Saturday, February 10, 2007

Cameco Q4 Earnings (Part II)

Part I explored the reaction of one analyst to the earnings and Cigar Lake issues of Cameco. Shifting gears slightly, I was interested to see what management had to say about the overall uranium market, the forces at work and how they ultimately influence yellowcake price; the following is from an excerpt of their recent conference call, published by SeekingAlpha:

Discretionary purchases and those are purchases not used to fill actual near-term fuel needs accounted for 73% of total transactions on the spot market last year. And that's a record level and an increase from 2005 when discretionary purchases accounted for 66% of spot volumes. Utilities and investment groups accounted for about 50% of spot volumes, as utilities continued to build inventory and investment groups continued to take positions in the rising market.

This unfortunately, adds end-stage volatility as everyone piles onto the uranium bandwagon;, because at some point, investment groups will need to unload their supply of uranium, although that will probably not happen anytime soon. It is something to always keep in the back of the mind, however.

Over 80% of spot transactions occurred off market, as buyers stayed away from public request for quotes in order to avoid increasing visible demand and driving prices up more quickly. About half of the 2006 on-market activity was sold by an auction, and those auctions were important in adding significantly to market transparency.

Does this mean that the actual price could be higher?

The first several weeks of 2007, it seems that spot price remained flat at $72. This plateau was a result of unwillingness on the part of spot sellers to offer fixed prices. With the expectation that spot prices are still under considerable upward pressure, sellers have been reluctant to commit to a fixed price, which would have them leaving the money on the table. Now, last week, the spot price resumed its upper trend and now stands at $75. Moving to the long-term market, the average long-term price indicator at the end of the fourth quarter was also $72, about double that of year-end 2005. And as in the case of spot price, long-term price has moved up since then this year and also stands at $75. As was the case with spot offers, sellers were reluctant to offer base escalated pricing under term contract fearing that they would miss upward momentum in the market.

Great news for uranium stocks like Paladin, SXR Uranium One, Urasia, Denison, as well as other uranium juniors with near-term production visibility. They seem to have every confidence that the uranium oxide price can only go up in the near-term, and because of this confidence, I myself look at the uranium investing landscape and can comfortably sink my money into various stocks without worrying about a catastrophic collapse, at least for now!

 

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