Eight undervalued uranium-plays

Depending on whom you speak to, opinions are mixed about uranium: some see it as the most viable alternative to non-renewable energy resources, and others view it as a potential source of ecological disasters. However, uranium has many uses and some countries have made a long-term commitment to use it. Out of 500 new nuclear reactors that are planned globally, China and India claim about half of them. The next two countries with significant projects are Russia and the USA.

How about Japan? According to a research report issued by Resource Capital Research, Japan has 55 nuclear reactors and accounts for 10-12% of the global uranium demand. After the earthquake, 4 reactors were shut down, diminishing the global demand by less than 1%.

With the Australian and global uranium share indices ebbing at lows following the fallout the Japanese disaster in March, brokers believe that now’s the time to identify prime buying opportunities within the sector. In the wake of 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.

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As you can see from the chart below, uranium prices have been wildly volatile and are now sitting near five year lows, well down from the 2007 bubble that saw prices hit a whopping $135 a pound – up seven-fold in just over two years.

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Source: IMF

Parry says US$70/lb is the likely level necessary to support stgelopment 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):