Tag Archives: Uranium

article 3 months old

Uranium Goes Quiet

By Greg Peel

As noted in Nuclear Ist Verboten last week, May ended with the uranium spot price down US50c to US$56.50/lb from its earlier price but US$1.50 higher than the April close. The market was left to contemplate the implications of Germany's post-Fukushima decision to phase out nuclear energy in the country by 2022.

There was very little activity in the week with only three transactions totalling 375,000/lbs of U3O8 equivalent noted by industry consultant TradeTech, and the spot price remained at the US$56.50/lb level. No new business was transacted in the term markets.

The week was impacted by the US Memorial Day holiday on the Monday, TradeTech notes, and also by preparations for this week's World Nuclear Fuel Market conference in Spain which had market participants in transit.

In a last minute update, released shortly before the publication of this story, TradeTech reports its spot price has fallen US25c to US$56.25/lb.

article 3 months old

Nuclear Ist Verboten

- Germany has declared it will phase out nuclear power by 2022
- The short term impact will not be substantial
- The medium term impact will not be substantial either


By Greg Peel

Germany is a world leader in the pursuit of renewable and other forms of “green” energy and as such has spent a good deal of effort trying to avoid burning coal and importing gas for its power needs. Germany is, for example, the world's largest developer of geothermal energy. The Frankfurt Exchange is considered the place to list companies involved in any form of alternative energy. And until early this week, Germany produced 22% of its base load power from nuclear reactors.

German nuclear power has always a bone of political contention in Europe's largest economy. While nuclear power does not involve the burning of fossil fuels and thus the emission of carbon, there are strong arguments that uranium mining does and therefore nuclear cannot be rendered truly “green”. And that's before you get to the small matter of what to do with the spent fuel rods (Britain still has every rod ever spent over decades of nuclear power generation in storage waiting for an answer to that question) and as to whether nuclear reactors are safe.

France and Sweden live happily with their substantial nuclear power generation but in Germany, the Green Party has always been anti. The coalition government in place in Germany a decade ago of which the Green Party was a member voted to phase out nuclear energy, but it was then usurped by a coalition of which Angela Merkel is now leader. Her government not only supports existing nuclear energy, but recently voted to extend the end-of-life shut-down schedules of the country's existing reactors by many years.

Then along came the Japanese earthquake, tsunami, and Fukushima nuclear disaster. In late March, a German provincial election delivered the country its first Green coalition state government. The vote was seen as a referendum on nuclear power, irrespective of all that's being going on otherwise including opposition to Germany's financial support of recalcitrant eurozone members. Merkel was forced to act.

Merkel called for two reports – an objectively pragmatic report from the country's Nuclear Safety Commission (RSK in German) and a less objective, broad social inquiry into nuclear power by a specially formed Ethics Commission.

The RSK delivered its report in mid May and while noting that a number of older reactors would be hard-pressed to withstand even a light plane crash, the overriding view was that Germany's reactors were sufficiently safe on the whole to withstand imaginable shocks. But then the EC reported and showed little equivocation in recommending Germany permanently shut down all of its nuclear reactors by 2022.

Fighting for her political life, Merkel went with the EC.

Although having previously extended German reactor life, Merkel's plan was always to phase out nuclear power over time anyway on the assumption it could gradually be replaced by renewable energy sources such as solar and wind, among others. So realistically, this decision, albeit purely political, does not represent a major policy backflip. Indeed, the EC's report added the caveat that it would be “unacceptable” if a nuclear phase-out simply led to nuclear power imports (from France for example) or higher electricity prices or – and this is the big “or” – increased CO2 emissions.

Whether or not the caveat seems somewhat ingenuously utopian, Merkel has vaguely made that pledge. No analyst across the globe has come forward to suggest a one-for-one replacement of lost base load power with renewables in the time frame is realistic, which implies Germany will have to simply increase its coal consumption, one assumes.

Germany had already shut down reactors in April pending safety checks but Macquarie notes a concerted push to increase solar and wind energy production worked, such that Germany's coal consumption actually fell in the month rather than rising as was expected. The problem, however, is that Macquarie suggests the unusually high level of sunny and windy weather experienced in Germany in April will not be the case every month.

(Note that the Swedes like to poke fun at the Danes for boasting the highest level of wind power generation per capita on the planet given often Denmark has to import nuclear-produced power from Sweden when not even a zephyr can be detected.)

Yet whether or not Germany's lost nuclear capacity can be replaced by renewables or will have to be replaced by fossil fuels is not the concern hanging over the uranium market. What uranium producers need to know, and investors in uranium producing stocks would like to know, is just what impact the German decision will have on the uranium industry.

In the short term, suggests Macquarie, not a lot. Indeed, the analysts are surprised that the drop in the uranium spot price post-Fukushima has been no greater than from US$73/lb to US$56/lb given a marginal production cost of US$40-50/lb at present. That the spot price is still trading above the cost curve suggests short-term supply remains tight, which can largely be attributed to stockpiling by China. China's current apparent demand for uranium is above its level of current consumption, but then China is not planning to alter its grand nuclear plans like Germany and right now can pick up stock at a good price.

Germany, on the other hand, already has stockpiles which it will now run down gradually in the phase-out period. At this point Germany will not be buying any more uranium on term contracts, so the global risk for uranium demand is a medium-term consideration. And even then, it is not exactly material. Says Macquarie:

“The direct impact on global uranium consumption relative to our post-Fukushima base case is to reduce it by about 1% through 2016, and to reduce demand by up to 2% by 2020.”

On those numbers, it's not what you might call a global nuclear disaster, assuming Germany is not suddenly joined by a rush of other countries with phase-out plans (Switzerland made the same decision previously). We can also, of course, note that a decade is a long time in global nuclear policy and development terms and a very long time in politics. Understandably, there are already rumblings of law suits and compensation claims from Germany's nuclear power companies.

Meanwhile, the German announcement right at the end of May did have an impact on uranium industry consultant TradeTech's monthly spot price indicator. Having risen last week to US$57.00/lb from US$56.00 the week before, the indicator was marked at US$56.50/lb on May 31. But that's still US$1.50 above the April price.

Activity soared in May compared to April, TradeTech notes, with 33 transactions completed in the spot market totalling 3.8mlbs of U3O8 equivalent.

The highlight of the month was first the denial and then the confirmation of the sale of all of the US Department of Energy's 5.2mlb stockpile reduction quota, which was intended to be sold gradually out to 2013, via Fluor-B&W to a single party. The problem is that while this might suggest the removal of a large overhang from the uranium spot market, the buyer – Traxys – is a trader and not an end-user. So in theory the stuff is still out there, one way or another.
 

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article 3 months old

Uranium Rumour Confirmed

By Greg Peel

The story so far:

The US Department of Energy was planning to sell 5.2m pounds of U3O8 equivalent from its stockpiles systematically out to 2013 to pay for the clean-up of the Portsmouth enrichment facility. This was keeping a lid on any potential bounce-back in the uranium spot price following its plunge after the tsunami.

Three weeks ago a rumour surfaced that clean-up contractor Fluor-B&W, which was to receive the DOE uranium as payment, had found a buyer for the full 5.2mlbs. The uranium price pushed up to US$57/lb.

At the end of that week Fluor denied the rumour and the uranium price fell back a dollar to US$56/lb in the following week's trade. But at the end of that week, Fluor announced it had indeed sold the whole lot to international metal and mineral trader Traxys.

Given the 2-year overhang of a sizeable amount of uranium had been removed from the market, one might have assumed a sudden rush of buying would result lest the post-Fukushima bargain prices ran away. Alas, it was not to be.

Last week a bill was introduced into the US Congress proposing a pilot program to re-enrich depleted uranium tailings to be sold onto the market to further assist with the Portsmouth clean-up cost and to fund another clean-up at a Kentucky enrichment facility and extend that facility's operation beyond its proposed 2012 closure date.

So the excitement was dulled, and industry consultant TradeTech reports it was a quiet week of trading last week with only six transactions completed totalling 650,000lbs of U3O8 equivalent. The consultant's spot price indicator did manage nevertheless to regain the dollar lost to US$57.00/lb.

There were no transactions in the term market. TradeTech's indicative prices remain at US$59/lb mid-term and US$68/lb long-term.

article 3 months old

Material Matters: Oz Energy Stocks, Oz Steel Data, And Forecast Changes

- Macquarie the latest to adjust commodity forecasts
- Oz steel data for April mixed
- Goldman Sachs adjusts preferences in energy sector


By Chris Shaw

Macquarie has not changed its directional view on commodity prices but specific forecasts have been adjusted. Bullish changes have been made to iron ore and copper numbers, while estimates for uranium have been lowered.

The changes reflect Macquarie's view Chinese economic activity levels continued to grow strongly over the first four months of 2011. Commodity end use demand has also been healthy. Ex-China, world PMIs (Purchasing Managers' Indices) have moderated slightly but continue to point to solid growth according to Macquarie.

Near-term, Macquarie sees something of a cyclical slowdown within what remains a positive longer-term trend. Economic growth has been geared towards Asia and there is nothing at present to cause any change to the view this trend will continue.

In general Macquarie expects steepening cost curves will mean prices stay higher for longer, so risks in relation to price forecasts remain to the upside. Major beneficiaries will be the low cost miners, so Macquarie sees scope for an increase in capital returns to shareholders, increased M&A activity in the sector, a push towards sustaining capital spending and renewed focus on organic growth.

Specifically, Macquarie suggests signs are the copper market is tightening up, with the market expected to be in deficit by as much as 500,000 tonnes in 2011 and by 200,000 tonnes in 2012. Thanks to higher than expected stock build over the past six months, higher price forecasts have been pushed out slightly. Macquarie is forecasting copper prices of US$10,304/t this year, rising to US$11,581/t in 2012. These forecasts are down 6.5% and up 5.0% respectively from earlier projections.

Aluminium price forecasts are largely unchanged, Macquarie suggesting post a rally since last October there is now limited upside from current levels. Forecasts stand at US$2,603/t for 2011 and US$2,316/t in 2012.

Zinc prices have fallen to levels Macquarie views as a strong buying opportunity, as downside appears limited thanks to pricing currently digging into the 90-95th percentile of the cost curve. Forecasts reflect this, Macquarie expecting zinc prices of US$2,316/t this year and US$2,449/t in 2012.

Nickel appears headed for a market surplus in the second half of 2011, a trend expected to cause an easing in prices. On a 12-month view Macquarie sees prices falling by 10-15%, forecasts standing at US$24,509/t this year and US$20,957/t next year.

In the bulks, Macquarie argues a supply shortfall will necessitate a large re-rating for iron ore prices, while met coal price forecasts have also been increased. The adjustments are significant, Macquarie lifting forecasts for long-run prices by 12.7% and 7.4% respectively.

Shorter-term prices should also gain, Macquarie expecting a re-acceleration in iron ore prices from the third quarter of this year. For the full year the broker is forecasting a price of US$178/t CFR China, which would be another record.

For hard coking coal Macquarie's forecasts have increased by 15% this year and by 19% in 2012 to US$303/t FOB Australia and US$264/t FOB Australia, with prices expected to stay firm until stock levels are replenished from current critical levels.

Macquarie has not significantly adjusted precious metal price forecasts, with average prices for gold expected to be US$1,490/oz this year and US$1,350/oz in 2012. Macquarie continues to prefer platinum group metals in the sector, particularly as silver appears vulnerable to more downside risk.

In uranium, Macquarie suggests the market is unlikely to move into a deficit situation prior to 2014. This implies price weakness until that time, Macquarie's forecasts now standing at US$60/lb this year, US$56/lb in 2012 and US$45/lb in 2013.

The Australian Bureau of Statistics has released steel import data for April, UBS viewing the data as mixed. Long product imports rose 33.1% compared to March, pipe and tube products rose 31.2% and flat products were broadly in-line.

In UBS's view, the combination of recent gains in the Australian dollar and falling regional steel prices suggests increased imports in the near-term. This risk has increased given global steel production rose in March in year-on-year terms.

With domestic demand still around 15% below the levels enjoyed prior to the Global Financial Crisis, UBS expects the market will see an increase in deferrals by domestic customers anticipating lower steel prices.

JP Morgan suggests the typical two to three month lag between orders of imported steel and those products actually arriving in Australia means the impact of the most recent increase in the Aussie dollar is unlikely to be seen until June and July import data.

But as with UBS, the potential for lower import prices in coming months has JP Morgan expecting domestic customers will increasingly defer orders. While import volumes rose in April, JP Morgan doesn't equate this to lower market share for OneSteel ((OST)). This is based on the view buyers are running down inventories while assessing competing price offers.

JP Morgan retains the view OneSteel's iron ore operations will allow the share price to perform better over the next six to 12 months than BlueScope Steel's ((BSL)). UBS agrees, though it rates both companies as Hold compared to JP Morgan's Overweight on OneSteel and Neutral rating on BlueScope.

Over in the energy sector, Goldman Sachs has adjusted its views on market leaders Woodside ((WPL)) and Santos ((STO)). Woodside has been upgraded to Buy and Santos downgraded to Hold, reflecting the potential for positive share price catalysts for the former and the absence of such catalysts for the latter.

According to Goldman Sachs, if Woodside's new CEO, Peter Coleman, can deliver progress on major growth options such as Browse, Sunrise and the Pluto expansion there is potential for material share price upside.

In contrast, Santos is in a risky execution phase at its Gladstone LNG project, while lacking any similar positive catalysts shorter-term. Comparing the changes of Goldman Sachs, the FNArena database shows Woodside scores three Buys, four Holds and one Sell and Santos is rated as Buy four times, Hold three times and Sell once.

article 3 months old

The Significant Upside Of Clean Energy

- JP Morgan initiates SLX with Overweight
- clean energy technology offers significant upside
- Consensus target supports the view 


By Greg Peel

RBS Australia has been covering Silex Systems ((SLX)) for over two years now but over the period has remained the only FNArena database broker to do so. That is at least until now, as JP Morgan has initiated coverage of Silex with an Overweight recommendation and a target price of $7.00, suggesting around 90% upside in twelve months.

RBS last updated its view on Silex post its half-year result in February, at which point it upgraded to Buy. The analysts had been sitting on Neutral beforehand waiting for the achievement of a specific milestone, and achieved it was. In the interim, SLX shares have dropped from around $5.00 to around $3.70. When you are a technology developer with only sporadic news to tell in a lengthy process, it's hard to maintain the excitement.

In February RBS maintained a target price of $9.02 which then suggested 80% upside. It suggests 140% upside today but RBS may yet pull its target back a bit based on the subsequent stock price drift. Suffice to say, there are now two brokers in the database who are very keen on what Silex is all about. So what is Silex all about?

Well predominantly, it's about the separation of isotopes using laser excitation, or SILEX. To you and me, this represents the only “third generation” uranium enrichment technology under development in the world at present. Uranium enrichment clearly increases the efficiency of nuclear reactors, which provides Silex with a “clean energy” tag.

As Elizabeth Bennett once said, “It is a truth (almost) universally acknowledged that technologies based on low-carbon emissions have a crucial role to play in the development of long-term global energy sustainability”. Or perhaps this was something the JP Morgan analysts offered in their initiation report. “We believe an investment in Silex Systems,”they continue, “provides exposure to the significant upside potential of the company's highly advanced 'clean energy' technology platforms”.

Note JPM is referring to “platforms” plural, because Silex is not just about SILEX. In June 2009, Silex Systems acquired Silex Solar from BP Solar when BP decided to exit the space. The company has since continued the development of highly efficient solar power for use at the scale of the electricity utility as well as for photovoltaic cells and panels.

Silex Solar already generates revenue from its solar panel business in Australia, but the numbers fell short of expectations in the half-year accounts given both the federal and NSW state governments backed away from solar energy subsidies in the period and reduced feed-in tariffs. This explains subsequent share price weakness. The new NSW government has also caused controversy this week by reducing solar power tariffs, but clearly both RBS and JPM see an investment in SLX as a thematic well beyond the simple notion of regulated green energy kick-backs in Australia.

Indeed, the uranium enrichment project is funded by a company called Global Laser Enrichment, the shareholders of which are nuclear reactor builder General Electric, its Japanese nuclear partner Hitachi, and Canada's leading uranium producer Cameco. Investment from GLE includes the current establishment of an engineering and manufacturing facility in Tennessee. GLE is funding the capex to bring SILEX technology to commercialisation which thus alleviates the need, one assumes, for SLX to be rushing back to the market for new capital in order to progress along the development curve.

Furthermore, SLX's current solar projects include a 2MW pilot plant in Mildura, Victoria, and a plant of up to 5MW in the US and these are being paid for out of the company's cash reserves. GLE pays SLX milestone royalties during the uranium enrichment development phase and SLX will receive a share of future GLE revenues.

GLE will proceed with construction of the first commercial SILEX facility subject to the receipt of US Nuclear Regulatory Commission approval which is expected early in 2012. Royalty income will then flow from FY14.

So aside from SLX's existing solar panel business, the stock offers early investment in wider scale clean energy technologies which will take some time to reach full commercial status. Clearly there are at least two brokers, nevertheless, who are very keen on the idea.
 

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article 3 months old

Material Matters: Recent Sell-Off Is But A Correction

- Commodity sell-off a healthy correction
- Price risks remain to upside
- How to play the sector at present


By Chris Shaw

Early May saw a sell-off in commodity markets, Danske Bank offering five reasons for the price falls and why they should be regarded as a healthy correction in the sector rather than any change in direction for commodities on a medium-term view.

The first factor contributing to the correction in Danske's view was the market starting to question whether US$130 per barrel oil prices would impact on the global economy. As well, the market was long commodities including oil when the sell-off began, forcing a lot of investors to quit their positions.

At the same time the market was long the euro, which became the wrong position when the ECB failed to honour expectations of a June rate hike. As the euro was sold off against the US dollar, this reinforced the rout in dollar-denominated commodity prices.

While investors had been long commodities, Danske Bank's view is the market had run ahead of fundamentals to some extent prior to the sell-off. This is because commodity prices had risen in expectation of tighter future market balances, rather than actual supply and demand movements.

The final factor in Danske's view is recent PMI data out of China and the US suggest the global economy will enter a period of weaker activity in the next few months. This is likely to dampen commodity demand, so limiting price upside.

For Danske Bank this suggests commodity prices will be somewhat range bound over the rest of the year, with price risks still primarily to the upside. For oil this implies a range of US$110-$120 per barrel for Brent crude, with higher prices to eventuate if demand growth is stronger than expected or if OPEC decides against increasing supplies.

Forecasts have been adjusted to reflect this, Danske Bank now expecting an average Brent crude price of US$114 per barrel for 2011, down from US$116 per barrel previously. In 2012 Danske's average price forecast is unchanged at US$119 per barrel.

Among the base metals Danske has cut forecasts for all metals except aluminium, to reflect new lower levels for metal prices as a result of the recent sell-off. Upside appears limited in the September and December quarters thanks to weaker demand, but prices are still expected to edge higher in 2012 as the economic soft patch passes.

Danske Bank's average price forecasts for the base metals stand at US$2,602 per tonne and US$2,694 per tonne for aluminium for 2011 and 2012 and US$9,431 and US$10,125 per tonne respectively for copper. 

For zinc, Danske Bank is forecasting average prices this year of US$2,327 per tonne and next year of US$2,283 per tonne, while for nickel Danske expects average prices of US$25,664 per tonne and US$26,750 per tonne respectively.

Similar to Danske Bank, Citi agrees the shorter-term outlook for commodity prices remains difficult, even though the recent correction has brought prices back to a level that better reflects fundamentals. With headline inflation rates increasing across a number of economies there have been more instances of monetary tightening and this trend is expected to continue in coming months.

China, for example, is likely to have to tighten further to deal with its inflationary pressures and Citi cautions this could threaten growth. At the same time, quantitative easing in the US is likely to have soon run its course, which could make markets more vulnerable to price shocks. 

Assuming the end of QE2, some lingering uncertainty about a US economic recovery and further policy tightening in emerging economies, Citi sees scope for a move back to US assets and the US dollar. Such a move would be likely to add to pressure on commodity prices.

This could come at the same time as seasonally slower growth given the northern hemisphere summer. This sets the stage for a continuation of the short-term correction in commodity prices, with Citi anticipating an eventual resumption of the uptrend of the past several years.

Price performance in the sector will still be somewhat commodity specific, as for example Citi expects bulk commodities such as iron ore and coal should hold up reasonably well during the current period of volatility. This reflects solid demand and ongoing supply constraints. 

Forecasts stand at US$120 per tonne FOB Australia for thermal coal for JFY2012/13 and more than US$300 per tonne for coking coal through the second half of 2011. Iron ore prices should remain around US$180 per tonne this year before easing to US$150-$160 per tonne over the next couple of years in Citi's view.

In contrast, copper has likely seen its cyclical high according to Citi, as excess stocks in China continue to be run down and mine supply appears likely to improve. This leaves Citi forecasting prices of US$9,413 per tonne in 2012 and US$8,646 per tonne in 2013.

Among the precious metals, Citi still expects silver prices will revert to the mean, though this will now come from a much higher level. Citi is forecasting an average silver price for the second half of 2011 of US$31.60 per ounce, before falling to US$27 per ounce in the first half of 2012 and US$21.50 per ounce in the second half of next year.

To reflect this view, Citi has tactically lowered its weighting to the resources sector, as the recent correction has only reversed recent gains and prices remain on average around 30% higher than year ago levels.

Citi is now below index weight for resources in its recommended portfolio. The shift has been achieved by reducing the mining sector to a small overweight position and by moving the energy sector to an underweight position via removing Oil Search ((OSH)) from the recommended portfolio.

Within the resource sector, Citi's most preferred plays include Rio Tinto ((RIO)), Fortescue Metals ((FMG)), Medusa Mining ((MML)), OceanaGold ((OGC)), Western Areas ((WSA)) and Resource Generation ((RES)). Least preferred are Coal and Allied ((CNA)), Alumina Ltd  ((AWC)), Lynas Corp ((LYC)), Macarthur Coal ((MCC)) and Murchison Metals ((MMX)). 

Among the exploration and production plays in the energy sector, Citi has Australian Worldwide Exploration ((AWE)) as its most preferred, while least preferred is Beach Energy ((BPT)). 

RBS Australia's view is valuations for many miners now appear too compelling to be ignored, especially as commodity demand remains reasonably strong. With many miners pricing in lower commodity prices than current levels, solid earnings results are expected, something RBS Australia expects will see investors return to the sector.

Given such a view RBS Australia has offered a number of trading ideas for the sector. The first is Rio Tinto ((RIO)) over BHP Billiton ((BHP)), as on relative value grounds Rio Tinto appears the cheaper play.

The second idea is to buy Fortescue Metals, as the stock offers leverage to strong iron ore prices, significant production growth and impressive cash flows. At current levels Fortescue offers cheap valuation metrics as well according to RBS Australia.

Alkane Exploration ((ALK)) is also considered a Buy as the first of what is expected to be several Memorandum of Understandings for offtake of future production has just been signed. This adds confidence in the quality of Alkane's product and with a long life rare earth mine in place, RBS Australia sees value.

Given significant cost curve support in both alumina and aluminium, RBS Australia suggests buying Alumina ((AWC)), which is supported by strong cash flows and a low gearing position. An attractive dividend yield should also support the share price, while upside to RBS's valuation stands at around 20% at current levels.

OZ Minerals ((OZL)) should also be bought for the potential for value accretive exploration success at Prominent Hill and given improved valuation following a recent share price pullback. RBS Australia also likes Iluka ((ILU)), this given the potential for zircon prices to continue to surprise to the upside relative to current expectations. This should be more than enough to offset the negative earnings impact from the stronger Australian dollar.

Regis Resources ((RRL)) also looks attractive as RBS Australia sees potential for the DFS into the Garden Well project to be better than the market currently expects. As well, Regis offers gold exposure with a low level of operational and political risk.

Atlas Iron ((AGO)) offers value relative to net present value on RBS Australia's numbers, this reflecting high margin production, a growing cash balance and a suite of development projects offering additional upside potential. Atlas is RBS's preferred iron ore junior.

On the other side of the ledger, RBS Australia has Aquila Resources ((AQA)), the broker rating the stock as a Sell given some uncertainty over funding options for developing upcoming projects. With selling down some project ownership to fund the West Pilbara project a possibility, this implies some downside risk to current forecasts.

The other Sell for RBS Australia is Energy Resources of Australia ((ERA)), as there is seen to be downside risk from a strategic review if the conclusion is the heap leach and Ranger 3 Deeps projects are unviable. As well, RBS suggests operations don't have the capacity to absorb another significant rainfall event given the open pit mine is already flooded.

article 3 months old

Africa, A Continent Of Opportunity

By Richard (Rick) Mills 
Ahead of the herd 

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

Little was known about Africa’s interior so early map makers would often leave this region blank. Today’s investors may be the equivalent of yesterdays mapmakers.

Africa is a continent of opportunity.

According to The Economist, between 2000 and 2010, six of the world’s ten fastest growing economies where in Sub-Saharan Africa. The only BRIC (Brazil, Russia, India and China) country to make the top ten was China which came in second behind Angola – the fastest growing country in the world.

Nigeria, Ethiopia, Chad, Mozambique and Rwanda made up the rest of the African countries within the top ten and all had annual growth rates of around 8% or more.

The International Monetary Fund (IMF) says Africa will own seven out of the top ten places for fastest growing economies between now and 2015. The World Bank raised its forecast for economic growth in Sub-Saharan Africa to 5.3% for 2011 - the highest forecast rate of growth outside Asia.

Africans, on a per capita basis, are richer than Indians and a full dozen African states have higher gross national income per capita than China.

A lot of this growth is driven by a blossoming domestic market - the largest domestic market outside India and China. Much of the funding for Africa’s private sector comes from domestic banks and investors - their returns on investment are among the highest in the world. In the last four years private consumption of goods and services has accounted for two thirds of Africa's GDP growth. In Africa's 10 largest economies the service sector makes up 40 percent of GDP – as a comparison India's is at 53 percent.

Today Africa has 14% of the world’s population and by 2050 one in every four people on the planet will be African - by 2027 Africa will have more people than does China or India. Development expert Vijay Majahan, author of Africa Rising, said the rapidly emerging African middle class could today number almost 300 million people - that’s out of a total population of one billion.

Many African stock markets performed very well last year - eight out of the eleven main Sub-Saharan African markets closed the year in positive territory. Leading the way was the Uganda Securities Exchange (USE) with a 34.16% gain.

Some of the factors contributing to the high growth rates:

- China’s demand for raw materials
- Higher commodity prices
- Big inflows of foreign direct investment
- Foreign aid and debt relief
- Urbanization - rising incomes - growth in domestic demand

“Africa could be on the brink of an economic takeoff, much like China was 30 years ago, and India 20 years ago.” The World Bank report - Africa’s Future and the World Bank’s Role in it

Africa is incredibly resource rich, natural resource extraction and the necessary infrastructure investment is driving the development of its growing industrial and service sectors. Some of the new prosperity results from better economic policies but the ongoing explosion in commodity prices drives investment in exploration, development and mining which leads to the building of bridges, roads and power lines. Infrastructure build out is ultimately responsible for the boom in prosperity. This is because much of the same infrastructure needed for mining is also the same infrastructure essential for growth in:

- Agriculture
- Manufacturing
- Services
- Trade

The latest African Mining Indaba in Cape Town, South Africa was attended by 6,000 delegates.

A number of economies are increasingly becoming more important in terms of resource extraction:

- The West African greenstone belts have seen strong investment and has transformed countries like Burkina Faso
- Mining investment – nickel, copper and cobalt - has the potential for encouraging the same kind of transformation in Cote d’Ivoire and Guinea
- Zambia, Mozambique, Burundi and Malawi are all of increasing interest to Rare Earth Element (REE) investors
- Namibia may become a leading resource economy due to its enormous uranium potential
- Zambia is experiencing a revival of its major copper industry with new mines being developed

Conclusion

There are African countries with a well founded, and much publicized, reputation for corruption and poor governance – to put it bluntly, some of Africa’s economies are too poorly run for there to be any hope of secure investment opportunities. But, in much of Africa, there has been a sea change underway for sometime - a substantial chunk of the continent has experienced a stealthy, economic renaissance because of unprecedented, long term, political stability.

Steven Radelet, author of Emerging Africa: How 17 Countries are Leading the Way, says five fundamental changes are at work:

- More democratic and accountable governments
- More sensible economic policies
- The end of the debt crisis and changing relationships with donors
- The spread of new technologies
- The emergence of a new generation of policymakers, activists, and business leaders

Africa is the last continent to be developed – ironic considering that research confirms the “Out Of Africa” hypothesis that all modern humans stem from a single group of Homo sapiens who emigrated from Africa 2,000 generations ago.

Over the next generation Africa could very well be where some of the best returns on investment will be made - thanks to the increasing global appetite for natural resources. Many of the countries (Nigeria with its 150 million people comes to mind) in Africa will take their place on the world stage - much as the resource rich nations of Australia, Brazil and Canada have.

Africa has long been neglected by exploration and mining companies - and their investors – but resource extraction will constitute the most important economic opportunity in Africa’s history over the coming decades.

Here is the opportunity – find the countries that match your risk acceptance level, find suitable investments within these countries and watch the others that presently do not meet your guidelines. Sooner, rather than later, after seeing their neighbors prosper, they will come to see the light and change their ways opening up the country for investment and meeting your risk levels.

Ahead of the herd investments in Africa’s resource sector could be represented in an investor’s portfolio, country by country, for years to come.

Are Africa’s resource rich countries on your investment radar screen?

If not, maybe they should be.

Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com

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Richard is host of www.aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 300 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, Resource Investor, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, FNArena, MetalsNews and Financial Sense. 

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article 3 months old

A Bottom Now Seen In Uranium?

By Greg Peel

We recall that the spot uranium price had run hard early in the year as speculators returned from their forced hiatus to pick up on one commodity which had been lagging in the great commodity price push. Uranium reached over US$70/lb before a bit of a pullback to the high sixties until the tsunami hit Japan. Those speculators subsequently bailed once more and the spot priced plunged on heightened activity before finding calmer waters of stalemate in the mid-fifties.

Having decided that speculator panic-selling had now abated, utilities came back into the market last week to pick up cheaper supplies. As industry consultant TradeTech notes, the utilities were also accompanied by uranium traders and speculators getting back in. Seven transactions were reported totalling 900,000lbs of U3O8 equivalent. As the week progressed, settlement prices ticked upward.

TradeTech has thus moved up its spot price indicator by US$1.25 to US$56.25/lb.

There were no new transactions or orders reported in the term market last week albeit TradeTech notes there remain several orders in the pipeline seeking sellers. The consultant's mid-term price indicator remains at US$59/lb and long-term at US$68/lb.

Impacting on uranium price sentiment at present is the plight of Energy Resources of Australia's ((ERA)) globally significant Ranger mine. Production has ceased due to flooding and will remain that way for at least some months. The company has announced additional capex for water abatement measures but the fate of the mine is as yet unclear. The loss of Ranger production to global supply provides upside impetus for uranium prices.

article 3 months old

Extract Resources In Play?

- Macquarie and Merrills have both upgraded Extract to Buy
- CGNPC's bid for Kalahari Resources provides a positive read-through
- Rio is also a contender, possibly putting EXT "in play "


By Greg Peel

All uranium stocks have been hit hard since the Fukushima disaster raised concerns that the nuclear intentions of various countries might be rethought as a result. Such concerns have also flowed through to lower uranium spot prices.

But while Japan may clearly need to reassess its nuclear plans, and at the very least the location of its reactors, and some European centres such as Germany may now look to furthering developments in green energy instead, the world's swing factor in the nuclear energy race is China. And one is hard pressed to find anyone who suggests China will alter its nuclear ambitions. Indeed, Beijing has suggested only that safety checks and a more stringent review of new model reactors will follow.

Before the tsunami hit, the China Guangdong Nuclear Power Company had put in a bid for British-listed Kalahari Resources at 290p per share. Kalahari owns 42.8% of Extract Resources ((EXT)) to provide an interest in Extract's world class Husab uranium deposit in Namibia. Post tsunami, CGNPC and Kalahari had agreed to a reduced bid of 270p, representing a 7% discount.

Macquarie notes that the UK takeover panel is not allowing an adjustment to the bid but Kalahari is appealing. The important point, however, is that the new CGNPC bid still implies a read-through value for Extract shares of $9.95 on BA-Merrill Lynch's calculations and a range of $9.60 to $10.35 as far as Macquarie is concerned. EXT shares are currently trading at $7.72 having dropped around 20% post-Fukushima.

Macquarie has taken the opportunity to reassess its pre-production operating expenditure forecast for Husab and a blow-out leads to a 56% reduction in discounted cashflow valuation. Macquarie has thus reduced its target price for EXT but that reduction takes into account the implications of the CGNPC bid for Kalahari. The target falls to $9.60 from $10.82.

Not only is CGNPC a real contender to secure Husab by taking out Extract, another major EXT shareholder is one Rio Tinto ((RIO)). Rio also has Namibian uranium interest in the form of its Rossing mine but that project is nearing the end of its life.

Merrills concurs with Macquarie's takeover thoughts regarding either party and as such has not reduced its pre-Fukushima price target of $9.50 for Extract.

Merrills notes further that now that the Namibian government has confirmed that new mining regulations won't impact on the Husab project and that it has no intention of nationalising mining operations that element of sovereign risk is removed.

Macquarie and Merrills have both upgraded their Extract ratings to Buy this morning (Outperform in Macquarie's case).
 

article 3 months old

Material Matters: Chinese Demand To Underpin Prices

- NAB, Goldman Sachs revise commodity price forecasts
- Gold a particular beneficiary
- Chinese iron ore purchases expected to increase short-term
- Solid underlying Chinese demand to underpin metal prices


By Chris Shaw

For the March quarter, National Australia Bank's Non-Rural Commodity Price Index rose 11.2% in US dollar terms, which equated to a 9.3% increase in Australian dollar terms. For the year to December 2010 the index rose a total of 51.7% in US dollar terms.

In the March quarter price movements were not uniform, NAB Australia and commodities economist Ben Westmore noting oil prices rose on the back of MENA conflicts, which at the same time raised concerns cost pressures will impact on industrial metal demand. Base metal prices fell in March by 3.2%, while gold rose by a similar percentage amount during the month.

With conflicts spreading across a number of regions and with global economic uncertainty still a factor, Westmore suggests it is no great surprise precious metals have seen support given their safe haven status.

Looking ahead, Westmore notes recent trends in PMI or Purchasing Managers Index readings across a number of countries are supportive of demand for those commodities used in the production process. The PMI increases point to signs of a broadening economic recovery.

Less positive for commodities is the gradual emergence of inflationary pressures, Westmore noting this has the potential to impact on physical demand. This doesn't change Westmore's view non-rural commodity prices should remain elevated through 2011, though some moderation in bulk commodity prices is expected as supply constraints ease.

Westmore expects the NAB Non-Rural Commodity Price Index will grow by around 24% to the end of December, before an easing in prices in 2012 as additional supply comes on line in response to recent high prices. 

Looking at specific sectors, Westmore suggests about US$15 of the recent gains in oil prices can be ascribed to unrest in MENA countries, the rest of the increase being attributed to strong macroeconomic data from the US and the core Euro area.

With the mood in the MENA region remaining tense there continues to be scope for a supply shock in oil, but Westmore notes there have been indications Saudi Arabia is willing to lift production as a counter measure if such a supply shock was to eventuate.

Westmore has lifted his oil price forecasts, with an average price forecast for Brent crude for 2011 of close to US$115 per barrel now, up from US$93 per barrel previously. Prices are expected to average around US$110 per barrel in 2012.

If the MENA conflict was to become broader-based, Westmore notes there would be scope for prices to rise significantly higher. On the other side of the ledger, if Libyan capacity was to soon be restored, downside risk to the oil price would likely be limited by the gradual gains in global demand in recent months.

While prices among the base metals fell in March, Westmore notes price levels remain higher than they were at the end of 2010 in monthly average terms. Improving PMIs are a positive indicator for metal demand, even though Chinese demand for base metals has been somewhat subdued in the early months of 2011.

This reflects ongoing policy tightening as Chinese authorities attempt to deal with signs of increases in inflation. This has seen some easing in speculative investment demand, especially in copper. Copper stocks remain comparatively low, while nickel stocks are still historically high and aluminium stocks are most inflated relative to long-run average levels. 

In coming months Westmore expects base metal supply will increase in response to recent strong demand and high prices. Excluding copper, Westmore expects supply will outstrip demand for all metals over the next two years. 

This leads to a forecast of a 9% rise in the bank's Base Metals Index through the year to December, before a fall of around 4% in 2012. Westmore doesn't expect higher oil prices will have a significant impact on base metal demand.

Strong investor demand continues to support gold prices, Westmore seeing this as a reflection of continued safe haven buying on the back of the MENA conflicts, the broadening scope of sovereign debt concerns and uncertainty relating to the earthquake and tsunami in Japan. 

Demand for gold has also been boosted by weakness in the US dollar and rising inflationary pressures, especially in the developing world. Westmore notes data from the US Commodity Futures Trading Commission showed net-long positions of non-commercial traders have declined in recent months, though this is being offset somewhat by an apparent rise in central bank demand.

Factoring in current conditions, Westmore has lifted gold price forecasts. He now expects prices to average around US$1,450 per ounce in quarterly terms through September, then a gradual easing beyond that time to levels of around US$1,375 per ounce by the end of 2012.

For the bulk commodities, support year-to-date has come from strong global steel production and some supply side constraints stemming from adverse weather conditions in major producing markets. While the Japanese disaster will cut demand short-term, Westmore expects reconstruction will result in stronger steel production. This in turn will mean solid demand for iron ore and coking coal.

Westmore anticipates a significant rise in new bulk commodity supply in both 2011 and 2012, which should broadly keep pace with growth in demand from emerging economies. This leads Westmore to suggest while prices for bulks should ease thanks to weaker demand growth in the developed world, prices are likely to remain at elevated levels. 

Forecasts for iron ore stand at US$170 per tonne for the June quarter and US$150 per tonne for the December quarter this year and through the June quarter of next year. In hard coking coal, Westmore is forecasting average quarterly prices of US$295 per tonne in the June quarter, then US$280 per tonne for the balance of 2011 and US$270 per tonne by June next year.

For semi-soft coking coal Westmore is forecasting average prices of US$225 per tonne for the June quarter, then US$212 per tonne through the end of 2011 and US$205 per tonne through June next year. Westmore's forecasts for thermal coal stand at US$130 per tonne from the June quarter through March next year before an easing to US$110 per tonne in the June quarter of next year. 

China will remain a driving influence on commodity prices and here NAB expects economic growth of around 9% in 2011, with some upside risk given a stronger than expected March quarter outcome. The forecast allows for further tightening in monetary policy in coming months. 

National Bank has not been the only one to revise commodity forecasts, Goldman Sachs also seeing need to update estimates to mark-to-market price movements in recent weeks. The changes mean small downgrades for copper, platinum, palladium and uranium and upgrades for aluminium, alumina, lead, nickel and zinc.

The magnitude of the changes among the base metals is modest, as for example forecasts for copper for 2011 have fallen to US460c per pound from US466c previously while nickel forecasts have risen to US1,031c per pound from US1,001c previously.

More significant changes to Goldman Sachs' forecasts have come in gold, where the forecast for 2011 has been lifted to US$1,449 per ounce from US$1,348 previously. A similar increase comes in 2012, the new forecast of US$1,522 per ounce well above the previous estimate of US$1,383. 

Gold prices continue to be supported by uncertainty in currency markets, geopolitical concerns and central bank buying. This sees the metal remain on Goldman Sachs' list of preferred commodities, as these factors imply price risk remains to the upside.

To play gold via listed Australian equities Goldman Sachs prefers Newcrest ((NCM)), Kingsgate Consolidated ((KCN)) and St Barbara ((SBM)), all of which are rated as Buys. The market agrees on Newcrest given a Sentiment Indicator rating according to the FNArena database of 0.9, well above the 0.4 reading for Kingsgate and 0.0 for St Barbara.

Turning to the bulks, while Goldman Sachs has not adjusted forecasts for the sector, Macquarie continues to see scope for a further short-term push up in prices in iron ore in particular. This is based on the view supply is tight relative to demand.

Macquarie expects a new round of Chinese iron ore purchasing activity in coming weeks, something that should support a move higher in prices. Whether this lasts into the second half of 2011 remains a question, Macquarie pointing out seasonal factors, the current credit squeeze and power shortages all threaten demand.

While any reduction in real demand could allow iron ore prices to trade below the range seen so far this year, Macquarie suggests any downside will be limited by an increase in cost support to around US$150 per tonne. 

This should offer a higher level of support than was seen last year when prices bottomed at around US$120 per tonne.

Still on China, Macquarie notes power rationing has been introduced earlier than usual this year in response to higher prices for thermal coal and tight electricity supply. The power cuts are expected to hurt Chinese metals output, this at a time when demand conditions remain robust.

With thermal coal prices continuing to rally, Macquarie expects the Chinese will return to the seaborne market in coming months. This should support prices in that market, especially for low-CV Indonesian and off-spec Australian material.

Chinese metal demand for the March quarter was fairly solid in Macquarie's view, as consumption growth in year-on-year terms remained positive for most metals. There has been a further shift to greater raw material imports, Macquarie attributing this to the availability of downstream capacity and a push to add value within China.

While aluminium output fell during the period, Macquarie notes Chinese stainless steel production surged in the March quarter and lead and copper output recorded double-digit growth in year-on-year terms.

Net raw material imports fell in metals where there simply wasn't material available or where prices had run beyond a level at which Chinese buyers were comfortable. Macquarie suggests steel scrap and copper concentrate were examples of this during the period.

In summary, Macquarie suggests Chinese demand for commodities has held up well in the face of tightening measures. This suggests while metal prices will continue to react to macroeconomic news, underlying Chinese demand should underpin prices in the near future.