The Conversation (0)
One consideration that has contributed to a decline in uranium equity valuations over the last 3 months has been the result of an overall market correction represented by a drop in the broader equity indices.
As of last Friday, the uranium spot market price is $48.85 per pound reported by UxC uranium consulting, representing a decline of 13.5 percent from the $56.50 range over the last quarter.
Equity market volatility
One of the factors that have contributed to a decline in uranium equity valuations over the last 3 months has been the result of an overall market correction represented by a drop in the broader Canadian and Australian equity indexes declining by 10.7 and 10.8 percent respectively. Uranium companies that are publicly traded on the Canadian exchange seem to have experienced a slightly stronger decline than Australian equities with an average decline of value in the range of 21.0 percent, compared with 17.2 percent share price deprecation.
Impacts have been intensified by the series of negative global economic forecasts including a recent survey of economists out by Bloomberg that the United States manufacturing industry may have declined for the first time in two years with the Institute for Supply Management’s factory (ISM) index falling from 50.9 in July to 48.5. Over the last three months, the implied results from the survey of more than 300 manufacturing firms monitoring new orders, supplier deliveries, production inventories and employment would represent a slowdown in the overall United States economy of 12.3 percent.
Global nuclear policy reviews and safety audits
Sweeping policy reviews of national nuclear policy have been a recurring theme and a trend that has emerged following the earthquake and ensuing tsunami damaging the Fukushima Dai-Ichi power station. As a result, an arguably more important factor than general equity anxiety in uranium company valuations has been an overall negative nuclear market sentiment following nuclear policy revisions in Germany, Italy and debate in Japan.
A number of larger uranium producers such as Cameco (TSX:CCO), Areva Group (EPA:CEI), Paladin Energy Ltd. (TSX:PDN) and Denison Mines Corp. (TSX:DML) have seen share prices decline respectively 19.2, 29.8, 34.6 and 29.2 percent. Uranium exploration and development companies have generally traded at discounts to the producers, implying additional risk premiums. A second result of the market trepidation over the last three months has been that the number of transactions and demand for uranium has been reduced.
Anomaly
One very notable exception to this overall trend is the most recent strong price appreciation of Hathor Exploration Ltd. (TSX:HAT). Last week Cameco announced that it intends to make an acquisition offer for all of the outstanding shares of Hathor. The hostile bid for cash consideration of $3.75 per share represented an implied premium to the share price at the time of 40.4 percent and which values the fully diluted share capital of Hathor at approximately $520 million.
For uranium investors this offer demonstrates an occurrence of a broader trend for corporate reorganization earlier outlined in a PwC report summarizing merger and acquisition activity during the second quarter. Serving as a backdrop, the strongest deal quarter since prior to the credit crisis of 2008 seems to have provided an opportunity for a cash rich, low cost uranium mining producer to attempt to obtain what it believes to be a very strategic asset in close proximity.
Foreign exchange developments
Currency rate movements can sometimes be of interest to uranium investors in following trends. Although many companies will employ complex currency hedging strategies, in general, when a uranium miner operates in a particular region, the expenses will be paid in that region’s currency. If the uranium producer exports to another nation, its revenues might lose or might gain in marginal value, or if nothing else the cost to hedge against currency rate volatility could be impacted.
During the last three months, the United States dollar depreciated 5.2 percent against the Swiss Franc and 5.1 percent against the Japanese yen, but largely stabilized compared with a steady trend of depreciation witnessed in the first quarter. The most recent report from the Federal Reserve indicated that it did not intervene in the foreign exchange markets during the quarter. The dollar’s depreciation occurred amid increased foreign exchange market volatility, although market participants characterized trading conditions as orderly. Several factors contributed to this volatility, including a series of weaker-than-expected economic data from the United States, shifts in relative monetary policy expectations, and ongoing concerns about the sovereign debt problems facing some countries in the euro area.
Over the same period of time, the euro was modestly weaker and generally traded in a narrow range against the United States dollar, but it depreciated approximately 3.8 percent against the Swiss franc. This might be of some significance to investors as this could potentially have financial implications for Areva, depending on forward contracts and hedging strategies employed by the utility, as Switzerland obtains approximately 38 percent of its electricity from nuclear power. Areva obtains approximately 63 percent of its segmented revenue from operations in Europe including Switzerland and has supplied fuel for the Swiss nuclear facilities at Beznau 1 and 2 for several years, and for Gösgen since 1979. Areva is also the recognized supplier for the Leibstadt power plant and currently holds a contract for the supply of fuel assemblies.
Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.