Uranium is Back

December 21, 2010

Matthew B. Smith

The last few weeks have been quite eventful in the uranium arena, to say the least.  The uranium spot price has come to life as Chinese buying gobbled up supply and hedge funds began to nibble based on fundamentals.  We have been uranium bulls for some time, a niche bull market in a much larger multi-year commodity bull currently taking place, and now that the uranium spot prices have crossed the US$60/lb threshold we see no return.

Investors now have the wind at their backs as the world currently has a reactor build-out taking place that will soak up all future production.  Yes, that is correct, all future production!  It has been our longstanding opinion that the Russians will no longer dismantle their nuclear warheads and sell the highly enriched uranium to the western world, that easy uranium is gone from the market place and when that happens over the next few years, a real gap is going to exist in the market place between demand and supply.  This is why the Russian’s are buying up all the producing uranium assets they can get their hands on and any near-term production as well.  One does not invest money in an asset class they believe that the price is going down in, and based on the Russians’ frantic buying over the past year, prices are going much higher in the next few years.

One of the issues that really bothered us in the last uranium leg up was the lack of merger and acquisition activity carried out by the big boys – the actual producers.  With the recent news regarding Paladin buying two development/exploration assets and the Russians acquiring control of Uranium One along with Mantra Resources coupled with Severstal’s (the Russian steel company) performing due diligence on Berkeley Resources is more than enough to get us excited.

We still believe that Ur-Energy (URG – AMEX, URE – Toronto) is one of the best values out there for investors.  The company is a near-term producer, looking to secure their last permits in the next month or so which will pave the way for the company to produce initially one million pounds U3O8 per year and then ratchet it up to approximately three million per annum.  Also, we believe that once the company is in production, that the market will revalue the company’s pounds in the ground giving the shares a value near US$5/share.  Once in production, this company could also become very valuable to other players in the industry, such as Paladin Energy or Denison Mines.  Even Areva would be a nice fit as they already have customers in North America. 

Regarding the two recent acquisitions, we believe that Mantra has one of the most intriguing properties out there.  It is world class, and management did a great job proving up the nearly 90 million pound deposit in only two years.  The deposit is one of the few new cheaply mineable deposits discovered in recent years.  Uranium One has an open-pit type project here, and based on the jurisdiction, we believe that it could be in production faster than many investors are anticipating.  Uranium One bought this asset at a very attractive price via ARMZ, with a very small premium to Mantra shareholders so we view this as a bullish development for UUU investors. 

Paladin on the other hand seems to be attempting to lock up as many deposits and as much highly prospective property as possible.  We have been studying the Labrador deposits for some time, and unless they know something about the immediate future that we do not, the Aurora asset purchase containing the Michelin deposit is a long-term play.  If memory serves us correctly, we have at least 6 months before we find out what the natives want to do about their moratorium previously placed on the area.  Paladin might have the expertise and track record to sway opinion in the area, but we think this was a strategic buy for Paladin to develop down the road, perhaps when their African projects are fully developed.

Over the next few months, we will be profiling uranium companies with projects warranting attention from investors.  Initial work has been done, and we can say that these companies have projects across the world.  At current prices there are many projects of interest, and many of the ones we have focused on are highly levered to the price of uranium, so as prices increase these companies should richly reward our readers.