AUSTRALIAN URANIUM MINERS MARKET VALUE UP 48%

Research By
Resource Capital Research (RCR)

PERTH (miningweekly.com) – The market valuation of Australian companies with one or more uranium projects grew faster than that of their Canadian peers over the last 12 months, research by Resource Capital Research (RCR) has shown.

In a report on global uranium companies, released on Wednesday, RCR said that the market valuation of Australian uranium companies had risen by 48% over the last 12 months, compared with Canadian uranium companies, which recorded a 29% increase.

However, the market valuation fell over the past month, with Australian companies suffering a 4% decline and Canadian uranium firms a 2% drop.

Over the past three months, the market valuation fell by 16% for Australian miners and 15% for Canadian miners.

RCR said in its June uranium report that in the past month, the uranium mining majors have had mixed share price performance.

The share price of the biggest-listed uranium-miner, Cameco, fell by 6%, while Denison Mines’ stock share price dropped by 1% .

Uranium One’s share price surged by a 24%, on the back of a deal with Atomredmetzoloto, or ARMZ. The Russian company will increase its holding in Uranium One to at least 51%.

Share prices for Energy Resources of Australia (ERA) were up 7% while Paladin’s share prices remained unchanged.

However, most companies had seen share prices drop over the last three months.

ERA suffered a 27% drop in its three-months share price, which RCR attributed to a number of factors, on of which was the super profit resources tax that Australia plans to implement.

Both Cameco’s and Denison’s share prices fell by 13%, when measured over a three-month period.

RCR noted that the Merrill Lynch Uranium Equity Index was up 6% over the past month, down 15% over three months and down 16% over the past 12 months.

PRICE OUTLOOK

RCR said that it expects the uranium price to continue to trade at around $40/lb mark over the next few months.

With the fund implied price (FIP) currently trading at $40,50/lb the spot price outlook was relatively flat.

Since April, the FIP has traded in a range of between $35/lb and $46/lb, with the low of $35/lb coinciding with equity market weakness in April.

The gradual downward drift in spot and contract prices over the past 12 months reflected, in part, the growth in new mine supply from Kazakhstan’s ISR projects.

“Uranium mine supply growth in Kazakhstan threatens to weigh down the sector cost curve in the short- to medium-term. Production growth from Kazakhstan has been phenomenal in recent years with production reaching 36-million pounds U₃O₈ in 2009 up 62% from 2008 levels of 22-million pounds, said RCR MD John Wilson.

He noted that production for 2010 was forecast to reach 47-million pounds.

“Production is low cost and frequently below $20/lb. As evident earlier in the year, a floor price of around $40/lb seems to be holding well but there is no significant utility demand to drive the market up.”

Utility purchases remain discretionary, Wilson noted, though timing of demand from long-term Chinese inventory build remains a factor with potential to influence short-term market trends.

Currently there are 439 nuclear power reactors in operation and 57 under construction. There are 496 new nuclear reactors planned or proposed globally as of June 2010, up from 435 in December 2009.

A total of 67 new reactors are scheduled to be commissioned by 2016.

Since December last year, the largest increases in planned and proposed new nuclear reactors are in India, taking its total from 38 to 60, and China taking its total from 125 to 154.

SIGNS OF UPWARD TREND FOR PALADIN ENERGY

Paladin Energy: Positive action


With uranium projects in Namibia and Malawi, Paladin's share price has been traveling down from 2007, accelerating in late 2008. Rising into 2009, the price halted in resistance at about $5.50 last June and resumed the downward path.

Following the test of the $3.40-$3.50 support in February/March, the price action has become more positive with the potential to tackle its downward barriers around $4.30 and then in the $4.50-$4.70 range.

Once clear, a new direction would be established towards $5.40-$5.60 and potentially higher. A drop below $3.50 would endanger the upward potential.

THUNDELARRA EXPLORATION CONFIRMS HIGH GRADE URANIUM MINERALIZATION

Australian ASX Listed Junior Uranium Explorer, Thundelarra Exploration announced that it has received assay results from a recent diamond drill hole at the Ngalia Basin uranium project intersecting high grade mineralization. The assay results have confirmed the presence of three distinct zones of uranium mineralization.

The drill hole, TNG006MD in the Northern Territory project encountered a mineralized zone assaying 1,771 ppm U3O8 over 80 centimeters including 50 centimeters at 2,316 ppm U3O8. This was intersected on an oxidation front associated with a highly altered conglomerate within the Mt Eclipse Sandstone.

This mineralization is of a similar style to the nearby Bigrlyi deposit owned by Energy Metals Limited, Paladin Energy and Southern Cross Exploration NL. Notably, the vanadium was not present in the mineralization.

The company said that 20 meters below the conglomerate, a steeply dipping fault zone was intersected. This structure appears to have been a conduit for uranium bearing fluids which have mineralized 1.5 meter selvedge zone around the fault assaying 318 ppm U3O8.

Of potentially greatest significance hole TNG006MD intersected 12 meters zone of strongly anomalous mineralization within the overlying Tertiary sediments. The average grade across this zone was 106 ppm U3O8 and included 32 centimeters at 1,547 ppm U3O8 and 72 centimeters at 296 ppm U3O8.

This intercept is interpreted to represent the margin of a paleochannel and is the first known occurrence of Beverley or Four Mile style paleochannel mineralization in the Ngalia Basin. This style of mineralization can yield large, high grade uranium resources that are amenable to In Situ Recovery.

Thundelarra has recently been awarded USD 100,000 grant from the Northern Territory government to assist funding of an airborne electromagnetic survey. This survey, scheduled to commence in July, is specifically targeting the identification of paleochannels within the Company’s 3,300 square kilometers Ngalia Basin tenure.

WHY URANIUM WILL MAKE SOMEONE RICH

Uranium is a very unusual sector. For one, it’s small. So small, that at one point in history top-producing nations like Canada and France tried to form a uranium cartel to control prices for the metal.

The “uranium OPEC” failed. But production today is de facto controlled by a handful of companies.

Consider this. The world’s top ten uranium mines account for 59% of global production. (The top mine, Saskatchewan’s McArthur River, alone puts out 15% of the world’s supply.)

This is very concentrated, compared to other sectors. In the copper sector, the top ten mines turn out just 30% of global supply. For gold, the number is even lower. About 19%.

This means that what happens at a just few uranium mines around the world makes a big difference to the price for the metal.

For this reason alone, good uranium projects are interesting. Any deposit that could become a significant supplier will garner a lot of interest. From would-be producers who want to break the stranglehold existing suppliers have on the market. And from same existing suppliers, who want to keep as much control as possible over the sector.

But the severe concentration of global production is just one reason to look at uranium projects. Another (perhaps better) reason is the extremely skewed grade distribution of the world’s uranium mines.

Let’s look at some charts. The first two show average reserves grade at the world’s top ten biggest-producing copper and gold projects (thanks to Dan Edelstein and Micheal George from the U.S. Geological Survey for help in putting these together). The grade distribution for both is fairly even, forming an orderly curve.

For gold, the world’s highest-grade mine (West Wits in South Africa) is 230% higher in grade than the second richest mine. And 1,970% higher in grade than the tenth richest.

Copper grades are even more clustered. Russia’s Taimyr Peninsula runs 2.6% Cu, which is 250% higher-grade than the second-richest mine. And 960% richer than the tenth richest mine.

The point being: there is about an order of magnitude difference in grade amongst the world’s top gold and copper mines.

Now look at the same chart for uranium.

Top producer McArthur River grades a towering 17.7%. After this, the world’s other top mines barely show up! McArthur is 2,360% richer than number two Rabbit Lake. And a staggering 59,000% higher than the number ten mine, Rossing.

In fact, four of the world’s top ten uranium mines (Budenovskoye 2, Tortkuduk, Olympic Dam and Rossing) grade less than 0.1%. (Although mines like Olympic Dam make up for some of this shortfall by producing by-product metals.) The grade discrepancy across the top ten mines is over two orders of magnitude. Significantly more out-of-whack than copper or gold.

Here’s another way of looking it. This chart shows the grade of the world’s top ten mines in all three sectors, presented as a percentage of the highest-grade mine. Gold and copper ramp down fairly smoothly. Uranium grades, however, cliff-dive into low numbers very quickly.

All of which is to say that there is a big disparity across uranium deposits. The world has one very rich production center (Saskatchewan), and a bunch of much, much lower-grade mines.

This has some important implications for price. I’ve shown the chart below before, but it’s instructive to look at it again here.

The cost “curve” for uranium is more like a hockey stick. We have a good deal of low-cost production in the world, which can be extracted for $10 to $15 per pound. Much of this comes from Saskatchewan, where high-grade ore makes for lower costs.

But once demand pushes past what these mines can deliver, costs ramp up fast. The move from $20 to $50 uranium (and even higher) comes quickly.

And we are pushing that curve right now. The World Nuclear Association estimates 2010 global uranium requirements at 81,000 tonnes. Putting us squarely on the far right side of the chart above.

Here’s the project opportunity. The disparity in grade and production cost across the global uranium sector creates a chance to “poach the curve”.

Most current uranium projects are focused on low-grade deposits that come in at the high-end of the cost curve. A number of such deposits are known globally (and have been known for decades), so the exploration work required is minimal.

But what the world is lacking is low-cost production. Anyone who can come up with a sub $30 deposit capable of producing on any kind of scale will have something very valuable to the world’s uranium producers, most of whom are still skeptical about buying projects with costs above $40. The successful team is going to make a lot of money.

(The majors’ fear of high-cost deposits is largely due to uncertainty over Saskatchewan’s Cigar Lake deposit. Cigar would rival McArthur River in terms of grade and scale, producing a projected 8,200 tonnes yearly at 17% U3O8. Except that it flooded in 2006, and the development timeline has been unclear since. If Cigar does come on-line, it will displace the need for a good chunk of higher-cost production, likely lowering prices. If it goes bonk, the need for new uranium projects is going to be all the more urgent.)

Finding new, low-cost deposits requires some work and fresh thinking. A few ideas spring to mind. Go after high-grade, Athabasca-basin look-alikes (or near look-alikes) in under-explored places like West Africa. This is capital intensive, and would likely key off of new technology.

Or, take the Olympic Dam approach and go after low-grade deposits that come with significant credits from other metals, lowering the attributable uranium production cost. This is my personal favorite. North African phosphates are a great candidate.

The case is there for pursuing good, new ideas in uranium. The next step is to pick out some specific plays for a more detailed economic and technical evaluation. Over the next few weeks, I’ll be putting together an “idea sheet” and directions for future work.

RUSSIANS THREATEN EXTRACT'S URANIUM SITE IN NAMIBIA

MINERS operating in Africa have been keen to play up the benefits of owning assets on that continent as opposed to the local economy with its now threatening resource super-profits tax, but there are still sovereign risks in the developing world.

Three weeks ago Extract Resources, one of the most successful emerging miners with its world-class Rossing South uranium deposit in Namibia, woke up to a rude surprise.

It came in the form of Russia's Prime Minister, Vladimir Putin, and his state-owned Russian State Atomic Energy Corp (Rosatom).

Talks in Moscow on May 20 between Mr Putin, Russian President Dmitry Medvedev and Namibian President Hifikepunye Pohamba resulted in a five-year memorandum of co-operation between the countries to develop Namibian uranium deposits.

Uranium is a natural resource with geopolitical issues unlike any other, thanks to its nature and the market structure -- most buyers are state-owned or controlled.

That bilateral agreement may have been a worry for Extract's chief executive, Jonathan Leslie, as it indicated a heavyweight encroachment into its region, but what came a few hours later would have been even more disconcerting. As reported by several Russian news agencies, including RIA Novosti, Rosatom issued a statement that same day in relation to the Namibian agreement saying that it had "sent an application on developing (the) Rossing South uranium deposit".

Extract's prinicpal asset is the wholly owned Husab Uranium Project that contains the very same Rossing South deposit, as well as the Ida Dome deposit.

Senior uranium industry sources believe that Rosatom is seeking to exploit apparent frustrations within parts of the Namibian government at Extract's slow pace in bringing the project through to production.

But Extract's Mr Leslie is emphatic that this is not the case.

"We have seen no evidence of (that frustration). We have also been assured at the very highest level that the Namibian government will not interfere with commercial negotiations with third parties," Mr Leslie told The Australian in an email from London.

Rosatom head Sergei Kiriyenko vowed his company was ready to invest $US1 billion ($1.2bn) in uranium deposits in Namibia.

"We are ready to guarantee investments," he boasted, emphasising that Rosatom could bring a deposit like Rossing South to production quickly and efficiently.

It is not known what rights the Namibian state would have to either appropriate the mine or transfer the mining rights to another company on the basis that Extract was not properly exploiting the deposit for the nation's benefit.

But it appears to some industry watchers that Rosatom is encouraging that outcome.

"There can be no question of failure to develop the mine in a timely manner, and no suggestion from the Namibian government that this is the case," Mr Leslie says. "Extract keeps the government closely informed.

"The company has moved rapidly from the initial discovery in February 2008 to the current level of activity, where we have one of the largest drilling campaigns in Africa, with 19 drill rigs on site.

"The definitive feasibility study is due in the fourth quarter this year, with a clear timetable to commissioning in 2013."

Extract owns an exploration prospecting licence over the Husab Project, and Mr Leslie reckons it has "far exceeded our renewal requirements".

"As part of the normal process we will apply for a mining licence," he said.

Rossing South has the potential to produce 15 million pounds of uranium a year, which would be equivalent to the second-largest uranium mine in the world behind BHP's Olympic Dam. It is, therefore, a strategic asset valuable to nations reliant on nuclear energy such as Russia, France, India and China.

Hype around the deposit fanned Extract's shares to as high as $11.45, but they closed on Friday at $6.98 for a still healthy market capitalisation of $1.7 billion.

Last year Extract -- which is 15 per cent owned by Rio Tinto and 41 per cent by London investor Kalahari Minerals -- began seeking a partner to develop Rossing South through a process run by investment bank Rothschild.

Potential strategic partners included Korea Electric Power Corp and state-run Korea Resources Corp, which admitted in March that they were considering buying a stake from Extract in Rossing South as part of a consortium.

The Australian understands that Extract, as part of the Rothschild strategic review, also held informal talks to merge with Paladin Energy to create a $4 billion-plus independent uranium player, but the price expectations of shareholders such as Kalahari meant a deal was not possible.

Paladin owns the nearby Langer Heinrich project in Namibia, which is fully operational and running at near-capacity. A merger between the pair would make strategic sense and alleviate tensions with the Namibian government over the pace of development at Extract's Rossing South.

According to Extract's most recent investor presentation, the company aims to have Rossing South in production at the end of 2013. But the prolonged nature of the Rothschild review, and more specifically the lack of an outcome, is said to have Namibia anxious and frustrated.

The appointment in February of Mr Leslie, a former manager of the nearby, established Rossing mine owned by Rio Tinto, should assist Extract. He told Boardroom Radio, ironically the same day as the Rosatom statement on May 20, that he "knows the Namibian government very well".

"The proposals received through the Rothschild process have demonstrated the strong level of global interest in Rossing South, and the potential capabilities and value that partners could bring to the project," Mr Leslie told The Australian.

"Extract remains in discussions with potential partners, but they remain incomplete and no decision has been made by Extract to finalise discussions with one or more of the potential partners.

"The Namibian government has been kept closely informed of these discussions."

The Namibian government-owned Epangelo Mining has signalled to Kalahari that it wants to take an ownership stake in Rossing South ahead of the project moving into production, according to a report in the Namibian newspaper New Era. Investors may well ask: is Rosatom talking about funding Epangelo into a minority stake in the project? Or is it a proposal to develop Rossing South with Epangelo and without Extract?

Whether the Rosatom application on Rossing South is simply a cheeky commercial broadside or a serious play threatening Extract's interests, it will heap pressure on the Perth-based company to move swiftly to finalise a partnership deal or merger agreement to ensure its future.