18/10/2005 - 22:00

Tim Treadgold: Briefcase - Smart money takes leave of uranium

18/10/2005 - 22:00

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What's wrong with this equation? Mum and dad speculators continue to play the uranium game by investing in penny dreadful exploration stocks, while three major shareholders in Australia’s biggest pure uranium producer sell.

Fairly obvious, isn’t it? One side buying, the other side selling. Less obvious is the fact that both events flag the end to this phase of Australia’s great uranium revival.

The sellers, in this case, are Cameco of Canada, Cogema of France, and Japan Australian Uranium Resource Development Company. All three have decided to cash in the chips they hold in the Rio Tinto-controlled Energy Resources of Australia (ERA).

Cameco, Cogema and JAURDC are serious players in the uranium game. Cameco, for future reference, is the world’s biggest single uranium producer with mines in Canada, the US and the former Soviet satellite of Kazakhstan.

These three, with respective interests of 6.7 per cent, 7.8 per cent and 10.6 per cent in ERA, opted to convert their unlisted B and C-class shares into conventional ERA shares, and sell while the price is high. In fact while the price, according to Briefcase, is ridiculously high.

In Cameco’s case it meant converting a $20.4 million investment made in 1998 into $191 million in cash, such as been the effect of the spectacular rise in the price of ERA shares, which have soared from a 12-month low of $4.85 to a high this year of $17.99, but have, more recently, eased back to $14.57.

Meanwhile, as experienced uranium players exit the game, mum and dad investors continue to ask naïve question such as “which uranium stocks should I buy?” and “do you think they’ll continue to rise?”.

The gullibility is stunning.

Yes, there has been a run among the uranium penny dreadfuls. Why, because the mob reckons that the time of uranium has come, that the world is re-adopting the nuclear fuel cycle as a viable, non-greenhouse gas energy source, and Australia is loaded with the stuff.

Everything about this is true, but three little issues are being overlooked – time, supply, and demand.

On the small matter of time, that is the time it will take to convert a uranium discovery into a mine, you can add the political factor – and ask the question of when will the Australian Labor Party lift its ban on the development of new uranium mines. There are signs that this is happening, but the key event, the 2007 ALP National Conference, is still two years away.

On the questions of supply and demand it seems to Briefcase that the world’s 480 (or so) nuclear power stations are quite adequately supplied, even if the spot price of the fuel has risen (along with every other commodity) over the past year.

The higher price is a big win for miners in production, such as ERA, Cameco and BHP Billiton, and there is no question that they, along with everyone else with a uranium mine anywhere in the world will be lifting output to satisfy demand.

And, on the question of demand, ask this time-linked question: how long does it take to get government and environmental approvals to build a new nuclear power station, and how long does it take to actually build? To both questions the answer is years, and more likely decades.

This comes back to the point about the smart money, which understands the uranium market heading for the exit, while less clued-up people continue to buy uranium penny dreadfuls rather than do something sensible, like bet the house (the wife and the kids) on the horse carrying the jockey wearing pink polka dots in the fourth at Ascot next Saturday.

•••

If the departure of Cameco, Cogema and JAURDC from the ERA share register isn’t sufficient warning that the first flush of the uranium boom is over, and might take years to return as political and environmental wheels slowly grind away, then consider another packet of evidence.

Last week, with a bongo-playing and flag-waving anti-uranium rent-a-crowd in the background, the first serious uranium conference for years was held in Fremantle.

Star act was that well-known comedian (sorry, left-wing politician) Martin Ferguson, who told the 250 delegates that uranium was okay, Australia ought to mine more of it, and we had a duty to do so if only to save the lives of Chinese coal miners.

Briefcase thought for a few minutes that someone from the Star Trek Voyager had beamed him back to another time zone because hasn’t it been Mr Ferguson’s party, the ALP, which has frozen uranium development for 30 years?

Perhaps the new tune can be put into words for a song for Mr Ferguson’s ALP mate, Peter Garrett. A working title might be: ‘Oops, we made a mess of that one didn’t we.’

Politics to one side, the Fremantle conference was a useful reference point for those penny dreadful uranium stocks because here was a chance to do a ‘before and after’ price test. In other words, what was the share price of presenting companies before the conference, and what price after.

It is no surprise to Briefcase to note that, of the 13 listed uranium hopefuls spruiking their wares, 11 came out of the event with their share prices lower than when they went in – and the two to rise did so by the skin of their teeth.

An example of this before-and-after test is Summit Resources, which started trading on Monday October 10 (the day before the event which ran over Tuesday and Wednesday) at 72c and closed on Thursday, October 13 (the day after the gabfest) at 64.5c.

Deep Yellow sagged from 16.5c to 15c. Hindmarsh Resources slipped from 50c to 46c, and PepinNini crashed from 47.5c to 37.5c, a 21 per cent fall over four trading days.

Uranium, because it is a hot topic, will continue to flare on speculator radar screens, but serious investors (like Cameco, Cogema and JAURDC) will see the current market as more a time to sell, than to buy.

•••

“Be wiser than other people if you can, but do not tell them so.” Lord Chesterfield, 1774.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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