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Stocks
Uranium heavyweights come back fighting
Nicholas Way - September 10, 2007
The share prices of the two pure uranium plays – Paladin Resources and ERA – have taken a bit of a beating. But long term the prospects are promising. Nicholas Way reports
In July, with the spot uranium price touching $US136 a pound, investors couldn’t get enough of the speculative variety of local uranium explorers. Stocks that had any hint of having a uranium play suddenly become more popular than AFL grand final tickets. Forget the fact their prospects of getting a mine operational were on a par with someone winning the lottery; uranium explorers were the flavor of the month.
No doubt some smart money got in and out of this U-boom. At the same time there will many investors who jumped in too late and are still holding scrip that’s fallen, in many cases, between 30-50% as the spot price of uranium fell from its July high to be now trading around $US90 a pound. That’s a 34% fall – and the fallout wasn’t pretty.
In this respect a market boom in uranium explorers is no different to any other commodity that’s suddenly found market favor; those with really long memories will remember back to 1969 when a nickel boom produced speculative frenzy around a stock called Poseidon.
The uranium heavyweights – Paladin Resources, operating in the African countries of Namibia and Malawi, and Energy Resources of Australia (ERA), the world’s third largest producer that operates the Ranger mine in the Northern Territory – were not immune to this sell-off. It would have been surprising if they were.
But what is significant is how they are quickly pulling back lost ground since bottoming out last month. ERA has jumped about $3 from a low of $14.50 on August 17 for a gain of 21%. Paladin hit the floor on the same day and has since recovered about 50 cents to be trading around $6 – a 9% increase.
These healthy recoveries suggest three realities about the uranium industry. First, a spot price heading towards $US140 a pound was never sustainable – and wiser heads in the industry knew this. They knew, as Keith Kohl of “Energy and Capital” so eloquently said, it was the correction “we’ve been expecting for years”.
But as he quickly added, “losing 34% is nothing compared with the long-term gains that yellowcake has made … Sure, looking at a two-month chart of uranium spot’s price will make you cringe a little. But don’t forget this – uranium was sold in 2002 for under $US8 a pound! I’m pretty sure that most of us would take a 1000% gain over five years.” Investors, he’s got a point.
Second, most of the political uncertainty that surrounded this industry in Australia is history. Labor has abolished its nonsensical three-mines policy, and the debate about uranium enrichment in Australia is a red herring; the future for Australia’s uranium industry, which has 40% of the world’s known reserves, is exporting the raw material – not processing.
Third, both companies have exciting corporate stories to tell. Paladin has began operations at its Langer Heinrich project in Namibia in Africa’s south-west, producing 119,586 pounds to 30 June 2007, and by early 2008 annual production will be ticking over at an estimated 2.6 million pounds. Just as importantly, the first sale has been made under long-term contract.
In addition, the feasibility study for the Kayelekera project in the landlocked Malawi has been completed. Construction should begin in the second half of 2008 at an estimated cost of US$185 million. On the home front, the Bigryli joint venture in Northern Territory and the Mount Isa joint venture in Queensland have been proceeding.
Paladin is still reporting losses, with the red ink to 30 June 2007 to the tune of $US38 million. But net assets of $US1.3 billion give this uranium player at lot of fat as it waits for its two African plays to begin paying big dividends. The broking firm Bell Potter estimates a net profit of $A103 million by 30 June 2008 and $A497 million by 30 June 2009. On the latter profit number, Paladin is only trading on an earnings multiple of seven times.
The ERA story – Rio Tinto is the major shareholder with a 68% stake – is better known to investors via its long-term project at the Ranger mine in the Northern Territory, which has about six more years operating life.
The weakness in its share price was only partly due to a lower spot price. Mother Nature intervened with heavy rain in Northern Territory that hurt production, pushing a $19.9 million profit in six months to 30 June 2006 down to $5.7 million in the corresponding half this year. That was the bad news; the good news was that ERA was expecting a loss.
For the full year to 31 December 2007 Bell Potter expects strong turnaround with a $52 million profit. Another year out to 31 December 2008 and it sees that profit nearly doubling to $98 million, a result that would put ERA on an earnings multiple of 14 times. In an industry where demand is growing exponentially (see Nuclear energy is here to stay) that’s hardly expensive. And even allowing for political risk, Paladin looks downright cheap.
More articles from this week's CompareShares newsletter:
Stocks: Uranium heavyweights come back fighting
CFDs: Hedging your losses, and making profits, using CFDs
Fundamental analysis: What is the price/earnings ratio of the overall market?
Smart investing: Home sweet debt
Resident Trader: Trading against computer-generated stops
Stock of the week: ABC Learning
Analyst report: The right insurance for investment
CFDs: Slippage - the sworn enemy of CFD traders
Options: Trading options close to expiry
Whatever your views, you can discuss this article - or any of Nicholas's articles - on our message board Your 2 Cents.
Nicholas Way is a former senior journalist at Business Review Weekly (BRW), who writes investigative pieces on Australian listed companies.
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