Uranium stocks lead the charge

Uranium stocks Summit Resources Ltd, Deep Yellow Ltd and Paladin Resources Ltd delivered top returns for shareholders over the three years to June 2007.

The common link between these companies is Paladin, which holds an 82 per cent stake in Summit following a $1.2 billion takeover earlier this year and a 14 per cent stake in Deep Yellow.

All three companies have enjoyed spectacular share price gains over the past three years, driven by a fundamental re-rating of the uranium market.

The growing political acceptance of the nuclear industry, and recognition of the role it can play as a ‘clean’ source of energy, saw the spot uranium price rise nearly fourfold to $A172 per pound over the 18 months to June.

That fuelled a flood of investment money into uranium stocks, even those with poorly defined resources and remote prospects of entering production.

Paladin is a different story.

Its chief executive, John Borshoff, has been a true believer in uranium for more than a decade, and has reaped the rewards.

While most other uranium companies are at the exploration stage, Paladin commissioned the Langer Heinrich uranium mine in Namibia last December.

Langer Heinrich was the first conventional uranium mine to start production anywhere in the world in the past 10 years, and meant Paladin was uniquely placed to exploit the historically high prices in the uranium market.

The company’s share price rose to a peak of $10.80 earlier this year, making it Western Australia’s fifth largest stock by market capitalisation.

At the end of June, when prices were taken for this shareholder return survey, Paladin was trading substantially lower at $8.26.

That was still enough to generate a total shareholder return over the past three years of 6,017 per cent.

The stock has since retreated to $5.50 per share.

This reflects three main factors: the general stock market downturn, a dip in uranium spot prices and a reduction in forecast production at Langer Heinrich.

Paladin announced recently that 2007-08 production would be about 2.2 million pounds, down from the design target of 2.6 million pounds.

Mr Borshoff said he was confident the design rate would be reached by January 2008.

Other issues facing Paladin include a challenge to its planned Kayelekera mine development in Malawi.

However, Paladin appears to have the support of the Malawi government and is pressing ahead with engineering and construction contracts.

“These latest developments in the execution of the project mean that plant commissioning remains on schedule to commence fourth quarter 2008,” Mr Borshoff said.

Yet another negative is the presence of French nuclear group Areva on Summit’s share register, which has blocked Paladin from moving to full ownership.

Paladin used its strong share price earlier this year to secure control of Summit, which in turn gave Paladin control of the Isa uranium joint venture in Queensland.

Isa is one of Australia’s most advanced uranium projects, but will only proceed if the Queensland government reverses its opposition to uranium mining.

The takeover bid put a rocket under Summit’s share price, which had been trading around $3.75 per share in February.

Paladin secured control in April with a scrip bid that valued Summit at $6.22 per share, or $1.2 billion in total.

Shareholders who accepted Paladin’s scrip bid have seen their investment fall in value by nearly half.

The small number who hung onto their Summit scrip have suffered an even bigger fall; Summit shares fell back to $3.69 at the end of June, which was still enough to make Summit the best performing WA stock over the past three years.

Deep Yellow was the second best performer after its share price jumped to 55 cents at the end of June.

Its share price has since fallen to 32 cents, and as a result many investors did not support its recent $40 million rights issue, pitched at 50 cents.

Paladin stepped in and agreed to take up the 27 per cent shortfall.

It pumped an extra $15.8 million into Deep Yellow, which has cash reserves and liquid assets of about $70 million to fund accelerated exploration programs in Australia and Namibia.