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With the Australian and global uranium share indices ebbing at lows following the fallout from Japan’s natural disaster in March, now’s the time to identify prime buying opportunities within the sector. In the wake of Japan’s earthquake/tsunami-induced nuclear fallout at Fukushima, the average value of the Australia’s uranium-plays tumbled by around 33 per cent. But with many of these stocks still looking oversold, the sector could well present value propositions.

An expected recovery in the uranium price is also encouraging investors to take a closer look at the sector’s underlying opportunities, especially as demand remains largely intact. While the impact of the Japanese quake may weaken discretionary inventory purchases, and produce some delays to new reactor construction programs, Tony Parry analyst with Resources Capital Research expects contract prices to return to over US$70/lb very soon.

He says this is the likely level necessary to support development decisions at numerous advanced projects, particularly in Namibia, including the large scale Extract (EXT) and Bannerman (BMN) projects, and potentially Deep Yellow (DYL).

With the worst of the uranium miners slump now over, according to Warwick Grigor head of research with BGF Equities, there will be a golden era of profitability for both uranium producers and those who can enter production within five-years. Nevertheless, many investors are nervy about funding future exploration while Japan’s nuclear mishap remains a fresh memory, and he says it may be some time for uranium share prices return to their January highs. The uranium price, currently around $US$57/lb is significantly off its peak of $US135/lb in June 2007. Yet with most of the damage already factored in, he expects the price to trade within a $US60-$US90/pound band for the remainder of 2011.

Despite the naysayers, the partial meltdown at the Fukushima nuclear power plant didn’t kill off long-term global demand for uranium – notably from China, Russia or South Korea. In the days following the crisis, a number of high profile announcements from various officials and governments around the world affirmed the commitment to nuclear energy, setting the tone for the market rebound.

As a result, Grigor says now is the time to start to focusing on individual uranium-plays and their project merits. Australia is already the world’s third-largest uranium producer, with nearly half of the world’s low-cost uranium reserves. Some estimates have Australia’s uranium output doubling by 2015, and quadrupling within 20 years.

Since the Howard government abandoned the three mine policy in 2007, Australian State Governments are now free to make their own discussions about uranium mining and production. While Victorian and NSW governments remain opposed to uranium mining for now, it is currently allowed in the Northern Territory and South Australia, with the Western Australia’s liberal government lifting its ban on uranium mining in 2008. The Queensland Government currently allows exploration, but prohibits uranium mining.

Australia currently produces around 9,000 tonnes of uranium annually exclusively through three mines – Ranger mine in the Northern Territory, and Olympic Dam and Beverly mines located in South Australia. The Ranger mine, Australia’s largest, is owned by Energy Resources of Australia (ERA) and represents around 53 per cent of Australia’s total uranium production.  

The Olympic Dam mine is owned by BHP Billiton (BHP) and represents around 39 per cent of Australia’s uranium production, while Australia’s third mine, Beverly is owned by Australian private company Heath Gate and represents approximately 8 per cent of Australia’s uranium production.  

Production from unlisted Uranium One’s Honeymoon uranium mine in South Australia is expected to start in the next few months, and the proposed expansion of BHP Billiton’s Olympic Dam could boost its uranium output eight-fold.

So despite myriad issues for producers/explorers – and the political headwinds still confronting uranium mining – what should investors look for when identifying which of the 50-plus ASX listed uranium-plays (ex-BHP) have the most upside?

Before drilling down into stock specifics, Grigor recommends looking at key jurisdictions that already have uranium approvals permitted, with a history of proven mines already in the area. Based on this criteria, he’s attracted to uranium explorers operating in three primary areas: South Australia, Botswana and Namibia. “Producers with a mine-life under 10 years may be compromised by having to take spot-price currently around US$60/lb,” says Grigor. “I prefer in situ leach mines because capital costs are a third that of an open-pit mine and can be worked through more progressively.”

While there are plenty of uranium deposits around the world, Simon Tonkin resources analyst with Patersons Securities says the key is to find the resource in sufficient quantities to justify commercial viability. Similarly, he recommends looking for uranium-plays where the quality of underlying ore body is above a minimum 400ppm. It’s also important, adds Tonkin to identify uranium producers with cash costs at/or less than $30-$40/pound.

Simon Tonkin
Resources analyst
Patersons Securities

1)    Stonehenge Metals (SHE): 

Chart: Share price over the year to 03/06/2011 versus ASX200 (XJO)

Is developing a potentially world-class uranium project in South Korea. Recent upgrades represent an 87 per cent increase in the inferred resource to 92Mt at 320ppm U3O8 for 65 Million pounds of contained U3O8. SHE is looking to grow on its near surface 65mlb U3O8 resource (grading 320ppm) during 2011 for a PFS in 2012. Currently trades at $0.11.

2)    Greenland Minerals and energy (GGG):

Chart: Share price over the year to 03/06/2011 versus ASX200 (XJO)

Listed on the ASX in June 2006, GGG is evaluating the uranium-rich Kvanefjeld multi-element project in Greenland. The Kvanefjeld resource has increased by 35 per cent and now stands at 350mlbs of U3O8, 6.6mt of total REO and 1.4mt of Zn. A definitive feasibility study (DFS) of production, including uranium, should start in second half of 2011. Some broker price targets are as high a $1.46, currently trades at $0.66.

Warwick Grigor
Head of research
BGF Equities

1)    UraniumSA (USA):

Chart: Share price over the year to 03/06/2011 versus ASX200 (XJO)

Has increased the uranium oxide resource at its Mullaquana project near Whyalla by 50 per cent, this brings the total resource to 19,000 tonnes, or more than 42 million pounds. USA has already defined an inferred resource of 12,700 tonnes on the flagship Blackbush deposit which is set for a trial recovery operation under the company’s schedule to achieve maiden production from late 2012 to early 2013. Continued drilling at its Plumbush deposit is expected to lead to further resource updates during 2011. Currently trading at $0.20, Grigor expects USA to hit $0.30 over the short-term and up to $0.70 over one to two years. Future upside from recent granite finds.

2)    A-Cap Resources (ACB):

Chart: Share price over the year to 03/06/2011 versus ASX200 (XJO)

Is regarded as Botswana’s preeminent uranium exploration company. ACB’s recent update at the Letlhakane Uranium Project elevates it to one of largest undeveloped uranium deposits in the world. The updated Global Mineral Resource completed by AusIMM establishes the JORC Resource at 780 million tonnes at 152ppm uranium for a contained 261Mlbs of uranium. ACB is expected to complete its Bankable Feasibility Study (BFS) in early 2012, then focus on bringing the project into early production. Currently trading at around $0.27, Grigor expects it to trade up to $0.35 over the short-term and up to $0.50 long-term.

3)    Peninsular Energy (PEN):

Chart: Share price over the year to 03/06/2011 versus ASX200 (XJO)

Is a low-cost mineral exploration company with uranium projects located in Wyoming USA, Karoo South Africa and Western Australia. The stock looks well positioned to be part of the next wave of USA ISR projects, with economic prospects bolstered by expanding/upgraded resource base. It’s currently completing its DFS, and has production potential of 1.5 million pounds U308 from Wyoming in 2012 and is targeting 2016/17 from Karoo. Currently trading at around $0.8, Grigor’s short and long-term price targets are $0.10-15c and $0.15-20c respectively.

4)    Energy and Minerals Australia (EMA):

Chart: Share price over the year to 03/06/2011 versus ASX200 (XJO)

Holds 3,403km2 in WA, prospective for uranium, precious and base metals, and lignite. A pre-feasibility study of uranium production at the Ambassador Deposit (Mulga Rock Deposits, WA, total 27.1kt U3O8) is planned for 2011. Likely output of U3O8 is 1200tpa (2.6mlbspa) for capex of A$260 million at an operating cost of US$25/lb. Looks attractively priced based on Grigor’s short-term target of $0.25, and up to $0.40 long-term.

Tony Parry
Resources analyst
Resource Capital Research

1)    Extract resources (EXT):

Chart: Share price over the year to 03/06/2011 versus ASX200 (XJO)

As the only uranium-play left with a T1 asset EXT is emerging favoured institutional stock in the sector, with huge strategic potential of 600mlb at its Husab discovery in Namibia. EXT looks increasingly susceptible to takeover which could add further share price upside. Chinese state-owned CGNPC recently made a failed attempt to gain control of EXT through a bid for its parent company London-listed Kalahari Minerals (KAH). While CGNPC may have another crack at gaining control, there may be other acquirers around. Currently awaiting its mining license.

2)    Deep Yellow (DYL):

Chart: Share price over the year to 03/06/2011 versus ASX200 (XJO)

Is a uranium exploration and development company currently focused on advanced resource development projects in Namibia and Australia (QLD). While more speculative in nature, interim data on its proposed 2.2mlbpa Omahola Project in Namibia is encouraging with potential production in 2014. Economics look very robust (~US$25/lb U3O8 opex) and are likely to be enhanced by the inclusion of the new Ongolo high grade discovery in the PFS due the second quarter of 2011. While DYL’s flagship Omahola project looks increasingly more compelling, the the share price (currently $0.165) gets worse – this presents an attractive entry point.

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