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Uranium Rocks!

D'OH!! I heard Homer Simpson is betting big on the uranium market. He buried a pile of luminous rocks in his backyard about a year ago … and he’s still waiting for the check to arrive. In the meantime, Marge couldn’t help but notice a strange breed of two-headed rabbit gamboling around the site where Homer stashed the glowing ore. Clearly, Springfield’s most famous resident has been the recipient of less than sound financial advice and probably needs to re-assess his investment strategy.

Still, Homer’s sentiment is right. Spot uranium prices have enjoyed an uninterrupted bull-run since May 2003. The reason for the increase in demand is mainly due to the over 50 new nuclear reactors that have been greenlit for Asia. The nuclear expansion is being led by China and India, but several other countries are planning to go ahead with construction plans. They include Vietnam, Indonesia and Pakistan.

But uranium has started showing signs of running out of steam. The commodity’s winning streak began faltering last month and prices have since fallen to $129 a pound, down 6.5% in three weeks. Nevertheless, prices remain well north of $100 and forecasters predict it will remain well supported around that level for the foreseeable future.

Should we be unduly worried about the recent drop in prices? Is this a warning sign of a more significant correction? Analysts don’t think so. The drop we witnessed in June is nothing more than a 'modest correction' driven by seasonal changes in demand.

The decline in the benchmark uranium spot price did generate a chain reaction that fed through to the shares of the big-listed uranium companies, particularly in Canada. Shares in Saskatoon-based Cameco Corp. , the world's largest uranium producer, dropped $1.76 to $48.68 in mid-July. The stock had traded as high as $59.90 as recently as June 18. Meanwhile, Toronto-based Denison Mines dropped 64 cents to $12.25.

July and August are traditionally soft months for demand in the uranium market calendar, analysts say, and the weakness that those months have created will most likely be reversed in September. And from a fundamental perspective, prices look like they will be shored up due to concerns over tightness in supply.

Analysts are predicting a supply crunch because of production setbacks at Cameco's troubled Cigar Lake project. Cameco has deferred a plan to resume production to 2011 instead of late 2010.

Another feature highlighting the bullish prospects in the uranium industry -- if not for the broader global mining sector -- is the trend towards consolidation. Only this week, shares of Australia-listed Paladin Resources surged to $8.88 on media reports that it could be a takeover target by Cameco Corp. The stock unwound some of the gains after paladin denied the reports. Despite its denial, analysts say Paladin remains an attractive takeover target.

Its low relative value when compared to recent transactions in the uranium space marks out the Perth-based company as a prime takeover candidate, according to Glyn Lawcock at UBS Securities. “We think there remains a possibility of a larger player such as Cameco (or others), taking a look at the company,” he said in a note to clients.

Although the upward march for uranium prices may be punctuated by the odd proverbial 'bump in the road' the outlook does look positive given robust fundamentals and the prospect for further industry consolidation.

UBS forecasts uranium prices will rise 170% in 2007 and another 54% in 2008, as secondary resources fall, mine production growth remains tight and demand continues to rise.

That should keep Homer Simpson glowing with optimism about his backyard investment. Mmm … yellowcake …

Send your questions and comments to us at commoditystore@cnbc.com. We will answer as many of your e-mails as possible on ‘CNBC’s Asia Squawk Box’ every Friday, 7 am to 10 am Hong Kong/Singapore time.

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