Uranium stocks, already trading at higher valuations than their national benchmark indexes, will rise further amid predictions the price of the fuel may surge as much as 30 percent, investors and analysts said.
Uranium prices, which last month climbed to the highest level in more than two years amid a pickup in demand from China, will rally as the global economic recovery spurs countries in Europe and Asia to increase purchases, they said.
Uranium spot prices rose 40 percent this year and 34 percent since the end of September to $62.50 a pound on Dec. 20, according to Roswell, Georgia-based Ux Consulting, which tracks the industry. Producers in Australia and Canada forecast demand for the metal will increase as countries, including India, expand their use of nuclear power to curb emissions from burning coal.
“Uranium spot prices have rallied strongly over the past few months on strong Chinese demand,” said Tim Schroeders, who helps manage $1 billion in Melbourne at Pengana Capital Ltd. “With an improving global economy, it’s not unreasonable to expect uranium demand to improve, to fuel increased economic activity.”
Uranium rose to the highest price in more than two years last month after China Guangdong Nuclear Power Co. agreed to long-term supply contracts with the world’s two largest producers, Denver-based pricing service TradeTech LLC said in a Nov. 26 report.
Nuclear Plants
China Guangdong, the country’s second-biggest builder of nuclear-power plants, agreed to buy 29 million pounds of uranium through 2025 from Cameco Corp., based in Saskatchewan, Canada, after striking a deal with the miner’s larger rival, Kazakhstan’s state-run Kazatomprom.
According to Jamie Coutts, a Singapore-based analyst at BGC Partners, a 30 percent gain in uranium prices next year isn’t unrealistic as China boosts purchases and after countries including France indicated they will increase nuclear-power generation, while Malaysia and Vietnam outlined plans to build their first nuclear plants.
Pengana’s Schroeders is more reticent about that figure.
“Whilst an expectation of higher uranium prices is not unreasonable, a 30 percent rise within 12 months from current levels would surprise,” he said.
Uranium stocks have had a mixed performance this year, with Cameco, the world’s No. 2 producer, soaring 18 percent in Toronto through yesterday, while Energy Resources of Australia Ltd., controlled by Rio Tinto Group, has plunged 53 percent in Sydney.
Top Picks
Coutts said among his top picks in Australia in the industry are Paladin Energy Ltd., which produces the metal in Africa and has climbed 18 percent this year in Sydney through yesterday, and Extract Resources Ltd., which has risen 7 percent and isn’t yet producing.
Paladin traded at 63 times estimated earnings as of the close of trading yesterday, compared with 14 times for Australia’s benchmark S&P/ASX 200 Index, while Energy Resources, even after this month forecasting as much as an 83 percent decline in profit for the year, traded at 25 times. Cameco traded at 38 times estimated earnings in Toronto, compared with 18 times for Canada’s Standard & Poor’s/TSX Composite Index.
“Investors have to do their homework and find out which stocks really have the upside and are most leveraged to an increase in uranium prices,” Coutts said. “But when you look overall at the supply-demand metrics of the sector, it really does become a compelling case for higher prices.”
Spot Prices
Both Paladin and Extract’s businesses are more tied to potential gains in uranium spot prices because of the nature of the contracts the companies negotiated, Coutts said. Others, for instance Energy Resources, have sealed more longer-term deals that are less influenced by potential gains in spot prices, he said.
While Energy Resources, which sells uranium to utilities in Asia, Europe and North America, has signed long-term contracts, the prices it gets are still influenced by spot prices, Lyndon Fagan, a Sydney-based analyst at Royal Bank of Scotland Group Plc said earlier this year.
Most uranium is currently delivered under term contracts, according to Eric Webb, Senior Vice President of Information Services at Ux Consulting.
“Many contracts today are combination offers, although you do still have a few pure market-related ones,” he said.
Paladin Energy’s Chief Executive Officer John Borshoff told analysts last month that the company expects uranium prices will keep rising after China “piled up” contracts. Last week, the company said it acquired uranium assets for C$260.9 million ($258.4 million) from Fronteer Gold Inc. in a deal that gives the Canadian company 52.1 million Paladin shares.
Atomic Expansion
China and India are leading the biggest atomic expansion since the decade after the 1970s oil crisis in order to reduce air pollution and power their economies. Chinese uranium demand may rise to 20,000 tons annually by 2020, more than a third of the 50,572 tons mined globally last year, according to the World Nuclear Association.
Macquarie Group Ltd. reported last month that Chinese uranium imports had increased, especially between June and September.
Vietnam’s government said in June the country plans to build as many as 13 nuclear-power plants with a capacity of 16,000 megawatts by 2030, and that it welcomes overseas assistance.
Malaysia is considering building two 1,000-megawatt nuclear-power plants to start operations in 2021 and 2022 respectively, state news agency Bernama reported this week, citing Energy, Green Technology and Water Minister Peter Chin.
Romania, Lithuania and the U.K. plan to build new nuclear plants, while France and Finland are already doing so. Italy plans a return to atomic energy after more than two decades.
Nuclear energy accounts for about a third of electricity production in the European Union, where 14 nations have atomic- power plants.
To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net.
To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.