Uranium price rise to kick off sector M&A activity

CONFERENCE CALLER: Matthew Keane metals and mining research analyst with stockbroking and research house, Argonaut opened the 2013 Australian Uranium Conference with a bullish approach for the metal’s immediate future.

Keane based his presentation on what he called an, “equities perspective of the uranium industry”.

“Argonaut have been long-term uranium bulls,” he told the opening day crowd.

“Following the rise and fall of many commodities over the past decade, probably the most recent being the decline in gold, I think uranium is yet to have its day.”

In terms of the price of uranium, Keane suggested it was not a matter of if, but when it began to shine.

Looking back at the last three financial years Kean showed how uranium stocks kicked off 2011 in fine fettle, as did the rest of the market.

 

Source: Company presentation

The catalyst for the uranium industry at this time was the unfortunate Tsunami tragedy, which resulted in the meltdown of the Fukushima nuclear power plant.

“From there we see there was a gentle decline in the uranium price and also uranium equities,” Keane said.

FY12 delivered further bad news in the form of the European debt crisis, which again was a flat time for commodity markets in general.

FY13 commenced with some promise that was halted by concerns regarding the slowdown of the Chinese economy.

“Through that year we also saw a decline in the uranium price to where it is now at, effectively, pre-GFC lows,” Keane said.

Comparing the performance of uranium stocks to other commodities, in particular base metals, gold and iron ore, Keane suggested uranium stocks had under-performed over the past three years.

Through the recently-closed financial year (FY13) uranium stocks have performed in-line with both base metals and iron ore stocks while gold stocks have fallen away as investors have moved their interest away from the yellow metal.

In the uranium sector producers and developers have continued the trend of outperforming explorers, with producers having the best time of the three.

The best performing developers are those with projects closer to fruition, Toro Energy (ASX: TOR) leading the domestic charge.

“Others that have performed well are the ones with a lower capex,” Keane said.

“We are in a risk-averse market at the moment and those projects with a high capex are viewed, perhaps negatively, by the market to this point.”

Keane said Argonaut expect the uranium price to hit around $US70 to US$80 per pound in the near term, saying this is the price that is needed to incentivise supply.

“The next wave of projects to come on line are, generally, higher technical risk, higher cost of production, generated by lower grades, and are often located in higher sovereign risk regions.

“There are few projects out there that can proceed at current prices, although…just a handful.”

Keane also suggested there could be a rise in Merger and Acquisition (M&A) activity in the sector as the uranium price increases.

“We do see increased M&A activity when we have a rise in the uranium price,” he said.

Keane explained this was the case throughout 2007 and again in 2011.

He also said however, that activity could have been driven by either the uranium price driving investment or the other way around where investment places pressure on the price

“I think there is probably a bit of both there,” he said.

Keane indicated 2014 could well be a better year for uranium, especially if the anticipated uranium price rise eventuates.

Should this occur we should, Keane said, expect to see is higher levels of M&A within the sector itself.