News Limited May 21, 2007 - Uranium sea change

Robin Bromby

Commodities

STAND by for a uranium sea change -- the end of the big tenement land rush and the start of serious exploration.

This means, according to Far East Capital's Warwick Grigor, that the race is now on among the 150 or so locally listed uranium companies to find a resource while the metal's price is still in its peak phase.

Mr Grigor, who charts hundreds of resource juniors on a daily basis, said that the potential uranium supplies to be brought on to the market by Canadians and others could eventually see the price go back below $US100 a pound. The metal was still holding strong at $US120/lb last week.

But if the land rush phase is just about over, it's ending with a bang as both established explorers and latecomers scramble for projects.

And Africa seems to be the latest favourite.

In recent days, Crossland Uranium Mines has expanded its search to West Africa by joining a Canadian explorer to pick up 5000sqkm in Burkina Faso; Murchison United has begun drilling in Guinea and is raising another $6.6 million; Western Uranium has hired consultants to find it uranium projects in Africa; recent entrants New Age Exploration and Palace Resources have jointly gone hunting uranium in countries ranging from Sierra Leone to Mali; and NGM Resources is acquiring three uranium leases in Niger, a country where Canadians and Chinese companies have also been pouncing on uranium leads.

Also joining the ranks of the uranium players is Marmota Energy, a float being spun out of Monax Mining. Xenolith Gold has plumped for "nearology" and acquired tenements close to advanced projects held by Nova Energy, while oil and gas junior Rawson Resources is going looking for yellowcake opportunities in Texas, Utah, New Mexico and Colorado.

Mr Grigor, in his client note on uranium, said the uranium boom was now fact, no longer fantasy.

"This is a bull market based on hard factual economics, not fantasies and what-ifs," he wrote. "At these uranium prices, there are enormous cash flows that can be made."

And he now likes many of the companies that, two years ago, he dismissed as marginal players. These were the players with low- grade resources but -- with the quadrupling of the uranium price in that time -- had now been placed in an enviable position.

"If the uranium price keeps rising, these companies will shine even more," he added.

Mr Grigor expects the new exploration phase to last about two years, after which investors would be much better educated.

The more serious companies would be moving toward production, but the majority of exploration stocks would probably have withered on the vine.

Far East Capital's rankings have now been expanded to include two more companies in the potential producer category, Alliance Resources and Bannerman Resources.

Alliance has a stake in a 15,000 tonne resource in South Australia while last week a European consortium bought a large stake in Bannerman as that company looked to develop uranium mining in Namibia.

Western Aussie thoughts on Uranium stocks

Among the companies he follows are Berkeley Resources (which is exploring in Spain and has formed an alliance with France's Areva, the world leader in nuclear power development); Energy Metals, which has a high-grade deposit in the Northern Territory and is a possible takeover target; Nova Energy, 57 per cent owned by Oxiana, which has two Western Australian projects that could be out of blocks as soon as state bans on mining are lifted; and Uranex -- not for its fashionable Tanzanian exploration so much as much for its Thatcher Soak deposit in Western Australia, once explored by BP and now shaping up as the flagship project for the company.

Wilson's tips for investing in uranium stocks are:

* They should be unhedged, so they get full exposure to the soaring spot price once in production.

* They must have exploration upside. In other words, they will have already found something but can value-add by extending the size of that resource with more drilling.

* Preferably, the projects are advanced and the company has started ticking off the milestones on the road to production. A Joint Oil Reserves Committee (which sets Australian standards for resource findings) resource would be a good start.

* They have the potential to be taken over, particularly if the company is at the grassroots end of the spectrum, realising value for shareholders.

Warwick Grigor wears several hats. He sits on the boards of Monaro Mining and Peninsula Minerals and he analyses the companies through his Far East Capital investment business. He says the biggest trap for new players is being impressed by a company announcing it has "radiometric anomalies". Think geiger counter making that squawky noise.

All that means is that there may be some trace of uranium, a mineral that is pervasive and widespread. The radiometric response is not an indicator that there's an economic amount of uranium underneath.

And investors should look for companies that have done some systematic exploration.

"Isolated assays mean zilch," he says.

"Investors have to stop getting excited by these isolated assays."

Grigor argues that 90 per cent of uranium companies are not yet in a position to say they have a mineable proposition. Only when they have a bank of drill intersections are companies in a position to talk with any certainty.

However, Grigor has shifted ground on the economic threshold of projects.

As he says in his latest uranium review, sent out to clients, he had to recant his view of two years ago (when uranium was only $US30/ lb) that a deposit needed to have a minimum average grade of 0.07 per cent.

"Now, with the rise in price, even grades as low as 0.04 per cent could be profitable," he says.

Grigor ranks 23 companies as either being in production or being well on the way to that state. Some of those are -- in his view -- already fully priced.

These include Summit Resources, Toro Energy, Marathon Resources (which is starting a scoping study on its Mt Gee deposit), Arafura Resources and Berkeley Resources.

The ones he would buy now are: his own Monaro Mining, which he argues has undervalued prospects in Kyrgyzstan; Uranium King, which has projects in Nevada and New Mexico (and the Americans support uranium mining); and Contact Resources, with its project in Peru.

Grant Craighead, an analyst with Stock Resource, says one point investors should keep in mind is whether a company has geologists who know uranium well.

There are not too many of those around, and they are getting on in years, given that we went for more than 20 years without exploration for the mineral.

"There is a limited pool of talent -- to be an expert on uranium, you'd have to be at least 55," he says.

Craighead has put his own money into Energy Metals (as well as recommending it to clients).

That company has a high-grade resource at Bigrlyi in the Northern Territory which, with a new drilling program about to start, is likely to get much bigger. More importantly, though, Craighead smells a takeover in the wind.

Canada's Denison Mines is a shareholder and is keen to get a foothold in Australia. It is about to see another of its takeover bids collapse.

All the signs point to Denison then switching its takeover energies to Energy Metals.

RED HOT TIPS

WARWICK GRIGOR'S WATCHLIST

Contact Resources ............ Undervalued Peru deposit

Monaro Mining ................... Undervalued Kyrgrzstan project

Uranium King ..................... US projects

Impact Minerals ................. Inexpensive but good project

Peninsula Mining ............... New project in Wyoming

Paradigm Gold ................... Cheap buy in Queensland

Erongo Energy ................... Namibia shaping up

Xstate Resources ............... US exposure

SXR Uranium looking for Australian assets

June 11, 2007 12:00am

ACQUISITIVE Canadian uranium player SXR Uranium One is sniffing for Australian assets as it moves to bulk up its production of the nuclear fuel.

Speaking to reporters after a seminar in Toronto, the company's chief executive Neal Froneman said he would like to achieve a "critical mass" in Australia, where uranium production is dominated by global miners BHP Billiton and Rio Tinto.

Uranium One is developing the Honeymoon project in South Australia, which is expected to begin production in 2008.

The company also has assets in the US, Kazakhstan and South Africa, and last week offered to buy Toronto-listed Energy Metals Corporation in an scrip deal worth about $C1.4 billion ($A1.55 billion).

Mr Froneman said the company was not currently in talks with any companies in Australia, however the Canadian miner is believed to be watching closely the efforts of local explorers, particularly in uranium-friendly South Australia.

China, which is planning to build almost 70 new nuclear power plants, is also taking a keen interest in Australia's uranium juniors.

Liu Xuehong, vice president of China Nuclear International Uranium Co, an arm of the state-owned China National Nuclear Corporation (CNNC), told World Nuclear News the company was contacting Australian explorers with the aim of forming partnerships.

CNNC will present next month at a conference in Perth, which is expected to be attended by a high-level Chinese delegation.

Six Chinese organisations are among more than 40 companies vying for a potentially lucrative uranium deposit in the Northern Territory.

The Chinese might also be buyers of uranium from Honeymoon, with just 40 per cent of the mine's production currently pre-sold.

Uranium prices have soared over the past two years, with renewed interest in nuclear energy driving demand well above supply, following years of sluggish exploration.

Spot prices hit $US138 a pound last week, up from $US7 in 2000, although producers caution that the spot market is driven largely by speculators and doesn't reflect long-term contracts agreed to by producers and utilities.

Mr Froneman said he expected demand to continue to outstrip supply, due to the long time lag between exploration and production.

"Up to about 2015, we don't see the market coming into balance," he said.

He predicted spot prices would hit $US150 a pound before the end of the year, but said prices actually paid by utilities over the long term would likely be about $US60 a pound.

Australia is home to about 30 per cent of the world's low-cost uranium reserves and moves to relax laws on developing new uranium mines have international players watching.

The Australian Labor Party recently scrapped its opposition to new mine developments, but has left the ultimate decision in the hands of the states.

Western Australia and Queensland -- home to some of the richest deposits -- are still opposed to uranium mining.

with Reuters

Grandich also sees $200 an Oz Uranium

Peter Grandich sees uranium climbing to US$200, financial players yet to take profits
With the spot price for uranium rising further in the wake of two auctions last week, and another major deal with sxr Uranium One Inc.’s $1.6-billion friendly bid for Energy Metals Corp., surging investor interest in the sector continues unabated.

But is the end of this bull market for the nuclear fuel near?

Not if you ask Peter Grandich, author of The Grandich Letter, who attributes rising prices to tight uranium supplies.

Although he thinks we’re past the halfway point for uranium equities, he thinks uranium prices will rise to US$200 per pound. Market monitors Ux Consulting and TradeTech recently raised their spot prices to US$135 per pound and US$138 respectively, while long-term prices are at US$95 for both groups.

Mr. Grandich expected that a hedge fund or Uranium Participation Corp., which buys physical uranium, might have taken some profits by now and actually sold some uranium. But they haven’t.

“By them not doing that yet, it convinces me that the US$200 target is more reasonable than we could even have imagined just six months ago,” he said, adding that some of these players got into the uranium play early at US$30 or US$40 or less.

“It’s very hard to pass up on 300% and 400% gains, and they are doing that at the moment.”

What about the suggestion that uranium speculators may be driving up spot prices to boost the value of their mining stocks?

While the amount of institutional money out there makes these sort of manipulations relatively easy, Mr. Grandich thinks this was more likely a year or two ago because shares had not yet risen dramatically. He also pointed out that since the beginning of 2007, uranium prices have climbed, but many uranium stocks have corrected.

Not only does Mr. Grandich expect there will be more consolidation in the uranium sector among current producers, he thinks advanced-stage exploration companies will also be acquired in the next stage of deals as prices continue to rise.

As far as the ‘nuclear renaissaince’ sxr Uranium One chief executive Neal Froneman expects in the U.S., Mr. Grandich thinks the recognition of an acute need for energy both globally and in the U.S., has opened the door again for nuclear energy to become a viable energy source there.

“If someone were to have told me as late as three or four year ago that anywhere in the continental United States we would have been speaking about a nuclear plant again, I would have told them ‘not in my lifetime’ and I’m 51 year old.”

Uranium May Reach $200 in Two Years

By Angela Macdonald-Smith

June 5 (Bloomberg) -- Uranium spot prices may reach $200 a pound within the next two years, buoyed by a shortfall in supply and increasing investment in the nuclear fuel by speculators, said Macquarie Bank Ltd., Australia's biggest securities firm.

The price, which reached $125 a pound in mid-May, will probably average $125 a pound this year, rising to $135 next year, Macquarie said in a June 1 report. RBC Capital Markets, UBS AG and producers Rio Tinto Group and SXR Uranium One Inc. are among those also forecasting further gains.

Uranium prices have jumped 12-fold since early 2003, underpinned by a shortage, concerns over future production and a lack of investment in new mines, Macquarie said. Efforts to limit emissions of carbon dioxide from burning fossil fuels have bolstered demand for uranium for power generation.

``In the near term, with the market expected to remain in significant deficit in 2007-08, risk on the supply side and growing speculative interest, it is hard to see what could prevent spot prices going higher,'' Macquarie analysts Max Layton and John Moorhead said. ``We would not be surprised to see prices move up to around $200 a pound over the next two years.''

Layton, based in London, is an economist who joined Macquarie in January from the Reserve Bank of Australia, the nation's central bank. Moorhead, based in Sydney, has been at Macquarie for a year and earlier held roles at ABN Amro Morgans and BHP Billiton Ltd., owner of Olympic Dam, the world's biggest known uranium deposit.

Global uranium supply fell last year as a gain in secondary supplies from dismantled nuclear weapons failed to offset a fall in mine production.

Ux, TradeTech

There is no formal exchange for spot uranium, and the two principal companies quoting spot prices are Ux Consulting Co. and TradeTech. Ux quoted the spot price at $125 a pound as at May 28, while TradeTech put the price at $133 as at May 31, according to the companies' Web sites.

The New York Mercantile Exchange started a market for uranium futures last month. The price of the June contract closed yesterday at $137 a pound.

The start of the uranium futures market, where settlement is by cash only, not physical delivery, may add to price swings in the spot market through 2008, Macquarie said.

``We note the massive drop-off in spot volumes in mid-late April and early may, prior to the beginning of the commencement of futures contracts on Nymex, suggesting that one short-term risk is that the financial settlement-only futures take demand away from the spot market,'' the analysts said.

SXR Forecast

Macquarie's price forecast is less bullish than that of Neal Froneman, chief executive officer of Toronto-based SXR Uranium One, who said the spot price may more than double to $250 a pound next year as demand outpaces production. SXR yesterday agreed to buy Vancouver-based Energy Metals Corp. for C$1.59 billion ($1.5 billion) in shares, after in February agreeing to buy UrAsia Energy Ltd. for $3.1 billion in stock.

RBC Capital Markets last week raised its forecast for uranium spot prices. Its 2007 average forecast is now $120 a pound, up from an earlier estimate of $100, the bank said in a May 28 report. That's still lower than Macquarie's estimate. RBC raised its 2008 forecast to $145, from $85, which is higher than Macquarie's estimate for next year.

UBS also expects further gains, the bank said in a May 16 report.

`Environmental Pressures'

``Despite sharp growth in the spot prices we remain confident that the uranium spot market will continue to strengthen over the next several years,'' UBS said. ``Strong long-term global energy values and mounting environmental pressures will continue to drive the market forward.''

Rio Tinto, the world's second-biggest producer of uranium, sees ``plenty of upside'' to uranium prices, Preston Chiaro, energy group chief executive officer, said last month. Rio is examining expanding output at mines in Namibia and Australia as it seeks to benefit from higher prices.

One of the risks to the forecast for higher prices in 2007 and 2008 is any positive news from Cameco Corp., the world's biggest uranium producer, about the start-up of the Cigar Lake mine in Canada, Macquarie said. Saskatoon, Saskatchewan-based Cameco said last month that a flood in October at the mine, the world's largest untapped deposit of high-grade uranium, will delay start-up for three years until 2010 and help double construction costs.

Hedge Funds

Any turn in sentiment by traders, speculators and hedge funds, which have helped drive up prices in recent months, would also quickly push prices lower, Macquarie said. About 8,000 tons of uranium or almost 20 percent of mine supply, may be in the hands of speculators and hedge funds, it said. Any move by Rio Tinto to accelerate expansions at the Rossing mine in Namibia and the Ranger mine in northern Australia pose a further risk to the higher forecast, the bank said.

The uranium market supply deficit, which was 10,572 metric tons last year, should halve this year and narrow further next year to 3,945 tons, as supplies increase from new mines in Kazakhstan, Africa and North America, Macquarie estimates. Beyond 2008 the market will probably move into surplus as supply responds to higher prices, it said.

Total supply is forecast to increase by about 46 percent to 90,500 tons by 2013 from 62,192 tons in 2006. Mine supply is set to surge by 85 percent to 72,821 tons by 2013, while secondary supplies are set to fall 23 percent over the period, the bank said.

Macquarie forecasts the average uranium spot price will fall to $100 a pound in 2009, $80 in 2010 and $65 in 2011, then to a longer-term average forecast of $40.

Ngapa clan want low level dump

Land in Australia's Northern Territory will be assessed for suitability for radioactive waste management facilities after nomination by its indigenous owners.

The Ngapa clan has put forward 1.5 sq km of its 200 sq km holding near Muckaty Station as a potential site for a low-level waste (LLW) disposal site and an intermediate-level waste (ILW) store.

LLW typically takes the form of laboratory materials like gloves, glasswear and clothing as well as contaminated soil and objects like luminous dials. The material is typically placed in steel barrels which are then compacted to save space. ILW would include disused radiotherapy and industrial radiation sources as well as waste resulting from the recycling of used nuclear fuel from Australia's research reactors, which has taken place in France and the UK.

The country's first research reactor, Hifar, has recently been shut down, having been replaced by Opal, which is currently in the commissioning phase.

The Australian Nuclear Science and Technology Organisation (Ansto) would now be permitted to study the land, alongside a number of other possible locations. If Muckaty Station were to be chosen, the Ngapa clan would receive A$1 million ($819,000) to invest in enhancing their education and training opportunities, while payments amounting to A$11 million ($9 million) would be made to a charitable trust for their benefit. The clan numbers around 60 people. The Ngapa land would be leased to the Australian government for 200 years, before being returned to them.

Meanwhile, Ansto has submitted an application for a licence to enter the second phase of decommissioning Hifar. The first stage was the removal of highly radioactive used nuclear fuel and the reactor's heavy water. The second phase would see the dismantling of non-radioactive parts of the facility and detailed work begin to fully plan the remainder of decommissioning work. Further permissions would be required before the third and final stage could commence, leaving the site free for alternative use around 2016.

Much material from Hifar's decommissioning would eventually be stored in the LLW and ILW facility.

Short Term Outlook points to Higher Uranium Prices

Shares of Paladin Resources (PDN) rose from a low $0.04 in January 2004 to beyond $1.00 for the first time in February 2005, a gain of 2500% in a little over a year. By January 2006 they had crossed the $3.00 mark, a gain of another 200% in less than a year. By December of last year they were trading above $9, representing another gain of 200%.

Paladin shares peaked at $10.75 in February this year and then again at $10.80 in April, only to fall back below $8.50, from which point they've risen again to above $9.

For the first time in more than three years shareholders have not made any gains on their shares over a five month period.

A similar story applies to shareholders of Energy Resources of Australia (ERA), which is currently trading some 14.5% below its April peak, and to most of the 160 other ASX-listed uranium stocks. In Toronto and New York as well most share prices of uranium producers and developers have retreated in the past weeks.

What is happening with uranium stocks? Has anything fundamentally changed for the sector?

Not really. If anything more and more market insiders and close followers of the industry have come to realise the market is likely to remain much tighter for a much longer time. Taken from that perspective uranium is no different from the likes of iron ore, crude oil and nickel for which average price estimates in the market have been continuously on the rise this year.

Uranium's spot price certainly has had the experts baffled since late last year. After entering calendar 2007 on an already higher than expected US$75/lb, spot uranium has made a few giant leaps to a preliminary peak of US$122/lb this week, up 62.6% in five months after doubling in price in each of the two previous calendar years.

If current market indications are any guide spot uranium will reach US$150/lb between now and December. If achieved, this would mean the weekly spot price has once again doubled within twelve months.

According to sources inside the industry, this scenario is likely to unfold sooner rather than later as spot uranium seems poised to record another leap forward in the next few weeks. This could possibly take the weekly spot price as high as US$140/lb in June.

Within this context, last week's price increase by US$2 to US$122/lb would have come as a minor disappointment to participants in the industry. Apparently several offers in the US market at around US$125/lb failed to find a buyer while one small transaction was concluded at US$122/lb during the week.

Two public auctions in two weeks have the potential to push spot uranium to new record highs. Firstly there is the monthly auction of 100,000 lb U3O8 (yellow cake or uranium concentrate) by Corpus Christi, Texas based and privately held Mestena. It is believed this month all bids are due by May 30. The Mestena auctions have been responsible for solving several deadlock situations between buyers and sellers in the first months of 2007.

This month the Mestena auction is competing with an unnamed hedge fund which is believed to have approached a number of potential buyers and invited them to submit offers by June 1. The fund is auctioning 200,000 lb U3O8 and 100 metric tons UF6 (uranium hexafluoride).

The positive prospects for uranium producers were also highlighted at a Rio Tinto presentation to securities analysts in London this week. Both the slides and a webcast of the presentation are available on the RioTinto.com website.

The company reiterated its intention to potentially double its global production in the next five years while still expecting the market to remain in deficit until at least 2012.

A recent presentation by industry service provider Nukem goes even further. The industry experts believe market fundamentals have shifted even more in favour of uranium producers recently, a situation that may not change for another ten years.

Nukem sees increasing demand for uranium as the world's focus on global warming and more efficient energy usage intensifies, while producers need time to ramp up new mines and extend their current programs. Delays and production shortfalls are more norm than exception, the experts at Nukem argue, pointing out the flooded Cigar Lake project could easily be delayed for three to five years (instead of the two years as stated by operator Cameco). This would have clear negative ramifications for buyers of uranium in the years ahead.

Cigar Lake is the single most important known new source of uranium in the world. The potential loss of production from the project in 2009 exceeds all current scheduled additional supply for the year, and not just in Canada but globally.

Nukem believes demand for uranium is likely to exceed the so-called high case projections by the World Nuclear Association whose estimates are used by securities analysts worldwide.

The presentation suggests supply and demand are unlikely to reach a balance for many years to come.

Whether all this means that share prices of every company with a vague connection to uranium will continue to soar is doubtful. Some market commentators believe part of the hot money has left the sector this year as momentum slowed and further appreciation of share prices had become less obvious.

Others believe investors have become more knowledgeable and they have started to differentiate between likely winners and losers in the sector. The fact that Cameco shares are trading near their all time high on the Toronto Stock Exchange could be interpreted as a sign of this.

Probably of equal importance has been the fact that mainstream stock brokers have sort of rediscovered the sector over the past nine months. Apart from revealing a wide variety in opinions and views, with corresponding large differences in price projections, reports issued by these experts have also shown investors further upside for share prices does come with limits.

As an example of this, Deutsche Bank analysts upgraded Paladin Resources to Buy this week with a price target of $9.73 arguing paying around 1.7 times Net Present Value seemed appropriate for a company such as Paladin.

Some commentators believe investors largely dismiss these NPV based calculations these days as the usage of long term product prices of around US$45/lb has become questionable with experts such as Nukem anticipating another ten years of global supply deficits.

But even looked upon from a pure price/earnings ratio point of view it is difficult to argue that Paladin shares are cheap these days. At Monday's $8.76, Deutsche Bank believes the shares traded on an estimated FY08 P/E multiple of 31 (forecast EPS $0.36) and a FY09 multiple of 18 (forecast EPS $0.56).

All of a sudden, a share price of $15, or even $12, as widely speculated only a few months ago, seems a long way off. Many an explorer is trading at higher resource valuations than both Paladin and ERA.

It should come as no surprise to anyone if share prices of most uranium stocks will fail to keep pace with further rises in the spot price from here on. The real challenge will come when the weekly spot price stops rising, though that may not happen for a while still.