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The Outlook For Uranium

Commodities | Dec 21 2010

By Greg Peel

In what will be FNArena's last weekly uranium market update for the year, we leave with a market split between two views.

One is that the sudden surge in Chinese uranium demand, affected by planned reactors now reaching construction stage, plus a reduction in grades across globally significant mines, is leading to a recovery in the uranium price. We are unlikely to return to the sort of madness experienced in 2007, but there is more upside to come.

The other is that Chinese reactor-build is really not that significant, that grade reductions are only temporary, and that Kazakhstan is a significant swing producer, all of which suggests a global market in uranium surplus for several years yet. Under this scenario, spot prices are unlikely to rise any higher.

They did rise last week nevertheless. Industry consultant TradeTech reports five transactions totalling 80,000 pounds of U3O8 equivalent, mostly traded as UF6. Buyers were bidding at prices higher than last week, but sellers were again backing off. In the end, the spot price indicator finished up another US$1.00 at US$61.50/lb.

TradeTech's medium term indicator remained at US$62/lb and its long term at US$65/lb.

Yesterday's announcement that Australia's Paladin Energy ((PDN)) had agreed to acquire Canada's Aurora Energy has again turned stock analyst attention to the uranium outlook. While all analysts agree Paladin will pay a fairly reasonable price for Aurora, all are keen to point out that there remains a ban on uranium mining in the areas of Newfoundland and Labrador in which the Aurora assets lie. And there is little indication the local communities are about to change their attitude to uranium.

Thus while Paladin's ongoing geographical diversification and exploration portfolio upgrade continues, once again it is reliant on a change in government policy, or a change in government. One analyst suggests it could be a decade before Paladin could even see production from Aurora. And all the while Paladin is sitting on another significant suite of assets in Queensland which it scored a few years ago in acquiring Summit Resources, yet the Queensland government shows no sign of lifting its own ban.

Investors in Energy Resources Of Australia ((ERA)) have also for many years held out hope the company could begin developing its Jabiluka deposit in the Kakadu National Park. The deposit lies in a territory which is not subject to government bans, but it is in a National Park and is subject to approval by local indigenous tribes who also show little sign of budging.

Not that there's any thing wrong with warehousing assets for an unknown future of course. But either the assets will remain dormant for a long time yet, or if not, the resultant increase in global supply will impact negatively on the uranium price.

In ERA's case, 2010 has been a year of disappointing production due to lower than expected grades. In the meantime, the spot uranium price has rebound this year some 50% from its lows. This has meant strong valuation support for relatively new producer Paladin but not for struggling ERA, which has seen its share price underperform Paladin's by 130% over the past twelve months.

There has no doubt been an assumption that because ERA's Ranger mine is now in its dotage, notwithstanding expansion plans to fresh sources, the grade decline must be systemic. However, CLSA analysts have countered this assumption by suggesting 2010 was just a blip. They believe 2011 will see a return to higher grades and that ERA's production will increase by 25% as a result.

CLSA has an Outperform rating on ERA, a Sell on Paladin, and has just reinitiated coverage of the Australian uranium sector with an Underweight rating.

CLSA suggests everyone's become just a little carried away with the Chinese reactor story. Of 441 reactors operating in the world last year, only 13 were Chinese. China's current build-out is nevertheless substantial, CLSA concedes, but the analysts forecast only 4.5% growth per annum in world uranium demand in the next decade.

With the panic overdone about grades at the likes of Ranger, Kazakhstan's production increasing by 65% in 2009, and the remaining wildcard of dismantled warheads as a significant supply contributor, CLSA's models show a global oversupply of uranium until at least 2020.

That's hardly the stuff of a raging spot market.

The JP Morgan analysts have also been scratching their heads as they've watched the spot uranium price jump quite swiftly this past couple of months. Similarly, JPM's modelling of demand/supply is not forecasting the supply shortage industry participants are calling for.

Other analysts are nevertheless quite enthusiastic about the prospects for spot uranium in the months ahead. Perhaps a tell-tale sign is that the spot, medium term and long term uranium prices have pretty much lined up now like ducks in a row. This might be a clue the spot price has found its level for now, barring any sudden supply shocks.

Given Paladin, ERA and their peers among significant producers only trade in the spot market if they have to make up for contract shortfalls, and otherwise sign medium and long term supply contracts, it might again only be left to fickle speculators to drive the uranium spot price higher into 2011.

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