Radioactive heatstroke
Speculators and hooligan investors have taken a brutal beating on uranium stocks, but the hell may be cooling off.
Author: Barry Sergeant
Posted: Thursday , 07 Feb 2008
JOHANNESBURG -
The average listed uranium stock has lost nearly two-thirds of its value in the past 12 months, routing unruly hordes of bloodied speculators and hooligan investors. Where boring commodities such as iron ore continue to be the superheroes of the China-driven commodity supercycle, uranium has proven to be a merciless skull cracker.
Running on the likely reality that dire global energy requirements would generate an entire new generation of nuclear power stations, the uranium oxide price moved up from around $7/pound eight years ago to a peak of $136/pound in late June, 2007. During January this year, spot uranium prices fell by $15/pound; this week, quotes were around $75/pound (down $3/pound on the previous week), according to Ux Consulting, a specialist uranium consultancy; peer group Trade Tech this week also quoted $75/pound (down $7/pound). While the long term expectation for both Ux and TradeTech remains at $95/pound, ongoing downward price pressure continues to dominate market sentiment.
There has been a smidgin of good news for bloodied investors in uranium stocks, courtesy Cameco (CCO CN, C$32.25 a share), the world's biggest producer of the stuff. During a results conference call this week, the company spoke with confidence about the level of valuations in the global uranium stock sector. This has led some analysts to ask whether Cameco might be looking around for acquisitions.
There may be a number of useful lessons from the relatively short, post-2000 history of uranium stocks. One of the handy case studies is supplied by Xemplar Energy (XE CN, C$3.17), which as recently as October last year traded below $2 a share. The stock price cleared the $8 per share level less than two months ago; since then, it's retrenched by nearly two-thirds.
At the time of its peak stock price, Xemplar, an explorer, was still waiting for assay results from drill cores submitted in December 2007. The samples, from 13 holes at Xemplar's Warmblad prospect in Namibia , were dispatched to Set Point Labs in Johannesburg . On 18 December 2007, Xemplar announced that it "believes it has effectively discovered a new uranium province in the Warmbad area, with the identification and delineation of over 14 large mineralized alaskitic bodies that outcrop in an area of approximately 40 kilometers by 28 kilometers".
While speculators noted that Xemplar had only been around for a year, it was equally noted that it had secured chunks of ground from Namibia 's northern border with Angola to the southern border with South Africa . A note after a site visit from Canaccord, an investment dealer, discussed six distinct mineralised radiometric alaskite bodies, about 12km apart, within an area covering 40km by 12km.
Inevitable market rumours of a "takeover approach" had it that the world's most conservatively managed mining company, (RTP LN, £52.35), and the world's No 2 uranium producer after Cameco, and owner of Namibia's Rössing uranium mine, may have been lurking in the wings. Xemplar was on the boil and in the first week of 2008, a recent addition to the UK broking scene, Fairfax rated it as a "world class uranium opportunity". Fairfax anticipated that "a major such as Rio Tinto, Areva or a Chinese" [entity] could be lining up to swallow Xemplar.
Ahead of even the first drill results from Warmbad, Fairfax gleefully put a potential valuation on Warmbad of US$2-7bn, based on a potential of 20bn tons of uranium oxide at 100 ppm (parts per million). These dreamy numbers dwarf Rössing. On these numbers indeed, Warmblad ranks as the biggest of its kind in the world by a factor of five to ten. When Xemplar finally published its first drill results Thursday, 8 February, the numbers looked fine, but the stock price drifted downwards.
At current stock prices, Xemplar carries a market capitalisation of just US$356m, a far cry from the mind-numbing figures spun out through the market over the past couple of months. Listed uranium stocks offer further brilliant case studies, such as Uranium One (UUU CN, C$6.35), which previously used loads of its heavily overvalued paper to mount a series of acquisitions that don't look very sexy anymore. For now, the bottom line is that uranium stocks may have reverted to reflecting some degree of fair value, but don't expect professional investors to come in until the drench of poor sentiment has lifted.
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