Wednesday, August 26, 2009

Resource Capital Research – September Quarter 2009


Equity research report : Global uranium companies

Key Points
Uranium Market:
• The uranium spot price is currently trading at US$47.50/lb, down 8% from 3 months ago (US$52.00/lb).
• The Fund Implied Price (FIP), a key leading price indicator is currently US$47.50/lb (same as the spot price) indicating there is no significant price change anticipated by the market near term.
• Since the beginning of July, the FIP has traded in a range from ~US$44/lb to ~US$52/lb. This is up from US$35/lb at the end of March.
• Traders are focused on the uranium supply side with the possibility of increased DOE liquidations leading to modest downside pressure.
• The long term contract uranium price is US$65.00/lb down from US$70/lb Dec ’08, and relatively stable since peaking at US$95/lb from May ’07 to March ‘08.
• There are 413 new nuclear reactors planned or proposed globally as of Aug ’09, up from 318 (+95 units, +30%) Aug ‘08.
• There are 436 nuclear power reactors in operation and 49 under construction (4 more than last
quarter).

• Strong uranium production increases continue in Namibia and Kazakhstan.

Uranium Companies:

• The Merrill Lynch Uranium Equity Index is down 4% over the past month, down 6% over 3 months and up 125% from the recent low reached 27 Oct ’08.
• The market valuation of Australian companies with one or more uranium projects is up 11% over the past month, up 24% over the past 3 months, and down 6% over the past 12 months.
• This compares with Canadian companies with one or more uranium projects, up 9% over the past month, up 19% over the past 3 months, and down 26% over the past 12 months.
• Australian uranium juniors are moving toward production 2H09 (White Canyon, ASX:WCU, Utah, USA) and 1Q10 (Alliance Resources, ASX:AGS, South Australia).
Resource Capital Research (“RCR”), an equity research company which focuses on small and mid size resource companies, today launched its major quarterly research report covering 19 global uranium exploration and development companies.
The quarterly report typically reviews companies listed in Australia, Canada, USA and UK and active in established uranium districts globally, including Australia, Canada, USA, Argentina, Peru, Mongolia, Zambia, Tanzania and Namibia.

Equity market performance

The market valuation of Australian companies with one or more uranium projects is up 11% over the past month, up 24% over the past 3 months, and down 6% over the past 12 months. This compares with Canadian companies with one or more uranium projects, up 9% over the past month, up 19% over the past 3 months, and down 26% over the past 12 months.
In the past 1 month, the majors have had mixed share price performance: Cameco (CCO) is up 10% (3 month performance +4%), Denison Mines (DML) is down 10% (3 month performance -21%), Uranium One (UUU) down 2% (3 month performance -28%), Energy Resources of Australia (ERA) up 6% (3 month performance +4%) and Paladin (PDN) down 8% (3 month performance -7%).
The Merrill Lynch Uranium Equity Index is down 4% over the past month, down 6% over 3 months and up 125% from the recent low reached 27 Oct ’08 (195).


Uranium price outlook

The uranium spot price is currently trading at US$47.50/lb, down 8% from 3 months ago
(US$52.00/lb) and compares with US$52.50/lb at year end December 2008. The Fund Implied Price (FIP) is US$47.50/lb (same as the spot price), which compares with US$41.40/lb at year end. The FIP has generally been a good leading indicator of near term spot price performance.
No significant direction change in price is anticipated near term and RCR’s price outlook is flat. With the end of the northern hemisphere summer near, there is potential for the return of buyers and an uptick in demand, though traders are focused on the supply side with the possible impact of increased DOE liquidations, as it exercises a provision to exceed the 10% cap, with modest concerns of downside pressure.
The FIP at US$47.50/lb, level with the spot price, suggests market expectations for no significant direction change in the spot price. Since the beginning of July, the FIP has traded in a range from ~US$44/lb to ~US$52/lb recently. This is up from US$35/lb at the end of March.
The long term contract uranium price remains at US$65.00/lb. It is down from US$70/lb Dec ’08, though has been relatively stable, compared to the more thinly traded spot market price, since peaking at US$95/lb from May ’07 to March ‘08. The gap between spot and contract prices is currently US$17.50/lb, having increased slightly over last quarter, due to the decline in the spot price.
Industry fundamentals remain strong, underpinning support for the contract uranium price, with anticipated growth in nuclear reactors and risk of supply shortage mid term (4-8 years).
World planned and proposed nuclear power reactors Currently there are 436 nuclear power reactors in operation and 49 under construction (4 more than last quarter). There are 413 new nuclear reactors planned or proposed globally as of Aug ’09, up from 318 (+95 units, +30%) Aug ‘08. A total of 71 new reactors are expected to be commissioned by 2015.
Events of the past 3 months include:
- China indicates it may review upwards its nuclear energy production target to 86 GWe by
2020 (up from 60-72 GWe target previously). This would require 75 new reactors, up from
the 11 in operation. 15 reactors are already under construction and the balance (64) would
need to commence construction by 2016.
- Continued growth of uranium production in Africa: Namibian uranium production increased 52% in 2008 to 5,149t U3O8 (11.35mlbs) up from 3,395t in 2007. Production in Niger fell slightly (-3%) in 2008 to 3,576t U3O8 (7.88mlbs) from 3,697t in 2007. South African production increased 22% to 772t U3O8 (1.7mlbs).
- Official figures from Kazakhstan indicate a significant increase in uranium production: production increased 28% in 2008 to 10,049t U3O8 (22.15mlbs) from 7,827t in 2007. KazAtomProm reported 1H09 production of 6,000t, up 57% over 1H08. Production target for 2H09 is 8,000t, taking 2009 production to 14,000t U3O8 (31mlbs). Target production 18,000t U3O8 (40mlbs) in 2010.
- Kazakhstan – construction of two sulfuric acid plants underway – sulfuric acid is used in Kazak ISR uranium extraction. Zhanakorganskiy region plant (capacity 500ktpa) – commissioning expected 2011. Stepnogorsk plant (capacity 180ktpa) – commissioning expected 2010.
- Extract Resources (ASX:EXT), Namibia: Scoping study indicates Rossing South mine production of 14.8mlbpa U3O8 - could dwarf neighbouring Rossing mine (RIO, 9.1mlbpa).
Estimated opex US$23.60/lb, capex US$704m. Rossing South resource upgrade at Zones 1 and 2 to 267mlbs U3O8 grading 0.049%. RCR site visit June ’09.
- White Canyon Uranium (ASX:WCU): Daneros mine, Utah – ore shipments are expected to commence Sept ’09. Annual production is targeted at 500,000lbs U3O8, with sale or toll
treatment to Denison Mines (TSX:DML) mill at White Mesa, 100km away by road.
- Alliance Resources (ASX:AGS): Four Mile Project (25% AGS), South Australia, ISR mining
permit granted July ’09. Production expected 1Q10 – 3mlbpa U3O8 with potential to increase
to >4mlbpa.
- Paladin Energy (ASX:PDN): confirmed third stage expansion at Langer Heinrich, Namibia,
increasing production to 5.2mlbpa U3O8 expected from 4Q10, up from 3.7mlbpa (Stage II).
Stage III expansion downsized from 6mlbpa due to water allocation constraints. RCR site visit
June ’09.
- Forsys Metals Corp (TSX:FSY): The company was advised August 19th that the proposed
plan of arrangement with George Forrest International Afrique will require review and
approval of Industry Canada prior to closure. FSY owns the Valencia alaskite uranium project
in Namibia.
“The uranium price is expected to remain flat over the next 3 to 6 months. Our leading indicator, the fund implied price is US$47.50/lb, which is currently level with the spot price. Traders have
expressed concern about the potential of modest downward price pressure from the US Department
of Energy (DOE) increased uranium sales, with the price risk partially offset by the potential for
increased seasonal demand.”
“We expect equity performance in the sector will be driven by broader equity market trends in the coming months, and in relation to specific stocks, the achievement of significant project milestones.
Indeed, there are a number of companies moving to production, including Alliance Resources and
White Canyon within the coming months, and others set to release significant resource upgrades and economic studies which could result in project rerating.” John Wilson, Managing Director of RCR said.
About Resource Capital Research
Resource Capital Research (“RCR”) (www.rcresearch.com.au) was founded in 2004 and is based in Sydney. RCR provides investors with in-depth reports on current investment opportunities in the mining sector both in Australia and globally. The focus is on small and mid cap resource companies, within the gold and uranium sectors, ranging from exploration stage through development and production. John Wilson the principal of the firm and analyst has over ten years’ experience analysing mining companies in Sydney and on Wall Street including for major investment banks.



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