Uranium Resources: Expansive Resource Potential Could Make Them a Bigger Player in Future

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 |  Includes: CCJ, FURAF, PALAF, RIO, SXRZF, URRE
by: Michael Filloon

Uranium has had a nice run of late. Most of the companies in this space have done quite well and it doesn't seem to matter whether they mine the commodity or they are just buying up areas and plan to keep the commodity in the ground while the metal appreciates. It's not a bad idea. Looking at the price of uranium at uxc.com or tradetech.com, both show the same price appreciation. With long term and spot prices coming together, we could see a large move in the spot market as producers by up uranium that they have contracted out to customers. Even if this doesn't happen like it did a few years ago, the price action is up and will continue so until the trend is broken.

One uranium stock to look into is Uranium Resources Inc (NASDAQ:URRE). This company saw price appreciation up to $13 when the price of uranium was in the $130/lb. range. If uranium price continues to move higher, this stock will move upward.

Uranium Resources is an exploration, development and production company. They have produced over 8 million pounds of uranium oxide since 1977. They currently have 101.4 million pounds of in-place uranium material. Market cap is currently 235 million. The stock currently trades for $2.54 per share. This may be a time to get in as it is off its short term high of $3.98. 46.9% is institutionally owned. Insider ownership is 5.5%. They currently have locations in New Mexico and Texas. They have 183000 acres.

The uranium market has several things going for it. First is the fear of global warming. I can not say that I do or do not believe in this, but it is a fear. There are also possibilities of a worldwide carbon tax based system. It is hard to qualify or quantify this until it is done, but if so this would strengthen nuclear's position. There is also the upcoming nuclear renaissance. I am sure this is happening as China and India account for over 40% of the proposed and planned nuclear reactor builds. Both countries have very large populations, and their countries do not have the resources to fuel coal or natural gas plants. It seems they have decided to dump their new found wealth into nuclear, as uranium is cheap and in some countries plentiful. Uranium Resources should be helped by the discontinuing of the Russia HEU agreement in 2013. Lastly, demand is increasing for uranium because of the new reactor builds. Demand could double by 2030.

Currently there are 436 nuclear reactors operating. 53 are under construction. 142 are planned. 327 have been proposed. The information is out there, and many people know that there are quite a few reactors coming on line over the next few years. What should be realized by this data is the World Nuclear Association published a report on this exact estimate and the differences from the 2007 report to the 2010 report is a 50% increase of planned and proposed reactors in just three years. It is possible that this number won't increase another 50% by 2013, but in all likelihood this number will continue to increase. This figure does not count the reactors that will be closed or are being replaced, but it is startling that we continue to see an increase in new builds.

Uranium Resources could stand to benefit from these numbers with respect to the amount of uranium produced in the United States. There are currently 104 nuclear reactors on line. These reactors require 43.1 million pounds annually. Currently the miners in the United States only produce 3.2 million pounds. It is difficult to estimate whether the United States will decommission war heads after the Russians decide to stop, which could decrease the amount required.

The main reason I like Uranium Resources is they have a significant holding of in-ground uranium. To give an idea of the latitude of their position, it is best to compare their resources to other world players. The competitors are:

1. Cameco (NYSE:CCJ) 948.5 million pounds
2. Rio Tinto (NYSE:RIO) 625.4 million pounds
3. Extract Resources (OTC:EXRLF) 390.7 million pounds
4. Paladin Energy (OTCPK:PALAF) 371.4 million pounds
5. First Uranium Corp. (OTC:FURAF) 257.7 million pounds
6. Uranium One (OTC:SXRZF) 195 million pounds
7.Bannerman Resources (OTCPK:BNNLF) 129.4 million pounds
8. Uranium Resources (URRE) 101.7 million pounds

I did not expect to see Uranium Resources up this high on the list, but they are on a very impressive list with respect to world players. Names not seen on the list are ones that have fewer resources.

Their strategy going forward is to fully exploit the resource potential in New Mexico. They are still trying to expand their asset base in both New Mexico and Texas. Uranium Resources is currently seeking partners to help increase their production. Most importantly, they are trying to prepare their properties before market price recovery.

Although Texas has been the major area of production for this company, their New Mexico assets have the most upside. From 1948-1999 over 340 million pounds were produced. It is estimated that over 588 million pounds remain. Uranium Resources believes they could produce 15-20 million pounds per year from this location.

They currently have a large head start on the competition as they have done most of the work to get licenses and permits. This is important because of the time involved to get the proper paperwork done before production is started. Their Churchrock/Crownpoint purchase was done in 1986. They finished what looks to be the last of court hearings and paperwork as of June of 2010.

When breaking down their properties, they have several areas of production. The first is Crownpoint at 1.2 million pounds per year. Roca Honda is designed to produce 1 million pounds per year. Nose Rock can produce 2.5 million pounds per year. On top of this, Ambrosia Lake District has exploration potential of 43000 acres.

One development with respect to uranium miners is a newer style of mining. Insitu recovery is a noninvasive mining process that reverses the natural deposit process. Existing groundwater fortified with oxygen leaches the uranium from within sands. The leached solution is then passed over ion exchange resin to recover uranium. After the cycle is completed the ground water is returned to its premined state. The important part of this process for shareholders is its cost effectiveness. In many cases uranium miners can get the price of mining down to around $40 per pound.

Uranium Resources has two existing sales contracts in Texas. Itochu Corp has signed a deal to buy uranium for a floor of $37 per pound and ceiling of $43 per pound depending on the spot price eight weeks prior to delivery. There is then a discount added at 50% of excess above 50 pound spot price. UG USA Inc is owned by Areva and their contract is based on the long term price with a discount but excalated for inflation.

In summary, Uranium Resources Inc. (URRE): Their expansive resource potential could make them a bigger player going forward, especially if demand cannot be met. Although Cigar Lake is suppose to come on line in time to help fill the gap between production and the amount used, it is difficult to know if they will be able to overcome water problems and other project slow downs. If it does come on line, there is still a significant amount of inventory that needs to come on line.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in URRE over the next 72 hours.