Size Really Does Matter: In the Case of Uranium Stocks, Smaller May Be Better

by: James Finch

In light of TradeTech’s December 15th announcement of the largest percentage increase of the weekly spot uranium price in history, the brewing kettle of some 300-plus uranium companies could quickly boil over. Multiple uranium buyers offered more than $70/pound for a modest amount of uranium oxide [U3O8] auctioned by Mestena LLC. The 260,000 pounds of Texas uranium, probably produced for about $30/pound through the in situ recovery mining method, might return the privately held uranium company nearly $11 million in operating profits.

The lure of $72/pound [and possibly much higher] spot uranium should attract more funds into the nascent uranium mining sector. According to TradeTech’s weekly magazine Nuclear Market Review, about fifteen utilities are now evaluating the purchase of more than 35 million pounds of uranium for delivery starting as early as 2007.

Before investors rush back into Cameco Corp (NYSE:CCJ), the world’s largest uranium producer, one should weigh one’s options. According to Fadi Shadid, an analyst at Friedman Billings Ramsey:

“The easy money has been made in the stock.”

A look at Cameco’s stock chart confirms the analyst’s suspicion. While spot uranium jumped by 97 percent in 2006, Cameco’s stock climbed but 21 percent.

CCJ 1-yr chart


More telling is uranium’s spectacular run since the October 23rd announcement by Cameco of flooding at the company’s Cigar Lake uranium project in northern Saskatchewan. Although uranium shot 30 percent higher, after the announcement, Cameco shares only crept three percent higher. Investors continued making the ‘easy money’ in the uranium juniors as Cameco languished. These included companies whose mining scenarios were still on the horizon or revenue-absent juniors whose advanced projects could be developed within a reasonable time frame.

Near-term uranium producers, such as Australian-based Paladin Resources [TSX: PDN] and South African-based SXR Uranium One [TSX: SXR)] soared respectively 54 and 57 percent after the Cigar Lake announcement. By early 2007, Paladin hopes to commence uranium mining in Namibia, and SXR should be producing at its Dominion mine in South Africa around the same time. Both announced the forward-selling of their not-yet-mined uranium to U.S. utilities.

Closer to home, Energy Metals Corp (EMU) anticipates producing on its Texas uranium property in 2008; Uranerz Energy (NYSEMKT:URZ) plans to mine uranium in Wyoming by 2010. Again, both handily out-performed Cameco the past two months.

Energy Metals rose 46 percent:

EMU 1-mo chart

Uranerz climbed 69 percent higher:

URZ 1-yr chart

Both Energy Metals and Uranerz hope to mine about one million pounds annually on their properties after the initial ramp up period. Both will be using the less expensive in situ recovery [ISR] method of uranium mining. If their operating costs approximate those of Mestena LLC, and the long-term uranium price stabilizes above $60/pound a few years hence, these companies could have healthy operating profits to reward their shareholders.

Cameco’s tragic news helped U.S. uranium producer Uranium Resources (NASDAQ:URRE) rebound from its own bad news. In mid September, URRE lowered expectations of annual mining production because of difficulties on a Texas property. The share price was sliced by half. Despite lowered production estimates, the company’s share price not only recovered, but climbed another 50 percent above its pre-announcement level.

URRE.OB 1-yr chart

While the big money flew out of Cameco, investors stuck to the bullish uranium story and sought out other potential uranium producers, many which trade on the Toronto Venture Exchange. Following Paladin’s success story in Namibia was Forsys Metals [TSX: FSY], another company which hopes to mine in that country before the end of the decade. It might be a horse race between AIM-listed UraMin and Toronto-listed Forsys as to which company will next put Namibia’s third mine into production. Since the Cigar Lake episode, shares in Forsys Metals galloped ahead by 69 percent.

Other Canadian-based companies, whose focus is upon bringing U.S. uranium properties into production, include Strathmore Minerals [TSX: STM] and UR-Energy [TSX: URE]. Both are following in the same vein as Energy Metals and Uranerz Energy. UR-Energy may likely become Wyoming’s next uranium producer. Strathmore hopes to mine its Roca Honda property in New Mexico. While those are among the more advanced stage uranium juniors, several others hope to follow in their footsteps. Since the Cigar Lake announcement, UR-Energy and Strathmore Minerals jumped 35 percent and 54 percent, respectively. [Note: All percentage comparisons for this article were made in the period of October 20 to December 15, 2006].

The medium-term price impact on the near-term uranium producers and junior uranium explorers could be more widely felt than with the uranium-producing giants, such as Cameco, ERA [Australia], Rio Tinto (RTP), or BHP Billiton (NYSE:BHP). Aside from Cameco and ERA, uranium production comprises a modest or negligible portion of the major miners’ company business. The more serious downside for the giants are the long-term contracts in which these uranium producers are entangled.

According to the Australian financial website, ERA lacks full disclosure on the pricing of its uranium contracts, but many guess it is around the U$20/pound level. BHP Billiton’s uranium production at Olympic Dam in Australia is reportedly being sold for less than US$20/pound. That appears to be the circumstance with Rio Tinto’s Rossing uranium mine in Namibia. Cameco fares better, but the company has hardly participated in this quarter’s surge of the spot uranium price. As an aside, the plant superintendent at Cameco subsidiary’s Power Resource Smith Ranch noted, in an interview conducted earlier this year, that much of the uranium production had been locked into long-term contracts for far less than the then-uranium price of less than $40/pound.

The looming showdown between uranium producers and the utilities, which purchase uranium from the miners, was finally revealed at the Platts conference reported upon this past October. While Rajiv Kundalkar, vice president of nuclear engineering for Florida Power and Light (NYSE:FPL), felt the spot uranium price was "too high" and forecast its fall, Dustin Garrow, Paladin’s marketing manager, predicted uranium could rally to the $80 - $100 price level.

During the Q & A session, Mr. Kundalkar admitted his company refused to purchase spot uranium the Department of Energy had offered in September because he thought the price was "too expensive." Cameco did purchase and later announced it had resold the same uranium at a higher price. During our recent investigation, it was discovered FPL’s fuel managers are still trying to obtain uranium for their nuclear plants. Some fuel traders have begun joint ventures with junior uranium companies as a potential means of assuring future uranium product.

On December 7th, Uranium Resources signed a definitive joint venture agreement with Japanese conglomerate Itochu Corporation to study the company’s Churchrock uranium property in New Mexico. Earlier this year, junior uranium explorer CanAlaska Ventures [TSX: CVV] had enlisted a pledge from an Australian subsidiary of Mitsubishi to help fund its exploration efforts in Canada’s Athabasca Basin.

Over the course of nearly 200 interviews with industry insiders, utilities, energy consultants and uranium company technicians and executives over the past 13 months, it has become evident to us that no one truly knows where the price of uranium will eventually settle or stabilize. In July 2004, StockInterview was the first to carry an article forecasting $100/pound uranium. But it was only in early 2006 that a handful began talking about $60, $70 and even $80/pound uranium. To date, every analyst, including those who weekly report the spot uranium price, has underestimated this uranium bull market.

Another shock to the system could occur in early 2007, when the global uranium mining production, for this past year, may very well be reported as having fallen short of 2005. Early estimates indicate lowered annual mining production has a high probability of becoming a reality.

Even the 800-pound gorilla might not arrive before the next uranium price leap. The single dampening fear of uranium producers is the specter of a significant offering by the U.S. Department of Energy [DOE)], auctioned from the agency’s AMU [already mined uranium] inventory. But, an extremely reliable source told us late last week that the DOE was extremely unlikely to auction any uranium at all until this coming summer.

Barring a miraculous ‘recovery’ announcement from Cameco about the company’s Cigar Lake project in late January or early February of 2007, shares of many of the junior uranium companies, especially the real near-term uranium producers, could be in for a rocket ride through early March 2007. Historically, junior mining stocks strongly rally until the opening day[s] of the highly regarded and widely followed Prospectors and Developers Association of Canada conference [PDAC] held in Toronto every March. This year, the conference starts on March 4th. Bear in mind, junior uranium companies should be considered highly speculative investments and unsuitable for most investors. Many who trade the uranium stocks are momentum players well versed in the natural resources sector.

Over the longer horizon, the uranium bull market might continue its stampede until the 2010 to 2013 time frame. At the earliest, Olympic Dam’s expansion is not scheduled until 2010. BHP Billiton is now soliciting bids for future uranium production before it commits to the estimated $5 billion capital expenditure the project’s expansion could require. [Olympic Dam is primarily a copper mine and the proposed expansion could be jeopardized should copper prices tumble and remain lower]. Kazakhstan projections of dramatic uranium production by 2010 have yet to be taken seriously by many analysts. And Cigar Lake remains an unknown quantity, perhaps even after Cameco comes closer to bringing this uranium mine into production.

As one knowledgeable uranium insider said, after TradeTech announced the weekly spot uranium price record:

“$100/pound is no longer out of the question.”