The pressure on the spot uranium price is off. Perhaps this will end the weekend price watch, which has taken on the cloth of a ‘hurricane watch.’
After 47 consecutive months without a drop in price, weekly spot U3O8 had a small hiccup. It was inevitable. In 85 percent of those 47 months, the uranium price surged higher.
According to the month-ending edition of Nuclear Market Review (NMR), the spot uranium price registered at US$135/pound at the end of June – down by US$3/pound from the previous week.
“After 23 months of tight supply, rising spot prices, and intense bidding for material, buying interest has waned considerably,” wrote NMR editor Treva Klingbiel. “And the market now sees increasing interest on the part of sellers to move material.” Klingbiel was referring to the period commencing August 2005, when the spot uranium price first crossed the US$30/pound threshold.
Lack of aggressive buyers helps explain why TradeTech dropped the consulting service’s U3O8 price indicator this past week.
“A few told us they would be willing to sell at US$135/pound, but have not been able to find buyers at this price,” chief executive Gene Clark told StockInterview in a telephone interview. “No one really needs it to meet contract delivery requirements right now. All the buying interest seems to be from discretionary buyers.”
According to the June 30th issue of NMR, active spot supply rose to 2.5 million pounds U3O8 while active demand dropped to less than 900 thousand pounds. The supply/demand ratio rose to 2.8 during June.
In response to many pundits who have been chattering about a peak in the uranium price, we asked Clark about this. “We don’t think it’s peaked,” he told us. “But speculators could make the market volatile.”
We asked him what it would take to ‘collapse’ the uranium price right now. “If speculators threw five million pounds or more into the spot market, this would put a lot of downward pressure on prices,” Clark responded.
But what about the long-term market? “The long-term market is fine,” Clark answered. “We still see considerable long-term activity, with no indication of softening prices there.” TradeTech’s long-term price indicator remained at US$95/pound.
It was at this point when we discussed the spread between the long-term price of US$95/pound and the much higher spot price. We asked if the spread was indicative of a ‘speculator’s premium.’ Clark told us, “There is definitely a speculator’s premium. In more normal market conditions, the basis for long-term base prices has typically been US$1-2 above the spot price.”
He explained, “Our long-term price indicator is really more appropriate for initial delivery beyond the 2010 time frame, where nearly all the long-term activity is occurring. Those who have to buy for delivery through 2009 would probably pay more than US$95/pound,” Clark noted. “Thus, the speculator premium isn’t necessarily as high as the US$40 spread between these price indicators.”For the rest of the summer, and especially during August, Clark predicts the market will remain slow, given the historical experience. “Maybe we’ll see more buying in the fall,” he told us.
How Does The Price Hiccup Impact Uranium Mining Stocks?According to Matthew Smith of TheInvestar, “Uranium stocks hit support levels across the board this past week.” Smith believes his Canadian uranium mining stocks index could drop by another 10 percent or more, which he considers ‘quite healthy.’
Smith also invests in the stocks found in his index. He wrote in an email, “We have been nibbling over the past week and a half, but are keeping some of our buying power available should we head lower.”
Smith told us, “Some of the best opportunities out there on the buy side are companies with actual deposits in ‘safe’ countries around the world.” Although Smith is not a registered investment adviser, he favors companies with uranium deposits in the western United States, such as Strathmore Minerals and UR Energy..
But Smith also believes Forsys Metals (FOSYF.PK) could soon go in play and possibly become a takeover candidate, following in the footsteps of UraMin. On June 15th, state-owned AREVA offered to pay more than $2.5 billion in cash to buy UraMin’s assets. As found with Forsys Metals, UraMin’s most advanced uranium project is in Namibia. One of our sources informed us that AREVA is not yet done buying companies in Africa.
This past Thursday, Forsys announced in a news release an increase in the measured and indicated U3O8 resource at the company’s Valencia deposit in Namibia to 41.4 million pounds. The company also forecast an increase of its scheduled U3O8 production, during the ‘steady state’ period, to 2.9 million pounds.
Other companies informed us of UraMin shareholders now searching for the ‘next new idea’ into which they might invest. Institutions and large sophisticated shareholders have been phoning and meeting with several uranium companies for the purposes of taking significant stakes. A new home for their recent winnings is how one uranium mining company defined this renewed interest in his firm.
Positive developments suggest uranium mining companies are entering the mainstream. For example, Uranium Resources (NASDAQ: URRE) and Uranerz Energy (Amex: URZ) both joined the Russell family of U.S. Indexes during the recent re-balancing.
We reviewed Bart Jaworski’s Uranium Equities Update, published on June 28th. Bart is the uranium mining analyst at Raymond James Equities Research Canada. Despite the minor spot price correction, Bullish Bart does not believe uranium prices have peaked. Part of the weakness he attributes to the psychological barrier of US$100/pound long-term pricing. This is probably one of the better arguments, because long-term uranium contracts provide a more persuasive basis for the uranium bull market galloping forward.
Jaworski’s four uranium mining stock recommendations are:
- Uranium One (SXRZF.PK), Strong Buy – Price Target: C$20
- UR Energy (UREGF.PK), Strong Buy - Price Target: C$5.30
- Denison Mines (AMEX: DNN); Out Perform – Price Target: C$16.50
- Strathmore Minerals (STHJF.PK); Out Perform – Price Target: C$5.60
In mid April, industry insider and Yellowcake Mining (OTC BB: YCKM) director Dr. Robert Rich warned of a uranium price adjustment
(http://www.stockinterview.com/News/04122007/Uranium-Industry-Expert-Yellowcake.html ). But what does this really mean to him? “The minute buyers see things go down, they are going to flock back into the market,” he told us.
For now, several stock analysts believe the current weakness could represent a buying opportunity. In discussions we had over the past month with various U.S.-based funds, we have few doubts the market should have a new wave of buying once the current correction runs its course.
Just as the spot uranium price has begun a consolidation, or flattening, phase, so have uranium mining stocks. As we said, it’s probably just a hiccup.
COPYRIGHT © 2007 by StockInterview.com
James Finch contributes to StockInterview.com and other publications. He has contributed to the widely popular “Investing in the Great Uranium Bull Market,” and “Uranium Outlook 2007 - 2008.” His recent work, “Investing in China’s Energy Crisis,” is now available at http://bookstore.stockinterview.com/