Shares in Cameco Corp. and -- to a greater extent -- Uranium One Inc. are up sharply today after J.P. Morgan initiated coverage of both stocks with an "overweight" rating.
The bank is bullish on the sector in general, forecasting a meaningful improvement in uranium prices through 2014, as a supply deficit arises from numerous project delays and a reduction in secondary supplies.
"UUU and CCO are low-cost producers with strong production growth profiles, and we are forecasting solid earnings growth for both companies," J.P. Morgan analysts, led by Tyler Langton, said in a research report.
It's particularly upbeat on the prospects for First Uranium, given its greater earnings leverage to uranium prices and stronger medium-term production growth profile. Share prices are reacting accordingly: Uranium One at midday is up nearly 12 per cent, and Cameco about 3.5 per cent.
J.P. Morgan expects Uranium One's production to rise from 10.7 million pounds in 2011 to 14.2 million in 2014; by comparison, Cameco's output is forecast to rise more modestly, from 22.4 million pounds in 2011 to 24.7 million by 2014.
Mark Busuttil, a J.P. Morgan analyst in Australia, is forecasting uranium prices to increase from the current $52 (U.S.) per pound to average $58 in 2012, $70 in 2013, and $85 in 2014. He sees the price retreating to an average of $75 in 2015.
Uranium One and Cameco are already up more than 35 per cent and 13 per cent, respectively, since the start of the year - and that's despite uranium prices remaining flat. But both stocks are well off their highs of late February.
"We view this pullback as attractive entry points as we don't believe either stock is accurately reflecting the significant increase in uranium prices we are forecasting. Both stocks also trade at discounts to their historical averages. UUU currently trades at 4.1x our 2013E EBITDA while CCO is at 7.6x compared to respective historical averages of 11.8x and 12.8x," the analysts said.
Upside: J.P. Morgan set a $5 (Canadian) price target on Uranium One and $29 target on Cameco.
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Citigroup Inc. shares are spiking higher at mid-day as Meredith Whitney, the influential U.S. banking analyst, upgraded the stock to "hold" from "underperform," according to CNBC. Citigroup reported earnings Monday that beat Street expectations and Ms. Whitney - a long-time bear on the stock - cited improving operating metrics and a still historically low valuation for her upgrade.
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5N Plus Inc.'s largest customer, First Solar Inc. , announced a major restructuring that will close manufacturing operations in Germany and eliminate 2,000 jobs. While the move is good for the longer-term sustainability of First Solar, National Bank Financial analyst Rupert Merer speculated the action could force 5N Plus, a provider of high purity metals, to restructure or even close its own operations in Germany.
Upside: Mr. Merer said he was maintaining an "outperform" rating and $6 price target "until we get more detail on the impact on volumes."
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Silvercorp Metals Inc. shares are down about 50 per cent over the past year and the stock has been among the worst performing in the sector. "The company has not fundamentally changed over this time frame, and so we are upgrading our rating on share price performance," said UBS analyst Chris Lichtenheldt.
Upside: Mr. Lichtenheldt now rates Silvercorp a "buy," although he trimmed his price target by 50 cents to $8 (U.S.).
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AuRico Gold Inc. is expecting to sell two projects in Mexico, El Cubo and Guadalupe y Calvo, for up to $250-million U.S. Canaccord Genuity analyst Rahul Paul is viewing the proposed divestitures as positive. "We believe these were likely non-core assets, likely deeply discounted by the market. In addition, the divestiture of El Cubo, in our view, should substantially improve the quality of AuRico's asset portfolio, facilitating re-rating potential going forward," he said.
Upside: Mr. Paul reiterated a "buy" rating and $13.50 (U.S.) price target.
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TransAlta Corp. stock has sold off about 20 per cent year-to-date, as investors fret over possible weak first-quarter results on April 26 and prospects that weak natural gas prices may push power prices down. Desjardins Securities Inc. analyst Jeremy Rosenfield believes these and other risks are "overstated relative to the current market price, which makes for an attractive buying opportunity for both value-oriented and event-driven investors."
Upside: Mr. Rosenfield maintained a "buy" rating and $25 price target.
Darcy Keith