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Uranium Week: Easter Doldrums

Industry consultant TradeTech’s weekly uranium spot price indicator remains unchanged at US$23.25/lb for the second week running. Heading into the Easter break, buyers and sellers showed a reluctance to shift their prices, resulting in only two transactions being recorded for a total of 200,000lbs U3O8 equivalent.

Utilities remain largely absent from the spot market, leaving only intermediaries and speculators to face off across the bid/ask spread. There is a modicum of interest being shown by utilities for mid and long term delivery contracts, settlement of which may lead to some clearer direction for the spot market.

Meanwhile, TradeTech’s term price indicators remain unchanged at US$28.00/lb (mid) and US$35.00/lb (long). The spot price has to date averaged US$24.00/lb in 2017.

Energy Resources of Australia ((ERA)) produced 1.32mlbs U3O8 in the March quarter, the company reported last week, a slip from 1.33mlbs in the December quarter. Planned mill maintenance impacted on processing volumes.

The company continues to produce uranium only from stockpiled ore at its Ranger mine in Australia’s Northern Territory. Those stockpiles are expected to run out by 2020 and ERA’s mining licence expires in 2021. The extension of that licence would require local indigenous approval, which to date has not been forthcoming, and a decision to progress the Ranger Deeps underground project.

That project is currently under care & maintenance due to the weak uranium price. Even if prices improve, ERA’s two-thirds shareholder Rio Tinto ((RIO)) to date remains unsupportive. At this stage Ranger Deeps appear to be somewhat of a pipedream. It would require a significant rebound in the uranium price to change anyone’s mind, one presumes.

UBS believes the fundamentals for uranium look very positive on a five-year view. In the meantime, ERA’s legacy long term contracts ensured the company received an average US$39/lb for its processed stockpiles in the second half of 2016, having enjoyed a price of US$45/lb in the first half. The company is under obligation to rehabilitate the Ranger above-ground mine site, which it must fund through uranium sales.

Legacy pricing will only trend down in the meantime nevertheless, unless there is a sizeable bounce in the spot price, throwing up a risk that ERA will not ultimately be able to fund the the rehabilitation program through to completion. If not, Rio Tinto has pledged to cover the difference.

If the Ranger Deeps project does not progress, UBS cannot see any value in ERA. With the stock trading at 68c (AUD) at the time of writing, UBS has set a target of 6c and maintains a Sell rating.

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