Australia | Mar 08 2007
By Greg Peel
While the uranium price has been heading north apace for the last two years, it was flooding at Cameco’s Cigar Lake project in Canada that has forced the price to leap to the recent level of US$85/lb. Cigar Lake was expected to supply 10-12% of the world’s uranium by 2010.
Energy Resources Australia’s (ERA) Ranger mine in the Northern Territory supplies 10% of the world’s uranium now. A week ago the NT was hit by Cyclone George. Heavy rain prompted a shutdown to mining operations.
Territory cyclones are hardly rare occurrences, and ERA suffered shutdowns last year under the same circumstances. Back then the company was able to meet its sale commitments through uranium loans and stock drawdowns. This time it’s different.
This time the spot price is much higher, as the uranium market is extremely tight. Due to the long term contract nature of uranium sales, ERA is only averaging around US$22/lb for its ore. Were it forced to buy in uranium to make good on its contracts, ERA would be forced to pay at least US$85/lb and probably more.
Thus the company has declared force majeure, relieving it of such an obligation. Analysts all agree this is a sensible move.
The company has indicated that although it should have the mine back up and running within the week, the total effect will be a production level down 20-30% on the March quarter last year. Analysts have responded by reducing earnings forecasts accordingly, but no one has reduced target prices. The simple fact is that production might be reduced, but the only way for the uranium price to respond is another shift upwards.
ERA’s contract customers will now be forced to go into the market, and uranium is extremely hard to find. The last auction trade a week ago – for 100kt at US$85/lb – was overbid by a significant volume at that price level.
This is good news for the likes of Paladin Resources (PDN), whose Langer Heinrich mine in Namibia has just commenced production. It’s been a rollercoaster ride for the Paladin share price, as investors initially took profits above $10, and then started selling in earnest in this latest correction. The hardest hit stocks were those that had risen most dramatically, and Paladin found itself back in the sevens.
Closing yesterday at $8.85, one presumes another jump is on the cards. The ERA share price has suffered a similar ride, but will likely not be overly damaged by the production loss, given the force majeure and the likelihood of a higher uranium price. ERA closed yesterday at $24.60.
The FNArena database shows ERA on a 2/2/0 B/H/S ratio with an average target of $27.50 (take out Deutsche Bank and its $29.90). Paladin is showing 1/2/0 and $10.51.
