Commodities | Apr 30 2007
By Greg Peel
The television pictures made for interesting viewing. While federal opposition leader Kevin Rudd was unsurprisingly flanked on the right by his federal deputy Julia Gillard at the ALP conference conducted over the weekend, the left-hand of God position was occupied by Queensland premier Peter Beattie. When the uranium vote scraped through in favour of a lifting of mining bans, it was Beattie who was first to shake Rudd’s hand.
What does this mean?
Little really, if we can make any sense of exactly what Beattie’s stance really is on the matter. If he was true to his word, we presume his own vote was cast on the nay side. And while the world held its breath to see whether unfettered uranium mining would finally be allowed across the Australian continent, it can only be disappointed.
Sure – the vote at the federal conference went the way of lifting the uranium ban. This should have been good news for uranium investors across the country, but in reality the result was fairly meaningless. Peter Beattie suggested he would lift his own state’s uranium ban, but only if “forced to”. Presumably this implies that if Big Kev put his foot down, Beattie would meekly capitulate, while still being able to run back to the coal mining unions saying “not my fault, blame him”. If he didn’t put his foot down, Beattie’s stance would remain one of status quo – ie no lift of the ban in Queensland.
Well Big Kev hasn’t put his foot down. While the federal conference may have cast its vote, the result is largely symbolic. The states and territories still retain the power to make up their own minds.
When asked what would transpire if any state refused to lift its ban, shadow treasurer Wayne Swan was quoted in The Age as saying “we’ll cross that bridge when we come to it”.
Presumably this means the federal ALP will leave the situation on hold until such time as it’s actually in power, which, if the polls are any indication, will be before the end of this year. For ultimately “There will be no retreat”, said Swan, “We will move and win this debate”.
That pretty much leaves us back where we started for now. South Australia’s Mike Rann is champing at the bit, Western Australia’s Alan Carpenter is unrelentingly opposed, and Beattie will no doubt hold his ground as well. NSW, Victoria and Tasmania are mostly irrelevant.
But actually, the situation may be even worse. While the Honeymoon mine in South Australia is set to ramp up to production, other would-be start-ups cannot necessarily take the federal vote as a green light. Mike Rann might be all for it, but what Rudd has determined is that each state must pass a similar vote through their own conferences. As another of Australia’s independent online media Crikey points out, “State ALP conferences are far more democratic affairs than the stage managed charade held in Sydney”. In other words, Rann’s keenness to get uranium mining moving in his state may yet be scuppered by a vote of all South Australian delegates.
But if the ALP wins the federal election, that is when we might expect some overriding policy brought to bear.
The market either thinks this is the case, or is misinterpreting the conference result as a blanket green light. Shares in Australian uranium miners are strong so far today.
The greatest focus in the lead up to the ALP conference has probably been on Summit Resources (SMM) which is banking on its Valhalla project in Queensland. Paladin Resources (PDN) is also taking the punt, as it is attempting to acquire Summit as we speak. Paladin had acquired just over 50% at the first close on Friday, so the offer now extends to at least May 11.
In the meantime, analysts at GSJB Were are holding on to an Underperform (L/T Sell) rating on Paladin and a Marketperform (L/T Sell) rating on compatriot uranium darling, Energy Resources of Australia (ERA).
The analysts remain bullish on short term uranium spot prices, as primary supply continues to fall short of demand and secondary supply begins to dwindle. However, on Were’s estimation Paladin is currently being priced on the assumption of a long term uranium price of US$122/lb, and ERA even higher (depending on Jabiluka). The analysts do not see this as realistic.
The likelihood is that the current surge in the uranium spot price will lead to attractive floor prices being placed on any new long term supply contracts. As soon as these are in place, Australian miners can quickly move to increase supply – ALP conference or no ALP conference.
BHP Billiton’s Olympic Dam is set to triple production while Rio Tinto’s (RIO) Rossing mine in Namibia could do the same. Rio is also sitting on further resources elsewhere. Weres also notes another 28 prospective mines/deposits waiting for that final green light. And that’s just Australia.
Cameco’s Cigar Lake in Canada will supposedly overcome its problems in another two years and Kazakhstan has vast deposits waiting to be exploited. Elsewhere in the world the rush is now on to mine uranium. It’s not that hard – uranium is abundant everywhere (albeit only in very small grades).
Hence Weres’ implication is that spot prices around current levels are not likely to stay forever. Investors looking to ride the uranium wave need to be careful about the stocks they select, lest the wave be cresting. One interesting development will be the start of uranium futures trading (May 7) in New York.
According to various accounts, hedge funds now account for some 20% of all available uranium – uranium which they have been no doubt hoping to sell at top-dollar prices as world demand grows. However, the introduction of futures contracts will provide hedge funds with a means of locking in their profits without the need to go about finding buyers. Thus it is predicted by some that the uranium spot price might actually fall when futures are listed.
On the other hand, a futures contract also provides the means for panicky utilities to hedge against the cost of their fuel into the future, rather than having to win allocations at an auction. Thus the contract could prove popular with buyers.
Where will the contract open? One thing’s for certain – the uranium price is suddenly going to get rather volatile, and there are plenty of Australian listed stocks trading on not much more than thin air at this point.
