Uranium for Dummies

Investors looking at Australia’s bubbling uranium stocks should bear in mind excess supply and takeover activity can turn investment champagne into flat beer.

An uranium explorer that less than three years ago thought it had an empty beer glass rather than just flat beer was Paladin Resources. To keep itself afloat it raised fresh funds at 1¢ a share, then months later failed to sell control of the company to another Australian party at 2¢ a share. Paladin is now about $4.80 a share, because it was quick off the mark in securing two good properties in Africa (along with hanging on to Australian properties despite domestic political barriers).

The flat beer scenario for uranium may be a long way off but we have this unnerving fundamental factor: Australia is producing more uranium explorers than the future market (as big as it looks) will absorb. Besides, even with modern search techniques that help find concealed ore bodies undetected by explorers as recently as the 1970s, the simple laws of exploration risk will produce failures. Some of those companies getting excited today about radiometric readings (that detect radioactive materials) may find the cause is not uranium.

Still, the signs are good for lifting the shackles off Australian uranium exports, for this country not only holds up to 40% of world reserves (if you take in deposits found back in the 1970s and 1980s that as yet do not comply with today’s ore calculation standards), but has some of the cheapest-to-mine deposits.

Australian politicians of all stripes prevented open development and got into a regulated Three Mines policy, followed by the Labor Party’s No New Mines policy. But today the Government is pushing for opening up the market, Labor is into a serious rethink but polarised views may ensure a bunfight at its April 2007 national convention, the Greens are still obstinate (despite a global reassessment of what constitutes clean energy) and the Democrats are still blowing in the wind.

In many ways, Australia’s 30-year uranium mining hiatus has allowed the Canadians '” who were not bound by such restrictions '” to dominate the global market. Yet some major Canadian underground mines have less impressive grades than those sitting on and near the surface in the Northern Territory, South Australia, Queensland and Western Australia.

Global uranium supply today amounts to about 100 million pounds of yellowcake and pundits say demand is now 110 million pounds and growing. Add to this some stellar projections on what is going to happen to yellowcake’s price '” it has come from a base of $US7 a pound (in 2003 it was $US11.30) to be about $US40.50; some say $US100 is not out of the question within two years.

Of course, uranium price increases of this order would quickly slow demand from the energy industry for nuclear power stations.

At a uranium Conference in Adelaide last month, hosted by the Paydirt Media group, John Hartwell, head of the Resources Division for the Federal Department of Industry, Tourism and Resources, said Australia exported a record 12,360 tonnes (about 27.2 million pounds) of yellowcake in 2005, valued at $573 million.

In price terms alone, the 2006 calendar tally will greatly elevate the revenue figure. BHP Billiton’s Olympic Dam mine dominates Australian production and is the world’s biggest yellowcake supplier; the Rio Tinto-controlled Energy Resources of Australia Ltd (ERA) has been Australia’s durable provider and, through grade, is one of the cheapest providers. The third miner is America’s General Atomics subsidiary Heathgate Resources, with the Beverley mine in South Australia, which ranks as the world’s biggest in situ leach solution (ISL) miner (a method of pumping the mineral to the surface through a leaching solution rather than by conventional underground procedures).

There are many numbers being thrown up about future demand. To take a conservative view, John Hartwell says China is looking to Australia as a preferred source (illustrated by the visit to Perth by Chinese Premier Wen Jiabao and signing of an uranium market accord with the Howard Government). China has nine nuclear power stations on line and plans to put another 30 into its power grid. Japan, the third-largest user of nuclear power after the United States and France, has just brought its 55th nuclear plant on line.

The World Nuclear Association says that globally there are 24 new nuclear power plants under construction, another 41 on the drawing board and an additional 113 proposed.

So that is one reason any junior Australian stock specialising in uranium prospecting or holding properties is going for a strong market ride. It’s a bit like the 1970s nickel boom, when the mere words “pegging for” or “drilling for” nickel sent penny stocks on a run. The nickel boom produced few mines but a lot of corporate carcases, and the issue is where do Australian uranium explorers head from the high of today?

There have been recent floats such as Toro Energy (issued at 25¢) that was stampeded for stock and gave stags a big profit. Toro is now trading around $1.20.

There should be many more Australian success stories from uranium than there were from nickel 30–35 years ago, but who will make the grade?

Without a doubt, those to benefit mostly today and tomorrow are the existing uranium mines '” and BHP Billiton is looking at how it can ramp up yellowcake supply, a factor needing a tandem lift in its copper output from Olympic Dam, because it is a copper-uranium-minor gold operation.

Two years ago a fourth Australian uranium mine was proposed by interests connected with SXR Uranium One Inc '” the Honeymoon project in the same region as Beverley was planned as an ISL operation. But SXR had a stop-start approach, due to troubled links in South Africa where an evolving scandal involving millions of rand is currently being played out.

If SXR'S South African interests become hamstrung by this controversy then Honeymoon will be looking like a very attractive overseas alternative.

What will be the next Australian uranium mine? First you need a crystal ball on Australian politics, for you have federal Labor under pressure to eliminate its No New Mines policy, something all the Labor-run states are already moving towards.

South Australia wants to see change, Queensland is changing its tune, Western Australia under new Premier Alan Carpenter is maintaining the No New Mines policy of his predecessor Geoff Gallop, while Northern Territory Chief Minister Clare Martin has been told by Canberra her anti-uranium stance won’t count.

Don’t worry about New South Wales because the Australian uranium map shows that deposits end on its borders with Queensland and SA. Why? We know mine geology doesn’t follow boundaries, but a long-term policy of banning uranium exploration created that void.

Assuming a the coalition retains federal power long enough for change, then it will more readily happen in the NT first. There is a lower line of resistance in SA for a potential second state for development, then comes Queensland followed by WA. In the meantime the ALP Federal Convention will have to debate its No New Mines policy and although there is growing investor confidence that change will take place, a group pragmatists has emerged between the hard-liners for and against, who will be guided by the electorate’s mood and whether changing the policy will alienate voters.

What Australian companies may become uranium miners in the next five years? In part, that will be affected by the exploration boom elsewhere in the world, notably Canada (where higher-grade deposits are now being found), Kazakhstan, South Africa, Namibia and emerging Uzbekistan.

That large rump of companies with grass roots or historic minor resources (not close to JORC code ore qualification '” a standard code for reporting mineral reserves) will be at least two years behind those with established major resources '” including finds as far back as the early 1980s that were dropped because of political and market barriers.

The best deposit is one of the world’s uranium pearls '” Jabiluka, now owned by Ranger miner, the ASX-listed ERA. Jabiluka, in the NT’s East Alligator River region, has a proven-probable 12.82 million tonnes grading 5.2 kilograms per tonne of U308 (yellowcake). There is also a resource of at least a million ounces of gold.

Other companies with advanced resources or reserves are:

• ASX listed Summit Resources Ltd, which has the Skal, Andersons and Walhalla deposits in Queensland.
• ASX listed Energy Metals Ltd, which has 55% of the Bigrlyli deposit in the NT.
• Cameco Resources Australia, a subsidiary of Canada’s global supply leader Cameco, which has the Angela deposit in the NT.
• SXR One, which has Honeymoon, Goulds Dam and East Kalkaroo in SA.
• Mega Uranium, which has an option over the Georgetown uranium-molybdenum project in Queensland.
• ASX listed Deep Yellow Ltd, which has Napperby in the NT.
• Arafura Resources NL, which has the Nolans Bore rare earths-uranium-phosphate deposits in the NT.
• Uranium Equities Ltd, an Australian spin-off with Canada’s Laramides Resources, which is taking up its package of properties that may include the Mulga Rock uranium deposit, a major discovery about 25 years ago by PNC of Japan, but subject to a legal wrangle.
• ASX listed Bullion Minerals.

Thanks to Australia's 30-year uranium mining hiatus, Canadian interests are now leading the pack. Canadian companies have snapped up SA’s Hindmarsh Resources, struck a uranium search accord with Bullion Minerals Ltd to take in its projects, while Energy Metals has tied up with Denison Mines which previously spent a frustrating phase in Australia in the 1980s and 1990s.

The Canadians find the Australian stocks cheap because of the higher price/earnings multiples for stocks back home, but some of the Australians are doing deals not just for exposure to the big North American capital markets but because the Canadians have the uranium search and development expertise that Australia has lost from three lean decades.

Disclosure: The Louthean family has interests in Energy Metals.