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Uranium Equities Getting Stronger

November 1, 2010


Matthew B. Smith


Over the past year our focus has mainly been on the rare earths sector, which has provided spectacular gains for clients and readers alike.  At the same time we have been focused upon our uranium companies and watching their stock prices appreciate considerably at the same time.  We were correct in sticking with our guns and riding the rare earths to further gains while not totally neglecting the uranium companies as they too rose, although far less significantly.


Since the uranium oxide spot prices was at the US$42 level, we have stated it was undervalued, and further explained that once the spot price began moving up, so too would the uranium juniors.  The price of uranium oxide is currently at US$52/lb and moving strongly in the upward direction.  Our focus was upon the near-term producers as they typically see the greatest gains as they bring production online.  It is still our opinion that this is the best way to play the space on a risk-reward basis, however we also feel that at this time intelligent speculation could yield significant gains. 


Last night it was announced that Berkeley Resources Ltd. (BKY – ASX) will soon receive a buyout offer from Russian firm Severstal.  It appears that the Russians are going to pull their above ground uranium supplies from the marketplace once the current deal to supply the West (referred to in the industry as HEU) ends, thus the need to purchase uranium companies around the world.  This is the second purchase from Russian interests in the past six months, the other being Canada’s UraniumOne.  Berkeley, as it stands now, will get A$2.00/share in the takeover and give the Russians near-term production in Europe, most likely to supply any future reactors they build on the continent.  With the next wave of producing projects coming out of the industry pipeline, it is our opinion that this is the beginning of a consolidating phase for the industry as a whole. 


Today we will cover the two uranium companies we like best here in America, and will provide further information regarding Canadian, African and Australian picks at a later time.


Ur-Energy (URG – AMEX, URE – TSX) has been among our favorite plays.  We have talked with management numerous times over the years and feel comfortable with their plans to bring their production online.  Currently the stock trades at US$1.35 which is about 40% higher than it was a couple of months ago.  It is our opinion that the company is worth $200 million with all the requited permits and licenses to bring their mine into production.  The $200 million market cap translates into roughly $2/share which is our first target.  In conversations with management it is our understanding that they will be one of the few to have a mill to process their production, and more importantly their mill will have about 1 million lbs of extra capacity.  The company will not give out specifics regarding the cost per lb to process the uranium at the mill, however they will say that investors can expect market prices on the revenue side.  We think that should the company be able to process other companies’ production that this could be worth a further $20 million to the market cap, or roughly $0.20/share.


We expect the company will reach their production goals, as they have had ample time to perfect the technology and refine their processes over the years, however during ramp up investors should be patient as it usually takes time to get the ISR fields running at ideal capacity.


The company will first bring on 1 million lbs per year in the first phase and then use cash flow from this production to finance bringing on the next planned phase which will be another 1 million lbs/year.  The company has plenty of projects in the pipeline, with some being developed by third parties, and all of these should be able to be financed via cash flow from ongoing operations once the first mine field is up.


URG is a company we like for many reasons.  It offers investors a fully funded American near-term uranium producer with potential to reach 3 million lbs of uranium production in the near future.  The company should become a major supplier to American utilities operating nuclear power plants in the country while also potentially being able to become a force in the milling side of the business.  We can imagine a few interesting scenarios where the company could maximize returns for shareholders via their spare capacity at their mill, but at this time cannot say for certain that those deals are even on the company’s drawing board, time will tell.  If nothing else, Ur-Energy offers a compelling target for a takeover proposal from the likes of Areva, Cameco, or UraniumOne (on behalf of parent company ARMZ) in order to lock up production near current and future clients (the reactors that are already built, or that will be built in the future).


We also like Strathmore Minerals (STM – TSX, STHJF – Pinksheets), which is in the Grants Mineral Belt in New Mexico and has $25 million in cash.  The company has announced a stock buyback as they feel that the stock is significantly undervalued at this time, which should help give the stock a floor.  They continue to advance their Roca Honda property which is 40% owned by Sumitomo.


Strathmore has a significant uranium property portfolio, and they have shown a knack for developing it and being able to monetize properties for full value.  These property sales have kept the share dilution to a minimum and helped finance property development.  This company could have production in the most important uranium districts in the United States in the years ahead, and the good news for investors is that in each of their areas of near-term production it appears that they have community backing.  This makes it exponentially easier to advance to the actual mining stage and keeps the company out of expensive litigation.    


This could be one of the first companies to production in the United States, however we are more intrigued by their properties in the pipeline.  The company has a strong portfolio of remaining properties which they will bring online over the next five years.  Their partner, Sumitomo, on what is arguably the largest (Roca Honda) project they have could place Strathmore ahead of the pack when it comes to securing long-term supply contracts with the Asian countries currently in a frantic frenzy to bring as many nuclear power plants online as possible.


We still maintain our view that uranium should be a key holding in investors’ portfolios and further believe that we are in the early stages of a new prolonged bull run for the uranium mining industry.  As countries around the world are beginning to discover, security of supply of the resources which power their economies is becoming ever more important, and valuable.  Currently the US only produces enough uranium to meet around 7% of their needs, in the years ahead we see this number rising, along with worldwide uranium demand.  The major catalysts for spot prices and long-term prices moving higher in tandem will be when the Russians remove their above ground stockpiles from the market, and that day is quickly approaching.



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