Tuesday, June 29, 2010

Canadian Uranium – Stalled price tanks stocks

Uranium price likely to remain flat for next few years

falling pricesThis blog post is an edited version of an article published June 17, 2010, V9:N341, in Fuel Cycle Week by International Nuclear Associates, Washington, DC.

It is an axiom in the uranium mining business that a company's stock price is in part a function of the amount of uranium it is capable of producing, now or in the future, and the expected price of that uranium. Canadian uranium miners have learned the truth of that axiom all too well in the past six months. A review of 12 Canadian uranium mining stocks – three producers and nine juniors – show a dismaying trend since December 2009.

Every quarter FCW compiles tracking information on stock prices across a selected list of producers and juniors. The trends for these companies as of June 11, 2010, is an unmistakable dive from prior values. Of the 12 stocks on our list [spreadsheet], seven have seen their prices drop by more than 20% and three have seen their stock prices drop by more than 10%. Only Denison (TSE:DML) managed to keep its stock price steady at CDN$1.35, and one junior, Fission (CVE:FIS), saw a huge leap in its stock price from CDN$0.16 to CDN$0.49.

If you held one million shares of Fission, you picked up a gain of CDN$330,00 just by watching the stock ticker. On the other hand, if you held one million shares of Cameco (TSE:CCO), you suffered a loss of CDN$9.6 million for the same period of December 2009 to June 2010.

Dramatic slide in prices

slide-and-splash The dramatic slide in stock prices over the past six months isn't due to any catastrophic mining event like the flooding at Cigar Lake. Rather, it is due to just the opposite. David Talbot, a securities analyst with Dundee Capital Markets, told FCW the reason is investor indifference due to the price of uranium being stuck at about $41/lb.

"The lack of movement of uranium price is the reason investors are not active. There is no incentive to invest if there is no movement in the underlying commodity."

However, nuclear utilities are benefiting from the low price. While the vast majority of uranium sales take place as part of long-term contracts, U.S. and European utilities have reportedly been buying on the spot market to secure uranium at what today looks like a bargain price - $41/lb.

Some winners among the losers

Fission Energy, which is the only firm on FCW's list which saw a gain in its stock price, announced May 27 new drilling results at its Waterbury Lake site in Saskatchewan. The exploratory drilling work is part of a joint venture with KEPCO, a Korean firm that last December inked a $20 billion deal to build four nuclear reactors in the United Arab Emirates.

Having an Asian partner may have helped Fission, but it was not a plus for CanAlaska (CVE:CVV) which has separate joint ventures with KEPCO and Mitsubishi and saw a 31% drop in its stock price from $0.16 to $0.11/share for the period December 2009 to June 2010.

Being a producer helps

Although Denison reported May 6 a quarterly loss of US$9.1 million for the period ending March 31, 2010, the firm also reported quarterly sales of 267,000 pounds U3O8 at an average price of $56.27/lb which is very close to the long term price cited by Ux Consulting on June 14, 2010. Additionally, the firm said May 6 it expects annual uranium production in the next year to continue at the same rate as 2009 which is approximately 1.6 million pounds U3O8.

Jim Anderson, a spokesman for Denison, told FCW the company's stock price stayed relatively stable, hovering at $1.35/share "because we are a mixture of an exploration and production company."

As far as general trends are concerned, Anderson said "investors are betting on future exploration results as a way to monetize the value of the stock. The low prices, and the spot price is particularly weak, create confusion about how to value stocks."

Anderson said the company's $9.1 million loss was attributable to "cost of production just below the spot price," and strengthening of the Canadian dollar relative to the U.S. The firm reports financial results in U.S. dollars.

Despite disappointing quarterly numbers, Anderson said lower uranium grades and higher production costs in the U.S. were offset, in terms of impact on the stock price, by "excellent prospects at our Wheeler River deposit where we have an aggressive summer drilling program."

Perhaps an indicator of the supply issue for the industry as a whole is Denison's report that as of March 31st it had 525,000 pounds U3O8 in inventory available for sale. That's one-third of its total expected production for the current fiscal year. The inventory is worth $22 million or more than two quarters of revenue at the current pace of sales.

Is change coming and how soon?

What's a uranium mining CEO to do? To raise funds from investors, CEOs must show them the demand for and the price of uranium will go up. Is there hope for this effect on the near-term horizon? Interestingly, one of Canada's largest producers thinks there is.

Penny Buye, Cameco's Director of Market Planning & Analysis, (right) said demand will increase. In a presentation to the RBC Capital Markets Global Mining & Materials Conference on June 9. she also said there is a "lag" between price and production and future uranium prices. (Photo via World Nuclear Organization)

"This uncertainty is a challenge faced by uranium miners when planning new production."

New demand will come from new reactors worldwide. Buye told the RBC conference over the next decade globally there will be 89 new nuclear reactors with 42 in China, 18 elsewhere in Asia, and 12 in India. The U.S. will add 9 new reactors.

Overall, Buye estimates there will be a 28% increase in electricity generating capacity from 390 GW to 498 GW fueled by uranium over the next 10 years. She said each 1,000 MW of new reactor capacity equates to 500,000 lbs U3O8/year in new demand.

However, it isn't clear how that demand would be spread over the next ten years in terms of timing or by region. If anything, the demand is back-end loaded toward the latter half of the period and concentrated in Asia.

Are there any wild cards?

Ed Sterck, a securities analyst with Bank of Montreal, told FCW there are no prospects for significant increases in the uranium spot price for the next few years. He said there is "ample supply coming to market."

Factors which might change this picture include increased demand from China as it starts up new reactors earlier than anticipated and possible changes in tax laws in Australian which could affect all mining in that country, not just uranium.

Sterck said an Australian government proposal could impose a tax up to 57% of the profits from uranium mines. He called it "nationalization by another name."

Sterck said elections slated to take place this Fall may overturn the proposal if the miners are able to make their case to the electorate and help vote in a new government. If the tax is implemented, Sterck said, it could cause some Australian uranium mines to shut down which could significantly impact global markets and drive the spot price up by the factor associated with the losses from shut down mines.

Another wild card is political unrest in any of the third-world producing countries especially in Africa or Kazakhstan could crimp supply.

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