VANCOUVER (ResourceInvestor.com) -- For investors, bad news can be good news depending which side of the trade they're on. In the case of uranium plays, investors in top dog Cameco [TSX:CCO | NYSE:CCJ] and fast riser Uranium One [TSX:UUU] may not be happy with more warnings of production shortfalls. But it's handy news for general uranium sector investors who have been beaten black-and-blue by the collapse in prices for the mineral.
Last Thursday, Cameco reduced its 2008 production guidance by a whopping 1 million pounds to 19.6 million pounds. As if it reinforce the point, Cameco's Cigar Lake mine continues to be plagued by flooding problems.
Another major player in the sector, Uranium One, has declared yet another big miss on its output. Its Dominion Reefs mine in South Africa is now expected to produce just 320,000 pounds of uranium this year, down heavily from the previous guidance of 590,000 pounds. It's worth noting that 2009 production remains forecast to best 3 million pounds.
In the volatile and secretive uranium pricing market, it's hard to say whether the poor outlook from Cameco and Uranium One will definitely drive sagging mineral prices higher, but it has certainly injected fresh interest into the junior side of the business.
"We think these production restraints are bullish for the uranium price," said Gregg Sedun, CEO of Uracan Resources [TSXv:URC] in Vancouver.
The deflation of uranium stocks has continued unabated in recent months. In just the past month - and despite an apparent bottom being found in spot prices - a cluster of closely watched uranium juniors has burned off another $1 billion in market value. Indeed, Uracan has been a notable victim of flight from the sector. It has retreated from recent highs above C$0.50 to below C$0.30 today. One year ago the stock was worth over C$1 more, but that was before the addition of 20 million pounds of new mineral resource in Quebec.
"We thought our large resource would have an impact on the share price," Sedun said. "But I guess until we see a sustained increase in the uranium price itself, investors will remain cautious."
In just the past month Uracan's peer group has seen a rule-of-thumb valuation metric tumble by nearly half (see tables below). Market value per pound of uranium resources has crashed from $4.75 per pound to just $3.21 per pound. Given already steep declines over the prior year, the recent activity looks like outright capitulation and may bring bargain hunters back into the fray.
Uracan is tied with Strathmore Minerals [TSXv:STM] as having the second cheapest uranium resources at $1.09/lbs and way below the average of $3.21/lbs and the median of $2.97/lbs.
A useful barometer of investor psychology in the uranium market is the discount or premium to which the Uranium Participation Fund [TSX:U] trades to Net Asset Value. It is currently trading just under its $8.45 NAV. At the peak of the uranium mania in April-May 2007, the fund traded at $18 with an NAV of $14-$14.50.
Sentiment may have signaled a turn when the fund starts to trade consistently above its NAV.
Uracan's Gregg Sedun and his dozens of colleagues are certainly hoping something - production cutbacks, seasonal price increases, a squeeze on new competitors trying to get into the sector or outright bargain hunting- will finally swing investor sentiment back toward their sector.