Uranium Correction-SUPPLY GAP AFTER 2013SUPPLY GAP AFTER 2013
RBC says uranium bull market thriving and forecasts average $100/lb price in 2007
In a recent study, RBC Capital Markets advised that mining remains in the middle of a uranium bull market with an average $100/lb price this year.
Author: Dorothy Kosich
RENO, NV -
An RBC Capital Markets research report released last month asserts that uranium remains in the middle of a bull market, with an average price of $100/lb forecast for this year.
In their report, "Investing in Uranium Companies," RBC provides a good introduction to the mining sector, which is applicable to a broader range of hardrock minerals and metals.
RBC's analysis asserts that a supply-gap will exist in uranium after 2013.
The analysts suggest the two best strategies that a uranium producer or developer can use to drive shareholder returns are "becoming a producer and positioning the company for acquisition. Other strategies include land/area plans or simply the acquisition of as many ‘pounds in the ground' as possible regardless of asset quality-but we believe these are inferior strategies," RBC Dominion Securities Analyst Adam Schatzker wrote.
RBC uses a formula of forward earnings per share (EPS) or CFPS multiples to reflect the valuation of uranium companies with existing operations. For those developing new projects, the analysts use a net asset value (NAV) approach. "For exploration companies where it is too early to calculate an NAV, we look to the enterprise value per pound of U308 (EV/lb) in resources."
The report advises that the most important criteria that needs to be evaluated when examining a uranium project include grade, deposit types, the kind of mining and extraction methods to be used, permitting issues, political risk, production timeline, and reserves, resource and historical resources.
"Due to the lower level of confidence, the application of mining dilution and cutoff grades, and the fact that the final reserve/resource may be smaller, we believe inferred resources should command lower EV/lb than measured and indicated resources and, of course, reserves," according to Schatzker.
He advised that is it worthwhile for investors to focus on uranium ISL (in-situ leach) deposits "as we expected that the contribution from ISL uranium deposits will increase dramatically over the next 10 years. ...ISL mines have the benefit of relatively low capital costs and lower environmental footprints, and they can often be brought into production in a much shorter timeframe than conventional mines."
RBC's top uranium company picks include Canada's Cameco (TSX: CCO; NYSE: CCJ) which is the world's largest publicly traded uranium producer. Currently Cameco is developing two new mines in Canada and Central Asia. Analyst H. Fraser Phillips forecast a 12-month target of Canadian $60/share.
Australia's Energy Resources (ASX: ERA), the world's third largest uranium producer, was selected by analyst Chris Lancaster as "SECTOR PERFORM, ABOVE AVERAGE RISK." Lancaster also selected Paladin Resources (ASX, TSX: PDN) because of its potential to write contracts of five or more years at prices around the current uranium price of US$85/lb. "Over the next four years to 2010, we estimated that PDN will ramp up production quickly to approximately 5.9 million pounds per annum of U308," he said. Lancaster rated Paladin "OUTPERFORM, ABOVE AVERAGE RISK" with a 12-month target of A$12/sh.
London analyst George Lequime picked First Uranium (TSX: FIU), citing its Ezulwini and Buffelsfontein gold and uranium projects in South Africa. He rated the company "OUTPERFORM, ABOVE AVERAGE RISK," with a 12-month target of Cdn$12/sh.
Toronto-based Schatzker likes sxr Uranium One (TSX: SXR), which recently announced its planned merger with UrAsia to form Uranium One. He highlighted SXR's Dominion Uranium Project in South Africa, forecasting that its atmospheric leach circuit will ramp up to 3.5 million pounds by 2008 and eventually double production by 2015. He rated the company ‘SECTOR PERFORM, ABOVE AVERAGE RISK," with a 12-month target of Cdn$18/sh.
"The EPS and NAV used to calculate our target price incorporate our valuation of UrAsia and assume that the deal proceeds as announced," Schatzker explained. "We believe that SXR will enter into contracts in 2007 that will determine a significant portion of the company's value; the ability of the company to successfully complete these contracts at the prices we forecast will likely be reflected in the share price."
Among the "NOT RATED" uranium companies highlighted in RBC's report were Aurora Energy, Berkeley Resources, Denison Mines, Energy Metals, Forsys Metals, Khan Resources, Laramide Resources, Mega Uranium, OmegaCorp, Strathmore Minerals, Tournigan Gold, Ur-Energy, Ur-Asia Energy, UraMin, Uranium Power Corporation, and Western Prospector Group.