Dundee positive on underlying uranium fundamentals

TORONTO (miningweekly.com) - As the uranium spot price last week reached its highest level in over a year, $52/lb, analysts at Dundee Securities are warning the increased demand that has driven up prices may not be sustainable in the short term.

"We also dread that investors are simply following sector momentum - a rising tide lifting all boats - and that elevated stock market activity is a result of those fearing that they may miss said boat," David Talbott and Julia Carr-Wilson wrote in a note.

"Meanwhile, we strongly believe in the underlying fundamentals of the sector, that end users are still buying, ultimately higher uranium spot prices are required to support future production growth, and that a steady uranium price increase would be healthier for the sector than rapid price gains and volatility."

The price of the nuclear fuel hit $52/lb on October 25, a $2,75/lb rise over the previous week's price, according to consulting company UxC.

Long-term prices, under which the bulk of uranium is traded globally, increased to $62/lb.

"This US$2/lb increase in the term base price puts the prices at its highest level since February and could be a positive catalyst for new investment in the sector," Talbott and Carr-Wilson said.

Last week, Germany's Parliament voted in favour of new legislation that would prolong the lives of nuclear plants there. That means more uranium consumption in the longer term, with the analysts putting the additional demand at over 100-million pounds.

"Ultimately, we expect uranium stocks to begin to attain share prices in line with their underlying fundamental valuations as mainstream investors begin to focus on the space," said Talbott and Carr-Wilson.

Uranium developer stocks have climbed about 80% since early July, with producers trading over 50% higher since that same time.

Dundee Securities recommended Uranium Participation, a Canadian company that buys uranium oxide as an investment, similar to an exchange-traded fund, as a buy.

The analysts gave the share a price target of C$8,75 a. Uranium Participation was trading at C$7,19 a piece on Monday afternoon in Toronto.

"We consider Uranium Participation to be a lower risk than the producer or developer stocks as its underlying net asset value is derived from the spot price and foreign exchange," Talbott and Carr-Wilson said.