Playing the uranium renaissance

Investors are buying into the nuclear renaissance story this week with Ur-Energy Inc. (URE-T) and Uranium One (UUU-T) hitting 52-week highs today.

And for those who want to avoid the hassle and delay of actually building a mine, shares in Uranium Participation Corp. (U-T) are also trading at their highest price in a year. The company simply holds uranium.

Canaccord analyst Eric Zaunscherb says the uranium spot price has jumped 26% since June. “Demonstrating the leveraging power of equities,” he says in a report, investors are now paying US$2.82 per pound for uranium in the ground. That's double the valuation in July.

Uranium has been changing hands in recent days at just over $53 per pound, way down from $136 in June of 2007 (when hedge funds were piling in) but it’s up from $40 per pound in April of last year.

Zaunscherb says there 441 nuclear plants operating around the world with another 547 “under construction, planned or proposed.” The good news for uranium bulls is that the new plants are bigger than their predecessors, which means they burn more fuel. “While the US build-out is hampered by financial and regulatory hurdles, Asian, Middle Eastern, and some European programs are proceeding with haste,” the Canaccord analyst says.

He says frantic competition among makers of nuclear plants appears to have induced two of them, AREVA of France and Rosatom of Russia, to offer reactors with life-time fuel supplies. “This puts a tremendous burden on these two companies to source uranium production.”

Ur-Energy, focused on developing properties in the western United States, is one of Canaccord’s picks. The company’s main asset is the Lost Creek project in Wyoming for which permitting has taken much longer than expected.

“Although it is likely that Lost Creek will become fully licenced by year-end, the delay will thrust Ur-Energy into a wicked Wyoming winter, postponing commencement of construction (to Q2/11) and production (Q1/12),” Zaunscherb says. “However, Ur-Energy has the capital and management expertise to deliver.”

The stock has climbed more than 50% in a month to trade at $1.66 (Canadian) today, higher than Canaccord’s $1.50 target price.

Uranium One has a range of assets in Kazakhstan, the United States, and Australia. Russian government-owned nuclear company ARMZ is acquiring a majority stake in Uranium One. BMO analyst Edward Sterck said in late October that the deal still needs approval from the US Nuclear Regulatory Commission, and the company hopes to close the transaction before the end of this month.

ARMZ plans to put US$610-million in cash into Uranium One, of which US$479 million will be paid directly to UUU shareholders (other than ARMZ) in a special dividend of US$1.06 per share.

BMO’s Sterck has a buy rating on the stock with a target of $4.20 (Canadian), excluding the special dividend. Uranium One traded at $4.71 today.

The BMO analyst says ARMZ plans to use Uranium One “as a vehicle for production growth outside of Russia and provides political backing in Kazakhstan.” Russian corporate governance, uranium and Kazakh politics might make for an unpredictable mix, but Sterck gets some comfort from the fact the board will have a majority of independent directors.

Other uranium juniors that Canaccord likes are:

• Forsys Metals Corp. (FSY-T), which is focused on advancing its Valencia uranium project in Namibia. A deal to sell the company more than a year ago fell through.
• Hathor Exploration Ltd. (HAT-X), which is advancing exploration plays in the Athabasca Basin of Saskatchewan. Canaccord says the company “stands out for its world-class high-grade uranium discoveries on the 90%-owned Midwest NorthEast project.”
• Tournigan Energy Ltd. (TVC-X), which is working on the wholly-owned Kuriskova uranium project in the Slovak Republic. The Slovaks get half of their electricity from four reactors, with another two under construction, and want to obtain fuel domestically.
• U3O8 Corp. (UWE-X), which has assets in Guyana, Colombia and Argentina. Canaccord says the company has “a healthy combination of technical strength in CEO Dr. Richard Spencer and strong financial backing from Sheldon Inwentash and Pinetree Capital, which now hold an estimated 11.2% equity interest.”

Canaccord also favours Paladin Energy Ltd. (PDN-T), arguing that its status as "the only significant public uranium producer without a strategic investor/alliance" means takeover potential.

Analyst Zaunscherb says “noteworthy” companies also include Blue Sky Uranium Corp. (BSK-X), which is working in the Patagonia region of southern Argentina, and Uracan Resources Ltd. (URC-X), which has projects in Quebec and Saskatchewan.

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