On Wednesday, Rio Tinto Plc (RIO) made an all-cash offer for Hathor for C$4.15 per common share, upstaging Cameco Corp.’s (CCJ) earlier bid of $3.75 in August. The average uranium stock has already recovered over 40% since the lows in early October, after a precipitous 75% drop since February this year, and the on-going bidding war sends a strong signal to players in the uranium space that the stock prices in the sector have most likely bottomed-out.
Furthermore, uranium prices, as represented by its most common form of triuranium octaoxide (U3O8), have also bottomed-out in 2010 in the $40 range, after collapsing 70% from a $136/lb peak in 2007. The peak in 2007 was the culmination of a meteoric 20-fold rise earlier in the decade.
Although uranium prices have weakened since the Fukushima incident in Japan and Germany’s much-publicized planned shut-down of all of its nuclear power plants by 2022, at over $50 they are still well above the $40 lows in 2009-10. Furthermore, the fundamentals in the uranium space have improved.
Although positive developments in the space have not received as much publicity as the negatives related to Fukushima and Germany, the fact is that (per Credit Suisse) 90% of the growth in new nuclear reactors is expected to come from the emerging economies of China, Russia and India. On a global basis, over 500 nuclear power plants are under construction or planned for development in the next 15 years, with China alone accounting for over a third of that total.
At the same time, the 20-year old Megatons to Megawatts™ or HEU program by which bomb-grade uranium from dismantled Russian nuclear warheads is being recycled into low enriched uranium (LEU) is coming to an end in 2013. The program currently fills the gap between supply and demand, and the culmination of the program should add to the upward pressure on uranium prices. We do not believe that these long-term positive developments are fully reflected in the price of U3O8 or in the price of uranium mining company stocks.
While it is still unclear who will win the Hathor battle, the hometown favorite CCJ that dominates the Canadian Athabasca Basin in Saskatchewan, that supplies over 23% of the worldwide demand for uranium, or British-Australian mining giant RIO. The battle is already a net positive for the uranium sector as prices have for most miners almost doubled in the last three weeks.
The ongoing battle has been signaling to investors in the space that asset prices of uranium companies have gotten low enough to excite a bidding war, and the positive sentiment resulting from that along with the improving fundamentals should lead to a recovery in uranium prices and the share prices of uranium miners. Besides RIO and CCJ, the following are some other uranium mining companies that may benefit from the positive sentiment and improving fundamentals:
- Uranium Resources Inc. (URRE): URRE engages in the acquisition, exploration, development and mining of uranium properties. It owns developed and undeveloped uranium properties in South TX, and undeveloped uranium properties in New Mexico. URRE does not currently generate any revenue, and trades at a price-to-book (P/B) ratio 3.5. The stock has been in a strong rally since the beginning of October, almost tripling nadir-to-peak in the last three weeks. On Tuesday, it announced that the Nuclear Regulatory Commission reactivated its Source Materials License to conduct in-situ recovery uranium mining in McKinley County, NM.
- Denison Mines Corp. (DNN): DNN engages in the exploration, development, mining and milling of uranium primarily in the U.S. and Canada, and also internationally in Mongolia and Zambia. The company's principal properties in the U.S. include the Arizona Strip uranium properties in north central AZ; the Colorado Plateau uranium/vanadium properties located to the southwestern CO and southeastern UT border; and the Henry Mountains Complex uranium properties in south central UT. It currently incurs losses and trades at a price-to-sales (PSR) ratio of 4.7, and a P/B ratio of 0.59. The stock is up over 75% since the lows in early October.
- Ur-energy Inc. (URG): URG is an exploration stage junior uranium mines, with 13 projects located in WY and NE, and 3 exploration projects located in the Northwest Territories and Nunavut, Canada. It currently does not generate any revenue, and it trades at a P/B ratio of 1.5. The stock is up over 65% since the lows in early October.
- USEC Inc. (USU): USU supplies low enriched uranium (LEU) to commercial nuclear power plants in the U.S. and internationally. It currently incurs losses and trades, and trades at a forward 10 P/E; also, it trades at a P/B ratio of 0.2, and at a PSR ratio of 0.5. The stock has also been in a strong rally since mid-October, and almost doubled in the last week.
- Uranium Energy Corp. (UEC): UEC is engaged in the exploration, acquisition and development of uranium properties in TX, WY, NM, AZ, CO and UT. It currently does not generate any revenue, but on a forward basis, it trades at a P/E of 2.5 based on a projected $1.17 in earnings for the fiscal year ending July 2013. Also, it trades at a P/B ratio of 4.3. The stock is up over 50% since the beginning of October.
- Uranerz Energy Corp. (URZ): URZ is engaged in the acquisition, exploration and development of uranium properties in the Wyoming Powder River Basin area. It does not currently generate any revenue, but on a forward basis, it trades at a P/E of 12 based on FY December 2012 earnings. Also, it trades at a P/B ratio of 2.6. The stock is up 70% since early October.
- Quaterra Resources Inc. (QMM): QMM is a Canadian company engaged in the exploration of base and precious metals, as well as uranium properties in North America. It does not currently generate any revenue, and trades at a P/B ratio of 1.5. The stock is up 20% since early October.
Meanwhile, CCJ trades at a forward 10 P/E, while earnings are projected to rocket from $1.25 in 2010 to $1.98 in 2011. Furthermore, it trades at a reasonable P/B ratio of 1.5 and at 7.5 times sales. RIO trades at a forward 5 P/E, while earnings are projected to grow at a 16% annual growth rate from $7.09 in 2010 to $9.53 in 2012; also, it trades at a P/B ratio of 1.5 and at a PSR ratio of 1.5.
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