Uranium Struggles

This story features PALADIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: PDN

By Greg Peel

For the past few weeks, rhetoric from uranium consultant TradeTech has suggested a slowly building demand side and a withdrawing supply side which should lead to higher spot uranium prices. But TradeTech continues to be frustrated. Uranium is simply in sound supply, and spot prices have little reason to become excitable this time around.

Notably, buying (such as it is) is dominated by actual utilities in 2010 – unlike 2006 when uranium speculation was all the rage with hedge funds. For years the uranium price wallowed below US$20/lb before the oil price really started to move last decade, drawing no interest from speculators. As soon as speculators saw an opportunity, the spot price eventually jumped to US$136-138/lb.

And pretty quickly retraced, all the way back to the US$40/lb level it's stuck on now. Hedge funds are once bitten, twice shy. Indeed, if you discount all spot price movement above about US$60/lb as nonsense, and consider the consensus long-term price forecast is US$50/lb, then all we've done is adjusted for renewed interest in nuclear energy by an amount which largely makes sense.

Indeed, Citi has only this week lifted its long-term price forecast from US$25/lb – which is a bit behind the times now – to US$50/lb. This might be a 100% increase, but it only brings Citi in line with everyone else, including Deutsche Bank which last week reiterated its US$50/lb price.

In the meantime, TradeTech reports six transactions in the spot market last week, but only to a total of one million pounds of U3O8 equivalent. Two transactions for a total of 650,000 pounds are attributable to part of the US Department of Energy's final inventory offload for 2010. Utilities were the buyers. On July 20 and 21 there are tenders out from utilities to supply a total of 560,000 pounds.

TradeTech suggests sellers last week were happy to drop their offers slightly to get the business done, and that in fact there has arisen a price discrepancy between different delivery locations. But on a net basis, TradeTech's spot indicator has fallen US25c to US$41.50/lb in the past week.

Given uranium being “out of favour” in Citi's eyes, the broker last week downgraded its earnings forecasts for Australia's two major pure-play uranium producers, Paladin Energy ((PDN)) and Energy Resources of Australia ((ERA)). Citi suggests the uranium market looks adequately supplied for now.

Paladin copped a 40% earnings forecast reduction in FY11-12 due to lower than expected spot prices and higher than expected costs, leading to a target price reduction from $5.40 to $4.40 (FNArena consensus $4.09). ERA's cut is only 6-9% in FY11-12 given the offsetting drop in the Aussie dollar, but Citi's target falls from $23.30 to $15.10 (consensus $16.92).

Citi rates ERA as Hold, given a rapidly diminishing mine life. ERA is awaiting approval early next year for its new heap leach facility which it will need to maintain current production levels. It also awaits, seemingly forever, the opportunity to expand Ranger and/or mine Jabiluka in the Daintree. Both require both environmental and local indigenous support (and probably a Coalition government, although the last one was not forthcoming).

Paladin is nevertheless rated Buy, based on expected production increases. Langer Heinrich is running over nameplate capacity now but Kayelekera has had its problems, albeit those now appear to be resolved. Paladin still needs to sign an offtake agreement for about 50% of Kayelekera production, but Citi expects China to be forthcoming at current term (long-term contract) prices of US$58-59/lb.

TradeTech reports no transactions in the term market last week.

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