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The growth company scene has witnessed a deluge of uranium prospects of late. Broker Canaccord is contemplating an AIM float for UrAsia Energy, a newly-created venture quoted on Toronto’s Venture Exchange with access to 70 per cent of the potentially rich Kharassan uranium project in Kazakhstan. AIM investors are also braced for the imminently expected £40 million flotation of Uramin, formerly Uranco, a company backed by resources investment group Galahad Gold with rights to an expected 100-to-260 million lbs of uranium in South Africa and Namibia.

One buyer is likely to be entrepreneurial investment minnow Yellowcake, recently floated on the Ofex private share market. The company is taking stakes in uranium prospectors and miners with interests in the uranium-rich Athabasca Basin in Canada’s Saskatchewan province as well as other candidates.

Another Yellowcake investment could well be Aussie-quoted Paladin Resources, whose boss John Borshoff ploughed a lonely furrow for years by investing in the Langer Heidrich uranium deposit in Namibia. Quoted at the equivalent of a few pence two or three years ago, the company has been raising £34 million at around £1 to advance the project.

Uranium Resources, floated on AIM in February, by Australian entrepreneur David Steinepreis, paid £350,000 the other day in shares and cash for 2,500 sq km of exploration territory in Tanzania. The Paris market waits further sales of state shares in nuclear power giant Areva.

No longer cooling
All of this activity is because uranium, as yet found principally in Canada, southern Africa, Australia and central Asia, has become a hot mineral after years in the cold. The market price, which once tested $100 a lb and breached $40 25 years ago, has recovered from little more than $7 a lb at the end of 2001 to around $32 today and several companies with uranium prospects have more than trebled in value in barely 18 months.

Sceptics fear another ‘dotcom bubble’, with avid punters pouring into a sector about which they do not know enough. Several of the projects now being touted could face production costs of $30 a lb or more, while some of the usual plausible promoters have been suddenly finding traces of uranium where none was ever suspected before.
That does not invalidate the case for uranium shares. It does suggest a cautious and selective approach.

A bull market
Jamie Strauss of broker Hargreave Hale was among the first to call the revival of uranium. The broker has raised £17 million for uranium companies over the past year.

Strauss says Hargreave’s index of the 18 ‘core’ uranium developers, mostly Canadian and Australian companies, including Paladin, JNR Resources, Cameco, Uranium Resources and International Uranium, is 285 per cent up on May 2004, despite a recent 37 per cent retreat from its peak. The ‘non-core’ prospectors remain some 63 per cent ahead over the same period, after peaking out 116 per cent ahead.

This flurry has been provoked by fears of a developing supply shortage of uranium in the order of 50 million lbs a year. Strauss argues these fears are overdone for the short term, because supply — from mines and utilities’ stockpiles — has lately been rising at 11 per cent a year, though he maintains mounting demand pressures will create a serious world shortage over the coming ten to 15 years.

Rewards and risks
Mining giants, such as BHP Billiton and Rio Tinto, have significant uranium interests, but the leading primarily-focused uranium group is Cameco of Canada, whose revenues topped £500 million last year. The company generates nuclear power and boasts 550 million lbs of reserves in Saskatchewan at ore grades many times the industry average.

Cameco’s shares have risen tenfold in five years to around £30 and the price has nearly doubled over the past 12 months. Cameco has a stake in Energy Resources of Australia, which produced 5,000 tonnes of uranium oxide last year for export. ERA shares, though off their peak, are still 70 per cent up since April at the equivalent of 620p.

Cameco is valued at around £5 billion, a fraction of the price put on leading oil shares. Also among what Strauss bills as the ‘core’ group of uranium plays is Altius Mining, quoted at the equivalent of £2 in Toronto. Headed by entrepreneur Brian Dalton, Altius, which could consider an AIM listing, receives royalties from Canada’s Voisey’s Bay nickel project and boasts stakes in eight uranium prospects in Labrador.

Denison, another Canadian group, produces uranium from the Athabasca Basin and at the equivalent of £7 is trading half way between its 12-month high and low. Speculators are dabbling in more high-risk Canadian counters, such as Solex Resources at 20p, with uranium prospects in Peru, UGL at 17p, investigating Mongolia, and Crosshair Exploration, with interests in Labrador and Newfoundland.

AIM candidate Uramin is run by experienced players Adrian Lungan and George Roach. The company has already raised £16.5 million from US hedge funds at the equivalent of 41.5p and should be priced between 80p and 110p. It has rights to uranium deposits at Beaufort West and Springbok Flats in South Africa and at Trekkopje in Namibia, where grades are higher than at Rossing, Rio Tinto’s Namibian uranium mine.

UrAsia Energy, a British Virgin Islands entity reversed into a Toronto Venture Exchange vehicle, will jointly own the Kharassan deposit with Kazakhstan’s state-owned uranium company Kazatomprom. The two have another potential new project, the £190 million Betpak Dala Joint Venture, with annual production of 1.7 million lbs already.

Ofex-quoted Yellowcake at 2.25p will focus on some of the Athabasca players and companies in the Galahad orbit. Meanwhile, backers of Reefton Mining, suspended on AIM at a lowly 2p, know all about the risks here.

An Australian-based diamond prospector in Namibia, Reefton suddenly announced there could be uranium on its Erongo prospect. The shares soared until the Namibian authorities said Reefton had no licence to explore.

As long as this proves an isolated episode (or at least one of only a few isolated episodes) and the case for uranium continues to make sense, UrAsia and Uramin should be well received. Paladin, Denison and ERA should benefit from renewed sector interest, as could Altius. Uranium Resources is for punters only – with Yellowcake equally high risk.

A powerful recovery
Uranium’s comeback is easily explained. It is the source material for nuclear power. These days, nuclear is firmly back on the agenda of developed countries worried about the security and price of oil supplies and the environmental cost of both oil and coal.

The 1986 Chernobyl disaster in the Ukraine put the brakes on nuclear expansion throughout the world, though industry insiders blamed it more on intrinsic inefficiency (and alcohol consumption) in the old Soviet system than on fundamental problems.

Now, the mood has changed. At present, there are 440 nuclear reactors in 31 countries generating 17 per cent of the world’s electricity, but this proportion could rise dramatically.

According to Canadian uranium group JNR Resources, the present 440 reactors need 77,000 tonnes of uranium oxide concentrate a year, against annual production in 2003 of only 42,300 tonnes. Stockpiles from utilities, combined recycled uranium and plutonium from spent fuel, ex-military weapons-grade uranium and other sources made up the difference.

Depleted stockpiles
By now these stockpiles have been depleted. Excess inventories held by utilities and producers are put at 100 million lbs, which will not last long if a current 36 million lbs rate of annual draw-down continues.

In the US, memories of the 1979 Three Mile Island nuclear plant meltdown (which was contained and led to no deaths) have faded. The Bush Administration is eagerly approving nuclear power projects.

In the 1970s and 1980s 220 US stations were commissioned, but they were not built. The USA has only 124 stations now and is fast making up for lost time.

Only 20 per cent of India’s nuclear capacity is operational, but that is fast changing. China is set to increase its demand for nuclear energy significantly.

Australia – uranium rich
Australia has some of the richest uranium deposits in the world, such as Olympic Dam — often seen as primarily a copper deposit — and Roxby Downs. For years, political opposition, especially from Western Australia and some other states put developments on hold.

There are signs of change now, with pressure from John Howard’s pro-nuclear federal government, which can at least impose its will on the Northern Territory, which is a not fully-fledged state. Anglo-Australian world mining leader BHP Billiton’s £4 billion takeover of Australia’s Western Mining this year is held to have been partly prompted by Western’s uranium prospects.

France has for years derived 75 per cent of its electricity from nuclear energy. The UK government is reviewing the possibility of a ‘third generation’ of British nuclear power stations in a political climate inconceivably more favourable than only a few years ago.
These and parallel developments elsewhere spell an inevitable long-term uptrend in demand. And a long-term game is how uranium should be regarded.

Jamie Strauss, of broker Hargreave Hale, suggests some of the recent rise in uranium prices reflects companies buying to meet supply contracts their own production cannot yet match. He argues some utilities have begun to rebuild inventories, claiming ‘unfilled requirements are at the lowest level for six years’.

Hence, there could be equilibrium between supply and demand for a few years, with new sources of uranium being developed in Africa, North America and Asia. ‘It takes ten years to build a nuclear plant,’ Strauss points out.

After that, however, he maintains increasing demand will pile on the pressure intensely. By 2020, the shortage could be heading towards 50 million lbs a year.