Tag Archives: Uranium

article 3 months old

Germany Unplugged

By Richard (Rick) Mills

As a general rule, the most successful man in life is the man who has the best information

The International Energy Agency (IEA) has recently warned us the world will face higher energy costs, higher carbon emissions and greater uncertainty over security of energy supply if it turns its back on nuclear power.

The IEA believes the future for nuclear power, and a subsequent reduction in carbon emissions, will be show cased in China, India and Russia. Out of the 62 reactors currently under construction, 48 – or 77% of the total – are being built in China, India, South Korea and Russia, another 82 reactors are planned and 210 are proposed for these four markets. 

China is the world’s largest consumer of coal, India produces more than 70 per cent of its electricity by burning coal and Russia mainly uses natural gas for electricity generation. A reduction in all three countries carbon footprints could be reached by switching a lot of fossil fuel generated power to nuclear power as nuclear’s life-cycle emissions range from 2 to 59 gram-equivalents of carbon dioxide per kilowatt-hour while emissions from natural gas fired plants range from 389 to 511 grams and coal produces 790 to 1,182 grams of carbon dioxide equivalents per kilowatt hour. 

In 2002, Germany enacted a law to phase out nuclear power, but the current government, led by Chancellor Angela Merkel decided (just last autumn) to extend the lifetimes of the country's reactors by an average of 12 years. This was based on the judgment that Germany would not be able to meet its power demand using only natural energy sources - wind and solar power - and would not be able to meet the governments ambitious goals of a 40% reduction in carbon emissions by 2020 burning more coal and natural gas. 

Merkel has consistently said that Germany has to remain a net exporter of energy, repeatedly stressing that there is no point closing German nuclear plants only to import nuclear power.

In 2010 Germany was a net exporter of power to France, sending 16.1 terawatt hours to the country compared with imports of 9.4 terawatt hours. 

Then, playing populist politics and over reacting to the partial meltdowns in Japan’s Fukushima Daiichi nuclear complex Merkels government immediately shut down almost half of the countries nuclear power and is closing the remainder in stages - the last reactor is to be closed in 2022. Germany, overnight, decided 40 percent of its nuclear power capacity will be shut down and removed 8,800 megawatts (MW) from the grid, the remaining 12,700 MW of nuclear supplied electricity will be gone by 2022.

Before the Merkel government shut down 40 percent of Germany’s nuclear power plants Germany had been an energy exporter. Not anymore, DIE WELT reports:

'Before and after the moratorium – as is usual for this time of the year – between 70 and 150 gigawatt hours were exported. After switching off the German nuclear plants, that surplus disappeared. Since then 50 gigawatt-hours have been imported. The power coming in from France and the Czech Republic has doubled and exports to Holland have been cut in half.'

In April 2011, France was a net exporter of power to Germany for the first time since the summer months of June, July and August 2010. 

This author would like to suggest the real proving grounds for nuclear power will not only be in China, India and Russia as the IEA predicts, but will also - and give us much more immediate results - be in Germany and the European Union. 

The IEA says Germany faces a big challenge to achieve its goal of replacing a significant part of its nuclear power generation with wind and solar. The Breakthrough Institute says that renewable energy sources would have to generate 42 percent of Germanys electricity in 2020 in order to replace 21,500MWs of nuclear power.

Germanys Green Power Quick Start:

- The Federal Electricity Feed Law (StrEG) of 1991 compelled public utilities to purchase renewable generated power from private producers on a yearly fixed basis 
- The Market Incentive Program (MAP) was introduced in 1999. MAP offered government grants totaling 203 million Euro in 2003 for the commercialization and deployment of renewable energy systems
- The Feed-in Tariff was introduced into the solar industry - the tariff gives producers of solar electricity a guaranteed price for the energy they supply to the grid. The price is set for 20 years and that price is considerably higher than the price paid for fossil fuel electricity (more than double). The Feed-in Tariff is open to both commercial solar providers and householders who connect their own solar panels to the national grid 

Recently the German government has been lowering feed-in tariffs, and solar power, much pricier than wind, has seen steep cuts in incentives. Germany also plans to slash subsidies paid to households generating electricity.

Germanys wind power generation is concentrated in the northern parts of the country. For Germany to supply its southern region with electricity from wind power in the north the country would have to build more of those extremely expensive giant offshore windmill parks in the North Sea. That also means a massive financial commitment to not only upgrade the existing grid to handle such diverse, spread out power but also building massive transmission lines to cross the country and deliver that northern power to the south. 

Many green organizations are against the transmission lines and offshore wind park construction has been held up for a year because of environmental issues. 

In any event offshore power generated by windmills in the North Sea would be much more expensive than French or Czech nuclear generated power which is readily available to southern Germany (where most of the shutdown reactors were located). 

The share of energy wind contributed to Germany’s power generation mix did not grow in 2009 because of a weak meteorological wind year. Despite more generational capacity being built, produced electrical energy from wind farms amounted to 37.5 TWh in 2009, compared to 40.4 TWh in 2008.

Chancellor Merkel has forsaken Germany’s much needed nuclear contribution to developing a sustainable, environmentally friendly energy policy. Unfortunately she’s created not just a German problem but a European one as well:

- Germany will import more nuclear generated electricity from its neighbors, France and the Czech Republic (who still use the old soviet style reactors) and will also have to import more natural gas from Russia (and coal from Poland), which makes the country even more dependent on Moscow for its energy supply 
- Germany’s new need for NG, coal and oil will push up energy prices for the rest of the EU – higher electricity costs will also project into the prices of consumer products. German and other EU consumers will see sharp increases in their energy bills as Germany is forced to import more electricity and pay for fossil fuels to generate electricity in-country while already built nuclear reactors sit idle and more are decommissioned
- Germany’s unilateral decision will impact the competitiveness of not only German industry but of the rest of Europe’s as well - which is already under pressure from an overvalued currency 
- Germany’s unilateral decision shows a glaring weakness of Europe - the absence of a common energy policy
- Donald Tusk, Poland’s prime minister announced Germany has put coal fired power “back on the Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Uranium Producer Consolidation Ahead?

By Greg Peel

The spot uranium market took a turn for the worse the week before last, dominated by a couple of aggressive sellers bailing in the wake of Japanese reactors remaining idle post Fukushima and the so-called German U-turn. BA-Merrill Lynch analysts had expected a floor in the spot price at US$55.00/lb but two weeks ago industry consultant TradeTech's spot price indicator was marked at US$51.75/lb.

Those aggressive sellers have been sated now, however, which means last week saw remaining sellers backing off in price to tempt buyers higher. Activity was low with only three transactions totalling 300,000lbs of U3O8 occurring. Each deal was completed at a successively higher level so TradeTech spot indicator finished last week up US$2.00 to US$53.75/lb.

With no action in the term markets, TradeTech's mid-term indicator remains at US$58/lb and long-term at US$68/lb.

Weakness in the spot price and general uncertainty has kept investors well away from uranium stocks, Merrills notes. We are also currently in a seasonal low in typical uranium demand. However among the larger caps, investors are beginning to recognise investment opportunities, the analysts suggest.

Merrills has downgraded its average spot price forecasts by 8% in 2011-12, to US$61/lb and US$67/lb respectively. The year-to-date average of TradeTech's weekly spot price indicator on FNArena's calculation is currently US$61/lb. The crunch for the market nevertheless comes in 2013-14 when Russian warhead supply is set to expire, and there Merrills forecasts US$75-80/lb.

Merrills has reduced its global uranium demand forecasts (ex of Chinese stockpiling) by 5-6% in 2011-13. However it's on the supply side of the equation Merrills sees pressure building. The analysts forecast a 0.5% fall in 2011 production, which is significant given Kazakhstan now controls a 35% share of supply. Cuts to global mine production are now 5% lower than previous forecasts through 2013.

Market dependency is growing, Merrills suggests, on a timely 2013-14 commissioning of Cameco's Cigar Lake mine in Canada and Extract Resources' ((EXT)) Husab mine in Namibia.

Most importantly, uranium miners have, like every other miner, being battling with rapidly rising capital expenditure, cost inflation, and currency headwinds. In the analysts' view, the incentive uranium price for a greenfield project is now US$$80/lb, which is thirty-odd percent above their forecast 2011 average price. With barriers to entry building, so too is the incentive for large caps to pursue a “buy versus build” strategy – taking out smaller players with producing or brownfield projects rather than investing funds from scratch. And the turn in investor sentiment since March provides potentially attractive entry points.

Indeed, Cameco's CEO said as much last week in a presentation. Merrills is anticipating opportunistic acquisitions and/or project joint ventures ahead, and on both an Australian and global basis the analysts' two preferred stocks are Paladin Energy ((PBN)) and Extract Resources.

article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

 By Chris Shaw

The first full trading week of the new financial year has seen a further increase in positive ratings on Australian equities, the FNArena database showing 14 upgrades for the week against nine downgrades by the eight brokers under daily coverage. Total Buy ratings now stand 53.1% of all recommendations, up from nearly 52.5% last week.

Bank of Queensland ((BOQ)) was a major beneficiary of upgrades, seeing an additional two Buy ratings over the past week as the valuation argument in favour of the stock continues to gain credence. The valuation argument was also made in favour of Westfield Retail as it was upgraded, the stock seen as offering an attractive defensive exposure in the Australian REIT sector.

Westfield Group ((WDC)) also enjoyed upgrades as more analysts in the market accept there is improved value following recent share price underperformance. Revisions to commodity price assumptions sparked upgrades for uranium play Paladin ((PDN)) over the week, while the likes of QBE Insurance ((QBE)), ResMed ((RMD)) and Westpac also saw upgrades.

On the flip side the major downgrade of the week was experienced by Murchison Metals ((MMX)) after the company updated on the progress of the Okajee and port and rail and Jack Hills uranium mine projects. Brokers see a need for a restructuring as the capital costs of development appear beyond Murchison at present.

Changes to commodity price assumptions were behind a downgrade for Gryphon ((GRY)), while the likes of Macquarie Group ((MQG)), Cardno ((CDD)) and Insurance Australia Group ((IAG)) also met with downgrades during the week.

There was little in the way of increases to target prices, which tends to underpin the argument while the market offers a number of value situations there are few obvious catalysts at present. Murchison's issues saw price targets for the company slashed by better than 70%, other reductions being of similar magnitude to the target increases.

Our usual update on earnings estimates is this week absent due to technological problems. Sorry, we couldn't get them fixed in time before today's update. Should be back next week.

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 BOQ 0.130 0.500 0.37% 8
2 WRT 0.710 1.000 0.29% 7
3 BTT 0.500 0.670 0.17% 3
4 WDC 0.710 0.860 0.15% 7
5 PDN 0.430 0.570 0.14% 7
6 TSE 0.570 0.710 0.14% 7
7 QBE 0.250 0.380 0.13% 8
8 RMD 0.500 0.630 0.13% 8
9 WBC 0.130 0.250 0.12% 8
10 TEN 0.130 0.250 0.12% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 MMX 0.330 - 0.670 - 1.00% 3
2 GRY 1.000 0.670 - 0.33% 3
3 CMW 1.000 0.670 - 0.33% 3
4 CDD 0.750 0.500 - 0.25% 4
5 MQG 0.290 0.140 - 0.15% 7
6 IAG 0.750 0.630 - 0.12% 8
7 WOR 0.500 0.430 - 0.07% 7
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 SKI 1.319 1.379 4.55% 8
2 ESG 0.907 0.920 1.43% 4
3 RMD 3.493 3.538 1.29% 8
4 PRY 3.656 3.699 1.18% 8
5 WRT 2.917 2.934 0.58% 7
6 WDC 10.079 10.090 0.11% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 MMX 2.100 0.560 - 73.33% 3
2 MQG 39.666 37.523 - 5.40% 7
3 CDD 6.363 6.198 - 2.59% 4
4 WOR 31.608 30.824 - 2.48% 7
5 GRY 2.143 2.093 - 2.33% 3
6 IAG 4.028 3.950 - 1.94% 8
7 CMW 0.775 0.760 - 1.94% 3
8 ABC 3.604 3.535 - 1.91% 8
9 ASX 36.682 35.980 - 1.91% 7
10 BTT 2.960 2.907 - 1.79% 3
 
 

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article 3 months old

Uranium: This Time It’s Different

- The uranium spot price is under pressure once more
- Excess supply is expected in the medium term post Fukushima
- Goldman Sachs does not nevertheless see a longer term Chernobyl impact


By Greg Peel

At end-May, the global spot uranium price indicator as derived by industry consultant TradeTech had risen by US$1.50 over the end-April price to US$56.50/lb, having traded down to US$50 after the March tsunami damaged the Fukushima reactors and suddenly sparked a rethink on global nuclear energy policy. It appeared that demand destruction was not as significant as a panicky market first assumed. But June has brought a different story.

TradeTech has marked its end-June spot price indicator at US$51.50/lb, representing a 9% drop from May. The consultant notes there was a big rush to sell in the last couple of days of June at a time when buyers are still uncertain over what path global nuclear energy might take from here. One “aggressive” seller was looking to place material quickly, but the fact remains that in the short term at least, the supply-side looks overladen.

What does trading company Traxys plan to do with the 5.2m pounds of U3O8 equivalent it acquired from US government stockpiles via a clean-up payment the government made to Fluor-B&W? The market doesn't know. The US government is also moving to re-enrich depleted tailings for sale to finance further clean-up projects, and traders assume that supply may come onto the market in coming months. Japan has shut down many of reactors and some may never be restarted, including the six at Fukushima, so stockpiled uranium inventories also add to potential near-term supply. There seems little reason for buyers not to back off in price.

June saw sixteen spot transactions totalling 2mlbs of U3O8 equivalent, TradeTech reports, down from 3.5mlbs in May. After somewhat of a hiatus, one medium term transaction was reported for deliveries beginning in 2013 and stretching over five years. TradeTech has moved its medium term price indicator down to US$58/lb from US$60/lb as a result. Yet amongst all this apparent weakness, commodities analysts at Goldman Sachs have, at the end of June, chosen to increase their long term uranium price forecast.

Good heavens, why?

Well let's first put things into context. Goldmans has raised its long term price to US$65/lb from US$54/lb. By contrast, TradeTech's long term price indicator has, for a long time, remained at US$68/lb. TradeTech sets its indicator based on actual contract deals signed today for long term uranium delivery. Goldman Sachs uses its forecast to calculate expected cashflows into time and thus value the shares of uranium producing companies. The analysts' forecast price represents 2016 dollars so to discount back against inflation that price would be higher today. In other words, Goldmans has largely brought its forecast up to meet today's market.

Mining stock analysts nevertheless prefer to keep their long term forecasts at conservative levels given the increase of risk with time, and historical price averages are a popular benchmark. But for most commodities China has come along and rather shattered historical price average modelling with its step-jump impact on the longer term demand side. The fact remains, nevertheless, that at a time when the world is wondering whether the nuclear energy game might be up again, as it was after Chernobyl, Goldmans has increased its uranium price forecast.

Nuclear energy had seemed like the way of the future post the seventies oil shocks, but the Three Mile Island (1979) and Chernobyl (1986) accidents brought new reactor construction to a standstill. Massive stockpiles of uranium had been gathered previously to fuel projected reactor growth so existing plants no longer needed fresh supply. The spot uranium price dropped from US$43/lb in 1978 to US$9/lb in 2003. By 1995, global uranium production had halved from its 1981 peak.

By 2004, the world was just starting to wake up to the China story. By 2007, speculation had driven spot uranium up to US$138-136/lb before the bubble and bust which saw the price plummet ahead of the GFC and bottom out again at around US$40/lb. Here we are in 2011 sitting in the wake of the second worst nuclear accident in history with a price around US$50/lb, and Goldmans suggests the market is pricing in the worst case scenario – that being a global reaction similar to those post TMI/Chernobyl.

However today's outlook, says Goldmans, is very different.

Japan has shut down the six Fukushima reactors and they are not expected to ever come back on line. Further Japanese reactors have been shut down temporarily for safety checks, as have reactors all over the globe. Safety checks have basically been globally ubiquitous, Goldman notes, but the same cannot be said with regard to policies on existing reactor fleets and on future nuclear ambitions.

In Germany, seven older reactors will be decommissioned immediately and all others closed down by 2020 to be replaced by renewable energy sources. This is widely recognised as a purely political decision from a government already losing ground to the Greens due to financial support for Greece and other eurozone members, and as such, and given the immense cost of renewable energy development, it is a decision most expect may be tempered over time.

Switzerland has cancelled new reactor construction plans and limited existing reactor life to 50 years, suggesting to Goldmans a full phase out between 2019 and 2034. Italy has put all reactor plans on hold for 12 months.

The UK, Czech Republic, Finland and a number of other countries are undecided, Goldman notes. Project delays and maybe some cancellations are possible but commitment to nuclear energy is expected to continue, with no talk of wholesale reactor shutdown forthcoming.

In the US, the government continues to broadly support nuclear energy as a strategic necessity. The Fukushima response from individual utilities has nevertheless been mixed.

In France, Russia and South Korea, it's business a usual. Political support for nuclear energy remains strong and expansion plans should be little changed.

In India, which suffers from a lack of its own energy sources, the government has stated clearly its planned nuclear program will not be impacted. And in China, projects have been suspended pending review but the government has reiterated its commitment to nuclear power.

Chernobyl may have killed off the global nuclear energy market for two decades, the impact from Fukushima will not be nearly as substantial, Goldman suggests. Global uranium inventories are much smaller today than they were in the nineties. On that basis the longer term outlook for the uranium industry remains intact, albeit somewhat dented.

In the medium term, the Tokyo Electric Power Company (TEPCO) is now looking to sell its uranium inventories which are understood to be substantial. Existing German utilities may no longer need to consider additional inventory carry unless the government's reaction is subsequently modified. And China no longer needs to pursue an aggressive inventory accumulation policy with Fukushima having dampened global demand. China is well covered for reactor start-up supplies for the next 3-5 years, Goldman suggests.

Industry consultant UxC estimates global reactor requirements for uranium will now be, comparing pre-Fukushima to post-Fukushima estimates, 3.5% lower in 2015, 9.7% lower by 2020 and 14% lower by 2030. Goldman Sachs does not concur. The analysts envisage a 1.8% drop in 2011 followed by a 1.2% rebound in 2012. From 2010 to 2015 Goldmans is expecting a compound annual growth rate in requirement of 1.7%.

One must consider that Fukushima will also impact the supply side of the uranium market as well as the demand side. Financiers are likely to become more reluctant. Most vulnerable are junior miners with projects planned in countries of high sovereign risk, Goldman suggests. Already uranium major Areva has decided to slow its investment in mine developments based in Niger and Namibia. And the uranium industry is subject to the same production cost inflation impacting on every commodity at present.

The rush to commence new uranium mining projects accelerated in the 2005-07 period of soaring spot prices. Yet global consumption was still running ahead of mine production before the tsunami hit. The gap has nevertheless been reducing and will continue to reduce, Goldmans forecasts. In the meantime, the shortfall has been made up from the release of US and Russian Cold War strategic stockpiles as well as the decommissioning of Russian warheads.

Warhead supply is expected to run out in 2013. The US government has released stockpiles recently and intends to release more, albeit only after re-enrichment. US stockpiles are substantial but complex in composition, Goldmans notes, meaning its not just a matter of releasing material straight onto the market. The same is true for Russia, where inventories are substantial but sales opaque, and the bulk of supply would need to be further processed before it could hit the market.

On the flipside, China may well slow its immediate inventory scramble but both China and India are expected by Goldmans to build inventory over time under state control, thus absorbing notional global surpluses.

The wash-up is that Goldmans expects the global market to be comfortably supplied until 2013. Assuming there is nothing to replace Russian warhead supply, it will be a much tighter market after 2014. After 2015, fresh supply from sources such as Canada's Cigar Lake will ease market pressure once more.

The analysts expect the annual average uranium spot price to trough in 2012 at US$55/lb before rising again in 2013-14. Their long term price premium to spot is set at US$8 in 2012 rising to US$11 in 2014.
 

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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earning Forecast Changes

 By Chris Shaw

Total Buy recommendations on Australian equities have moved even higher this week, the FNArena database now showing nearly 52.5% of all ratings by the eight stockbrokers under daily coverage are Buys. The increase comes despite little sign of any improvement in the outlook for corporate earnings or the broader economy.

During the week there were 16 upgrades compared to just seven downgrades, which is a continuation of the recent trend and suggests the valuation argument remains favourable for many companies.

Orica ((ORI)) received an upgrade to a Buy rating given an improved balance sheet has the company in good financial shape and earnings growth suggests value. Westfield Retail ((WRT)) also saw an upgrade to Overweight from Underweight, the argument being the stock offers defensive earnings and there is scope for June 2011 NTA to surprise to the upside.

Seven Group Holdings ((SVW)) was also upgraded and saw increases in price target, this being the result of changes in analysts covering the stock. Valuation arguments support the upgrades to Kathmandu ((KMD)), Paladin ((PDN)), AGL Energy ((AGK)), CSL ((CSL)) and Sonic Health ((SHL)), while an improved outlook given a competitors strong quarterly result was behind the upgrade for Sims Group ((SGM)).

Among the downgrades are Cochlear ((COH)), this given the combination of a high multiple and a slowing in earnings growth expectations. Generally weak trading conditions or valuation issues are behind the downgrades for Macquarie Airports ((MAP)), Macquarie Group ((MQG)) and ResMed ((RMD)).

While MAp saw a ratings downgrade there was also an increase in price target, this reflecting the potential for a proposed asset swap involving the company to deliver a positive valuation result for shareholders.

Positive initiations of coverage on Austbrokers ((AUB)) and Lynas ((LYC)) saw increases in consensus price targets for the two stocks in the database, while Orica and Westfield Retail also enjoyed price target increases associated with the upgrades in ratings.

The consensus target for Boart Longyear ((BLY)) fell after an initiation of coverage added a target below the previous consensus, while Ten Network ((TEN)) similarly saw a cut in target given ongoing evidence of weakness in advertising markets.

With fresh eyes looking at Seven Group the company enjoyed the largest increase in earnings estimates during the week, while the likes of CSR ((CSR)), Spark Infrastructure ((SKI)) and SP Ausnet ((SPN)) also saw changes to estimates as did Lynas, MAp and McMillan Shakespeare ((MMS)).

Resource stock Energy Resources of Australia ((ERA)) and refiner Caltex ((CTX)) were hit with the largest cuts to earnings forecasts during the week, while others to see numbers lowered by around 4.0% or more were Macquarie Group, Rio Tinto ((RIO)) and Aquila Resources ((AQA)). More modest cuts were made to estimates for Tabcorp ((TAH)), Qantas ((QAN)), BHP Billiton ((BHP)), Atlas Iron ((AGO)) and Blackmores ((BKL)).

 

 

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 ORI 0.130 0.500 0.37% 8
2 WRT 0.710 1.000 0.29% 7
3 SVW 0.600 0.800 0.20% 5
4 KMD 0.800 1.000 0.20% 5
5 LYC 0.330 0.500 0.17% 4
6 SGM 0.430 0.570 0.14% 7
7 PDN 0.290 0.430 0.14% 7
8 AGK 0.750 0.880 0.13% 8
9 CSL 0.250 0.380 0.13% 8
10 SHL 0.500 0.630 0.13% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 MAP 0.830 0.670 - 0.16% 6
2 MQG 0.290 0.140 - 0.15% 7
3 RMD 0.630 0.500 - 0.13% 8
4 BLY 0.860 0.750 - 0.11% 8
5 COH - 0.250 - 0.290 - 0.04% 7
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 AAX 3.336 3.545 6.26% 4
2 TAH 3.110 3.275 5.31% 8
3 SVW 9.710 9.940 2.37% 5
4 MAP 3.487 3.555 1.95% 6
5 ORI 28.104 28.441 1.20% 8
6 AUB 6.570 6.638 1.04% 4
7 KMD 2.133 2.153 0.94% 5
8 SHL 13.253 13.371 0.89% 8
9 LYC 2.383 2.400 0.71% 4
10 WRT 2.917 2.934 0.58% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 PDN 4.337 4.130 - 4.77% 7
2 MQG 39.666 38.094 - 3.96% 7
3 BLY 5.197 5.106 - 1.75% 8
4 TEN 1.319 1.306 - 0.99% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 SVW 70.380 75.220 4.80% 5
2 CSR 24.125 25.950 1.80% 8
3 SKI 7.950 8.588 0.60% 7
4 SPN 8.250 8.488 0.20% 8
5 MMS 61.420 61.647 0.20% 3
6 LYC - 2.200 - 1.975 0.20% 4
7 MAP 8.459 8.659 0.20% 6
8 CSL 177.263 177.388 0.10% 8
9 SEK 29.725 29.825 0.10% 8
10 NHF 12.175 12.275 0.10% 3

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 ERA - 7.175 - 14.950 - 7.80% 8
2 CTX 114.550 108.050 - 6.50% 6
3 MQG 349.500 344.071 - 5.40% 7
4 RIO 1030.422 1026.386 - 4.00% 8
5 AQA - 4.050 - 7.750 - 3.70% 4
6 TAH 66.900 64.850 - 2.10% 8
7 QAN 18.950 17.150 - 1.80% 8
8 BHP 411.961 410.211 - 1.80% 8
9 AGO 23.886 22.771 - 1.10% 7
10 BKL 160.533 159.667 - 0.90% 3
 

Technical limitations

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article 3 months old

Uranium Buyers Cautious

By Greg Peel

At the end of May it was confirmed that trading company Traxys had agreed to acquire the entire 5.2mlbs of U3O8 equivalent which the US Department of Energy was set to sell, gradually, to clean-up contractor Fluor-B&W by means of payment. At the same time, a bill proposing the re-enrichment and sale of government-owned tailings to provide further clean-up funds was introduced to Congress.

In the meantime, Germany has joined Switzerland in announcing the gradual phase-out of nuclear power, Italy has voted against increasing nuclear capacity and a large number of Japanese reactors are now off-line pending safety inspections. There are fears some will never come back on line.

These developments all add to to a reduction in uranium demand and an increase in spot uranium supply beyond the norm. What does Traxys intend to do with its 5.2mlbs? That is unclear. Industry consultant TradeTech notes that spot uranium demand was weak last week as participants continue to monitor supply-side issues. There is also the potential for new supplies from producers and hedge funds to enter the market in coming months, TradeTech reports.

Last week saw four transactions in the spot market totalling 500,000lbs. A utility seeking 200,000lbs for July delivery has also selected a supplier. Sellers are finding it increasingly difficult to entice cautious buyers, TradeTech suggests, and have begun to lower prices in order to conclude deals.

Despite the caution, TradeTech's weekly spot price indicator fell only US15c last week to US$54.10/lb. The consultant's mid-term contract price indicator remains at US$60/lb and the long term at US$68/lb.

article 3 months old

Material Matters: Lead, Nickel, Uranium, PGMs; Sector Consolidation

- Nickel and lead outlooks subdued
- PGM fundamentals remain positive
- Sentiment a negative for uranium
- Some cracks emerging in Chinese growth
- De-Linking of commodity and equity prices suggest consolidation opportunities


By Chris Shaw

Commodity prices have come under pressure of late thanks to another round of risk aversion due to European sovereign debt concerns and nickel has been one of the worst performers among the industrial metals.

Prices fell to a 7-month low of US$21,600 per tonne last week, RBS suggesting at least part of the fall may be due to concerns over surging supply of the metal. A number of major expansion projects are due to come on line in coming years, RBS suggesting the key for prices will be how successfully these metallurgically complex projects can be commissioned.

HPAL or High Pressure Acid Leach2 technology is the major concern, RBS noting the success record of such projects is not good. On RBS's numbers total nickel production will increase by 565,000 tonnes per annum between 2010 and 2015, with four of the 10 largest projects of the HPAL variety.

The Ambatovy project in Madagascar has already run into problems that will delay scheduled production, which RBS expects will narrow the expected surplus in the nickel market this year.

While further such disappointments should be a positive for nickel, RBS expects this will be offset by successful capacity additions. This is expected to limit the potential upside for nickel prices relative to other base metals in coming years.

Still on base metals, Citi notes International Lead Zinc Study Group figures showed the global lead market recorded one of its highest ever surpluses in April. Demand fell during the month, while supply increased.

Citi notes that related to other base metals, stocks-to-consumption is low at less than three weeks. This means while the price remains above fair value, lead remains vulnerable to any supply outages. As these have occurred relatively frequently over the past few years there has continued to be support for the price.

One potential positive according to Citi is planned capacity closures in China. At present, 585,000 tonnes of outdated lead smelting capacity is earmarked for closure this year. Awaiting evidence of these closures, Citi suggests lead prices may tread water for some quarters.

Turning to the platinum group metals, Goldman Sachs remains of the view there is potential for further upside in coming years. This comes from a combination of highly constrained mine production growth and recovering demand from the automotive sector. 

In Goldman Sachs's view, consumption growth is likely to run ahead of incremental production thus keeping the PGM markets tight. Widening deficits are expected for both platinum and palladium through 2015. This should push prices higher, which is needed to destroy jewellery and investment demand and so make more metal available for industry. 

Shorter-term palladium is favoured given platinum is expected to be in surplus this year, but Goldman Sachs is positive on the medium-term fundamentals of both metals and suggests the distinction between each metal is less important for equity investors.

In terms of forecasts, Goldman Sachs expects palladium prices will average US$808 per ounce this year, rising to US$850 per ounce in 2012 and US$950 per ounce by 2015. For platinum, forecasts are for average prices of US$1,885 per ounce this year, US$2,079 per ounce in 2012 and US$2,350 per ounce in 2015.

To play the potential for upside Goldman Sachs prefers Aquarius Platinum ((AQP)), rating the stock as a Conviction Buy with a $7.50 price target. This is well above the consensus price target according to the FNArena database of $6.37. 

In uranium, Citi expects the current poor sentiment will continue for at least the next few months, limiting performance even given a more positive longer-term story. This longer-term story is based on expected new demand, with the likes of China, South Korea and South Africa all looking to add capacity.

Citi's numbers suggest even if Japan, the UK and the EU decided to cancel any plans for expansion, new planned and proposed capacity globally would still exceed today's nuclear fleet.

Following a change in analyst coverage of the two leading Australian uranium plays – Energy Resources of Australia ((ERA)) and Paladin ((PDN)), Citi has revised its models. Paladin has been upgraded to a Buy from Hold previously, while ERA remains a Hold. 

Earnings estimates and price targets have been adjusted in both cases, Paladin's target moving to $4.05 from $5.50 and ERA to $4.90 from $12.70. Consensus targets according to the FNArena database stand at $6.81 for ERA and $4.34 for Paladin. Sentiment Indicator readings for the two companies stand at 0.4 for Paladin and minus 0.3 for ERA.

Given China's role as a driver of commodity demand the state of the Chinese economy is of great relevance. Macquarie's analysis of the latest macro data suggests while headline numbers remained solid, some cracks are emerging. 

Sales of excavators and heavy trucks contracted in year-on-year terms in May, while construction activity is also slowing. Macquarie suggests the signs of a slowing are not yet enough for any loosening in monetary policy, especially given inflation remains elevated.

Macquarie's view is there will be one further hike in interest rates before policymakers react to the deteriorating growth outlook. 

Taking a broad view of the resources sector, BA Merrill Lynch suggests while commodity prices have held up relatively well so far this year, resource stocks have not delivered similar performance. This de-linking between commodity and equity prices presents an opportunity for sector consolidation.

Screening the sector for free cash flow generation ability and companies to find the most attractive valuations, BA-ML suggests the iron ore, coal and precious metals assets screen the most favourably. Adding to the attraction is in general it is easier, quicker and cheaper to buy new capacity rather than to build it.

Among the Australian companies, BA-ML estimates the 29 miners covered will generate US$142 billion in free cash flow in the next three years. This, plus operating synergies, growth options and infrastructure are likely to be key factors driving any consolidation in the sector.

BA-ML's numbers suggest Macarthur Coal ((MCC)) screens very well in the coal sector, while most emerging iron ore companies in Australia have built up relationships with strategic investors. Atlas Iron has not yet done so, but BA-ML notes it is now generating solid cash f lows from its operations.

Where Australian M&A activity levels have already picked up is among junior gold miners, BA-ML noting there have already been four transactions announced this year. Further deals are likely, with those most likely to move being companies with strong production growth and or exploration upside. 

In the uranium sector BA-ML sees Paladin and Extract Resources ((EXT)) as best placed to benefit from consolidation appeal. For Paladin the attraction is valuation following recent share price weakness, while for Extract there is likely Chinese interest in the Husab deposit and good synergies with Rio Tinto at the Rossing mine. 

article 3 months old

Pressure Lingers For Uranium

By Greg Peel

The week before last saw minimal activity in the spot uranium market which was largely a result of attendance at the World Nuclear Fuel Conference, but last week was hardly a hive of activity either. Uncertainty is lingering over global uranium policy.

Speculation that more European countries might take Germany's lead in phasing out or restricting nuclear capacity growth is keeping buyers at bay at present, notes industry consultant TradeTech. Italians last week voted against a referendum to expand the country's nuclear capacity, albeit the vote was tied up with referenda on other measures and a resounding “no” across the board was taken more as a general protest against President Berlusconi than a specific energy consideration. Still – nuclear is not a popular word at present.

Speculation also continues that none of the Japanese reactors which have been shut down for safety checks in the wake of Fukushima will ever reopen, although the market is split. News reports on the weekend showed Japanese businessmen being encouraged to “dress cool” this summer and eschew stuffy suits for shorts and Hawaiian shirts such that air-conditioning demand can be reduced ahead of what may be inevitable power cuts in this limbo period.

Either way, there is currently more supply in the spot market than demand, Trade Tech reports, such that the price had to fall to entice three transactions last week totalling 500,000lbs, with utilities and speculators involved on the buy-side. TradeTech's spot indicator has thus fallen by US25c to US$54.25/lb.

Offers were due last Friday for a delivery of 200,000lbs of U3O8 equivalent in July, Trade Tech notes.

article 3 months old

ERRATUM The Global Gas Race

In yesterday's article, The Global Gas Race (see below), the suggestion was made that Citi analysts believed Origin Energy would "ditch" a second train at APLNG. This interpretation was incorrect. The suggestion made by Citi was that Origin might initially move to a financial investment decision (FID) on one train only, while having enough gas for two. The story also stated there are six trains at the North West Shelf, while there are only five.

The article has been amended accordingly.

- LNG is set to benefit from a global nuclear back-down
- Shell is investing heavily
- The US has approved shale gas exports
- The race is on to meet Asia demand or fall by the wayside
 


By Greg Peel

Recommended reading: The New Global LNG Dynamic; LNG: Here Come The Yanks.

Origin Energy ((ORG)) is attempting to shore up funding for a second LNG train for its Asia Pacific (APLNG) project in Queensland. To that end it has just successfully raised 500m euros via a London-listed hybrid issue which Citi suggests should stave off the need for the company to raise dilutive equity, at least until FY13. Even then, Citi believes Origin will still need to find a partner(s) to take an equity stake in a second train.

The news simply reinforces the reality that LNG projects are extremely costly, take an awfully long time to ramp up, and as such require long term sales agreements to be in place in order to make their construction viable. These in turn need confirmation of sufficient gas reserves. But given expectations of an accelerating LNG demand curve in emerging markets, particularly China and India, should long suffering investors in Australia's LNG fortunes be concerned?

China's gas demand, notes Deutsche Bank, now exceeds that of the UK and that of Germany, but this “only hints at the large demand increases projected over the next five years,” the analysts suggest. China, and also Europe, will increasingly need to draw upon a common source of supply, being Central Asia. If that's not enough, energy analysts at UBS have now increased their earlier incremental global demand increase for gas as a result of nuclear closures, a result of Fukushima, by 50%.

UBS is somewhat perplexed that Germany would choose to close down all its nuclear reactors over time given many are young and feature modern, low-risk designs which could easily withstand floods or earthquakes. Older reactors in Switzerland or the UK would be more obvious choices, UBS suggests, as would some French reactors in questionable locations. Germany has none of these issues, which makes the decision purely a political one. Switzerland is planning to phase its reactors out as well, and what of Belgium and Spain? UBS sees 11GW worth of European closures out to 2013. Japan closed 15 of 55 reactors post-quake and not one has received approval to restart despite annual refuelling. Because they are too dangerous? No, because of local government opposition.

It is now the traditional maintenance season for US reactors, notes JP Morgan, but an “extraordinary” number are currently off-line.

This is, of course, all bad news for the uranium industry but good news for the natural gas industry given gas power is the obvious substitute for nuclear power. Gas is currently cheap and known to be abundant, oil is expensive and believed to be limited, and while coal is abundant the carbon emission issue may yet render coal power expensive. China is still building coal-power plants at ridiculous rate, but it is also continuing to build nuclear reactors and is ramping up its regasification capacity with the view to importing more LNG.

Royal Dutch Shell clearly believes gas is the future, given it has just committed to building a US$10bn floating LNG platform off the WA coast. It is a massive project, and a project of the future. Not so futuristic is Shell's Pearl facility nearing completion in Qatar. Again a project of enormous scale, Shell plans to turn Qatari gas into diesel at Pearl using 1920s gas-to-liquid technology. The facility should be fully operational in mid-2012 when it will provide 8% of Shell's energy output. As of next year, Shell will be producing more gas than oil, reports Investment U.

Interestingly, it is only the current high price of oil which makes the project viable. Shell began building Pearl in 2006, and industry experts ponder whether the company would choose to build Pearl today, even though oil prices are higher, given a significant increase in capital costs. If you have a rich gas field, as Shell does in its joint venture with state-owned Qatargas, then today you would more likely turn that gas into LNG rather than diesel, those experts suggest.

Adding Shell's LNG plans in Australia, including its floating LNG project, to other planned Australian projects means that Australia's liquefaction capacity growth rate will take over that of Qatar's – which boasts several LNG “megatrains” – in the next ten years, JP Morgan reports. Shell alone will be investing US$30bn, including the US$10bn FLNG investment.

JPM calculates that Australia was the second largest non-Asian exporter of LNG to Asia in 2009, behind Qatar. Aside from the attraction of Australia's abundant gas fields, local and foreign investors see the benefits in exploiting Australia's close proximity to the Asian region. Which brings us to US shale.

US authorities had been debating whether or not, in a time of diminishing US energy security, local gas producers should be allowed to export valuable US gas as LNG to the rest of the world. As the world's biggest consumer of oil, the US is the world's biggest importer despite its own production in the Gulf of Mexico and elsewhere. And despite importing most of its oil from friendly Canada and Mexico it still needs Saudi Arabia, Venezuela, and then some of its serious enemies as import sources. If sources of oil are indeed diminishing at a time when emerging market demand is exponentially growing, then the US will need to rely even more heavily on Arab and Persian production in the future.

Unless it turned more decisively toward its own abundance of natural gas. But no – better to export that. Last month the authorities gave approval for a company called Cheniere to be the first LNG exporting cab off the rank and given existing storage tank and port infrastructure in the Gulf, the company believes it can have its first LNG away in 2015 – one year earlier than global analysts had pencilled in for the first US LNG exports. The Cheniere green light should be the trickle that turns into a flood, given the number of shale gas companies in the US (including one BHP Billiton ((BHP))) eager to get moving.

Aside from the delay of supply from most projects until 2016, and assuming Cheniere's date is ambitious, the US still has a proximity problem. It costs more money to get LNG from the US (Gulf) to China than it does from Australia, for example. Citi believes Cheniere has the jump however, given its aforementioned existing facilities will lower its landed gas price in China to a comparable Australian price of US$64/bbl of oil equivalent. (Note that LNG is priced as a ratio to the oil price).

Even if the US gas spot price was to rise to US$6/mmBtu (as the forward curve suggests) from US$4/mmBtu (spot) where it is now, notes Citi, that price would still only be a comparable US$75/bbl.

Not all US shale gas LNG producers will have that advantage, and not all will be up and running by 2016. Yet from 2012-15, the first of Australia's new LNG projects now under various stages of completion/approval will be ramped up and a new wave of Australian-produced LNG will hit the global market.

At present the world is suffering from a gas glut from previously ramped up projects in Australia and Qatar in particular (as well as traditional suppliers such as Russia and the North Sea) which has exceeded the demand growth curve in emerging markets. That curve is nevertheless catching up fast, such that Australian projects ready in 2012-15 will meet significant fresh demand. By the time US shale becomes a significant source, we'll fall back into glut again, until even further down the track when once again that demand curve catches up.

But “even further down the track” is not good enough for a lot of planned projects in Australia which will miss the first demand growth window. To be viable, they must be looking to reach financial investment decision (FID) status fairly soon, which means proving up sufficient gas reserves and finding sufficient long term customers. The costs and the risks are just too much to consider when the time frame is too long. At present, even the 2012-14 window projects are struggling with funding issues, sales contracts and equity partners, as the above news on Origin's APLNG would attest. Bear in mind Origin is pitching for a second train.

Irrespective of the added gas demand a slowdown in global nuclear ambitions might herald, Citi sees too many options for buyers ahead. The analysts believe Origin will end up moving to FID on only one train at this stage, even though it has enough gas for two. And time is running out for projects such as Woodside's ((WPL)) Browse. We recall that Woodside is still struggling to get to FID on a second train at Pluto, things are going so well in PNG for Oil Search ((OSH)) and Santos ((STO)) that analysts are contemplating trains three and four, North West Shelf has five trains, Gorgon is massive, Shell's planning FLNG, let's not forget Santos' Gladstone project, as well as Arrow's Fishermans Landing, and, and, and, need I go on?

All of this in the face of eventual exports of US shale LNG, of pipelines to China planned from Turkmenistan and even Russia, Qatar's vast reserves, the other half of Qatar's reserves owned by Iran, a big gas field discovered off India, and the fact China hasn't even started looking for shale in its own back yard yet.

How are you looking with your current portfolio of Australian LNG gas producers and hopefuls? Getting impatient yet? It's all going to come down to timing, because first movers will win big and slow movers will fail.
 

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article 3 months old

Uncertainty Dogs Uranium

By Greg Peel

Last week saw the annual World Nuclear Fuel Conference held in Seville which distracted the usual market suspects and ensured a mere 150,000 pounds of U308 equivalent was traded in the spot uranium market, industry consultant TradeTech notes. However the lack of activity did not ensure a flat price.

Last week German chancellor Angela Merkel received backing from her cabinet for the nuclear phase-out plan agreed upon by the chancellor and state premiers the week before. Nuclear power currently provides 25% of German power. Uranium stock investors looking for a hedge are no doubt considering increasing their exposure to alternative energy companies given Merkel's plan includes a doubling of alternative energy capacity in Germany to 35% of all power needs, over time.

Japan's reactors are also now to be shut down for maintenance which has some in the market concerned they may never come on line again. However, the rest of the market finds this suggestion very unlikely and news reports are conflicting, TradeTech notes.

Either way, there just weren't any buyers rushing to stick their hands up last week, either because of uncertainty of global nuclear demand or because the buyers were all in Spain, away from their desks. The two transactions that did occur were struck at lower prices leading TradeTech to reduce its weekly uranium spot price indicator by US$2.00 to US$54.50/lb. The consultant does however note a utility entered the market last week requesting 550,000lbs for July delivery.

TradeTech's term price indicators remain unchanged at US$60/lb medium and US$68/lb long.