Uranium: 'Opportunity Knocks'.

Tuesday, 2nd May 2017 12:25 - by Stefania Barbaglio

Uranium prices have continued to trend lower. Time to research the best companies.

Global Commodities markets are cyclical and volatile. Timing is everything. Movements from bear to bull markets can reap high rewards.

An Investors’ maxim ‘buy low and sell high’ can only be achieved by taking a calculated risk, get it right and the upside can be phenomenal. Market volatility can be used to your advantage, if this is done even with a modicum of accuracy, the sky is the limit. A notable example is the British millionaire ‘Lucky’ Jim Mellon, who hit a timely jackpot with Uramin during the uranium bull market. 

Uranium: why now?

After the bull market of 2001-2006, when the price of uranium reached an all-time high, in excess of $135 a pound in 2006, the Fukushima Daiichi disaster occurred, causing the uranium price to fall to a low of $18 a pound. It has since settled at $22-23 a pound. We’re now in the longest uranium bear market ever experienced. Bear markets are always the authors of bull markets and vice versa, the expectation is that the market will eventually turn.

Fundamentals

 Globally, the total cost of producing a pound of uranium is about US$60, so with a price of $23, there’s a shortfall of $37 a pound. Production costs are coming down as companies seek to be ever more cost conscious, using volume to make up the difference. Uranium is a necessary form of energy, although it’s not trendy, necessity is ‘the mother of invention’ There is still some way to go for the price to match that of production cost, but the gap is narrowing.

The market will turn. This won’t be today or tomorrow but change is likely to be seen over the next 1/3 years. This period could see some pretty interesting movements in uranium stocks, the potential is there for the right companies, share prices could go through the roof. We already had a preview of this in November 2016, when uranium prices embarked on an epic rally, gaining 50% in just 3 months, with a few uranium juniors doubling, and some even going up by 400%. Pick the right companies and you can have your ‘Uranium cake and eat it!’.

The fact that uranium prices have settled means that sellers are gaining confidence in the market and are not as willing as last year to slash prices just to make a deal. Uranium prices depend on many variables including key elections in Europe, Japan’s nuclear reactor restarting, Europe’s energy security, as well as political and economic developments in Japan, the US and China. Japan has applied to turn on 26 of the 57 reactors turned off after Fukushima. US and EU utilities will be uncovered in next few years and are re-contracting now.

A recent important event of note: the U.S. DOE has reduced the amount of uranium it is authorised to transfer into the market.  This reduces spot supply and is about half the size of the Kazakh production cut we saw earlier this year, which pushed spot prices up by 28%. This represents a very positive development in the uranium space, as it reduces the amount of uranium that was being dispersed into the market by the U.S. DOE.

The EU is also a key player, with energy security clearly at the top of its agenda. In fact, in a recent report from FORATOM it indicated that if it wants to meet its growing power needs, while at the same time reducing its carbon footprint, more nuclear power use is necessary. This can only be a positive element.

Finally, China is also moving ahead, as promised with a huge nuclear power expansion. Last Thursday, the China Nuclear Energy Association said that the country had 20 nuclear reactors under construction. The Chinese will have 36 reactors on full production with a total capacity of 34.72 GW, which will almost double its nuclear power capacity when the new plants come online – which is anticipated to be 2020.

Q. How do you analyse the right opportunities in a bear market with a view that is going to turn?

A. It’s all about tactical speculation.

Spot the right companies with the best assets, the best management teams, low G&A costs and small enough for your returns to multiply exponentially. 

One specific company in pole position on the London market is Berkeley Energia (LON: BKY).

Berkeley owns and operates the Salamanca project in western Spain the largest open air uranium mine in Europe, where pre-construction activities recently started. The project is being developed to the highest international standards and has strong EU backing. EURATOM is supportive of the Salamanca project as an important contributor to the European Union's low cost, clean energy security. Strong support is also coming from local and National Spanish government. The community surrounding Salamanca are chomping at the bit for employment. The Company’s commitment in hiring and training residents of the local community has been very well received. Berkeley Energia are employing more than 70 local workers and expect to be hiring 450 more when production in the mine starts, with a further 2,000 indirect jobs across the region.

Growing interest is also coming from US, Asian, European and African utility players who are looking to diversify their supply to a low-cost OECD supplier. The company has already invested 70million euros to develop the project.

In their recent quarterly report, BKY updated the market on development of the Salamanca mine: all infrastructure work is on track for completion, the land acquisition process is almost complete, major equipment has now been ordered and the Company has entered a strategic partnership with a Glencore company, to supply locally sourced reagent from 2018 to 2021 at a cost substantially below the one first estimated in the Definitive Feasibility Study (DFS).

Operations are progressing well, financials are on track. The Salamanca project will be one of the lowest cost producers. This will attract strategic investors and financiers, considering the company has a robust balance sheet with cash of US$29.2m and no debt. Discussions are continuing with a potential exploration JV partner aimed at outlining additional resources to extend the mine life or expand production.

The Management Team has now a proven track record of building value for shareholders. When Paul Atherley (Managing Director) was appointed in 2015, the Company was trading just over 10p per share. Interest from the city of London was sceptical. The market cap’ has been quadrupled, racing to a trading price of 71p per share in February this year, the company now have strong institutional investor backing.

With sentiment in uranium beginning to turn, at a time when US utilities have begun to re-contract uranium supply and Japan is planning to restart applications of 25 reactors of which five have now been approved now is time to hunt for opportunities…

Three of the UK’s top mining analysts value Berkeley Energia at over £1 per share (Paul Smith from WH Ireland reiterated his BUY recommendation with an increased target price of £1.28p; Michael Stoner has an NAV of £1.18p per share and reiterates his BUY recommendation based on a risk weighted NAV of 90p per share; Ben Davies has a Fair Value based on conservative NPV assumptions of £1.06p per share and a HOLD recommendation based on a share price of 60p per share), the current trading price of 42p per share, Berkeley Energia could be a good tactical speculative investment. The trick here is to get in and hold for the bounce in the Uranium cycle.

Today Berkeley Energia updated its corporate presentation for Chief Commercial Officer, Hugo Schumann, to present at the World Nuclear Fuel Cycle in Toronto last week.  To view the full presentation please click here

Now, do your own research.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.