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    Uranium's good news, bad news
    By Tim Treadgold
    December 21, 2009
    PORTFOLIO POINT: Despite fresh interest in nuclear power, most of Australias uranium stocks have a problem matching their reserves with pricing.

    Uranium will be a winner in a post-Copenhagen environment. Despite initial disappointment with the scope of the latest global emissions agreement, the move towards nuclear power is accelerating. Moreover, at home new opposition leader Tony Abbott has publicly called for a new debate on nuclear power.

    For investors in uranium these twin developments mean uranium the raw ingredient of nuclear power is an energy choice of the future. But investors in two Australian exploration companies have discovered to their cost over the past two weeks that uranium is both a long game and a big game.

    On December 11, PepinNini Minerals (PNN) shocked its shareholders by dumping, for now, its one-time flagship, the Crocker Well project in South Australia. Within minutes PepinNinis share price had crashed from 33 to 19, which is where it remains.

    Three days later, on December 14, Bannerman Resources (BMN) suffered a similar wipeout when its shares plunged from $1.16 to about 66, despite reporting a decision to proceed with a definitive feasibility study on its Etango project in Namibia, southern Africa.

    PepinNinis problem was the combination of the low spot (or short-term) US dollar price for uranium of $US45 a pound, and the high value of the Australian dollar, which, in the words of chairman Norman Kennedy, had made the project not viable based on current market conditions.

    Bannermans problem was the fine margin revealed in a pre-feasibility study, which pointed to a pre-tax internal rate of return of just 22% based on the long-term uranium price of about $US70 a pound and a higher-than-expected capital cost of $US555 million for the project.

    For investors with an interest in uranium there are multiple lessons in the PepinNini and Bannerman cases, but before considering the lessons it is worth noting that very few of the current crop of Australian uranium hopefuls have any hope of becoming mines until the uranium price rises, or they discover bigger and richer deposits.

    Particularly sobering is the application of a simple test used by a man who has already made one fortune from uranium and has just returned for a second dip. Alan Eggers made about $60 million for himself, and $1 billion for other shareholders when he sold control of Summit Resources (SMM) to Paladin Energy (PDN) in 2007 for $1 billion.

    Eggers, who returned to public life in June as executive chairman of uranium explorer Manhattan Resources (MHC), believes that size and quality are critical to the success of a uranium deposit. You need a minimum resource base of 50 million pounds (25,000 tonnes) and the ability to deliver five million pounds (2500 tonnes) annually for a minimum of 10 years, he says.

    His rationale behind what appear to be very high numbers is that unless a mining company can clear those hurdles it is unlikely to secure a long-term sales contract with an operator of a nuclear power plant and get the all-important long-term uranium price.

    Unlike many other commodities, uranium is selling in an inverse price structure. The short-term price is about $US45 a pound. The long-term price is about $US70 a pound, with nuclear power station operators offering the higher price to ensure continuity of supply while the short-term price has been depressed by speculative trading.

    What this means is that size is a priority test when looking at a uranium investment, and quality a second but equally important test if looking at small projects because they will get the lower price and need a higher grade ore body to make a profit.

    If the 25,000 tonne Eggers test is applied to currently known Australian uranium deposits, only 10 out of 48 pass, and of that 10 most are owned by big mining conglomerates such as BHP Billiton and Rio Tinto, foreign companies, or are in Queensland where uranium mining is banned.

    Its the size (and quality) test that explains why most of Australias next generation of uranium leaders are operating in Africa where you find companies such as:

    Extract Resources (EXT), which has risen from $1.20 to $8.50 over the past year, to be capitalised at $2 billion thanks to its share of the Rossing South uranium deposit, which adjoins Rio Tintos big Rossing mine in Namibia

    Paladin Energy (PDN), which has two African mines in production and a share price that has recovered from last years low of $2.18 to about $4.07, capitalising the company at $2.9 billion.

    Mantra Resources (MRU), a third Australian in Africa, with a promising discovery in Tanzania and a share price that is up from 66 to $4.16, for a market value of $454 million.


    It is much harder to find an Australian listed uranium stock working in Australia that clears the Eggers hurdles of ore body size and annual output rate.

    The top 10 uranium ore bodies in Australia are: Olympic Dam (BHP Billiton, South Australia), Ranger (Rio Tinto, Northern Territory), Jabiluka (Rio Tinto, NT), Yeelirrie (BHP Billiton, WA), Kintyre (Cameco of Canada and Mitsubishi of Japan, WA), Mt Gee (Marathon, SA), Valhalla (Paladin, Queensland), Four Mile (Alliance, SA), Mulga Rock (Energy and Minerals, WA), and Westmoreland (Laramide of Canada, Queensland).

    For investors there is not a lot of choice in that list. BHP Billiton and Rio Tinto offer diluted exposure to uranium. The Mt Gee deposit of Marathon has been mired in environmental issues. Valhalla is on a no-uranium state. The Four Mile project of Alliance is bogged down in a legal dispute as is the Mulga Rocks deposit of Energy and Minerals.

    Layered on top of legal, environmental, and foreign ownership issues are this months share-price collapses of PepinNini and Bannerman, which failed to clear commercial hurdles.

    PepinNinis Crocker Well project, which was believed to have the advantage of a big Chinese partner in SinoSteel, fell over because it is too small and would probably have to accept the short-term (low) uranium price. PepinNini chairman Norman Kennedy says work will continue to see whether additional resources located in the vicinity of Crocker Well will have an effect on project viability.

    Bannermans share price was decimated despite the miner having a suitable annual production target of 57 million pounds of uranium for a minimum of 16 years. What upset investors was the forecast 22% internal rate of return, which is low for the mining industry, and the capital cost of $US555 million, a heavy lift at a time of tight debt and equity markets (see Buying is cheaper than building).

    Compounding Bannermans problem was an assumption that the project would get the long-term uranium price of $US70 a pound rather than the short-term $US45, which is alarmingly close to the average life of mine cost at Etango of $US41. In other words, a secure long-term contract with a big energy user is critical to the success of the mine, which Bannerman says will now be the subject of a definitive feasibility study.

    The lessons for investors from the share price collapses of Bannerman and PepinNini are:

    . Uranium is unlike any other mineral. Mining and producing it means entering the nuclear fuel cycle and a world controlled by governments and the electricity companies that operate nuclear power plants.

    As power plant operators are the only customers, mines must align their output with the very long-term interests of the electricity producers.

    The higher long-term price of $US70 a pound is only available to big mines that can guarantee long-term uranium supply for at least 10 years.

    The lower short-term price exposes a miner to trading companies and speculative investment funds.


    That leaves three possible ways for investors to have uranium as part of a portfolio: through a big miner such as BHP Billiton or Rio Tinto; by identifying a small company with the potential to develop a rich mine; or by treating uranium stocks as a trading opportunity until a deeper and more transparent market develops.

    In Australia, that leaves very few entry points. Eggers new company, Manhattan, has been a recent favourite of speculators (and former Summit shareholders), rushing up from 19.5 when he took control in June to recent trades around $1.20.

    Manhattans primary asset is a uranium deposit east of Kalgoorlie in WA called Ponton. It was discovered by Japanese explorers in the 1970s, and lies due south of the Mulga Rocks deposit of Energy and Minerals.

    Ponton currently fails Eggers own test of size, having just 5500 tonnes of uranium in the resource category, but exploration continues to reveal thick and rich extensions of the mineralised structure, which is yet to be included in the resource calculation.

    Adding to the potential of Ponton is the theoretical ability to mine the uranium via a technique known as in-situ leaching, which involves pumping fluids down into the ore body and extracting the uranium-enriched fluid as it returns to the surface: a cheap and efficient method being used around the world, including the Beverley mine in South Australia.

    But, whatever the technical mining solutions for Manhattan and the other Australian uranium hopefuls, there are multiple hurdles to clear before any uranium project makes the transition from concept to reality which, for investors, means uranium has to be handled as carefully as the people mining the stuff.
 
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