IAN MCGUGAN

From Friday's Globe and Mail

Posted on Thursday, April 14, 2011 7:11PM EDDecrease text size

If you believe that stock markets typically overreact to news – and if you possess nerves of steel – uranium stocks are looking mighty attractive. Since Japan’s nuclear disaster hit the headlines on March 11, shares in producers of the metal have tumbled nearly 25 per cent. Some now trade at valuations that make them look like ripe takeover targets – that is, if the world’s ambitions for nuclear energy haven’t suffered a fatal blow as a result of the tragedy at the Fukushima nuclear power plant.

What are we looking for?

Uranium miners that hold the potential for a big rebound if the hit to nuclear energy proves to be transient.

What did we find?

A broad swath of uranium miners that are trading below estimates of their intrinsic value.

One way to measure that intrinsic value is with book value, an accounting measure that looks at the gap between a company’s assets and its liabilities. Bloomberg calculates that the average price-to-book value of uranium miners plunged 31 per cent since the Fukushima disaster. Some companies in the sector, including Australia-based Toro Energy Ltd. and Toronto-based Mega Uranium Ltd., are trading at discounts to book value.

Another way to evaluate uranium stocks is to compare them with estimates of a stock’s net asset value. In a recent report, RBC Dominion Securities provided a look at several key uranium miners and found that as a group they were trading at a discount to NAV. The premium or discount on individual companies varied widely, from a premium of 20 per cent on Uranium Energy Corp. of the United States to a discount of nearly 58 per cent on Berkeley Resources Ltd. of Australia.

Investors who are tempted to jump in should take the time to research specific companies. Many observers believe the uranium sector’s current funk will last for several months and warn that stocks could get even cheaper. “If the stocks sell off to a certain extent we could see an increase in [mergers and acquisitions],” Edward Sterck, a London-based mining analyst at BMO Nesbitt Burns, told Bloomberg. “I don’t feel we’re quite at that level yet.”

Mr. Sterck says the top takeover candidate among uranium producers is Paladin Energy Ltd. of Australia. The company, which has projects in Africa and Australia, doesn’t have major shareholders that could try to block a deal, the analyst told Bloomberg. In addition, it is already producing uranium, making it more attractive to acquirers than an exploration company

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