS was prompted to make this observation in reviewing Paladin post the completion of the Summit Resources (SMM) acquisition, in which Paladin closed the books at 81.82%. UBS has actually reduced its Paladin target price from $11.70 to $11.00, but that is a result of the scrip offer for Summit affecting stock dilution. Nevertheless, this price still represents a 23% premium to the current share price, which despite ever increasing uranium spot prices has been knocked down on the Summit deal. On that basis, UBS has upgraded Paladin to Buy.
As it stands now, the FNArena database shows a 2/2/2 B/H/S ratio on ERA with a $24.00 average target and a 3/1/1 on Paladin with $10.53.