Uranium Equities Getting
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
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.