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Uranium Bubble & Spec Market Outlook

By: Tony Locantro


-- Posted Tuesday, 19 July 2005 | Digg This ArticleDigg It!

 

During the trading sessions of last Monday and Tuesday there were numerous comments on the strength of the speculative market and how it was reminiscent of the Nasdaq Bubble in early 2000. Tuesday for me was probably the strongest day I had witnessed in around two years as trading volumes across a number of situations increased dramatically.

 

DAYTRADING INTEREST RETURNING

 

It is pleasing to see that stocks are now running when key resistance levels are breached. Stocks trading around 8c have edged ahead prior to a strong run through 10c when 0.5c price steps take effect. In other situations we have seen breaks of 20c and 40c on strong volume, which often results in, follow through buying at the beginning of the next session. In most cases the trading has little to do with fundamentals and rarely are market caps taken into consideration, as the key element is liquidity and the ability to readily enter and exit a stock. The underlying market depths are the strongest I have seen since the Nasdaq Bubble, however it would only take some fear to creep in from the US markets and the party may end abruptly.

 

ANOTHER BRUTAL TAX LOSS SELLING PERIOD

 

Leading up to the end of the financial year (June 30 2005) the selling pressure in a number of stocks was similar to 2004 with general market weakness exacerbating the situation. With confidence low and technical selling dominant I can understand why some began to question the fundamentals of the stocks they were holding and the prospects going forward. With a number of exploration programs underway during this period there is always the risk of not being exposed, however with the benefit of hindsight selling earlier in the year and coming back in the last week of June would have provided some handy gains on the recovery value alone.

 

After every tax loss-selling period there is the desire to approach it in more prudent fashion the following year, however when funds become available the temptation to invest immediately is overwhelming for those committed to the sector.

 

BUBBLE FORMATION IN THE URANIUM JUNIORS

 

The performances of the uranium juniors in Australia this year in particular has been astounding and has easily eclipsed the strength and vibe generated by those companies focused on nickel exploration and development.

 

Company

Price Jan 4 2005

Current Price 15/7/5

% Increase/Decrease

Arafura (ARU)

$0.135

$0.225

+ 67%

Alliance (AGS)

$0.039

$0.07

+79%

Batavia (BTV) X

$0.046

$0.048

+4%

Bullion (BLN)*

$0.18

$0.13

-28%

Compass (CMR)

$0.32

$1.15

+259%

Curnamona (CUY)

Listed 19/4/5 $0.20

$0.675

+237%

Deep Yellow (DYL)

$0.019

$0.12

+532%

Equinox (EQN)

$0.58

$0.53

-9%

ERA (ERA)

$6.05

$13.99

+131%

Extract (EXT)

$0.017

$0.025

+47%

Giralia (GIR)

$0.19

$0.21

+10%

Glengarry (GGY)

$0.039

$0.034

-13%

Goldstream (GDM)

$0.37

$0.305

-18%

Investika (IVK)

$0.021

$0.016

-24%

Jindalee (JRL)

$0.28

$0.29

+4%

Kal-Boulder (KAL)

Listed 20/4/5 $0.20

$0.205

+3%

Marathon (MTN)

Listed 17/3/5 $0.20

$0.32

+60%

Omega (OMC)

$0.255

$0.95

+273%

Paladin (PDN)**

$0.48

$1.39

+190%

Peppinnini (PNN)

Listed 15/4/5 $0.20

$0.285

+43%

PlatSearch (PTS)

$0.09

$0.088

-2%

Range (RRS)

$0.055

$0.029

-47%

Redport (RPT)

$0.018

$0.073

+306%

Reefton (RTM)

$0.047

$0.085

+81%

Resolute (RSG)

$1.38

$1.03

-25%

Scimitar (SIM)

Listed 28/1/5 $0.20

$0.26

+30%

Summit (SMM)

$0.17

$0.47

+176%

 

* Recent announcement of uranium leases

** On June 23 2003 Paladin shares were trading at $0.009 (9/10 of one cent) providing a 1444% return over the period.

X BTV shares were trading at 1.8c on June 30, 2005 and have increased 167% over the last three weeks.

 

IMPACTS OF THE URANIUM BUBBLE

 

  • Reinvigorated interest in the speculative sector through increased trading volumes.
  • Heightened the anxiety levels of the traditional gold and silver enthusiasts who may have missed out on significant profits due to inadequate exposure. Once fear is related to “missing out” we may be much closer to a significant near-term correction in the sector that is likely to have a devastating impact on investor confidence.
  • Created the platform for further political and public debate in relation to uranium mining. There have been a number of news polls that have indicated increasing public support for uranium operations.
  • Generated significant wealth for the early movers in the sector and have allowed IPO’s to proceed that otherwise would have struggled.
  • Resulted in a number of sector reviews that have highlighted the political and development risks but have failed to ebb the flow of funds targeting the sector.
  • Potentially has set the scene for increased attention directed towards gold and silver late in CY 2005
  • Stimulated discussion on the merits of thorium has an effective substitute for uranium as a source of nuclear energy. The benefits of producing around half the waste of uranium have been countered with the requirement for infrastructure changes that would require higher uranium prices to justify the large capital expenditure.
  • Provided a number of dilemmas for “value investors” when the market capitalisations of some of the companies are priced for perfection. (Project advancement and ultimate production despite lengthy lead times)

 

Although clients have invested in a number of companies that have benefited from their uranium interests, our reasons for identifying these situations was initially based on the REE/Phosphate (Nolans Bore) potential of Arafura Resources and for the Browns base metals deposit that Compass Resources are aiming to develop around 80kms south of Darwin (NT). During the Nasdaq Bubble a number of our gold and mineral sands juniors switched their focus to the IT sector and multiple upside returns were easily attainable. To an extent these returns were “off the side of the boot” and a similar situation is threatening to emerge here. The word “uranium” previously would rarely appear in company reports and with investors/speculators searching frantically for new opportunities a number of companies are going to get swept into the frenzy regardless of their apprehension at jumping on the bandwagon.

 

With market capitalisations blowing out and traders entering the fray the risks have increased significantly and this was illustrated later last week when stock rotation came into play and a number of companies corrected off their rolling 12-mth and all-time highs. For many the sector now is based on momentum trading with no reliance on the underlying fundamentals, which would represent an acceptable definition of the term “gambling”.

 

GOLD SECTOR REMAINS SUBDUED

 

With the uranium sector all the rage the gold juniors have largely been overlooked and as a result in some situations excellent medium to longer-term value has emerged. The markets lack of appreciation for bonanza drilling results was clearly illustrated when Ramelius Resources (RMS) announced a 1m intersection at 748 g/t gold then followed this up with another 1m hit at 950 g/t.

 

On June 10 2005 the first intersection was announced and the shares only managed to peak at 20c after opening at 17.5c. Within three weeks the share price was again struggling to attract any attention at 15c. In a market more conducive towards gold exploration I would have expected the share price to at least threaten 40c with only 59m shares on issue. Despite the lack of market appreciation the key will be taking note of projects and companies likely to undergo a re-rating once funds move over from the uranium juniors.

 

With a stronger USD, a shortage of key personnel, rising diesel and subsequent production costs the Australian gold sector is under considerable pressure with a number of projects shelved or delayed due to the requirement to delineate further high grade resources.

 

After attracting considerable overseas buying the majors have undergone a near-term correction, which has impacted down to the mid tier and junior explorers as they struggle to maintain even a low level of investor interest.

 

The Australian gold sector is in dire need of either corporate activity or a major gold discovery around the 1 million ounce mark to stimulate trading interest and allow for takeover premiums to be applied to certain companies. With Diggers & Dealers (August 8-10 2005) fully booked it will be interesting to assess the sentiment of the various companies, industry experts and from the exploration geologists themselves.

 

THE SEARCH OF THE ELEPHANT

 

As the uranium sector embarks on its merry dance and the gold enthusiasts shake their heads in disbelief there is always the potential of a major mineral discovery “Elephant” stealing the show. A further discovery of the magnitude of Prominent Hill (copper-gold) Kalkaroo (copper-gold-molybdenum), or Thunderbox (gold) would be the likely catalyst that could again create a regional boom similar to the Gawler Craton in 1996/1997.

 

EXPLORATION WATCHLIST FOR REMAINDER CY 2005

 

The risks associated with investing in greenfields exploration are significant and it should be noted that in some cases the odds of discovering an orebody are well in excess of 200-1. A number of stocks in the sector will often be sold off heavily during tax loss selling and trend lower on miniscule volume when other stocks are running. Investing in these companies can be frustrating and the key is portfolio allocation and more importantly patience.

 

Company

Share price

Project

Targets

Drilling

Integra (IGR)

$0.089

Borthanna (SA)

Copper-gold-uranium

TBA planned for later 2005

Jaguar (JAG)

$0.15

Wilson River (TAS)

Nickel

TBA (weather conditions)

Sandfire (SFR)

$0.17

Mt Genoa (WA)

Base Metals

TBA (September 2005)

Malachite (MAR)

$0.11

Mt Ramsay (TAS), Phoenix (NSW)

Tin (Mt Ramsay) Gold (Phoenix)

Drilling Mt Ramsay now Phoenix TBA

PlatSearch (PTS)

$0.088

Callabonna (SA), Quinyambie (SA)

Base Metals

Drilling now underway

Lodestone (LOD)

$0.075

Mt Morgan (QLD), Cracow (QLD)

Gold-copper

Mt Morgan 20 July 2005

Cracow TBA

Tri Origin

$0.10

Lewis Ponds (NSW)

Zinc-lead-copper

Drilling underway

Ramelius (RMS)

$0.15

Wattle Dam (WA), Hilditch (WA)

Gold (Wattle Dam), Nickel (Hilditch)

Results pending Wattle Dam, Hilditch (TBA)

Western Plains Gold (WPG)

$0.20 Issue

K1, Eurowie

Iron oxide copper-gold

Drilling subject to ASX listing (Closing date August 10 2005)

 

 

The Australian speculative market is riding the uranium wave with conditions the strongest they have been since April 2000. As market capitalisations move well in excess of fundamentals many are now gambling on momentum and are being driven by the fear of missing out. Without any near-term catalysts the gold sector remains weak, however we now have a solid platform in which to hopefully benefit from if consolidation and/or a major discovery can capture the markets attention.

 

 

Personal Disclosure: The author holds direct/indirect interests in Integra, Jaguar, Arafura, Sandfire, Malachite, Lodestone, Tri Origin and Ramelius. Clients have significant interests in all of the companies featured.

In the event of any share price movement on speculation of positive results some holdings may be liquidated with further selling on positive or negative exploration results. At current share prices I have not advised clients to sell and any sales would be based on their own financial circumstances.

 

Disclaimer: I have direct/indirect holdings in the stocks listed/mentioned above. Clients have considerable holdings in each of the stocks and may change these holdings without notice. The information on each stock has been derived from ASX reports, company discussions and a site visit to Nolans Bore in 2004.

Each of the stocks listed is to be considered as speculative, and may not be appropriate for individual investors. No buy recommendations have been provided on the listed stocks, and the opinions on each are those of the author only. It should also be noted that some of the stocks may have very low levels of liquidity and may result in significant percentage rises and falls. Please conduct further research and consult your financial advisor before making an investment/trading decision.

About the Author
Tony Locantro is a
Perth based Senior Private Client Advisor specialising in the junior resource market. He is the author of "The Green Room, A Guide To Speculating On The Australian Stock Market" (available free to prospective clients via email request) and presents on resource stock investment. He has been a contributor to a number of precious metals and market related forums.

If you would like further information or are interested in becoming a client I can be contacted at tlocantro@aapt.net.au


-- Posted Tuesday, 19 July 2005 | Digg This Article




 



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