By Jim Slater
The oil boom is off the boil and is now gently simmering. However, there is still little doubt in most people's minds that oil is a very precious commodity and that in the long term the price will go up well beyond previous highs.
The strength of the oil price and the long term worry about the scarcity of oil has increased the commercial viability of alternative sources of energy. Much more importantly, the growing risk of global warming has made it imperative to reduce carbon emissions from fossil fuel. I have just finished reading The Weather Makers by Tim Flannery. It is a very impressive and persuasive book which makes it very clear that the time to begin reducing carbon emissions is right now.
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Uranium: demand from nuclear power is set to rise
Governments throughout the world are waking up to the necessity for urgent action. Wind turbines and solar power are two of the best-known alternatives but neither of them is likely to provide enough power to make a really meaningful impact. The obvious answer is nuclear power. There are already 440 nuclear power stations in over 30 countries supplying 16% of the world's electricity. France supplies 80% of its electricity this way. Another 30 reactors are planned notably in China, Russia, Japan and South Korea. After Iran's plans to install nuclear reactors were not seriously challenged by America six more Arab countries have expressed their intention to follow suit. They include Saudi Arabia for desalination, Egypt, Morocco and Algiers.
Tony Blair has said that the UK will have another look at nuclear power. The Australian government commissioned a report which has recently given the green light to an expansion of uranium mining and the development of domestic uranium enrichment capacity. There is little doubt that within the next few years there will be a material advance in the number of operating nuclear power reactors and plans for installing more.
The obvious question to ask is where is all the uranium going to come from? A few years ago the uranium price had slumped and there was a surplus of Russian post-cold-war equipment that kept the market well supplied. During the last few years, the uranium price has risen from just over US$7 in 2001 to US$63 today.
Uranium: other reasons the price is set to rise
The most recent uranium spot price of $63 is understated because it is based on long-term contracts and some suppliers are now asking for a further uplift linked to the spot price at the time of delivery. It is important to realise that, for the utilities running nuclear power stations, uranium is a relatively small part of their overall costs so it is not very price-sensitive. Most of them are far more concerned with securing the long-term supply of sufficient uranium for their present and planned nuclear reactors.
On top of the growing demand and short supply, a leading producer, Cameco, had a major disaster at their Cigar Lake mine in the south-eastern Athabasca Basin in Canada. The mine flooded and could be out of commission for up to two years. This may sound like a relatively unimportant happening but it is almost the equivalent of taking Saudi Arabia out of the oil market for two years. Lake Cigar accounted for about 17% of near-term world production in a very tight market. (For more on this story, see: Are we facing Peak Uranium?)
How to find the best uranium stocks
I like to find companies with a tailwind behind them. In the case of uranium producers it seems to me to be more like a hurricane! I have therefore devised five exacting criteria and eagerly researched the universe of uranium producers to find a share which meets them all. The clear winner is SXR Uranium One which is quoted in Canada on the TSX. Here are the details of how it checks out:-
Criterion 1
Properties to be in relatively safe political territories.
SXR-1
Properties in South Africa and Australia with a valuable option on a major Rio Tinto uranium property in the USA. SXR also owns a 50% interest in attractive exploration properties in Canada, and a 71.6% interest in Aflease Gold, which owns the Modder East Gold Project in South Africa.
Criterion 2
Existing producer or early producer to meet the growing uranium supply gap particularly during the next two to three years.
SXR-2
South African Dominion mine coming into production in early 2007 followed by the Honeymoon project in Australia in 2008.
Criterion 3
Future production to be as unhedged as possible so that full advantage can be taken of rising uranium prices.
SXR-3
Production completely unhedged allowing all sales to be made into the fast-rising spot market.
Criterion 4
The cost per pound of uranium (i.e. the market capitalisation divided by the number of pounds of uranium in Measured and Indicated and Inferred Resources) to be well below the average for producing companies.
SXR-4
Allowing for recent financings, at the present market price of C$13.4 shareholders in SXR pay only US$5 for every pound of uranium against for example: US$12 in Paladin Resources, US$13 in International Uranium and US$13 in UrAsia.
Criterion 5
A relatively attractive estimated future price earnings ratio once the company's mines are in full production.
SXR-5
SXR's estimated prospective 2008 multiple of 14 compares for example with 40 for UrAsia which has its mines in Kazekstan.
As you can see, SXR Uranium-One measures up very well to all of my demanding criteria. I have been buying the shares for several months and now have a significant shareholding in the company.
I am not the only SXR enthusiast. For example, respected Canadian brokers, Raymond James, recommend the shares to out-perform and rate the company in the universe they cover as the most leveraged play to uranium prices'.
SXR is quoted on the Toronto and Johannesburg stock exchanges under the symbols TSX:SXR and JSE:SXR. At the present price of C$13.4 SXR's market capitalisation is C$1498m. My initial target price is C$20.
Another top uranium share: Uranim
Another uranium share I like very much is Uramin. Galahad Gold, in which I have a 10% interest, owns 20 million shares. This gives me an indirect interest in two million Uramin shares and together with my family I have a further substantial shareholding.
Uramin is a year or so behind SXR and is more of a value investment than an immediate earnings play. Uramin has three main uranium licenses:-
1. In South Africa mainly in the Ryst Kuil Channel, after allowing for the black empowerment percentage, it has 27m pounds of uranium.
2. In Namibia at Trekkopji it has 157m pounds.
3. In the Central African Republic at Bakouma it has 41m pounds.
Note: The pounds of uranium referred to above are based on the total of Measured and Indicated and Inferred resources.
All three resources are open to further development. In Namibia, for example exploration rights have just been granted over a further 91,161 hectares adjoining the Trekkopji deposit of 37,368 hectares. Production is expected in South Africa and in the Central African Republic by 2010 and in Namibia a trial mine could be in operation by late 2007.
In addition to its three main properties Uramin also has a 50% interest in an attractive exploration project in the Athabasca Basin and it has further resources in Chad, Botswana and Mozambique.
A particular attraction of Uramin is the very low cost to its shareholders for every pound of uranium. As I pointed out if you buy shares in several well-known producers you pay about US$13 a pound. In Uramin, which is quoted on AIM, at the present price of 99p the cost per pound of uranium, after dilution for a recent £35m placing is about US$2.20. Many analysts do not use the cost per pound argument. They point out that no allowance is made for the grade of the deposit and there is no distinction between pounds of uranium that may not be produced for 40-50 years and those that will be produced during say the next ten years.
There is also no distinction between Measured and Indicated resources which need a considerable amount of money spent on them to lift them to Measured and Indicated status. However, the cost per pound is one of the few rough-and-ready measures available to compare the relative value of mining stocks. One of the leading Canadian brokers, Canaccord, uses it in their weekly Junior Mining report and I have found it to be a reassuring statistic with several other mining stocks in which I have invested successfully.
Although Uramin will not be in production in a big way until 2010, in 2011 it plans to be producing 5000 tonnes of uranium oxide per annum, which would make it one of the top six producers in the world. Hopefully as this begins to be anticipated the gap between its cost per pound of US$2.20 and the average of US$13 will close, resulting in a substantial rise in the Uramin share price.
First published in Investing for Growth, 16/12/2006
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