A lesson for U and U and U

[miningmx.com] — HAVE so many billions of Rands (and dollars) ever been lost as quickly as with mining group Uranium One (UUU)?

Built from scratch from the old Aflease shell, UUU – which timed the investment hype around uranium perfectly – became one of the most exciting mining shares on the JSE. In early 2007 investors still could not seem to get enough UUU after its mega merger with US-based Energy Metals Corporation. Right now trading patterns suggest spooked investors are offloading with some vigour.

Technically, I can’t speak with any authority about the intricacies of the uranium market. But trading patterns in UUU – especially on the Toronto Stock Exchange (TSX) – certainly told me six months ago already that something nasty was afoot.

The last time I wrote a column on UUU was in September 2007 (“What’s behind massive Uranium One trades?‘), which was when more than 10% of the issued shares of the company changed hands in two days on the TSX.

The reason I wrote the column (not being a mining journalist) is because I had been contacted by so many readers with widely differing views on UUU – which at that point was seeing a slight buckling in its share price. These views ranged from hard core junior mining investors (who typically argued that UUU’s resource base was sound and that long term prospects were completely misunderstood by mainstream investors) to cynical investors (who basically reckoned the UUU share price was supported mostly by hype).

In that column I wrote: “But with the persistent downward pressure on UUU’s share price lately, it’s difficult not to look bearishly at the large trades last week.”

I also wrote at that “if one were to take a cynical look at the trading volumes on Thursday and Friday there may be a contention that some players in the market may have got a whiff of something unpleasant at UUU.’

At the moment there’s clearly a bit more than just a whiff around UUU, and developments reinforce the notion that markets are rarely ever wrong.

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On Friday, UUU finished 13% down at C$4,63 with a chunky 22m shares changing hands on the TSX – a far cry from its C$18,65 high in March 2007. The share finished 11,5% down at 3725c on the JSE on Friday. That gives UUU a market capitalisation of C$2,1bn or R17bn – a fairly calamitous collapse from the levels or around R29bn near the end of 2007.

The point with UUU is that the market trading patterns (both in Canada and in South Africa) has been trying for the best part of six months to tell investors that something is not quite right with UUU.

If we go back to the September last year the massive trading volumes at the time were seemingly prompted by concerns around production targets at South Africa’s Dominion mine.

Subsequently UUU admittted there were a couple of production hassles at Dominion, and production targets were revised slightly downwards.

Trading patterns since the beginning of 2008 have also suggested that the market was not comfortable with developments at UUU. Therefore the recent revision down of production at Dominion and in Kazakhstan should really come as no big surprise.

The big shock, obviously, was the stepping down of CEO and prime mover Neil Froneman – who noted (in an interview with Miningmx) that the production revision played no role in his decision to step down.

Naturally, cynical investors would not miss the irony in Froneman’s contention that UU had entered into “a very different phase’.

That different phase no doubt refers to that pressure cooker period when a company, which has a market capitalisation of R17bn, needs to justify its valuation by proving it can deliver uranium profitably from its mines that were acquired at a fair cost.

Revising the production guidance for 2008 by a whopping 32% to 3,15m pounds is not the kind of forecast that is going to provide support for the UUU’s share price.

The reasons for the production fall off are numerous – but after the initial problems (highlighted in September last year like autoclave problems and sulphuric acid shortages) the latest array of hitches sound like a bout of “excusitis’.

Scanning the litany of excuses for the 2008 production downgrade I can’t exactly feel too confident about whether the revised 2009 production guidance (set at 6,6m pounds) is realistic. Reading the rather vitriolic comments on international trading forums does not help either – where the alleged “dishonesty’ of UUU’s management seems to be a rather sore point.

I would not (unlike some of my irrepressible correspondents) be banking on anything more than the odd bounce at UUU. With bad vibes abounding the share looks extremely vulnerable.