Conflicting Signals Continue In Uranium Market

This story features PALADIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: PDN

By Andrew Nelson

Will they, or won’t they?

This is the question that has been holding the uranium market in thrall for over a month now. “They” refers to the Japanese Government and “will they or wont they” refers to the plan to wind down Japan’s nuclear program. This unanswered question now has uranium spot sellers in full retreat.

After announcing the restart of reactors back in June, the Japanese government said last month it would look to phase out nuclear power by 2040. As has been covered in this forum before, it was seen as a pie in the sky statement backed up by little in the way of practical thinking, or so thought many commentators. In fact, the prevailing opinion is that existing reactors will still need to be restarted to simply keep up with the nation’s electricity demand. Yet since the announcement, the spot uranium price has started marching backwards once again.

Last week JP Morgan joined the choir, lamenting the seeming indecision in Japan and the fact that despite a few little blips, Chinese utilities are still not importing uranium. Just like everyone else that holds an opinion on the topic, the broker believes prices will ultimately have to move higher given ever decreasing production will start putting the clamps on supply.

And right along with an increasing amount of sellers, JP Morgan has buckled under the pressure of the seemingly obvious; uranium isn’t going to jump to US$100/lb tomorrow, or probably even the day after. This realisation has spurred the broker to take a closer look at its theories on uranium supply and demand. This fresh look has the broker now thinking that there will probably be a delay in the arrival of the tight market conditions it has been expecting.

The change in view saw the broker lower its uranium price forecasts for 2012-14 on Friday.  The new price forecasts are for US$49/lb in CY2012, US$55/lb in CY2013 and US$80/lb in CY2014.

The lowered uranium price forecasts, of course, take a toll on the broker’s earnings estimates and valuations for both Paladin ((PDN)) and ERA ((ERA)) here in Australia. In the case of Paladin, the valuation is pared back 4%, although the stock remains the broker’s top pick in the space given the work being done at currently producing operations and better leverage to rising uranium prices. ERA’s valuation slips 5%, with the broker seeing significantly more risk and uncertainty in the stock given the company’s life pretty much depends on the as yet to be decided upon Ranger 3 Deeps project.

In their own report last Friday, industry consultant TradeTech also blamed market uncertainty on the as yet unknown direction of Japan, noting the conflicting signals coming from regulators and politicians on the nation’s new energy policy and about the intentions to restart idled reactors. And as we all know, investment markets don’t like uncertainty, not one little bit.

What we were left with was another slow week. There were just five transactions in the spot uranium market last week that saw less than 600,000 pounds of U308 change hands. This compares to the week prior, when 1.1 million pounds found new owners.

TradeTech notes that prices dropped fairly steadily over the course of last week, with buyers comprised of the normal mix of utilities, traders and financial entities. Sellers also included the usual suspects like producers, traders and financial entities. By the end of last week, TradeTech’s Weekly U3O8 Spot Price Indicator was down US$0.75 to US$45.75 per pound.

If there is any good news to be taken from last week’s activity, it’s that falling prices are starting to draw out more buyers. However, and here’s the big problem for sellers right now, every bit of new demand is being met with a little bit more supply. Hence, increasingly desperate and cash starved suppliers were again willing to cut prices in order to get deals done.

There was no new demand and no transactions reported in the term uranium market last week. This meant TradeTech’s Mid-Term U3O8 Price Indicator stayed put at US$50.25 per pound and the Long-Term U3O8 Price Indicator remained fixed at US$61.00 per pound.
 

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