Uranium Spot Price Up-Ticks Two Weeks In A Row
Uranium investors have had to endure Chinese-water-torture like spot prices this year. While each weekly drop has been small, the overall 2013 price decline so far for U3O8 is $10/lb., equal to a 23% decline from $44 to $34 per pound.
We should also keep in mind that uranium prices were down last year, and again in 2011after Japan's March 11 record earthquake, tsunami and nuclear plant accident. The 2012 spot high/low was $52.50/$40.75 and for 2011 it was $73/$49. My point is that 2.5-years after Fukushima, uranium spot prices have been more than cut in half. The question is, has uranium finally found its bottom?
We have detailed the various supply and demand catalysts and continue to believe that uranium prices should move significantly higher. These range from the number of nuclear power plants doubling worldwide by 2030, to more immediate demand growth as Japan's 50 reactors start coming back online later this year. Uranium supplies continue to tighten with deferments and mine closures as a result of low prices, while at the same time U.S. nuclear utilities need new sources to replace about half of their supply that came from the 20-year HEU Agreement with Russiathat has just ended.
Markets usually react to higher demandor to lower supplywith higher prices, which eventually come back into balance as more supply is produced. We saw this in 2007/2008 with U3O8/oil prices both spiking to record highs of $137/lb. and $147/barrel. That world energy growth up-trend was suddenly upset by the financial crisis in 2008, resulting in both oil and U3O8 correcting to around $40. Oil prices have since recovered to over $100/barrel again, however uranium spot prices are back to the mid $30seven though its fundamentals have never looked better. Why is uranium stuck?
Trend Traders know that major gains can be made if you can accurately time the first significant up-move of a major downtrend reversalU3O8 especially has seen big spikes in the past. However investors still tend to remain on the sidelines until after a new up-trend is established, although this can only be determined in retrospectafter a significant up-move holds. I actually thought we saw the bottom last December at $40/lb., before bouncing 10% on news of Japan electing a pro-nuclear governmentbut the bounce didn't hold that time.
With U3O8 down over 50% in 30-months, finding its spot price bottom has certainly been elusive. Even those who fully appreciate the world's growing need for reliable, clean and low cost nuclear energy, and who recognize the S&D outlook dilemma for uranium and the positive value impact this represents to its miners, may still be waiting for that technical bounce and for it to hold.
The fact is that market trends tend to move prices beyond fundamental valuesso many wait. The question now is, will that wait end soonwith the U3O8 spot price up two weeks in a row?
More And More Uranium M&AMega And Denison Bid For Rockgate
While uranium investors continue to sit on their handswaiting for U3O8's next up-trend to emergeuranium miners know better than to wait and have been busy positioning for the next wave.
In 2011 we saw (TSX: CCO)(NYSE: CCJ) Camecoworld's largest publicly traded uranium producerand (NYSE: RIO) Rio Tintodiversified miner with a $92B market-capbattle back and forth for Hathor Exploration and its high-grade Roughrider deposit in the Athabasca Basin, until RIO's C$654M bid won. Last year state-owned China Guandong Nuclear Power Group bought Extract Resources for its Husab deposits in Namibiabelieved to be the 4th largest in the world. In 2011 Russia's state-owned ARMZ bought Australian listed Mantra Resourcesdeveloping the Mkuju River project in Tanzania; this year ARMZ is acquiring the balance of what it doesn't already own of major producer (TSX: UUU) Uranium Oneset to close later this week on Friday October 18.
A key potential turnaround sign for any beaten down industry is when you see increased Merger and Acquisition activityas assets become so cheap that the big boys have to unclench their wallets and step in. This is somewhat like when insiders start buying their own extremely depressed shareseven though they already own a ton of stock. For uranium, we have seen more M&A transactions in the 2-year+ bear market since Fukushima than there was in the 4-years priorduring a bull U3O8 market.
In addition to the above bigger deals, there have been many smaller ones. The most interesting buyout lately is for (TSX: RGT) Rockgate Capital. In June Rockgate and (TSX: MGA) Mega Uranium announced a proposed merger to create a diversified company with advanced uranium assets in Australia and Mali, West Africa. The implied price then was C$0.25/RGT share, paid in MGA shares.
In August the companies executed a Definitive Agreement, shareholders were updated and an Interim Court Order was obtained for the combination. In September two leading independent proxy advisory firms recommended Rockgate shareholders vote in favour of the deal, and the company waived the application of its Shareholder Rights Plan.
A few days later Rockgate advised of the receipt of an unsolicited offer from (AMEX: DNN)(TSX: DML) Denison Mines. A week later RGT announced the termination of the agreement with Mega, but made no recommendation with respect to Denison's offeralthough the news release indicates a superior DML offer, but with some concerns. In any event Mega was paid a C$1M break-up fee.
The interesting part is that Denison gets Rockgate's ~C$23M in cash, paid for totally in shares at a ratio of 0.192 DML per RGT share. This works out to just over C$23M as of Friday's C$1.04 DML closing price. Denison will likely pay a few million in transaction fees, but this deal finances itself as the closing costs and any other premium paid to get RGT's cash is offset by the up to 20% Discounted Market Price that might have otherwise been factored into a DML Private Placement to pay for RGT.
The practically free bonus is getting Rockgate's 100% owned, 267 km2 Falea uranium project in SW-Mali, near Senegal and Guinea. RGT's most recent NI 43-101 resource report shows 45.3Mlbs. U3O8 at 0.07%, with a further bonus of 36.9Moz of silver and 155.4Mlbs. of copper ... so far!
Mali is Africa's third-largest gold producer with eight active gold mines. Mining in general has been down this year, and even more so for Mali as a result of recent terrorist acts. As the geopolitics there eventually improvewith only a small portion of Falea explored so farre-rated risk values and a potential African spinout with Denison's Mutanga project in Zambia might make RGT a sweet deal.
While Denison has exploration and development uranium projects in Zambia, Namibia, Mongolia, and perhaps soon in Mali, its focus remains on Canada's Eastern Athabasca Basinas one of the largest property holders there with 49 projects covering 600k+ hectares. Earlier this year we saw Denison acquire JNR Resources and then Fission Energy, primarily for their Athabasca assets.
That Fission deal resulted in a new spinout company also called Fission, to hold its predecessor's Western Athabasca propertiesincluding Patterson Lake South (PLS). (TSXV: FCU) Fission Uranium and its 50% joint venture partner (TSXV: AMW) Alpha Minerals have shown high-grade PLS drill results all year that have propelled their combined market caps to over $345M currently.
PLS has become a hot uranium area play with many companies recently acquiring nearby properties. On Sept. 18 FCU and AMW announced the execution of a definitive agreement for them to now mergeconsolidating and repositioning their PLS projectalso providing a new spinout company to hold their non-PLS assets. Why so much M&A activityunless uranium is about to turn higher?
U.S. Uranium MiningUranerz Energy
As Russia, China and other major producers make their moves, the United States seems caught flat-footed without a secure future uranium supply plan. Back in the 1960's the U.S. was both the world's largest consumer and producer of uranium. It's interesting that while the U.S. still consumes the most uranium, U.S. production has shrunk over 90%now at less than 8% of its needs.
With uranium's rarity and strategic importance in nuclear power, warheads, medicine and other vital industries, it's also interesting that Russians now mine more uranium on American soil than the U.S. itself. Will U.S. based U3O8 miners command a patriotic premium as the public starts realizing this?
The U.S.' largest uranium production facility is Cameco's Smith Ranch-Highland (SRH) plant located in the Powder River Basin (PRB) of Wyomingthis only makes sense as most U.S. uranium comes from the PRB. A detailed property location map of the central PRB shows Cameco, Uranium One and (AMEX: URZ)(TSX: URZ) Uranerz Energy surround each otherjust to the north of SRH. The blue, red and beige area colours also give you an idea of each company's comparative land position.
Uranium resin from Uranerz' Nichols Ranch projectthe company's first ISR minewill be trucked about 15-miles south to the SRH plant for final processing. Mine construction started in August 2011 and is nearing completion, with production anticipated by yearendsee URZ' Oct. PDF presentation.
We have mentioned several U.S. based uranium miners before, but watch these three in regards to the U.S.' key PRB play. Beaten down 1-5 year charts look interesting for each company, however Cameco is a major global producer that is focused more on the Saskatchewan/Alberta Athabasca Basin. Uranium One also produces globallysoon to be a wholly owned Russian private company.
Our focus is more on smaller-cap stocks like Uranerz, which holds over 80k acres in the PRB and is the only pure PRB uranium play. The company's NI 43-101 shows ~19Mlbs. U3O8 from 7 projects explored so farout of their 30 PRB projects. URZ' Nichols Ranch mine is licensed for up to 2Mlbs./year with the initial production rate targeted at 600k-800k lbs. per year after ramp-up.
We look forward to Uranerz' resources expanding with future exploration programs, however the more immediate URZ catalysts that we are watching for now are additional mine construction updatesincluding completion of drilling at their second of two Deep Disposal Wellsand the final processing of their low-cost $20M state loan.
As URZ' first uranium mine moves towards commissioning, several analysts this year have put URZ' target north of $2/shareover double the current share price of US $0.94 and its $81M market-cap. When quoting URZ at our website and then clicking the Analyst Tab, our data provider shows the Consensus Rating for URZ is Strong Buythe highest rating possible for the four analysts reporting. The Industry Comparison shows URZ ranked number one out of 101 stocks with recommendations.
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