Sunday, March 11, 2007

Another Uranium Mine Flooding: Spot Price Jumps to $90US/lb

We are coming up onto a crossroads two weeks post-global correction that started February 27. The resource stock-laden Canadian TSX Venture Index dropped from 3,274 to 2,955 at closing March 5, a haircut of almost 10%. Since then, it has climbed back up to 3,127 and is looking for direction: will it rise and try to break through a double top (May 2006 being the other peak) or further correct downwards after last week's bounce?

Since the bulk of North American uranium stocks are listed on the TSXV and generally move more or less in lock and step with the exchange, overall sentiment should be gauged. However, if one is relatively assured that the correction is mostly over and done with, there seems to nothing that can obstruct uranium stocks from buoying higher.

This is because the uranium fundamental story that concretized in many investors' minds after Cameco's announcement of its Cigar Lake mine flooding back in October 2006 will now be buttressed by news of another unforseen flooding: the Ranger Mine of Energy Resources of Australia Ltd. (ERA). On March 7, ERA sent out a press release describing the aftermath of cyclone George on its uranium mining operation. First, a force majeure was declared by ERA on its sales contracts as a result of the flooding. Second and more importantly, its first quarter production is estimated to be between 20-30% lower than last year, with second quarter impact still yet to be assessed. James Finch of penned an article suggesting that the impact of the Ranger mine flooding could be the reduction of 4% of 2006 worldwide uranium production, a figure that simply cannot be made up by new production this year.

Indeed, Tradetech's March 9th report raised the uranium spot price from $85 to $90US/lb in part due to ERA's surprise announcement. It seems that the psychological $100/lb of uranium oxide will be broken sooner than expected, although analysts have already been revising their uranium estimates upwards.

Thus, as long as the broader markets remain stable, uranium stocks, especially newly-minted and near-term producers with unhedged uranium sales contracts will likely see short-term appreciation: this list includes sxr Uranium One and Urasia Energy, two uranium juniors who will merge together shortly, as well as Paladin Resources and Denison Mines; Denison, itself a recently-merged company from International Uranium Corporation and Denison Mines, is in the process of applying for an AMEX listing in hopes of attracting some of the nascent American investor interest in uranium stocks.


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