Mining News Daily

By: Bill Ridley

Retail investors made hundreds of millions of dollars on junior uranium stocks from 2005 up until this past summer. Many of our readers have taken profits and are now holding shares for long term growth. But with the recent market meltdown, what does the future hold? Is the uranium bull market finished or will these beaten down stocks come back?

I recently interviewed people in the physical uranium market to find out what is happening behind the scenes – and to try to get a handle on where the uranium price might be going over the next year or two.

What I found out is that the uranium market is very complex. The uranium price is not set from what I call a free market. There are few buyers and even fewer sellers. Both sides will tell you a much different story of what’s happening in the marketplace. Each side has their story and they try to sell you on their position. As a result, most analysts, newsletter gurus, and even uranium exploration companies are not clear on the market dynamics.

In today’s turbulent market, we as investors need to focus on future investment opportunities which are now selling at huge discounts. In reviewing the uranium market, it seems clear that there is little downside risk to the price of uranium short term. All other economic factors staying equal, I don’t see this changing as the cost of mining is too high to warrant a price decrease below $50.

Going forward, if anything, it seems to me that there is greater potential for higher prices.

New plants are being built which will increase demand further. The supply side is already tight with production shortfalls expected to continue. And due to the shrinking credit market, new mine production could be delayed indefinitely.

The big wildcards which could change prices significantly either up or down over the next one to four years is the expected new production coming from Cigar Lake and Olympic Dam. A number of industry experts outside of the aforementioned panel are quietly saying the Cigar Lake flooding problem may never be resolved. As for the Olympic Dam project, the sheer size and cost of the project is so big, it may not get completed either. Never mind the current credit crunch problem.

Any price projection that shows the uranium price coming off in three years time is because of the Olympic Dam and Cigar Lake projects. The buyers of uranium see these mines as saving their world.

Rumors are that Olympic Dam will cost $28 billion to build. They’ll have to move a million tons of rock per day just to build a super pit. The mammoth Highland Valley mine in B.C., Canada moves 265,000 tons a day and its one of the biggest mines in the world.

Just to give you an idea of the scope of the Olympic Dam project, just to have enough heavy equipment in place necessary to move a million tons per day would require an entire year’s worth of production from Caterpillar (NYSE: CAT, Stock Forum). I don’t know if these numbers are fact or fiction but these are the type of numbers that are being bandied about.

So the likelihood of these new projects coming on line is not guaranteed. A lot of today’s new production is coming from older mines which have been re-activated like those around the White Mesa mill in Utah owned by Denison Mines (TSX: T.DML, Stock Forum).

New discoveries by junior uranium exploration companies over the past 20 years have been a rarity. Only two notable significant new discoveries have been made, both of which we’ve been following in Winston’s Growth Stock Report since they started trading.

One of those was by Hathor Exploration (TSX: V.HAT, Stock Forum), which has just received its first institutional research report by analyst Patrick Donnelly of Salman Partners. Donnelly reports that the Roughrider Zone at Hathor’s Midwest NorthEast property is a “World class discovery!” Based on his discussions with management, he has estimated that the deposit has approximately 828,000 tonnes at an average grade of 2.4% U3O8, containing approximately 43.8 million pounds which could get much bigger as drilling continues.

Donnelly has suggested a 12 month price target of $6.40 and expects Hathor to become a takeover target. “Given the Midwest NorthEast’s proximity to the McClean Lake mill, we expect that AREVA, Cameco or Denison Mines could attempt to take over Hathor.”

A second exploration company that has created a large and growing resource in Canada – 20 million pounds - is Uracan Resources (TSX: V.URC, Stock Forum). Managed by the team from the former Bema Gold and Endeavour Financial (TSX: T.EDV, Stock Forum), their association with Endeavour means they will always have access to capital, even in this market. Their deposit is right at surface in Quebec with power and highway on the property, giving it a huge leg up on other development stage assets. Expect a new and larger resource in the next couple months.

So in conclusion, I’m still very bullish on the uranium market. I believe the greatest capital gains will come from the junior explorers who are proving up resources, namely Hathor Exploration and Uracan Resources, both of which are trading at deep discounts from their market caps this past summer.