Seeking value in uranium stocks

Amid a small sea of bloodied names, RBC searches for value among uranium equities.

JOHANNESBURG - 

Uranium One (UUU CN, C$5.03 a share), one of the biggest disappointments among resources stocks over the past year, may still face downside, according to a recent report on value among listed uranium stocks, released by analysts at Royal Bank of Canada Capital Markets.

A majority of listed uranium stocks, especially the newer entries, have been savaged as spot uranium oxide prices have more than halved after peaking around $138/lb in June 2007. Specialist trade consultants Ux Consulting last week reported prices falling $3 week-on-week to $65/lb, while TradeTech reported a $4 slippage to $65/lb.

Analysts at RBC CM believe that Uranium One has traded up sharply from its recent low of C$3.04 a share, on investors looking to buy "based on the notion that it was oversold". However, its recent climb to more than $5 a share is a "full valuation", the analysts argue. "We continue to believe that there are still many risks to the company's assets, in particular its Dominion mine (performance risk) and the Kazakh assets (political risk)".

For companies in RBC CM's uranium coverage universe, the analysts calculate "the uranium price we believe is being discounted, or implied, in the share price (assuming the uranium price is flat from today forward). The results of this analysis illustrate that the equities we believe to be fully or over-valued in the current market are also implying uranium prices substantially higher than their peers. Further, the uranium prices implied by the share prices of the companies we feel are overvalued are also much higher than the current spot price of uranium".

RBC CM analysts believe that the current uranium spot price has been "driven to excessively low levels due to intense selling pressure and lack of buying demand, coupled with the typical illiquidity of the spot market. The long-term price, on the other hand, has not changed since May 2007 and we think this better reflects the market's view of longer-term supply-demand fundamentals".

For exposure to near-term appreciation of the uranium price, RBC CM continues to recommend Cameco (CCO CN, C$37.52); for longer-term exposure to the uranium market, the preferred equities are named as First Uranium (FIU CN, C$6.62), Aurora Energy (AXU CN, C$3.70) and Ur-Energy (URE CN, C$1.57).

RBC CM analysts argue that Cameco is trading at an implied price that falls toward the lower end of the group: "We believe that Cameco will likely continue to be the best name among uranium producers, especially since the water-related risks at Cigar Lake have been reduced recently and it has a top-tier asset base that is in production. Cameco's contract structure should provide the company with increasing uranium price realizations over the next decade".

South Africa-based First Uranium, described as "primarily a gold company", is noted for trading below the value attributed to it by RBC CM's analysts: "We are not surprised that it is trading at a negative implied uranium price given our view that the stock is trading as a ‘cheap' gold company with ‘free' uranium exposure. We think that the successful execution of the company's near-term milestones, including the start of operations at the Ezulwini mine this month for gold and June 2008 for uranium should provide positive catalysts for the shares".

First Uranium's value is currently discounting a flat $630/oz gold price, according to the analysts: "We expect First Uranium will be able to execute its business plan with less risk than its peers given the extensive and conservative engineering work that has been carried out".

Aurora, an explorer and developer, is noted by the RBC CM analysts as trading at a stock price "discounting a constant uranium price that is not much lower than some of its peers; however, given the leverage to higher uranium prices that we estimate the company has (e.g. for each US$5 per pound change in realized uranium prices, our NAV [net asset value] estimate increases by $0.80 per share), relatively small changes to the long-term uranium price drive large changes to Aurora's NAV". RBC CM analysts estimate a long-term uranium price at US$45/lb, "but, we assume that Aurora will contract the early years of its production at prices closer to US$80 per pound".

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