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Uranium sector shows signs of returning to life

Don't look now, but the uranium sector is actually showing some signs of life after going into a near free fall early this year with news of the Japanese nuclear crisis.

Uranium prices appear to have stabilized and equities that are linked to the commodity have risen about 10 per cent, on average, over the past three weeks.

Could it be that the dreadful sentiment that permeated the sector is finally starting to lift and a sustained recovery is at hand?

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The analysts at Dundee Capital Markets tend to think so.

"We are starting to hear a buzz in the sector - many investors are starting to realize that many of these stocks are trading well below their net asset values," analyst David Talbot said in a research note today.

Despite the Fukushima reactor meltdown, he contends that longer-term fundamentals haven't changed for uranium, and he expects there'll be more demand than supply in just two to three years.

Germany's planned exit from the nuclear industry certainly spooked the market. But the announcement isn't nearly as important as many believe, he contends. "With 180 million pounds of worldwide uranium requirements, Germany represents only 5 per cent of demand today and would have been only 3 per cent by 2020."

In the meantime, 61 reactors in 16 countries remain under construction - and they will require a lot of uranium to keep them humming.

"Long term, (demand) might be down 5 to 10 per cent from where we expected to be by 2020 – but we still expect more demand than supply by then, particularly as low uranium prices potentially defer even more mining projects," he said.

He notes that sentiment has received a big boost in recent weeks from a number of events supportive of the industry, including: Bannerman Resources Ltd. , a developer of uranium deposits, receiving a takeover offer from a Chinese mining company; the U.K. revealing plans for eight new reactors; Russia, China and India reaffirming their support for nuclear power; and Cameco's CEO suggesting he's on the lookout for acquisitions.

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Upside: Mr. Talbot believes it will be developers, rather than producers, that are likely to rebound first.

His favourite picks: Hathor Exploration Ltd. , with a $5.60 target; Rockgate Capital Corp. , with a $4 target; UEX Corp. , with a $3 target; and Ur Energy Inc. , with a $3.25 target.

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Valeant Pharmaceuticals International Inc. intends to acquire Dermik, a dermatology unit of Sanofi that has significant presence in North American dermatology markets. TD Newcrest analyst Lennox Gibbs said the $425-million transaction is "strategically sound" and "substantially bolsters" his confidence in Valeant's ability to achieve $4 in cash earnings per share in 2012.

Upside: Mr. Gibbs raised his price target by $4 (U.S.) to $64.

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Centerra Gold Inc. has announced the discovery of a gold, silver, lead and zinc deposit on its Altan Tsagaan Ovoo property in northeast Mongolia. While initial results are encouraging, TD Newcrest analyst Greg Barnes cautions that much work remains to assess the feasibility of the project given its complex metallurgy.

Upside: Mr. Barnes maintained a "hold" rating and $22 price target.

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Taseko Mines Ltd. , operator of the Gibraltar mine in B.C., reported less copper production than expected in the second quarter due to the delayed ramp up of a new feed system, noted Wellington West Capital Markets Inc. analyst Steve Parsons. Although trimming his estimates for Taseko's 2011 cash flow, Mr. Parsons maintained a "buy" recommendation, expecting that 2011 will be "largely a positioning" year for the company.

Upside: Mr. Parsons kept his price target of $6.80 unchanged.

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Unlike most of its peers, First Solar Inc. has a solid pipeline of utility-scale power projects to serve and that will help insulate the company from broader sectoral weakness, said Brigantine Advisors analyst Ramesh Misra. While he trimmed his financial estimates for the second quarter because of weak demand, he notes First Solar still has the strongest balance sheet in the industry.

Upside: Mr. Misra reiterated his "buy" rating at $170 target.

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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