March 2007


Author: Barry Sergeant
Posted: Tuesday , 27 Mar 2007
JOHANNESBURG –

Prices for uranium (uranium oxide, U3O8, to be exact) have soared in the past few years as record crude oil prices have forced public and private sectors to announce rafts of nuclear reactors as a cost-effective energy alternative. Long-established uranium producers have benefited enormously; the market capitalization of the No 1 producer, Cameco, is close to US$14bn.

Uranium prices have grown ten fold in just five years. Between the early 1990s and 2004, uranium markets were in a supply/demand deficit, balanced by inventories held by nuclear generators and traders. Prices started turning in 2001, from between $5 and $10/pound, to current quotes around the $80/pound mark. Over the past five years, Cameco’s NYSE stock price has increased from less than $3 a share to more that $45, with current quotes around $40.25.

The global uranium rush has triggered an explosion in exploration, along with entrepreneurs dusting off dormant projects, and rushing to the market. This raises serious questions of potential risk for equity investors, confronted by a plethora of choices.

In a major new report, RBC Capital Markets (RBCCM) notes that “many uranium exploration and development projects are being advanced by numerous companies”, and finds it “inevitable that some of these companies will successfully bring their projects into production in the coming years – something the market will need in the future to bridge the supply/demand gap that we expect to exist after 2013”.

There are many ways of valuing mining companies, and uranium has been out of fashion for so long that a number of additional risks may require consideration. In an examination of 21 listed uranium stocks, RBCCM has chosen from several different valuation methodologies, depending on the company. For uranium companies with existing operations, a forward EPS (earnings per share) or CFPS (cash flow per share) multiple is applied, reflecting valuation relative to peers and the market cycle.

For companies developing new projects, RBCCM often applies a net asset value (NAV) approach, sometimes coupled with a forward EPS multiple. For exploration companies where it is too early to calculate an NAV, RBCCM looks to the enterprise value (EV) per pound of U3O8 in resource. While the EV/pound metric is “easy” to calculate, RBCCM cautions that it should not be used in isolation.

Cameco is, of course, the world’s No 1 producer of uranium oxide. Its principal interests comprise Canada’s McArthur River and the flood-affected Cigar Lake, Inkai in Kazakhstan, and the US’s Crow Butte and Smith Ranch/Highland operations. Rio Tinto, one of the world’s biggest diversified resources entities (along with BHP Billiton and Anglo American) rates as No 2 world producer of uranium oxide, thanks to its stake in Energy Resources of Australia (ERA), and its 69% interest in the Rossing mine in Namibia.

France-based Areva is No 3, and like Cameco, has interests in Canada’s McArthur River and Cigar Lake. KazAtomProm rates as No 4 producer, thanks to its interest, like Cameco, in Inkai. BHP Billiton is next on the list, followed by TVEL (Russia), Navoi (Uzbekistan), Vostgok (Ukraine), Nufcor (South Africa) and CNNC (China). There are also lesser-known producers of uranium oxide, such as AngloGold Ashanti, as a by-product from its gold mines in the Vaal River district in South Africa.

These big names among uranium producers present at least two problems for the investor: many are not listed, and where listed, uranium income, while substantial, may not be material to the stock as a whole. BHP Billiton, the world’s biggest diversified resources stock, is a prime example. Its huge Olympic Dam operation in Australia, run primarily as a copper producer, owns by far the biggest uranium oxide reserves in the world. Its uranium income is, however, substantially “diluted” by income from a number of other divisions.

As such, 21 listed stocks with exposure to uranium may be considered as investable. There are six with a market capitalisation of $2bn or more: Cameco, ERA, Paladin Resources, UrAsia, Denison Mines, and sxr Uranium One. Following in terms of market capitalisaton are UraMin, First Uranium, Aurora, Energy Metals, Mega Uranium, Laramide Resources, Forsys Metals Corporation, Ur-Energy, Tournigan Gold, Strathmore Minerals, Khan Resources, Western Prospector, OmegaCorp, Berkeley Resources, and Uranium Power Corporation. sxr Uranium One is currently involved in potential corporate action with UrAsia.

RBCCM rates just five of these stocks, starting with Cameco, as “top pick, above average risk”. Risks that are seen as applying to ERA can be seen as equally important for all other uranium stocks: fluctuations in the uranium price, currency, and project capex (capital expenditure) and opex (energy, material and manpower costs).

First Uranium is notable for its absence of “prior corporate history”, along with “no meaningful comparisons in the market and no meaningful short-term cash flow”. Paladin Resources faces notable hurdles at its Langer Heinrich and Kayelekera operations, while sxr Uranium One will be carefully studied for its ability to bring Dominion and Honeymoon into production on time and on budget.

Back on the fundamentals, RBCCM believes that uranium oxide prices are in the “middle” of a “bull market”, with 2007 forecast prices expected to exceed $100/pound.

There is a cautionary note, in that prices could move beyond that threshold.

Sprott Asset Management’s chief investment strategy, John Embry, writes in the March 30 edition of Investor’s Digest of Canada that we’re nearing the exhaustion of central bank gold reserves in the face of rising demand, which is when the price of gold will “go ballistic“…

You can read this article in Adobe Acrobat (pdf) format HERE

The following short Flash video could help you save your financial sanity!

Honest Weights & Measures

(requires Adobe Flash Player)

Two things to notice (and ponder on) in the following Jones commentary on money:

  1. the bling-bling sound of REAL MONEY on the desk, and
  2. the chinese (!) music in the background …

…enjoy!

For those of you still pondering on the future value of the greenback, here’s a hint on the shape of things to come…

Those with more “Democratic” gusto might prefer the following variation. Of course when the proverbial $#!+ hits the fan, the final result will always be the same: ([value of]fiat$)

For more variations on the fiat theme check out HERE

Gold Eagle’s co-editor Vronsky is no word mincer, and laconically shows with the aid of a graph the way to go for investors who wish to be on the safe side of this bubbly stock market:

“…To be sure, I AM BIASED. But my bias is predicated on many years of study, experience and recent investment history, which teach me that it behooves all investors to have a significant amount of their total net worth in some form of precious metals (ie bullion, select gold and silver stocks and/or precious metal coins). The chart below should convince all but financial masochists and the clinically retarded where the best return might be obtained going forward. It demonstrates 6-year comparative performance of HUI (+731%), SILVER (+190%), GOLD(+144%), DOW (+16%) & NASDAQ (-23%). It is almost axiomatic to observe, WALL STREET STOCKS AIN’T CUTTING THE MUSTARD !!

click to enlarge
Not to comprehend the awesome and illuminating ramifications of the above chart may prove to be hazardous to your financial health…as HUI (gold and silver equities) leaves the rest dead in the water.

Mirror, mirror on the wall, WHO is the fairest of them all? Yesterday, today and the foreseeable tomorrows!…”

Please click HERE for the whole article.

Gold Eagle’s co-editor Vronsky is no word mincer, and laconically shows with the aid of a graph the way to go for investors who wish to be on the safe side of this bubbly stock market:

“…To be sure, I AM BIASED. But my bias is predicated on many years of study, experience and recent investment history, which teach me that it behooves all investors to have a significant amount of their total net worth in some form of precious metals (ie bullion, select gold and silver stocks and/or precious metal coins). The chart below should convince all but financial masochists and the clinically retarded where the best return might be obtained going forward. It demonstrates 6-year comparative performance of HUI (+731%), SILVER (+190%), GOLD(+144%), DOW (+16%) & NASDAQ (-23%). It is almost axiomatic to observe, WALL STREET STOCKS AIN’T CUTTING THE MUSTARD !!

click to enlarge
Not to comprehend the awesome and illuminating ramifications of the above chart may prove to be hazardous to your financial health…as HUI (gold and silver equities) leaves the rest dead in the water.

Mirror, mirror on the wall, WHO is the fairest of them all? Yesterday, today and the foreseeable tomorrows!…”

Please click HERE for the whole article.

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