Uranium Heats Up

Have we seen the bottom?

Over the last few weeks, but particularly since the beginning of the year, uranium stocks have reversed their long slow slide into oblivion. Something has changed and we venture to say that the bottom of the uranium price cycle has been reached. There are a number of reasons why this might be the case and we discuss some of those reasons here. We also look at a selection of the more prominent uranium stocks on the ASX and briefly describe the salient points of each as we see them and suggest our preferences in each category – producers, developers and advanced explorers. We also take a brief look at uranium ETF’s and how they have been performing over the last 12 months. We rate the uranium sector as a Speculative Buy.

Key Points

- We believe the uranium price has bottomed: There are a number of reasons why we believe the uranium price has bottomed and for the ASX-listed uranium sector. Both the NEA and IAEA suggested that developing production capacity in the coming years to supply uranium was a far bigger threat than availability of resources. A prolonged period of low prices has shuttered development capacity and only “significant investment and technical expertise” will relieve that threat.

- Cheap uranium results in uncovered future demand: Utilities that require uranium for power generation have been under no pressure to replenish inventory. The recent over-supply and availability of cheap uranium means some utilities have been complacent. Many long-term contracts are nearing completion and new ones will have to be struck to ensure delivery in a few years’ time. However, due to low prices, most of the world’s mines and potential new projects are uneconomic and new development will not take place. 

- KazAtomProm: Two weeks ago, the Kazakhstan uranium producer, KazAtomProm said it would reduce output by 10%, representing 3% of global supply, because of low prices. The reason this is important is that it is a complete deviation away from the previous strategy and does indicate that their own mines may be subject to lower recoveries or lower grades.  

- Small producer pool to choose from: The uranium sector in Australia is relatively immature by international standards. We ignore BHP and RIO, but look at three producers – ERA, Peninsula Energy and Paladin, preferring exposure to Peninsula Energy (PEN) until Paladin (PDN) can sort through its debt issues.  

- Developers in short supply too: Due to the low pricing, very few uranium companies have taken their projects all the way through to construction, as most projects require a much higher incentive price in order to make an investment decision. Our preferred stock from the developers in Berkeley Energia (BKY) now developing their Salamanca Project in Spain.

- More choice in Explorers: We take a look at seven advanced explorers, each with defined results and advanced studies, some with approvals in place. We prefer Deep Yellow (DYL) as a pure explorer, Bannerman Resources (BMN) as a leveraged option on the uranium price, and Vimy resources (VMY) as a company in transition from explorer to developer.

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