Rudi On Thursday

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

With both industry consultants keeping their weekly uranium spot price indicators unchanged at US$75/lb this week, have we finally seen the bottom?

Chances are very high we have.

The most compelling argument about why this could be as low as it gets for spot uranium this year came to me though an email correspondence with one of the close followers of the energy markets in North America.

Utilities are increasingly worried that if the malaise lasts too long it may put off or delay too many projects and this would create a similarly tight market situation as in the second half of last year, the email read. (This was in reference to the flooding of Cameco’s Cigar Lake project which triggered the speculator craze that lasted until June this year).

Of course, utilities want many more projects to go ahead so that supply can catch up with growing demand. However, when possible, they refuse to pay silly prices for their fuel. I was already informed that the global credit squeeze had started to delay investments in new projects as high risky developers, and even some high profiled producers, found it difficult to find anyone who would lend them money, including (in the case of the developers) their own shareholders.

If both buyers and sellers find a common interest in a stabilization of the uranium price, than surely the bottom of this price correction could no longer be far off?

A few days later I spotted a similar view in a research report by Canadian experts at Haywood Securities. In addition to all the usually cited factors you all know by now (in a nutshell: demand is still expected to outgrow supply in the years ahead), analysts at Haywood noted that as uranium companies had seen their share price drop by up to 50%, and by at least 30%, it could be expected that several were likely to delay their development programs. As total supply is already lower than demand, ultimately this will only further widen the gap and thus keep the market in deficit for longer.

Haywood believes the same principles apply to those companies who had been looking to raise additional capital through a combination of debt and equity. All in all, the specialists are of the view that, with production shortfalls in 2005 and 2006 likely to be repeated this year, plus some delays in project developments across the globe, the stage is already set for a robust 2008 and beyond. No wonder some utilities have become worried that if the price weakness lasts any longer the situation might actually get worse instead of better.

Deutsche Bank analysts expressed a similar view in an update on Energy Resources of Australia ((ERA)) on Wednesday morning, stating there would likely be upward pressure on uranium prices for several years to come. As it happens, ERA should enjoy a double whammy benefit as its old legacy contracts should gradually expire and this should allow the company to benefit more from an ongoing tight market situation.

I can only imagine how all this must be music to the ears of all those investors and speculators who fell in love with their uranium holdings earlier this year, didn’t see the turnaround coming in June and subsequently held on to their shares until today.

It’s a long and scary road from US$138/136/lb whole the way down to US$75/lb.

ERA shares are still trading more than 30% below their average target price of $24.15. Macquarie and GSJB Were are the only ones with a negative rating. Shares of Paladin Resources ((PDN)) are still some 20% off their average price target of $8.43.

For investors who’d like to minimise their risk, and prefer to make investment decisions instead of gambling decisions, it would seem but logical to concentrate on these two leading producers on the local share market.

Often they will find, however, that share prices of non-producers can generate higher returns, but they also come with higher risks. Not in the least because there’s often no in-depth independent research information available about these companies.

(A cynic would argue that even ERA and Paladin are still not that widely covered and most brokerages only initiated coverage relatively recently).

One of the developers that is increasingly attracting attention from analysts and investors is Bannerman Resources ((BMN)). FNArena knows of at least six local securities researchers that actively cover the stock and we believe all hold a positive view towards the company’s prospects in ultimately becoming a producer nearby Rio Tinto’s Rossing mine in Namibia.

The company is currently seeking a secondary listing in Toronto and this is bound to trigger even more interest overseas – this in addition to a Bankable Feasibility Study in 2008 which is expected to pave the way to start production sometime in 2011 (at the earliest).

I noticed the aforementioned Haywood has already started to formally cover the company. The rating is Sector Outperform, Speculative.

And last but not least, here’s one to tell all your friends around the barbecue this summer: in 2002 the average spot price for uranium was US$9.86.

(With thanks to Haywood).

Till next week!

Your happy as always editor,

Rudi Filapek-Vandyck
(As always supported by the fabulous team of Greg, Chris, Terry, Joyce, Grahame, George and Pat)

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