- USA
- MARKET CAP
$48m
Uranium SA
Uranium Market Implodes
USA: Sell around $0.31
The tragic events in Japan, including the ongoing drama at the severely damaged Fukushima nuclear plant, have been the catalyst for a massive downgrading of stocks in the uranium sector.
At the same time spot uranium prices had already been weakening following a recent announcement by US Department of Energy outlining plans to sell further uranium stocks into the spot market over the next three years.
“Emerging players in the uranium sector will struggle to attract new investors and funding until there is greater clarity on the long term demand and pricing outlook for uranium following the recent events in Japan.”
We refer Members to the Market Correction article elsewhere in this week’s report for additional analysis of the revised outlook for the uranium sector following the earthquake / tsunami damage to the Fukushima nuclear plant in Japan.
To paraphrase, in the near term there will be reduced demand from Japanese utilities due to the current closure of around 14 reactors, accounting for 2.5-3.0% of global uranium consumption. This will exacerbate spot price weakness that had emerged in recent weeks due to the market being fully supplied.
Indeed, revised expectations are that it may take 3-4 years for tightness to re-emerge in the uranium market – and this timeframe is at risk of being extended if there are significant delays / deferrals in new reactor builds following this week’s events.
With spot pricing expected to remain weak (say US$50 – 60/lb) in the foreseeable future it will be challenging for emerging companies to achieve attractive returns from new projects, as well as attracting equity / debt funding on favourable terms. In the case of Uranium SA this is occurring despite good progress in its ongoing assessment activities.
Most recently, the company has advised that it is on track to achieve its previously announced exploration objective of having around 20,000t of U3O8 mineralisation in Inferred Resources at its South Australian Mullaquana project, by the end of March 2011.
Essentially, management believe the present drill out of the Plumbush prospect has the potential to replicate the existing nearby Blackbush prospect Inferred Resource of 12,700t of U3O8 mineralisation. This would put the company on track to commence field trials in late 2011.
Assuming the field trials proceed to plan, the company would then target commencing production-related site works in the second half of 2012, with initial production possible by year end. Initial production would be at a nominal rate of 100tpa of U3O8, building towards 400tpa by late 2013.
Since our last update, Uranium SA has raised more than $8m at 25 cents per share, leaving the company well placed to advance its exploration and assessment plans despite recent market turmoil.
Our updated estimate of the capital structure of the company is as follows:
| Market Valuation | Issued Shares (m) | Share Price (cents) | Market Cap (A$m) |
|---|---|---|---|
| Fully paid shares | 146.2 | $0.33 | $48.2 |
| Options & Conv. Notes | 13.8 | $0.33 | $4.5 |
| Cash from options | |
|
$3.5 |
| Diluted Market Cap | |
|
$49.3 |
| Cash | |
|
$9.6 |
| Debt | |
|
$0.0 |
| Enterprise value | |
|
$39.7 |
Discussion and Recommendation
Uranium SA continues to rapidly and successfully advance its assessment of its Mullaquana project and this had been recognised in the market with strong share price appreciation during early 2011.
However, the events of the past few weeks have changed the environment for emerging uranium producers for the foreseeable future. Reduced uranium price expectations will lower the potential project returns, and make project funding more challenging and expensive.
We initiated coverage of Uranium SA in late September 2010 at 27 cents and recommended topping up in the recent 25cps rights issue. Accordingly, despite the dramatic collapse in the share price earlier this week, it is possible to exit the stock with a positive return.
Accordingly, Stock Resource recommends Members Sell Uranium SA around 31 cents.
The Chartist’s Perspective
Uncertainty prevalent
Our last review of the share price for Uraniumsa was in November last year when the price had been buffeted from the 40c level which combined its first upside objective with a significant barrier. At the time we were looking for the price to pullback to the 25-30c support for its next bouncing point.
To get to this point we had followed its history from the peak at 47.5c in January 2007 from which the price trended down finding support initially around 12c in 2007 and 2008 before the bearish influence reasserted and pushed the price down spiking into a low at 1.9c in November 2008. In a momentum reversal the price bounced up to 4c in 2009 where it broadened the action to break higher and launch itself back to 12c by June of last year. Pausing in resistance the price pulled back to support around 6.5c where it rebooted and surged through the 12c barrier to quickly attain its next main barrier around 30c.
The break through of the barrier occurred on October 29 last year which launched the price to its first objective around 40c. Reaching towards this level on November 16, the price produced a one-day reversal dropping back to seek pattern support around 30c to bounce and retackle the 40-50c peak zone, breaking higher in December to steam towards the next objective to 70c.
The price produced an upward spike to 69.5c on January 19 but the combination of reaching a target and divergent momentum halted the advance. The price rolled into a top with the subsequent action in February and continued momentum decline confirming a change in direction for the stock. Another warning was issued on March 7 with a dead cross on the moving averages and then again on March 9 with the drop below 48.5c to complete the top with the drop below 46c on the gap down on March 14.
The sharp sell-off to 26.5c has brought the stock to within key support around 24c and a danger zone in the 19-21c area. There has been a preemptive bounce but for the action to gain weight the price would need to rally back above 38.5c with the 40-50c zone again becoming a significant barrier to the upside. The short-term momentum is at supportive levels which lend a favourable aspect to the short term, but we remain cautious until there is more positive price action.
While uncertainty is prevalent the risk remains high that the downward pressure may reassert with the risk of a drop below 19c triggering a fall towards lower prices.
‘The Chartist’s Perspective’ has been independently derived by Regina Meani from charting and technical assessment, and has not taken into account fundamental analysis of the company.
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Disclaimer
Breakaway Investment Group Pty Ltd, and its authorised representative Stock Resource, have made every effort to ensure the reliability of the views and recommendations expressed in this report. Our research is based upon information known to us or which was obtained from sources which we believed to be reliable and accurate at time of publication.
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As at the date at the top of this page, Directors and/or associates of Breakaway Investment Group Pty Ltd currently hold positions in Adelaide Brighton (ABC), Beach Energy (BPT), Carbine Tungsten (CNQ), Commonwealth Bank (CBA), Cue Energy (CUE), Energy Metals (EME), Integra Mining (IGR), KUTh Energy (KEN), Namoi Cotton (NAM), National Australia Bank (NAB), Northern Iron (NFE), Otto Energy (OEL), Pluton (PLV), Regional Express (REX), Sipa Resources (SRI), Tiger Resources (TGS), Westpac (WBC) and Zicom Group Limited (ZGL). These may change without notice and should not be taken as recommendations.
Reference within the Stock Resource Report to the “Stock Resource Portfolio” is a reference to the hypothetical portfolio on the “Past Predictions” page, which includes details on the methodology used to derive the performance figures.
