Big Jump In Spot Uranium

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

By Greg Peel

Who lit a bomb under the uranium market?

Industry consultant TradeTech notes a variety of buyers lined up to buy U3O8 in the spot market last week, spread across producers, utilities, traders, intermediaries and investors. As each new buyer popped up, sellers backed off their prices and as such by week-end TradeTech's price indicator had risen US$4.00 to US$52.50/lb.

Pressure building on the buy-side has been apparent for some time, yet a lack of urgency has seen the spot price creep up only in frustrating increments. But last week the spot market reacted to increasing demand from mid-term and longer-term buyers as investors jumped in to the spot market compete with producers needing to make up for contract shortfalls. Ten deals were transacted for a total of one million pounds of U3O8 equivalent, TradeTech notes.

The US$4.00 jump represented the biggest weekly move in the price indicator since the US$5.00 jump in November 2008.

Prior to last week, the analysts at BA-Merrill Lynch had been assuming 2010 would end with a “loose” global surplus of around three million pounds of uranium, but a sudden tightening on the supply-side has changed the analysts' minds. Merrills now believes 2010 may end with a small deficit of some one million pounds.

Utilities – the real end-users of uranium – have their requirements pretty well covered for the rest of this year, suggests Merrills, but 2011 is shaping up as a different proposition. Of all commodity markets, the uranium market is more susceptible than most to perceived supply-side risks, particularly when those risks become apparent at globally significant mines.

Enter Ranger.

Energy Resources of Australia ((ERA)) surprised the market a couple of weeks ago with a very disappointing quarterly production report. Grades emerging from ERA's flagship Ranger mine in the Northern Territory have plunged which is not particularly good news ahead of the wet season which can often turn Ranger into a rather expensive swimming pool. Merrills doubts Ranger will return to previous production levels through 2011-12.

And while hope springs eternal for expansion of the Ranger mine and even possible approval for Jabiluka in the Kakadu Park, just as eternal is the process of negotiation with local traditional owners and the government. No one is holding their breath.

In the meantime, BHP Billiton's ((BHP)) massive Olympic Dam uranium mine is seeing solid ore production but also lower year-on-year grades. Rio Tinto's ((RIO)) Rossing is in the same boat. (Rio also owns two thirds of ERA).

Elsewhere, promising production opportunities in Niger are being held up by security concerns and the real swing factor – Kazakhstan – appears to be suffering from a misinterpretation, and thus overestimation, of production expectations. Merrills notes Kazakh supply is crucial to the ongoing global supply/demand equation.

On the demand side, Merrills notes 2011 will see due dates for Chinese utilities to turn current non-binding memoranda of understanding on supply into definitive long-term supply contracts.

All of the above adds up to upward pressure on the spot uranium price as we enter 2011, with TradeTech's observations from last week's action testament to this belief.

Merrills suggests the best bet for local investors is Paladin Energy ((PDN)) which currently only scores three Buy ratings out of seven brokers in the FNArena database covering the stock. Paladin is seen as struggling a bit by some brokers with its ambitious African expansion plans but a surging spot uranium price would trump such problems.

Click to view our Glossary of Financial Terms