Uranium readies for revival

Reuters: SUSAN TAYLOR - November 30, 2008

OTTAWA Uranium miners have found themselves with a hearty recipe for powering a stock market revival: rising prices for the nuclear fuel, strong demand, and supply disruptions. The only ingredient missing is investors.

The spot price for uranium has surged 25 per cent over the past five weeks, a performance unmatched by the stocks of companies in the uranium sector. From a basket of 56 stocks tracked by Haywood Securities, for example, 42 fell over the last week, three were unchanged, and just 11 saw gains.

These companies are putting out news that is good for the supply and demand situation, but hurts the individual companies, said Dundee Securities analyst David Talbot.

Supply is shrinking as uranium producers, stung by the global financial crisis, have been closing mines, delaying developments and cutting production forecasts.

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Almost every single producer has downgraded their forecast for 2008 production guidance, said Haywood Securities analyst Geordie Mark. It's something like 5.5 million pounds already downgraded ... when production last year was around 107 million pounds, it's a big deal.

With a tighter supply, the spot price for uranium climbed another $2 (U.S.) to $55 per pound the past week. That's up from a two-year low of $44 touched in October, when funds and investors sold off uranium supplies and equities.

Spot prices peaked at $136 a pound in June, 2007, compared with $7 in 2000.

The world's nuclear reactors require an estimated 170 million pounds of uranium annually, said Mr. Talbot, who forecasts supply at 107 million pounds this year.

There are nearly 440 nuclear reactors producing electricity around the world, with construction under way on 35 plants, notably in China, South Korea, Japan and Russia, according to the World Nuclear Association. Construction of a further 60 reactors is forecast in the next 15 years.

Against that backdrop, Mr. Talbot said the time is right for investors to warm up to uranium stocks.

These things trade on the spot price and the spot price seems to have bottomed at $44. Now it looks like it's rising due to supply-demand fundamentals, he said.

What we notice, when the stocks rise, is that they rise fairly quickly. You would rather be in the space early than sitting on the sidelines.

Among producers, he likes Paladin Energy , which recently hiked estimates for its Kayelekera project in Malawi and its Langer Heinrich mine in Australia. He said Uranium One could benefit from its low-cost operations if uranium prices do not continue climbing.

Among juniors, he prefers cashed-up UR Energy, which sees production at its Wyoming project in 2010, and Athabasca Basin explorers UEX Corp and Hathor Exploration .

Mr. Talbot also likes Strateco Resources, which he said is the only junior currently in the permitting stage. It is seeking permits for its Matoush project in Quebec.

Inventory funds, such as Canada's Uranium Participation Corp, are a good way to enter the sector with lower risk, Mr. Mark said.

The metal is already there, it's housed, so all you're doing is (being) exposed to changes in, effectively, the metal price, which we think will rise over the coming year.

Analysts also say merger and acquisition activity is set to sweep the sector, in deals with potential to enrich investors. Buyers appear willing to pay prices well above stock market valuations for assets, said Mr. Talbot, pointing to Forsys Metals , which was sold recently at a 51 per cent premium.

We're right at the cusp, in the sense that the companies are getting closer and closer to being cash-strapped and requiring financing, Mr. Mark said. M&A is going to happen, particularly because there are very few new players that are going to be producers in the next five years.

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