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Cameco: A Falling Tree?
Friday, August 22, 2008

Over the years we have been amazed by many events and how investors react and perceive them. One question our mentor asked us recently brought a smile to our face as it hit home with what many investors are thinking and feeling right this very moment. His question to me was, “If a tree falls in a forest and no one hears it, did it really fall?” My initial response was that, “What happens when everyone hears it fall, but fail to either believe or recognize that it no longer remains?”

This may all seem trivial to many of you, but these questions we asked of each other were in regards to Cameco Corporation (NYSE: CCJ TSX: CCO) and their Cigar Lake underground, and underwater, mine. The market took a few points off of the stock price, but as always seemed to give the large miner the benefit of doubt.

The first time this happened we agreed that this was trouble and things would get worse before they got better, if they ever got better. Mining any material is hard enough to do while on the surface, it is exponentially harder once one begins to travel beneath the surface to accomplish this feat. Here is what we know from what Cameco has told all investors, and yes in some situations we have read between the lines here to better inform our readers of the situation. On Tuesday August 12, 2008 at 9:15 PM EST Cameco issued a press release alerting investors to the event whereby they once again lost control over flooding in the Cigar Lake Mine. The company had spent nearly a year doing remediation work by sealing off areas with cement and re-freezing the ground around their shafts. Two things stick out like sore thumbs here and that is the fact that this is another nighttime press release regarding Cigar Lake, one will remember that when the flooding first occurred Cameco issued a press release in the early morning hours that day. Second, this news was so material that the company felt obligated (we commend them for this and are not putting them down, just pointing out the seriousness here) to inform investors when in less than 36 hours they would be releasing earnings and could very well have snuck it in there. So the news was horrible, the company acknowledges the news was horrible, yet the investing public seems to think that there is still a pot of gold somewhere at the end of this rainbow.

Initially many juniors took off on the news, and then retreated over the next few trading days. Cameco shares were down hard for the week, yet found some support and managed a small rally earlier this week.

Investors have rallied behind Cameco after the initial sell-offs, the initial release and then the earnings release, and have erased half of the losses incurred from the horrendous news regarding Cigar Lake.  Spin it as they may, it is currently an aquifer and shall remain an aquifer until they plug the leaks, drain the shafts, and begin mining uranium and not water.

Unlike financials, when one mining firm (especially the largest producer) has problems it generally leads to higher prices. That is, higher prices for the material being produced as well as higher prices for the near-term producers and explorers of that material. This seems not to be the case in this situation, but if a tree falls in the forest, whether or not anyone heard it is not important. Really what matters is first, whether any other trees where affected by the fall, and second, which trees now have better growth prospects due to light being able to trickle down to them (say purchasers of uranium) and more nutrients from the ground (say investment capital from funds and individual investors).

Looking around there is really one standout among all the juniors, and we find it to be Ur-Energy (AMEX: URG TSX:URE). The company will now come to market before Cigar Lake with no doubt in our minds. They already have enough capital to bring forward their Lost Creek project and are on track with all of their permitting on the federal and state levels. We recently spoke to Bill Boberg in an interview we will be releasing, and he believed that UR-Energy had what it took to bring this project along with Lost Soldier into production successfully. Each project should produce 1,000,000 lbs. U3O8 annually and their location and cash position reduces nearly all risks associated with the other miners around the world. Investors will not be diluted from the issuance of more common shares, nor must they worry about the company not having financing to bring the project online. Further Wyoming is a state very happy to have mining jobs, is pro-uranium and the people do not oppose having a mine nearby. The government will not take over their assets upon completion nor should one expect a drastic change in the tax code or royalties due. Most important, other than the water they pump into the ground, it is hard to see water flooding their facilities. For those wanting to bet on the rise of the U3O8 spot price and long-term contract price along with a production kicker, Ur-Energy at this point seems the best option on price, expertise, value and basic fundamentals.

Our guess is that investors will soon wake-up to the fact that mining uranium is not easy. It is hard to do above ground and exponentially more difficult to do below. Yes Cameco may look cheap now with a trailing twelve months P/E around 26, but without the growth investors are expecting on the production side one cannot assume that the new contract prices will be enough to raise growth rates enough to justify even this beaten down share price. If Cigar Lake is lost for good, the world- not just Cameco, will have to wake up to the fact that 10% of the current uranium demand will not be fulfilled by this source in the future. Our mentor noted that, “…if this redwood falls, everyone will notice” and suddenly bad news for Cameco will be great news for the sector as a whole.

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