Thoughts from Myron — Uranium Explorers vs. Uranium Producers

By Myron Martin, December 2, 2013

Ed. note: Here the latest installment from longtime reader and junior miner man Myron Martin. He has agreed to our trading restrictions (he won’t trade the stocks he mentions for three days), and we have not reviewed, approved or screened his stocks or ideas, and the opinions he expresses are solely his own.  Many of the stocks Myron covers are microcap “penny stocks” that can move dramatically with or without fundamental reasons, so please be cautious. Myron’s past commentaries can be seen here.

Since my last column, my thoughts have been drawn to the many essays and press reports I have read about high-income people leaving countries like France because of the onerous increase in taxes, the devastation of the middle class in Greece, Spain, Portugal etc., and even the increasing efforts of Sovereign Man, Casey Research, Jeff Berwick (Dollar Vigilante) and others urging U.S. investors to get second passports and consider moving some of their wealth offshore, or even looking for another country to immigrate to if things get even worse economically. It has been said that what “goes around comes around,” and it made me think of my own ancestry even though I am third-generation Canadian.

My ancestors left Europe in the 1700’s, primarily from Northern Germany, Switzerland and parts of the Netherlands, seeking religious freedom and greater economic opportunity, coming to America with William Penn, after whom Pennsylvania is named. In the 1800’s, a contingent from there came to Waterloo County in Ontario, seeking rich soil for expansion of farming communities that became restricted by growth of the community in Pennsylvania. While things still look pretty good in Canada compared to the problems in the U.S., at my age, immigration to another country offering greater freedoms and a sounder financial status is not very practical, but future events might make it imperative once again, as it was for my ancestors. So, a friendly reminder for any Americans disillusioned with what is happening in your country: you have a prosperous and friendly neighbour right next door where more junior mining companies get financed than anywhere else in the world. Life is good here for now.

My focus is simply economic diversification into countries offering the best foundational value to invest in…anything that offers protection and growth in hard assets as opposed to debt-based instruments with third-party liabilities, which I believe are on the verge of collapse, even though some may appear to offer short-term paper profits. While I will no doubt add to gold and silver recommendations, for the moment, as long as the trend remains down, I prefer to focus on sectors that offer diversification in commodities that are in short supply, that the market is overlooking, and not on Wall Street’s radar. I think I have provided enough good stocks in the precious metals sector that astute investors using stink bids with limit orders can accumulate a base of holdings at what will prove to be excellent prices. I do have many more good solid companies to profile, and will, once I detect a decisive turn in the markets, which could happen very quickly.

Leading the “short supply” list is uranium, followed by platinum and palladium (platinum group metals, or PGM’s), zinc (there are major mines closing down), and various “critical and specialty” metals, including rare earths, that are on Western governments’ strategic supply list. These are sectors in which I have done very well for many years, so lets get started on a few prime candidates in the uranium space, which I have covered briefly before. My premise is that I would prefer to invest in producers and near producers for the bulk of my uranium allocation, with a smaller percentage devoted to explorers that have the best land holdings and prospects based on management experience and financing. There has been a lot of attention on the Athabasca Basin  as one of the richest sources of uranium in the world, including the past year’s discovery of new deposits by Alpha Minerals (AMW.V ESOFF) / Fission Energy Corp. (FIS.V), (now Fission Uranium Corp. (FCU.V FCUUF)), the merger of which I previously mentioned here and here!  I am not profiling them in this column simply because the market has already marked them up substantially, so the immediate profitability is mostly priced into these stocks, until they make further discoveries or actually develop a mine. There are so many new players in the area that I can not do justice to all of them in a single column. And for that matter, with the U.S. being cut off from Russian supplies from “decommissioned nukes” at the end of the year, it is also imperative to consider potential and existing U.S. sources to supply its domestic needs. It seems appropriate to me to focus on actual producers first, those that can ramp up production to meet potential U.S. shortages caused by the ending of the Megatons to Megawatts agreement with Russia fairly quickly.

Uranium Energy Corp. (UEC) ($1.87), is my absolute number one uranium pick and I would rate it as suitable for up to 3% of your portfolio. UEC actually has more acreage and pipeline of projects than most of the Athabasca Basin players and has low cost in-situ leach (ISL) production with many more (12 projects) to tap into as fast as they can be developed. ISL is a not-yet-well-known production process, but at this World Nuclear Association website you can get a clear explanation of the process of liquid extraction that avoids the necessity to first mine and break up rock to extract the uranium present. ISL is far cheaper and less disturbing of the environment than conventional mining operations, of which UEC also have a dozen projects in the pipeline. In-situ recovery is simply faster to production and lower cost, allowing profitability even at current low U308 prices, so UEC will always have a cost advantage over strictly conventional mining producers.

UEC is South Texas based, with their ISL production facility fully permitted and licensed in a strategic “hub and spoke” pattern at Hobson, and with four ISL projects in close proximity for efficiency. They also have a huge pipeline of both ISL and conventional exploration projects, five in Arizona, six in Colorado, four in Wyoming and five more in South Texas, in addition to the already-operating Palagena project, and the Goliad project is in an advanced stage of development. A recent press release announced that they are beginning exploration and delineation of their additional South Texas Burke Hollow project, and have raised $7.1 million at $2.10 per unit, meaning big institutional investors paid more for their shares than what you can buy them for today. In addition to their U.S. holdings in prime uranium belts, they also added what is now the largest land package, initially 247,000 acres in Paraguay, with in-situ potential, in 2011, and a few months later bought an additional 740,000 acres, so nearly a million acres in total. A 10,000 meter drill program is in progress.

UEC is headed by Amir Adnani, a highly-experienced and very effective company builder renowned in the industry for finding the best projects and building mines on time and on budget. I like the fact that he is a huge personal shareholder in both UEC, where I have been a shareholder for years, and also Brazil Resources Inc. (BRI.V BRIZF), a rapidly-growing gold company in Brazil, mentioned previously here. Amir is also CEO of Brazil Resources, where I am also a stock holder, because of his stellar performance in quickly building UEC into a major uranium company to be reckoned with. The company has $20 million in cash plus $7 million in uranium inventory. In the fiscal year ending July 31st at the Hobson plant, a total of 194,000 pounds of U308 were “dried and drummed,” with the fiscal year sales totaling 220,000 pounds, generating $9 million in revenue. The average sales price was $41 per pound, with the average cost of pounds sold being $26. So, unlike mines being shut down because of low margins, UEC still has a nice margin at today’s low prices. When prices rebound to meet demand, as so many experts are predicting for 2014, profits should rise exponentially even as production is ramping up. During the fourth quarter, the company completed its fourth uranium sale of 50,000 pounds at $40 per pound, for an additional $2 million in proceeds, while production cost dropped a dollar, which is always nice in a tight market.

This well-developed company has 98,148,474 fully diluted shares, of which a high 20% are owned by management and insiders, and another 30% by major institutions, so raising money if needed is not difficult given Admir Adnani’s reputation in the industry. While the stock chart shows a slow downtrend, it is not nearly as severe as many similarly-sized miners over the past year. It was up $0.11 today (November 25th), so no worries, a bottom has probably been reached. A lower price is always desirable when buying into great companies like this, so get your stink bids in. I have two more not-well-known, excellent “in production companies” to profile, so I am starting right away to prepare a profile for the mid-December column and possibly a few of the other seven Athabasca Basin contenders I am not yet familiar with, if a few of them impress me enough to want to add more to my already substantial uranium portfolio.

As many of you probably know, the most money made on juniors is usually on discoveries, so any junior with good prospects (land adjacent to recent discoveries) is likely to attract the attention of newsletter writers. The most recent focus because of the Alpha/Fission joint venture discoveries has been the formation of the Western Athabasca Syndicate, which consists of:

  • Athabasca Nuclear Corp. (ASC.V YWRLF) at $0.16 with 58.4 million fully diluted shares, holding 391,142 acres, and the initiator company;
  • Skyharbour Resources (SYH SYHBF), at $0.10 with 75.8 million fully diluted shares and 400,000 acres;
  • Noka Resources (NX.V), at $0.27 with 35.7 million fully diluted shares and 488,463 hectares of land; and finally
  • Lucky Strike Resources (LKY.V LKYSF) at $0.10.

Lucky Strike has no specific land holdings given, but combined, the four companies hold about 700,000 acres (five projects) in the immediate vicinity of the most recent Patterson Lake North and South discoveries that have been making the news of late. In the interests of full disclosure, I received spinoff shares in two companies from investments several years ago and have since bought a few hundred shares in the other two. However, it is not necessary to own stock in all four companies to benefit from any discovery that may be made, as the syndicate has an agreement to spend $6 million over two years on the collective and most promising properties, with each company having up to a 25% interest in all of them. No matter which property proves up first, the chances are that all properties/companies’ holdings will benefit as the exploration advances. With the Athabasca Basin supplying 20% of global demand for uranium, and having huge tracts of unexplored land showing the highest grades in the world, this, from my prior experience and judgement, is a reasonable “speculation” for about 2% of your portfolio whichever one or two explorers of this column’s batch you choose. Skyharbour I know best, and have held the longest. Noka has property in the Preston Lake area, which is the largest single land package at 246,643 hectares.

I have mentioned these companies before in previous columns, here and here, but what I suggest is that you look at Western Athabasca Syndicate’s newly-created website, which has by far the best and most detailed maps, to get a real feel for the area and the many players. You will see the names of many more companies, some of which will get at least a cursory mention as I continue my research for the mid-December column. The Lucky Strike website has the best information on the status of nuclear plants and uranium supply/demand statistics etc.

I have a long-standing and in-depth interest in the whole uranium market and am very familiar with numerous companies, so it was interesting that a company I have been tracking for several months now (along with several others when they first made headlines), appeared in a rather provocative promotional video by Angel Publishing’s Nick Hodge. This is the type of teaser Travis usually unravels, but he sent this one to me with the suggestion that it was Azincourt Uranium (AAZ.V AZURF), and he is right! I don’t have room here to give it the full Travis treatment of extrapolating clues and quoting extensively from the promo, which I do strongly suggest you read, because Nick presents a good overview of the nuclear industry, and the case for uranium being a timely investment.

Azincourt Uranium ($0.28) falls basically into the same “speculative category” as the previously-mentioned coalition of four candidates for the next Athabasca Basin discovery, along with several more that will have to wait for my mid-December column because there is no imperative to buy them immediately, unlike an actual uranium producer. Ask yourself: would you rather pay $500 for a newsletter that offers you the names and ticker symbols of just two early-stage, highly speculative stocks, like Nick Hodge would give you, or get complete coverage of the industry for your $49 investment in a Gumshoe Irregulars membership? I thought so, so lets look at Azincourt and see if it fulfills Nick’s promo promise. The key factor in all this is that the many Athabasca Basin exploration contenders may indeed spike, depending on who makes the next discovery. They are however highly speculative and years away from actual production under the best of circumstances.

Why not “just the facts please”? This is what I find so offensive in these promos: fear mongering about people being “left in the dark,” being used to hype an as yet explorer-stage company like Azincourt that can do nothing to actually alleviate the alleged immediate supply problem triggered by the cancellation of the Megatons to Megawatts agreement with Russia the end of the year. Nobody should be paying $500 for a non-solution like that, even if Azincourt proves to be a valid long term speculation in the uranium sector.

Incidentally, I just counted up my cache of world-wide mining district maps, and allowing for duplicates from year to year, I estimate I have at least sixty up-to-date that show what companies are active around the world in various mining districts of note. Guess what? There are indeed one dozen major players advertising in the Athabasca Basin map, with probably at least a dozen more minor speculative holdings I will not list for now. Do the math: if I picked just one stock from each map to profile, it would keep me busy for two and a half years, and if a market is hot, like the Athabasca Basin, multiples could easily stretch that to five years or more. The real reason for the market interest in Azincourt may not be its Athabasca Basin holdings at all, as substantial as they are. It may be their share purchase agreement to acquire 100% of a private Peruvian company owning 100% of the rights and interests in the advanced-stage Macusani project, covering 14,700 acres on which $12 million has already been spent. The present owner Minergia had defined 18 million pounds U308 (measured and indicated) and an additional 17 million pounds inferred up to September 2011. Long term, that may well be a profitable strategic move for the company. You can read that report here. For the record, while you are on the Pinnacle website, which you can join for free, I should let you know that I regularly blog on that site as “thinker 70” and frequently comment on stock submissions.

Making my case for development still requiring many years (and investment dollars) is that, according to that press release, a 50% present owner of Minergia, a company called Vena, began exploration in 2006, and the five separate projects being acquired are said in the report to have been defined as containing “potentially economic mineralization,” indicating years of work and further permitting and expensive drilling before building a mine could even be considered. That is not a bad thing, just normal circumstances that are not usually mentioned, or at least downplayed in these puff pieces touting early-stage stocks that are presented as solutions to what are allegedly more immediate problems. The market can be schizophrenic in such situations. It may bid up the price of the acquiring company by recognizing the long-term benefit of the new asset, or, it may punish the company for the shareholder dilution implied by the new issue of stock and/or outflow of cash to acquire additional assets. The Azincourt stock chart would indicate a blip ($0.355) around the time the Peruvian acquisition was first announced, but it has now drifted back down to $0.28, nearer its low for the month, again reasonably normal actions.

Some positives that justify market interest in Azincourt are that it is led by the former Cameco (granddaddy of the Canadian uranium industry) exploration director Ted O’Connor, and they have partnered with what they describe on their website as “Athabasca Basin’s leading exploration company, to explore the highly prospective Patterson Lake North property,” which they now own. This is hardly surprising given that the rest of the management team (Dev Randhawa as CEO and chairman, and Ross McElroy as COO, president and chief geologist) is the same basic team that developed the former Fission Energy Corp. (mentioned above), which after its major new discovery, sold its other Athabasca Basin assets to Denison Mines Corp. (DML.TO), a more mature company and the reason it is already part of my portfolio, and was mentioned previously in my column here. This type of thing is not at all uncommon in the industry. Competent management teams make a discovery (and a lot of money), sell some assets to fund a new company to do it all over again. So to sum up, Azincourt, under mostly former Fission Energy management, owns the Patterson Lake North deposit! Alpha Minerals Inc. (see above) merged with joint venture partner Fission Energy, and Fission Energy was renamed as Fission Uranium after the merger. It now owns the Patterson Lake South discovery, where at least a half dozen other companies have now bought property, hoping to hit it big as well.

My perspective on Azincourt is that one success often leads to another, and with competent management and a highly prospective asset I might consider a stink bid around $0.25, but only after verifying the financials with management (as I can’t seem to find a present cash figure that satisfies me), plus gleaning any additional information not yet on the website.

I rank Azincourt the same as I do the members of the Western Athabaska Syndicate, a 1% allocation individually, or 2% in total for your choices. Each company has some distinctive features that only you can evaluate as to what has priority for your portfolio.

Nick Hodge, in his promo for Azincourt, mentions NexGen Energy Ltd. (NXE.V NXGEF) ($0.265), which is also getting some market attention because of their land holdings’ proximity to two major discoveries in the Athabasca Basin. With 156,805,460 fully diluted shares, their stock price must be compared with that background in mind when picking an explorer-stage company to speculate on. But, they do have $6 million cash, which means they won’t have to go back to the market anytime soon to dilute the shareholders further. Their Radio project is adjacent to Fission’s Patterson Lake South discovery, and they have a 70% option that can be bumped up to 100% on fulfilling certain exploration expenditures, which they have the money to do. Their other property is near the famous Roughrider property developed by Hathor, which was bought out for $642 million by Rio Tinto (RIO RTPPF). It is definitely worth putting on a watch list, but I doubt that this is the second company Hodge is alluding to, otherwise he would not have given it away.

A more likely candidate is Forum Uranium (FDC.V FDCFF) ($0.285). After a 15:1 consolidation in January, Forum has only 41,397,761 fully diluted shares, which, as mentioned above, requires a careful comparison on stock price along with other considerations. Their website claims a treasury of $3.2 million, which is not too shabby. They emphasize the fact that they have been acquiring properties in the Basin since 2004. Their present vice president of exploration, Ken Wheatley (who joined Forum in 2007), was head of a team that discovered 132 million pounds of uranium in eight deposits, four of which are already being mined/managed by Areva (AREVA.PA), the big French nuclear company, mostly in the Kiggavik district of the more northern Thelon Basin in Nunavut. Also part of the Forum team is Dr. Boen Tan, who, with 40 years experience, is their chief geologist and was responsible for the discovery of the 200 million pound Key Lake deposit. All told, the Forum team has discovered over 300 million pounds of uranium, valued at over $10 billion dollars, even at today’s depressed prices. There are a lot of joint ventures in the district and Forum is the operator of the Northwest Athabasca deposit, which is 64% owned by NexGen , 23.5% by Cameco and 12.5% by Areva.

They have another 40% owned project in a joint venture with Rio Tinto, which owns 60%, so sorting out the value and potential of the various juniors becomes quite complicated. Forum also has three 100% owned projects and a current $1.25 million drilling budget. They have some interesting statistics on their website that help to put project size and economics into perspective when comparing the investment potential of uranium against gold. A 1% uranium deposit is equivalent to a half-ounce per ton gold deposit, or a 10% copper deposit (which is rare), but some uranium deposits are also around 2.5%, which would be considered high grade. Some Athabasca basin reports are showing U308 grades as high as 20% so I don’t doubt there are many more mines in its future in the years ahead. As investors we just have to have patience while the grunt work gets done to identify the best prospects.

Even the Thinkolator would have to chew a while to pick a winner in these complicated interlinkages of management teams, joint ventures and projects. In any case, I have listed my own speculative holdings, as well as my main producer that can meet a potential ramp-up in demand in 2014. There are two more to come in my next column, with which I have been intimately familiar for some time. In addition, there are at least seven other companies active in the Athabasca Basin that I have not yet had a chance to even look at, so there is still a lot of work to do before making any further recommendations of mostly speculative-stage exploration companies. Being potentially overweight in uranium for 2014 is not a bad strategy, at least until there is a decisive turn in precious metals prices, which I will jump on with recommendations when the evidence is compelling.

These are the uranium stocks mentioned I currently own, in alphabetical order, not priority of purchase. (I won’t be buying anymore until I have sold tax loss stocks in December.): Athabasca Nuclear, Denison Mines, Lucky Strike, Noka Resources, Skyharbour Resources, and Uranium Energy Corp.

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