For those who believe that the bottom of the cycle is a good time to buy, uranium may be a way to go in 2008.

With the commodity price of uranium – as well as the share prices of many uranium exploration companies – having fallen and flattened in the back half of 2007, there may be room at the playing table for discerning investors, according to top sector analysts who are especially tipping ASX-listed companies, Energy Metals and Alliance Resources.

2007: A Tale of Two Halves

Until recently, you could be forgiven for calling the 21st century the ‘uranium century’. From 2000 to mid 2007, there only appeared to be one direction for uranium – up.

Due in part to nuclear energy’s expansion in places like China, India and Russia, uranium’s spot price boomed from a historic low of less than $US7 per pound in December 2000 to a historic high of some $US138 per pound in June 2007.

It’s no wonder that the ‘nuclear powered bulls’ on the Australian market had a great run; Australian-based uranium exploration companies’ share prices also consistently climbed to mid 2007.

But the second half of 2007 told a very different story. From June, uranium’s spot price fell or was flat for 16 straight weeks until settling around $US75 per pound in September and closing the year out around $US85 per pound.

The fortunes of Australian uranium exploration shares mirrored the six-month fall of some 40% in the commodity price.

Our analysis shows that of a sample of some 50 uranium exploration companies listed on the ASX, only five performed above the S&P/ASX All Ordinaries Index over the last 6 months. The Australian operations that were exceptions to the rule were: Epsilon, Genesis, Integra, Lincoln Minerals, and Primary Resources.

Experts Say

We asked two leading specialist uranium market analysts – Warwick Grigor of Far East Capital and Stephen Bartrop of Stock Resources – some questions to make sense of it all:

1. What explains uranium’s downturn?

2. What’s the outlook?

3. Which companies are they tipping in 2008 and why?

Stephen Bartrop of Stock Resource reckons that the Australian uranium equities market reached “a state of euphoria” in early 2007.

“Uranium equities’ prices were out of whack with reality. Their rate of increase far outstripped the value of the companies. The fire was fuelled by retail investors who were having blind punts on companies who simply had the word ‘uranium’ someplace on their website,” Bartrop says.

“The back half saw an inevitable correction. What also emerged was increased differentiation between companies within the sector, as discerning investors figured out who has real value and what was purely speculative,” Bartrop continues.

Warwick Grigor, whose Far East Capital will be issuing a uranium equities market study this week, has a similar view about the front half of 2007: “a lot of hot money with very little quality control.”

“Part of the dynamic were outrageous statements by some exploration companies and their spruiking of very selective deposit sampling. It was a feeding frenzy. It was stupid for the market to go so high, and then stupid for it to go so low. Now, we’ve got a much more realistic situation,” Grigor says.

Going forward, Grigor remains optimistic about uranium.

“The commodity price is still nine times what it was five years ago and the forecast price of around $USUS to $US100 realistically reflects the actual shortage of material for the next three years.

“Putting aside 2007’s distortions, there is real structural change in the way we generate electricity around the world. The expansion of the nuclear industry – partially driven by climate change concerns – is only constrained by the shortage in supply of uranium,” Grigor says.

Going forward, Bartrop agrees there will be increased uranium demand, but counsels a ‘squeeze the avocado’ investment strategy.

“The reality with this sector is that there is a very big variety in the quality of the resource. On the one hand, you have companies that actually have established access to uranium deposits and, on the other hand, some companies who are just kicking sandhills.

“It also depends on where you are operating. There is for instance greater policy certainty in South Australia and the Northern Territory than there is in Western Australia and Queensland,” Bartrop points out.

Grigor also counsels carefully picking and choosing.

“It’s very easy to get positive signs of radioactivity, but it’s very hard to have systematic drilling and sampling programs that prove something’s mineable. Those are the companies to look for,” he says.

The experts’ advice reminds CompareShares of an old resource sector joke. How do you spoil a perfectly good exploration prospect? Drill a hole.

Tips

Jokes aside, what are Bartrop and Grigor tipping for 2008?

Both nominate the same company – Energy Metals. Says Bartrop: “Big deposit at Bigrylyi in the Northern Territory, big JV partner in Paladin, increasing their commitment.” Says Grigor: “Good grade material, looks like one of the Australian sector’s live ones.”

Energy Metals (ASX code: EME) has had a 52 week high of $8.29 and is currently trading around $3.40. Last week, the company informed the market that it has just completed further drilling exploration at Bigrylyi and looks to have the “upgraded resource expected to be available in late March.”

While favouring US operators, Grigor also puts Aussie-listed Alliance Resources on his tip list. “They’ve got one of the best discoveries in Australia going at Four Mile in South Australia and they’re in it with the very established player, Heathgate [who operate one of Australia’s three current uranium mines].”

Alliance Resources (ASX code: AGS) has had a 52 week high of $2.88 and is currently trading around $1.40. Two weeks ago, Alliance advised the market on its exploration program at Four Mile with its CEO stating that the October and November drilling results were “outstanding”.

Finally, while there are dozens of uranium explorers listed on the ASX, there are but two Australian-based uranium miners/ producers that are open to stockmarket investors: BHP Billiton, who operate the Olympic Dam mine in South Australia, and; Rio Tinto, who through its Energy Resources Australia subsidiary operate the Ranger mine in the Northern Territory. (The operator of the third existing mine, Beverley in South Australia, is Heathgate Resources who are an affiliate of the US-listed General Atomics.) Certainly, the value of the two big Aussie miners isn’t built on uranium alone, and especially not on ‘just kicking sandhills’.