written by reader Thoughts from Myron — Uranium Explorers vs. Uranium Producers

By takeprofits, 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 d