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Analysts remain bullish on outlook for uranium after nearly doubling in 2006
Sun Jan 7, 12:58 PM
By Craig Wong
VANCOUVER (CP) - After nearly doubling last year, the price of uranium appears poised to continue its bull run in 2007 as demand for the radioactive fuel continues to outstrip supply, analysts say.
"It is a commodity that has for years been under a lot of pressure from excess supply and now the seeds have been sown and we're beginning to see the flip side of that," said RBC Capital Markets analyst Adam Schatzker, who has forecast the price will average US$100 per pound in 2007.
"There is not a lot of mine production. The inventories that were being sold into the market are disappearing and we're actually in a supply-demand deficit."
Though hedge funds and other speculators are beginning to move into the uranium market, he said the biggest driver to the recent increase in price is a shortfall in supply and growing demand.
New nuclear power plants are being built in China and other parts of the world, while few new major deposits have been developed, leading to demand that is 40 per cent ahead of current supply.
For years the price of uranium removed the incentive to spend the money building any new production or searching for new deposits. With governments selling their inventories the markets were flooded with cheap uranium and there was no need to dig up new deposits.
But those inventories are depleting and uranium users still need the fuel for their reactors.
The price of uranium averaged US$28.15 per pound in 2005 and jumped to and average of $48.10 per pound in 2006. However the spot price for the radioactive metal was a whopping US$72 per pound at the end of the year.
Scotiabank commodity specialist Patricia Mohr has suggested that the current upswing in uranium prices is a "secular" change in global energy markets, due to the price of oil and that nuclear power generation emits virtually no greenhouse gases.
"While exploration activity has surged for uranium - across Canada, Australia, Africa and in Kazakhstan - there has been little improvement in mine production," Mohr wrote in a recent report forecasting an average price of US$80 in 2007, ending the year close to $90.
She suggested mine production gains this year will be limited as Cameco (CCO.TO) and Areva will likely boost output in Kazakhstan, the Dominion project will start up in South Africa and Smith Ranch may be expanded in the United States.
The shortfall in supply was made worse when Saskatoon-based Cameco, the world's biggest uranium producer, reported flooding at its Cigar Lake mine in northern Saskatchewan, a project it had hoped to bring into production in 2008.
Construction at the deposit, which has proven and probable reserves of more than 232 million pounds of uranium at an average grade of 19 per cent, began in January 2005, but came to a halt last year after a flood that pushed back completion by at least a year.
Though the company has started round-the-clock work drilling holes to the source of the water inflow so it can pump in concrete, it is not known when the mine will actually be able to come into production.
Some market watchers have speculated that the Cigar Lake mine may never begin commercial production.
Schatzker said the flood at the mine that is expected to produce 18 million pounds a year when it comes does come into production, had a "fundamental impact on the market."
"The range of expectations of where that might go is all over the place because really a lack of information and a lack of clarity," he said.
But even with the trouble, Salman Partners analyst Raymond Goldie still rated Cameco a top pick for the year.
"We believe that investors have been overly concerned about the link between oil prices and uranium prices and about the flood at Cameco's Cigar Lake uranium project," said Goldie, who has a C$55.95 12-month price target on the stock.
"However, as investors realize that what Cameco loses at Cigar Lake on volume, it more than makes up on price, Cameco's share price continues to recover."
Investors have been flocking to uranium stocks, particularly those of junior companies with a lower stock price.
For example, Paladin Resources Ltd. (PDN.TO), a small Australian miner that trades on the TSX and has uranium properties in South Africa, has been a top trading stock for several weeks on the Canadian markets.
SxR Uranium One Inc. (SXR.TO), a Toronto-based resources company, has also been a popular investment as has been Denison Mines Corp. (DML.TO), an intermediate uranium producer, with mining assets in the Athabasca Basin of Saskatchewan, and the southwestern U.S. as well as exploration properties in the U.S., Canada and Mongolia.
Investors have been drawn to Denison because the company owns parts of two of the four uranium mills operating in North America today, giving the company a diversified mining asset base as well as milling infrastructure.
The Toronto company recently got C$100 million in financing to back its bid to acquire OmegaCorp Ltd., an Australian-traded miner with uranium projects in southern Africa, including the advanced stage Kariba Project in Zambia.