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Saturday, March 31, 2007

Conforce International (CFRI) conference call questions

Conforce International (combined links) announced a conference call for Tuesday April 17, 2007 at 4:15pm EDT. They invite investors to submit questions via email (see the link) before the call. Here are the questions I sent to them, listed in priority order from what I consider most important to least important:

1) How will the future rollout of EKO-FLOR be financed? Will shareholder dilution be involved and, if so, how much can be expected? Would a "rights offering" make sense? How does company liquidity affect how fast EKO-FLOR will be ramped up?

2) What is the company's liquidity situation going forward? What are the sources and potential sources of liquidity?

3) Given that EKO-FLOR will be on allocation in 2007, why was Oceanex chosen for the first trial order?

4) Does the Company know about any current efforts by other companies to develop other composite container floors?

5) What are the long term limitations on the percentage of overall container market share that EKO-FLOR can attain?

6) Can the Company provide any details on the situation with the apitong plywood market? Any anecdotes about quality or price changes? Are there any clear long term trends in supply?

7) What are the Company's views about alternatives to both apitong and composites, such as bamboo?

8) Any details about the manufacturing of EKO-FLOR? Who? Where? When? How?

9) Can the Company provide any information about the anticipated pricing of EKO-FLOR?

10) At what point would it make sense to have the Company's financial statements audited?

Friday, March 30, 2007

CXTI partial results

CXTI announced that it can't file the 10-K in time, so it's getting an extension. Meanwhile, they're announcing some things. (CXTI combined links)

I don't own any shares of CXTI any more. I sold most of it earlier in the year (I wrote a bit about it here) and I sold the small remaining part today. My reason for selling today was because I need the cash for a private investment. I would have preferred waiting till next week since I had bought the shares on April 3 and 4 of 2006 (the stock price had dipped a bit back then and I bought some), so waiting until next week would have resulting in long term capital gains rather than short term gains. I knew CXTI's results for Q4 would look worse than they really are, just as Q3 looked better than they were. They were late in filing, as I had hoped, but offered a glimpse of Q4 results. Rats. So, not taking any chances about what the market might do after thinking about it, I bailed.

Lesson learned: Forget the taxes and just decide what to do. You can't predict near-term future stock prices. I should have sold it all months ago and then bought back when the price dropped today. Then I might be on the right side of the trade today instead of the wrong side. Forced error.

Long term, I believe CXTI stock will continue going up. If I can get a good price, I won't hesitate to buy back in. This is a good business to own. The real question is whether CXTI at this price is a better investment than the other stuff I own. Right now, I don't think so, but I could easily be wrong.

CXTI's revenues were $17.4 million for Q4. This is down from $19.4 million in Q2. No big deal. Net income for Q4 was $1.7 million, but there's a $3.8 million non-cash charge. This is the whole derivatives oscillation issue. When the stock price goes up, it makes earnings look worse, which causes the stock price to go down, which makes earnings look better, which causes the stock price to go up, etc. etc.

I don't know how much of that $3.8 million non-cash charge is due to derivatives, but it's probably at least most of it. Interestingly enough, they had a $3.8 million benefit from a change in fair value of derivatives in Q3. They showed net income of $6 million, but I argued it was closer to $3 million.

Q4 seems like it might have something like $5.5 million in what I'd consider earnings, but that seems a bit high, considering that revenues are actually lower.
Management and the auditors are currently reviewing the treatment and valuations of the convertible debenture associated with the October 2005 private placement post the Amendment and Waiver Agreement dated October 31, 2006, including certain non-cash adjustments related to the early extinguishment of debt.
While I wish I could say bad things about this, I actually consider this a non-issue.

The conference call should be interesting: 4:30 PM EDT, April 12.

CXTI has been a fabulous investment! And I suspect it will continue to do well.

Thursday, March 29, 2007

CPI Aerostructures (CVU) Q4 results

CVU (combined links) issued their Q4 results today.
Revenue decreased 8% from the prior year (the year was really bad, 2006 stunk).
Gross margins increased to 16% from 12% (normal is around 30%).
Net income was positive, but pretty much zero.

They've been waiting for a very long time for the gigantic C-5A TOP contract to start ramping up. The giant cargo jets are in the Middle East and haven't been back for the repairs/upgrade.
We are participating with a major international prime manufacturer in the proposal process to provide new wings for over 200 A-10 Warthogs, and are looking at several other subcontracting possibilities as well.
It's good that they're working at getting into other business while waiting for the C5As.
With the expected return of our historical gross margins coupled with overhead reductions taken in mid-year 2006, we look forward to a healthier profit picture for 2007. Based upon the level of new and pending orders, we are reaffirming our prior 2007 guidance. We anticipate 2007 revenue to be approximately $25 million, with a resulting net income of approximately $2.0 million.

Conference Call

3rd best year for new orders. $30 million (up 80%). Open orders for up to $300 million (which is what everyone is waiting for). Larger average contracts ($231K vs $94K in 2005).
Fixed the production problems in 2006.
Q4 revenues were way up from Q2 and Q3 (like 30-40% or so).
Diversifying. $5 million in two orders from new customer, Sikorsky Aircraft. Total subcontracting more than tripled to $7 million. They expect more subcontracting to major prime contractors in the future: diversification.

They're bidding on the A-10 Warthog contract for new wings on over 200 planes. Total contract with a major prime contractor is over $500 million. CPI is providing some "critical" subassemblies. In 1995 CPI was awarded a $3.5 million contract to re-outfit all the A-10 planes (was needed after the Gulf War). CPI is very familiar with the design and issues with it. Six CPI employees are from Fairchild Repblic, the manufacturer, and they participated in the wing work in the past.

C-5 TOP program: CPI is trying to figure out when this is going to happen. Lockheed won a $25 million contract for other work to improve performance on the planes. This might indicate that the DoD is moving ahead finally, since it's a 3-pronged approach: avionics, engines, and structural parts [if I understand correctly, they already did the avionics a while back].

In subcontracting, CPI has established a solid relationship with Lockheed Martin. Also a supplier to Northrup Grumman and Sikorsky.

CPI is planning on some road shows with institutional investors.

Questions and Answers

Is the C-5 TOP work ever going to happen? How much has been done? What's the chance of it never coming in? What are the factors?

It's difficult to know and CPI can't really say, but the fact that the other two items are being done indicates that the CPI structural work should follow along [I would agree]. If you're going to upgrade the avionics and the engines, "the structure has to come along with it."

About $14.7 million has been released to CPI so far (i.e. almost none). It's been 3 years so far and there are 4 years left on the contract. Consider the lack of airlift mobility as a sign that this work is needed.

Where is CPI in terms of timing on the A-10?

RFPs (request for proposals) were submitted in January. The government has come back and asked for clarification from all the different competitors. They expect answers in early April. Right now it's tracking for an award in the middle of May. So far things have been happening fast and it seems like they want to get this done.

Each year they'll determine how many they want to fund for A-10 work. It's not an IDIQ contract (indefinite delivery, indefinite quantity).

Do government disbursements seem to be accelerating?

They're in the same place that they've been for the past 2 to 2.5 years. Lots of RFPs, no awards. Until things wind down in Iraq, the "bread and butter" awards is going to remain slow.

Any other subcontracting opportunities besides the companies listed above?

Always looking for others.... Can't mention names. Because CPI has established very good relations with these companies and because they've tripled the revenues on subcontracting so far, there's plenty of room to grow just with these 4 customers.

Have the 6 A-10 employees been signed on to long term contracts?

No. But they're long term employees....

Is the A-10 RFP for the production or just the prototype?

"Nah-nah-nah! The RFP is for the entire program start to finish, starting with re-engineering work, actually starting with the conversion of the orginal drawings into new formats. Then the building of prototypes. Then the production" of 200 wings or sets of wings, I know it's 200 planes.

The Air Force has made the decision to move ahead on the 200 planes before the prototype is built. This is their plan.

Any idea how many other bidders there are for the A-10?

Could be anywhere from 4 to 6. All of the competitors are worthy at the moment. Nobody has been eliminated as being technically incapable or anything like that.

Breakdown of military vs commercial on the $7 million subcontracting work?

Pretty much all of it was military. About $500K was commercial.

For subcontracting, are the gross margins better or worse than the contracting work?

The nice thing about the subcontracting is that the margins are better. CPI can do the work cheaper than the primes due to lower overhead, unions, etc. The margins are around 30% and maybe a bit higher?

When will overall margins reach normal levels?

Mid-year CPI should be at around that level. Not in Q2, but probably in Q3.

On the $300 million unawarded contracts, how much is where CPI is prime vs sub?

Around $250 to $270 million is prime.

How much of that is with the C-5 TOP contract?

Can't figure it out on the fly during the call, but inquiries are welcome.

Lots of awards near the end of last year, isn't it normally about 6 to 9 months before they hit?

Normally, yes.

$18 million to $20 million of the $30 million will probably be realized in 2007. Some was realized in 2006.

So there's not much additional business needed to get to the guidance level (which results in an expected $2 million in net profit for 2007).

What's the pitch for the road show?

Not really a pitch, just that CPI is getting past two down years, things are looking up, just want to get in front of investors and let them know who CPI is.

What sort of work has CPI done on the A-10 and what work have the competitors done?

All new leading edges [wings?] on the entire fleet of A-10s. That alone probably gave CPI more [wing?] experience on the A-10 than anyone else in the country.

CPI could end up being a subcontractor to someone else who wins the contract.

The 6 A-10 employees are from Fairchild and worked specifically on the wings and the wing program. "We have engineers who actually helped design them. We have mechanics who actually helped build them. And we have operational guys who helped make sure it was built right and on time. So we bring that to the table...." [excellent!]

CPI has seen the design flaws now (of course no one knew what they were 30 or 40 years ago when the planes were built).

"That's what we bring to the table that nobody else has."

[I'm thinking the odds are better than one-in-four or one-in-six.]

When are the road shows?

Starting out in April and going every month for 3 or 4 months.

They believe they've explained to people why things were not going well in the past 2 years. [I agree.]

If one of these big contracts goes through, it'll transform the company. Yes it will. How many more of these company transforming possibilities are out there?

That's internal information that can't be stated to the public. Whether it's 10 or zero.

But it sounds like the logjam is still in place.

"That's correct from our experience and the experience of our competitors."

David Cohen from Midwood Capital [big shareholder]:
With the 2007 targets, what's been identified as the tax rate and tax liability?

Very low due to the NOLs. Down in the 35ish rate. They have a state tax carry-forward.

What was SG&A for the year?

$3.6 million. It was normal for Q4 vs the other quarters other than usual stock option expenses and so forth.

What about the vendor issue and the wording in the press release?

Very minor, fraction of a percent of gross margins. The issues are gone. [I missed some of this]

Next guy:
CPI is a subcontractor in the A-10 bid, how much will CPI influence the decision vs the capabilities or lack by the prime?

100% correct. However, CPI is a contractor to a major prime and CPI was specifically named by the prime in the proposal. CPI evaluated the prime before joining up with them. So CPI believes in these guys.

Also there are subcontracting possibilities with other primes who might win the contract.

How much of the TOPs is in the projection for 2007?

None. And none of the $300 million is in there.

Some things have been added, some dropped out of the 300.

Nothing significant has been lost recently (except for the thing more than a year ago that CPI was sort of glad to lose).

In the CPI TOP program, what if they drop the C-5A vs C-5B/C?

The contract didn't call for anything over quantity 47. If they ordered everything in the contract, it would only be 47. So it's not a big issue(?) I take this to mean that the contract was not assuming all the planes. There are 60 C-5As, 49 C-5Bs, and 2 C-5Cs? I'm not sure if this excludes the one that crashed recently (all survived, if I recall correctly). Wikipedia has more details.


Yeah, I'll keep holding the stock.

UPDATE April 2, 2007:
CVU issued a press release saying that some SG&A was reclassified as cost of revenues. Gross margins changed from 16% to 14% for 2006 and from 10% to 9.2% for 2005. Net income wouldn't be affected.

Sunday, March 25, 2007

uranium spot price 95 dollars

This article says the spot price of uranium (which eventually will show up on TradeTech's spot price indicator and then later on UxC spot price indicator) has increased to $95.00 per pound of yellowcake. And this is before the anticipated auction next week.

This past week, three transactions were reported by NMR editor Treva Klingbiel for less than one million pounds U3O8 equivalent. Two transactions of 650 thousand pounds U3O8 equivalent contained in UF6 and one for less than 300 thousand pounds of U3O8 were completed in the past week. Material was sold for immediate and June deliveries.

Seven buyers continue to seek over three million pounds,” according to Treva Klingbiel She added that several additional utilities have begun making preliminary inquiries about future purchases. “Buyers remain willing to pay higher prices,” Klingbiel wrote.
My guess: anyone bidding less than $100 per pound in the auction next week isn't serious about being the winning bidder.

I'll keep adding more stuff below in updates until the next uranium posting.

UPDATE March 27, 2007:
Well, it looks like the next phase of the uranium bull market has begun: When the Story Goes Mainstream.

Here's an article in the New York Times about the uranium mania written in that strange manner that newspapers have adopted over the decades.

...Mr. Shumway’s eyes light up and he cracks a grin as he ponders the fortune he now hopes to gain.

“There’s big money in it,” he said as he probed piles of waste ore at Pandora with a Geiger counter....
But anyway, they cover the main points and of course the usual suspects are there: David Miller, StockInterview.com, James Finch, and I'm happy to report, Strathmore Minerals... he said, his eyes lighting up with a wry smile pondering the fortune he now hopes to gain.

UPDATE March 28, 2007:
One day later, the Wall Street Journal has an editorial ($$ subscription probably required) called "Our Atomic Future" arguing for adopting nuclear power.

Higher construction costs are more than compensated by lower fuel costs [even with yellowcake at $100/pound since fuel is not the dominant cost of running a reactor] and higher capacity ratings. America's existing nuclear plants are now operating so profitably that Connecticut Attorney General Richard Blumenthal recently proposed a windfall profits tax because the state's reactors were making too much money.

The reason building nuclear plants has been expensive and time-consuming is because of exaggerated popular fears of the technology. The public is now coming around. Seventy percent now consider nuclear plants acceptable, meaning new plants will probably not become bogged down in endless court delays.
And it doesn't matter much what people in the West do since China, India, Russia, and others are determined to build a lot of nuclear reactors.

Nufcor is lending out their stockpiles. They've lent out 40% of the stockpiles so far to those affected by the Cigar Lake and Ranger floods and plan to lend out the full 100%.

Utilities such as nuclear power plants in need of uranium but unable to source it on the market have borrowed the metal from Nufcor, as have producers who have delivery commitments but are unable to meet those cheaply through buying material at fiercely contested auctions.
As Yogi Berra said, "Nobody goes there anymore, it's too crowded." Buyers complain that investors are the ones causing the price to go up by gobbling up the uranium, but if there was any significant surplus, it wouldn't work; certainly not at these prices.

Scorer reckoned that investors like Nufcor, Canada’s UPC and hedge funds hold 15 million lb of uranium, equating to eight percent of global consumption for one year....

You don't corner a market and push prices up by a factor of 10 by buying just 8% of global consumption. Normal consumption demand is going to be increasing by more than that.

If anything, the lending makes the market look even worse. Prices are this high and the stuff really hasn't even been taken out.

And this article is a good read.

I agree it’s hard to come to grips with $500-a-pound uranium, but my analysis shows that such a price might very well be sustainable. Here’s why …
(warning: the comparison of uranium pellets to oil is flawed since it doesn't take into account the huge costs associated with converting the uranium into electricity. Also the unfilled uranium requirements argument is flawed since it doesn't consider how much of the future production is associated with the requirements. But then again, I've made flawed arguments about uranium at various times.)

Bubbly frothiness? Bring it on!

Friday, March 23, 2007


Someone asked me in the comments of the last post to write something about BGII. I had looked at them here and here.
could you give an update on BGII...? thank you!
They've been accused of smurfing by the IRS. Smurfing is a banking term for a particular part of money laundering. If you have a business which generates a large amount of cash (typically drug dealing, but it could be anything, even coin laundromats or lottery-ish machines), then a significant part of the business is converting physical cash into electronic cash. The IRS requires banks and others to report transactions of $10,000 or more to the IRS for tax purposes. So the obvious response of those attempting to circumvent the IRS is to break down transactions into smaller amounts and deposit them into multiple, seemingly independent accounts. If you go to your local bank every day with $9,999 deposits, they're probably going to report you as suspicious (it's one of the FDIC red flags). This turns into a cat-and-mouse game and a typical method is to split the cash into lots and lots of small chunks and have a large number of "smurfs", typically young males with time on their hands, to carry the cash to lots of individual deposits. But if we're talking about hundreds of thousands of dollars, you've got a problem with finding enough trustworthy smurfs. One of them gets "busted" for some unrelated drug charge and confesses to the money laundering involvement in exchange for a reduced sentence and, bingo, your operation is busted.

Based on the financial statements on their website, BGII has perhaps 15 cents in net cash and marketable securities per fully diluted share and they're making money (4 or 5 cents per fully diluted share for 9 months) and operations are bringing in cash. The stock is selling for 13 cents per share.

Of course they haven't announced any news since 1995 and they went dark quite a while ago.

It looks like they lost the "we're not a gambling machine" case in Alabama on Dec 4, 2006.

But more important is this investigation by the IRS as reported on Dec 1, 2006. The IRS has seized a million dollars of the company's cash.

My guess is that the stock will go nowhere unless the IRS issue is resolved. My guess is also that the allegation is likely to be true because it doesn't seem like one of those things you'd be wrongly accused of doing. But here's the thing: if they've been lying to the IRS, they'd probably also be lying to shareholders and skimming money out of the business and into their pockets: why risk reporting it to shareholders if you're trying to hide it? In fact, it would make more sense that they're more likely to want to cheat the shareholders than the IRS and the tax evasion thing is just a side issue (like Al Capone). But the key thing here is that I only know what I've read on the company's own website.

Here's an interesting book: How to Cheat at Everything

Thursday, March 22, 2007

Conforce International (CFRI) aims for the bleachers

Conforce International (combined links) issued this press release today:
Based on the Company's recent launch of its EKO-FLOR container flooring product, as well as the addition of two other composite-based flooring products in various stages of development, management of the Company expects to record for the fiscal period April 1, 2007 to March 31, 2008, total revenues of 26 - 29 million USD resulting in EBITDA of 3.6 - 3.9 million USD and net earnings of approximately 8.5% or 2.2 - 2.5 million USD.

That is for the year starting in just a few days. And for the next year...
For fiscal 2008, management of the Company expects that a significant portion of its field trials will have been completed on all three of its EKO-FLOR composite products and therefore anticipates a significant increase in revenues and earnings. For the period April 1, 2008 to March 31, 2009, Company management projects total revenues of between 112 - 116 million USD resulting in EBITDA of 23 - 26 million USD and net earnings of approximately 13.5% or 14 - 16 million USD.

Ok, so they're projecting earnings of roughly $2.3 million in the upcoming year and roughly $15 million in the year after that?

They have 120 million shares of stock selling for under 50 cents. They're expecting net earnings of perhaps 2 cents this upcoming year and 12 cents in the year after that.

Of course one big question is how much dilution is in the future? Another big question is whether their projection is realistic.

But overall I consider this to be excellent news.

UPDATE later that day:
I'm always extremely skeptical when someone claims a stock price has been manipulated. But this was particularly odd. I grabbed the last part of the tape that was still available on OTC BB and show it below. I bought some shares during the day and found that every time I bought, there was another transaction on the tape immediately afterwards (marked at the identical time) at a lower price. Most of these are from someone else's buying. If a toxic convertible gets announced soon, then it's worth digging further.

0.35 10000 15:57:37
0.36 10000 15:57:37
0.38 100 15:51:48
0.37 100 15:51:40
0.37 10000 15:51:29
0.36 10000 15:51:12
0.36 5000 15:50:55
0.38 5000 15:50:55
0.36 6938 15:50:55
0.38 6938 15:50:55
0.38 1300 15:50:53
0.36 1300 15:50:52
0.38 20000 15:50:34
0.37 10000 15:50:24
0.37 10000 15:49:54
0.38 5000 15:48:31
0.38 2000 15:35:05
0.39 1500 13:26:09
0.41 1500 13:26:09
0.405 1500 13:25:41
0.39 2500 13:06:20
0.41 2500 13:06:20
0.39 2500 13:05:58
0.41 2500 13:05:58
0.38 1062 12:50:45
0.40 938 12:50:45
0.36 2000 12:50:45
0.40 3000 12:27:42
0.40 6000 10:57:35
0.43 10000 10:57:26

UPDATE next day:
When I look at investments, I try to understand them operationally. In other words, based on the bits of information I pick up, I try to understand what's going on inside the business. This is where all that time reading business history books, listening to business stories from old timers, and watching businesses has helped to understand how these things behave.

It's always great fun to attend marketing meetings where people show very exact hockey stick curves of future revenues ramping up quickly only to find out that there's no real substance behind the data. The charts are created "top down" based on the need to have a nice optimistic chart rather than "bottom up" based on what actual future customers are planning to do, how much market share can be stolen, from who, and how, etc.

The market is upset that Conforce isn't ramping up fast enough. More than a year will be wasted before any meaningful earnings will appear. These numbers don't dazzle Mr. Market.

I'm impressed with the numbers. Conforce has demonstrated a pattern of behavior that's almost certainly based on how the CEO does things. They set up a number of specific/measurable/attainable/realistic/time-limited goals and then methodically reach each one. I like that way of doing things when you have a clearly definable place you need to reach. Conforce has met their goals with a great success rate up to this point. That gives me confidence that they'll hit these revenue/earnings goals or at least get fairly close.

Growing a business is difficult. I see investors all the time who think that sustained 30% growth is not so hard. In my opinion (which is somewhat grounded in experience), growing at 30% means that most people in the organization will need to be doing essentially a different job every 2 years or less. Google is planning on a ridiculous growth rate and Steve Balmer of Microsoft, who knows a thing or two about growing a large organization in a fast-changing industry, has pointed out the stupidity of it.

Conforce needs to grow into a larger company with much larger revenues, lots of new customers, lots of new vendors, etc. That won't happen suddenly. What's most important is that it happens at all.

Wednesday, March 21, 2007

Table Trac (TBTC) revisited

TBTC, chart, website, sec
I had looked at Table Trac back in Dec 2005: 10-K, Q1-to-Q3, more stuff, Googling, competitors, conclusion

The conclusion was that recurring revenue was too small and installations would only take them so far.

At that time, the stock was trading at around 70 cents. It has now doubled in price (it had reached as high as $2). So what happened?

Looking at the most recent 10-Q (Sept 30, 2006):
The balance sheet looks very strong, lots of cash, nearly all equity. $131K net cash. 4.4 million diluted shares.

Revenues for the 9 months are actually down from 2005. Margins is still good, but operating income is down for 9 months (up for the quarter vs prior year). They earned 5.9 cents per share for the quarter, but only 4.7 cents for 9 months.

Cash flow from operations is terrible, only 1/3 of income (AR and inventory).

This seems to be the reason:
Anticipating the 4 casino system sale announced July 18, 2006 to a Customer in Central America and the Oklahoma Casino sale announced August 4, 2006, the Company acquired inventory in the second and third quarter of 2006. The company acquired computer hardware and outsourced the manufacture of the custom hardware for these orders.
So we need to back up and look at the announcements. Oddly, there are no 8-K filings during that time period (or anywhere near that time). Looks like they registered for more shares, but then withdrew... wait, no, they filed the wrong form. Hehe.
A FORM 10SB12 Registration of securities for small business [Section 12(b)] was inadvertantly filed instead of the intended Filing for extention [sic] of time

And it looks like an investor picked up 5.4% of the company (217K shares), perhaps inadvertantly? Doucet Asset Management (awful "under construction" website).

Well, the news has all expired and there's nothing on their website. Google shows nothing. They never filed any 8-K statements. That's pretty funny.

So it seems they picked up 5 casinos. Maybe more (if they got more than one in Oklahoma). I don't see anything to change my mind about the business. But at least they did better than most of their competitors:
IGT up about 30%
Shufflemaster down about 20%
Progressive Gaming down nearly 50%
and Venture Catalyst (sec) merged into IGT at $2.58 value. According to the 10-K, the market price of shares was 71 cents to $1.60 in their Q2 ending Dec 31, 2005.

Misc Thoughts (EPLN, ETLT, YHGG, LVWD, NICK, uranium)

Did a scan of SEC filings for all my investments; nothing worth noting.

Old stuff: EPLN dropped to 70 cents and volume dried up. Nothing from ETLT although the only interesting outcome would be if it turned out to be fraudulent. Otherwise, there's nothing of interest since I would've sold the stock regardless and I'm willing to admit that it's more than likely just fine. I see that YaSheng Group (YHGG financials) has dropped. Their 10-K showed 41 cents earnings, but it was mostly gobbled up by their continuous large capex. My guess is that in reality, they're probably breaking even or possibly worse. That was a cigar butt stock, but it sure does seem cheap with an apparent P/E of less than 4. LiveWorld (LVWD collected entries) is still stuck at 50 cents. And NICK (sec) is doing fine: after the subprime panic clears up, they'll look very good, in my opinion.

Cameco now says Cigar Lake is delayed by another year. And the market pushed the stock price up fairly substantially after that. This would make it seem that the market was expecting worse, which would also explain why the juniors' stock prices took a beating at the same time. Another explanation is that there is simply a fixed amount of dollars chasing uranium stocks right now and Cameco's announcement simply shifted money around: Investors hate uncertainty and the market probably sees this as Cameco removing some uncertainty... although I believe Cameco didn't reveal much more than was already known.

UPDATE same day:
I updated the post on the BakBone firings. Nothing new.

UPDATE Mar 24, 2007:
Here's another uranium article. It's interesting that the two biggest risks they see are the same ones I came up with independently.
One is the risk that another disaster, such as Three Mile Island or Chernobyl, could cause sentiment to change again, away from nuclear energy. This is definitely a consideration, particularly as nuclear energy spreads to countries which may not have stringent health and safety standards.

The other risk, albeit a left-field one, is that a strategic stockpile of a few million pounds could hit the market. The U.S., for example, still holds a strategic stockpile. But it is called strategic because it is precisely that. It seems unlikely that this would be sold just to provide a temporary solution to electricity production.
The first risk is minimized by the fact that lots of countries are pursuing nuclear power, many of them are not as easily influenced by the latest fad panic (China, India, Russia, various small countries). The second risk only delays the impact of the imbalance, rather than remove it. I suppose the worst case would be a big stockpile dumping right as your favorite uranium company is ramping up production. But the imbalance is so huge and demand will be growing so much that I just don't see taking a loss because of this.

Saturday, March 17, 2007

Yet Another Uranium Post

Here's another StockInterview post about uranium prices. A commodities analyst at Macquarie Bank forecasts uranium prices to fall back to a long term price of $35 per pound of yellowcake. This doesn't make any sense. Given the amount of production needed for the steadily rising demand, there's going to have to be an enormous sustained increase in uranium mining.

The long term market price for that uranium is not going to be significantly less than what it costs to mine the uranium. I don't have links for this, but I've read from at least one credible source (David Miller of Strathmore) that with production up to full demand, the incremental costs of mining are such that the long term price should be roughly $65. I've read this in other places, but don't know how independent they are (Miller makes a lot of noise in what is a small industry). A good sampling is Strathmore's estimated costs of production for each property they own (page 15 of this document). From cheapest to costliest, the price quickly ramps up above $35. However, this is just US properties. The stuff I've been reading over the years has made it fairly clear that most uranium costs above $35 to mine. A lot of the stuff I read when I first invested in Strathmore talked about this because the uranium price at that time was only about $30 or so and that the uranium investment thesis required a significant increase in price.

The price was very low for years because of a massive glut caused by converting huge numbers of nuclear weapons into reactor fuel. Not to mention the situation decades ago when demand was low and uranium mining was in full swing in anticipation of increasing demand that materialized much more slowly than expected.

People might be pointing to Kazakhistan and Namibia for future supply, but the support infrastructure in those places is negligable. For those places to meet the demand, it will cost a great deal to ramp them up that much. There are stories of donkey paths in Kazakhistan. In all honesty, I wrote this down before reading the full article I linked to above where it mentions the same thing.
However, it has to be noted that while Kazakhstan has undoubtedly a massive amount of uranium underneath its surface, the country's role in the industry is also seriously hampered by a lack of modern infrastructure and a highly corrupt political and business climate. You won't hear or read much about this in general, but that's because everyone who wants to do business over there knows that any proof of criticism cannot be bought off and is likely to backfire in a big way.
In other words, keep your mouth shut about the donkey paths. The Uranium Bull Market book* that's being peddled everywhere has some interesting things to say about Kazakhstan. The country does produce a great deal of uranium and that will increase over time. But mining companies definitely need everything in writing signed by everyone possible, and even then they need to hope their rights are respected.
In addition, Kazakhstan is not immune to the lack of available experienced staff that is haunting the mining industry in general. And to make things even worse the Kazakh government currently requires in situ mines to have recovery rates of at least 80%. Existing mines of Cameco and Kazatomprom are struggling to meet this requirement, even after two years of test production.
GSJBW makes two interesting assumptions with regards to secondary supply. The analysts anticipate Russia will not renew the HEU agreement with the US [which they've already stated] and that Techsnabexport (Tenex) — representative of the Russian Federal Agency for Atomic Energy — might stop exporting uranium from Russia in 2008.

With regards to Western inventories which were built up pre-1990, the analysts believe the majority of this material has either been delivered, or is committed.
The analysts also believe Cameco's troubled Cigar Lake project won't be up and running until 3-4 years from now. They subtly hint at the fact that some experts believe the mine will never reach production.
I'm not an expert, but you've got to wonder why a uranium mine with deposits of 19% uranium were left undeveloped all these years after being discovered in 1983, when people are chasing after stuff that is significantly less than 1% elsewhere. Given what mining experts have said, it doesn't seem like the low hanging fruit it appeared to be. They did some work on creating a mine shaft in 1988 and then quit. Then when they go back to it after uranium prices go up, they have 2 separate mine floods.

Australia will lift its 3-mine policy, allowing Honeymoon (resource info, only 5.8 million pounds but at costs of perhaps only $12.40/lb) to open.

The US Dept of Energy is considering increasing its sales of stockpiles up to 5 million pounds of U3O8 equivalent per year...
but Merrill Lynch also notes the DOE has made it known it doesn't want to interrupt the normal market dynamics as well as that the Department wants to support the nuclear renaissance.
Dumping uranium into the market is what caused the current mess. Increasing the dumping would simply forestall the inevitable. Also, I refer back to this chart of supply and demand over time to show that the total amount of 5 million pounds per year is less than 3% of consumption.

UPDATE same day:
* I read the Uranium Bull Market book only fairly recently. Much of the stuff has been on the web at various times. It's the same information from the same people. A big chunk of the book covers various specific companies with a rating system. But it's a very good collection of information in one place. There's some things that I hadn't seen anywhere else, such as the details of various reactor types.

Also, the US will probably have the first new nuclear reactor order since the 1970s within a year. Any new reactors probably won't go online until 2015, which means they'd be buying uranium around 2013. My guess is that the politics will get resolved within the next one or two years and there will probably be several new reactors in the pipeline right after that.
Regulators expect to receive about 20 applications for new plants over the next three years with at least 30 new reactors.
Many of those probably won't get built due to NIMBY political opposition.

Russia plans to build two new reactors each year through 2015.
Government officials said Friday that Russia will build two nuclear reactors annually through 2015, and increase to four a year by 2020 in an effort to sharply increase atomic power generation, according to Russian news agencies
Uranium Participation (U.TO), the only pure uranium holding company, is currently trading at C$14.95 while the most recently reported net asset value claims 4.2 million pounds of U3O8 and 950,000 Kg of UF6, which based on current spot prices, is worth US$91 per pound and [estimated] $249 per Kg respectively. The result is worth US$618 million or C$726 million. With 50.69 million fully diluted shares, this works out to be C$14.32 per share, which is roughly the market price of the stock. This doesn't seem to indicate much of a bubble in uranium, considering that the spot price has been steadily increasing since 2003 (from well under $15) without a single declining week. The market is saying that the value of the uranium is more or less equal to the current spot price.

Paladin opened their Langer Heinrich mine on Friday which is expected to produce 2.6 million pounds of yellowcake per year.

Is that enough uranium news for you? A year ago, things were a lot more quiet. It's very difficult to keep up with everything nowadays. I've clearly seen a shift this year toward more mergers and capital raising events (both public and private).

UPDATE next day:
There's another 100K pound sealed-bid auction coming up at the end of March.
“Bidding is expected to be aggressive,” wrote Nuclear Market Review editor Treva Klingbiel in the March 16th issue.
An article slightly independent from StockInterview.
Most responses we received following our Friday story, inspired by Macquarie analysts forecasting spot uranium would spike shortly and then fall back to US$46/lb by 2011, were highly critical of Macquarie's price forecasts.

One of our readers, a keen follower of the uranium industry, again pointed out to us that production of uranium in major producing countries like Canada and Australia has consistently failed to match projections over the past few years. Last year, total uranium production in both countries fell against the previous year.

Olympic Dam production has been declining, apparently and management has been forced to buy uranium on the spot market to make up for it.

Washington Gas Light Company (WGL, WGLCN, WGLCO, WGLCP)

This is a fairly pointless exercise since it's a preferred stock in a big gas utility (and I've thrown these out in the past), but sometimes I've found interesting things in unexpected areas. And the child laborers dug this one up, so I'll take a look at it.

WGLCN, WASHINGTON GAS LIGHT CO., website, sec, yahoo, chart, Serial Pfd Series $4.25 Cum (No Par)

The common stock is on the NYSE as WGL. In addition to WGLCN, they also have $4.80 Series and $5.00 series of preferred stock, all on OTC BB. All of these are callable by the company.

A holding company comprising a gas utility (Washington, DC) and it owns shares in a lot of regulated gas and unregulated energy-related companies in the DC area (HVAC, "CLEC" style unregulated gas and electricity resellers). Looking at the most recent 10-Q for Dec 31, 2006: Here's an interesting case where the balance sheet lists PP&E above current assets. According to my Wiley GAAP book, this is because current assets doesn't mean much for utilities (as well as broker-dealers, investment companies, and real estate companies).

$3 billion in PP&E, 30% depreciated. Roughly $800 million in current assets matching the same in current liabilities. Capital stack is about 1/3 equity, less than a third long term debt, and a bunch of deferred tax and regulatory liabilities.

Over 40% of revenues is non-utility. 12% operating margins (10% in prior year). For this stuff, let's look at the 2006 10-K.

Some customers are "interruptable" where gas can be supplied at the option of the supplier rather than customer (turning off supply during peak usage times). Obviously these aren't "widows and orphans" but are businesses with alternative sources. Anyone familiar with economics knows the value of having customers like this for a business with high fixed costs and plant that must be sized for maximum usage. In DC, Interruptable customers receive a majority of the profits earned from sales to them above a certain gross margin threshold. Interruptable customers pay a cost of service amount.

All the company's customers can choose their gas supplier independent of the company which owns the pipes to their location.
On September 15, 2006, Washington Gas filed an application with the SCC of VA to increase its annual utility net revenues in Virginia by approximately $23.0 million. The application seeks an overall rate of return of 9.12 percent and a return on common equity of 11.25 percent. This compares to the current overall rate of return of 8.44 percent and return on common equity of 10.50 percent as authorized by the SCC of VA in its Final Order issued to Washington Gas on December 18, 2003.
Here's the upside and downside of being a utility.

They have a pension plan with all the associated liabilities and assumption issues. This one is almost entirely funded. They assume a discount rate of 5.75% and a rate of compensation increase of 4%. They assume assets will have a long-term return of 8.25%, which is a bit high.

This is funny: they have 1.5 million stock options. This is a utility! How much impact will any individual or group have on the price of the stock on the upside? Maybe I'm wrong here, but it seems to me, the company can only screw up and make the stock drop. Most reasons for the stock to go up would be demographic or macroeconomic, no? The stock options granted in 2006 have an average exercise price of $32.13. The stock ranged from around $28 to $33.


Given returns on assets and equity that are this predictable, is it likely that the preferred shares are mispriced? No. Based on the long term chart, the preferred stock doesn't really have enough volatility to make it useful.

The company's use of stock options seems silly to me, given that they have a nearly guaranteed return on equity. This is like Buffett's analogy of putting money in a savings account and setting up incentive options for "managing" it.

I wasn't aware that gas utilities were unbundled.

Friday, March 16, 2007

DAC Technologies (DAAT) 2006 Results

DAAT (sec) I last covered DAAT back in July 2006. These guys make gun cleaning kits for Wal*Mart stores. I noticed something this time worth noting (otherwise, I really don't follow the company closely at all).

Here's the press release for 2006.
However, due to a number of factors, we have experienced a decrease in our gross profit margins of about 5% for the year as compared to last year. During 2006, we experienced some significant price increases on some of our items, particularly some of the gun cleaning kits. These increases were due to increases in commodity prices for brass, metal, plastic, as well as wood. There has also been a devaluation of the US dollar versus the Chinese RMB of 4% in the past year. Since our Chinese manufacturers operate their business in RMB, they are now receiving 4% less when they convert the US dollars we pay into RMB. This has caused them to have to increase their prices to recover this loss. It has been difficult to raise our own prices in response to these increases.
Just an interesting sample point. When inflation happens, you find out who has pricing power and who doesn't. Having Wal*Mart as a main customer doesn't help.

Thursday, March 15, 2007

Conforce International (CFRI) looking at financials

Conforce (combined links) issued their Q3 results here on Feb 15, 2007. They incurred a loss of $142K which is pretty much all explained by the increased R&D costs which increased from Q2 due to the EKO-FLOR work. The costs of rolling the product out should be even larger. Where will the cash come from?

Cash $4,785 (i.e. pretty much none)
AR: $445K (increased by $109K from $336K)
Fixed assets: $80K (net of $40K accumulated depreciation)
and some other small assets.

Shareholder advances: $309K (up from $250K), no interest or terms of repayment
plus some other liabilities for a total of $463K

Pretty close to zero

The cash flow statement is fairly screwed up. Basically they have almost no cash, shareholders have loaned the company cash to keep things going (probably by delaying their salary payments).

I'm probably crazy to continue owning the stock. I haven't been selling, although it's clear that some people have been, probably due to the less-than-ideal financial results of Q3.

How much dilution will occur? Can they get bank loans? Would this still be a good investment with 50% dilution? Can a slow ramp-up be done at low cost?

There are two important questions to ask here:
1) Will they succeed?
2) What is one share worth after dilution and/or costs of financing?

I'm betting that the answer to #1 is yes. I could be wrong.

Regarding question #2, the way to look at this is to assume a fairly severe dilution scenario and then figure out what the stock is worth afterwards. I think 50% dilution is a good yardstick to use (double the share count). Given the current price of around 50 cents and 120 million shares outstanding (which would become 240 million), is this company worth more than $120 million? I think the answer is yes.

How much cash could they raise with a 50% dilution? I figure more than $10 million.

In the first post, I asked if this is worth significantly more than $60 million. This is a great example of why you need a seriously deep discount for these sorts of stocks because you may need a massive margin of safety.

Container floors for a 20 foot container have historical prices of very roughly $150, often times more. Given the advantages of EKO-FLOR, maybe Conforce can charge $200 per container. That might be optimistic, I don't know. If they fetch a net margin of 5%, that would be $10 per container. There are roughly 20 million containers manufactured per year. Conforce has a goal of about 6% market share, which would be about 1.2 million containers per year. With 5% net margins, that would mean they'd be worth around $180 million as a company. That's not a very good margin of safety if they have 50% dilution. But the long term trends are definitely in Conforce's favor: diminishing apitong plywood supplies, increasing global trade, increasing ecological awareness, and presumably more need for controlling the container environment in terms of chemical contamination etc.

And then there's the issue of whether they'll get more than 6% market share in the long run.

I don't know, maybe I'm just trying to convince myself to stay with it. I have to admit that the lack of liquidity caught me off guard. Am I paying attention here? I continue to own the stock (I haven't sold any).

Wednesday, March 14, 2007

poor quality Strathmore valuation (STM.V, STHJF)

I know that I've spent a lot of time on Strathmore Minerals lately, but it's for good reason. The stars are aligning for this particular industry.

This market commentary article was posted on U3O8.biz today. It whines about the price drops of uranium stocks. But the interesting part is a quote of analyst Graeme Currie:
"The perception of what one pound of uranium is worth [in the ground] has materially increased," concludes analyst Graeme Currie, whose analysis has bumped up the value for "measured and indicated" resources to $10 (U.S.) a pound from $8 and for "inferred" resources to $6 from $5.
First of all, we know that this is a meaningless measure for a lot of reasons which are all related to the question of "How much does it cost to extract that pound and when can we expect it to be extracted?" The answer can range from "$4"/"today" all the way to "$100"/"when hell freezes over" which produces a value of roughly $87 and $0 per pound respectively.

However, one thing we can say about Strathmore Minerals is that they've cherry picked properties based on a huge amount of historical database information before the whole uranium mania caught hold. So perhaps we can apply Currie's formula to Strathmore.

I'm taking the info from Strathmore's website here. Let's consider "historical demonstrated" in the same category as "measured and indicated" and let's consider "historical inferred" in the same category as "inferred" (I believe the categories are different due to whether they're NI 43-101 compliant and Strathmore's record is very good when it brings the info into compliance).

When I do this, and use the numbers above, here's what I get.

numbers are in millions of pounds of U3O8
MI means measured and indicated
IF means inferred
HD means historical demonstrated
HI means historical inferred
Church Rock: MI=11.8, IF=3.5
Roca Honda: MI=17.5, IF=15.8
Nose Rock: HD=18.2
Dalton Pass: HD=3.5, HI=0.8
Roca Honda North: HD=0.3
Copper Mtn,WY: HI=24.6
Sky, WY: HD=0.8
Pine Tree, WY: HD=2.6
Section 36 (Reno Creek), WY: HD=1.3
West (Reno Creek), WY: HD=4.0
SWD Claims Area, WY: HD=0.9
FMC Claim, WY: HD=3.7
Ketchum Buttes, WY: HD=1.4
Juniper Ridge, WY: HI=5.5
Gas Hills I, WY: MI=8.4
Gas Hills II, WY: HD=1.5
Gas Hills III, WY: HD=0.3
Chord, SD: HD=3.8
Dieter Lake, QB: IF=3.8
Duddridge Lake: IF=0.7

Total measured and indicated: 37.7 million pounds
Total inferred: 23.8 million pounds
Total historical demonstrated: 42.3 million pounds
Total historical inferred: 30.9 million pounds

Assuming dollars per pound specified by Mr. Currie
MI=10, IF=6, HD=10, HI=6
The total value would be $1.1 billion or about $14.65 per diluted share (@77 million shares)

Assuming dollars per pound
MI=10, IF=6, HD=5, HI=3
The total value would be $824 million or about $10.70 per diluted share

Assuming that 60% of everything listed gets extracted at an average cost of $40 per pound, sold for $80 per pound and split 50/50 in a joint venture, and then discounted another 50% due to time, the total value would be $10.50.

UPDATE same day:
Yellowcake announced that the joint venture agreement with Strathmore is done.
Yellowcake said it is paying US$100 thousand, and US$100 thousand on the subsequent anniversary dates for 4 years for a total obligation of US$500 thousand. The company is spending US$1.6 million per year for a period of 5 years for a total commitment of $8 million. Yellowcake will earn 50% of the optioned interest upon spending US$4 million and earn the remaining 50% optioned interest upon spending the additional US$4 million.
There were other details that I don't see here (Strathmore gets 9 million shares of Yellowcake stock which I think is around 20% of the company, Strathmore gets 3% royalty payments on Yellowcake's portion of ownership, Yellowcake pays for the Texas database evaluation). Juniper Ridge has 5.5 million pounds of historical inferred at a grade of 0.1% (2 pounds per ton), I don't know anything about the permeability/porosity/depth below water table/etc. and whether it can be mined via ISR methods, but given that Strathmore is pulling out this property early, it's probably pretty good (perhaps $30 per pound to extract?).

If I understand correctly that Yellowcake will be doing other mining development, I figure Strathmore ends up with something not far from 50% of the value of Juniper Ridge, but it's pretty convoluted.

UxC tells TradeTech, "I'll see your $90 and raise you a dollar." The spot price went up another dollar to $91.

Denison reported their results.
Future sales of the Company's uranium inventory and production will be under market related contracts with appropriate floor prices. In March 2007, one such contract was completed for the sale of 17% of the White Mesa mill production commencing in 2008 up to a maximum of 6.5 million pounds with a minimum of 2.5 million pounds by the end of 2011. The sales price is 95% of the published long-term price for the month prior to delivery with a floor price of $45.00.
That's a pretty low floor compared to what I've been reading.

They produced a lot less than the prior year:
Twelve month production at McClean for 2006 totaled 1,794,000 pounds compared with 5,490,000 for 2005.... The primary reasons for lower production in 2006 were lower-grade ore feed, the absence of higher-grade ore from the blind boring/jet boring operations, reduced throughput caused by variances in the arsenic concentration of the ore feed that resulted in elevated temperature in the leach circuit and a shortage of reagents due to road closure caused by forest fires.
There's production coming online, going into their Athabasca basin mill in 2010/2011 and ramping up to 9 million pounds per year. They were expected Cigar Lake to come online in 2008: "close but no cigar." There's other stuff coming online.

They're doing some serious exploration work in Athabasca basin. A possible project going forward in Mongolia (possible production in 2010).

Overall industry stuff:
Over the four-year period 2002-2005, global primary uranium production averaged 93.1 million pounds of uranium. In response to increasing uranium prices, worldwide uranium production rose to 104.6 million pounds in 2004 and to 108.1 million pounds in 2005, however, it dropped in 2006 to 104 million pounds as a result of production problems at several production centres [NOTE: this doesn't include Cigar Lake which wasn't expected to produce until 2008].
Based upon recent assessments of future secondary uranium supply, the scheduled uranium production forecast and forecasted nuclear generating capacity, there is a growing requirement for increased uranium production to meet the forecast needs of Western reactors. Based upon the most recent assessment of market trends published by the World Nuclear Association, "The Global Nuclear Fuel Market: Supply and Demand 2005-2030," (September 2005), under Reference Case conditions (uranium requirements, secondary supply) uranium production to support Western reactors will need to expand from its 2004 level of 93.2 million pounds, up to 123.0 million pounds in 2010 and reach 161.4 million pounds by 2015. These estimates are subject to a number of assumptions about future events and the anticipated deficit could change if the assumptions are incorrect.
And more perspective on uranium prices:
Over the period from 1996 through 2004, annual spot market demand averaged just under 20 million pounds U3O8 or about 12% of the annual world consumption, but has jumped to about 35 million pounds over the last two years as utility inventories commence to be rebuilt and investors and hedge funds have entered the market as significant buyers.
Historically, spot prices have been more volatile than long-term contract prices, increasing from $6.00 per pound in 1973 to $43.00 in 1977, and then declining from $40.00 in 1980 to a low of $7.25 in October of 1991. From this low in 1991, the spot price increased to $16.50 in June 1996. The primary reasons for this increase were trade restrictions limiting the free flow of uranium from the former CIS republics into the Western world markets, the Nuexco bankruptcy under Chapter 11 of the United States Bankruptcy Code and related defaults on deliveries, and the reluctance of uranium producers and inventory holders to sell at low spot price levels. The drop in spot demand in the following four years along with Russian HEU Feed sold under the USEC Privatization Act largely contributed to a relatively steady drop in prices to $7.40 in September 2000.

Prices remained depressed as a result of weak demand, falling to $7.10 in January 2001, but, due to moderate increases in demand and production problems at the McArthur River and Olympic Dam operations, prices rose to $12.25 by September 2003. Another major impact to the market occurred in early November 2003, as a result of Russia terminating a long term contract for the supply of HEU Feed with Globe Nuclear Services and Supply GNSS, Limited ("GNSS").

The uranium spot price started 2004 at $14.50 per pound U3O8 and has increased steadily since that date reaching $72.00 by the end of 2006.

The long-term uranium price has undergone an even more pronounced increase over the past several years, rising from just under $11.00 per pound U3O8, at the end of 2002, to $75.00 per pound at the end of 2006.

Future uranium prices will be influenced by increased demand from new reactors being constructed or planned in many parts of the world as well as the amount of incremental supply made available to the market from the remaining excess inventories, HEU feed supplies, other stockpiles and the availability of increased or new production from other uranium producers.

UPDATE March 15, 2007:
Ok, here's the official press release about Strathmore and Yellowcake, and it has all the details I was looking for.

UPDATE March 15, 2007:
China plans to hoard uranium.
China is building an emergency supply of crude oil and plans to expand that to metals and uranium.
UPDATE Fri, March 16, 2007: The uranium thesis in a nutshell
The chart at the top of this article is a great view of the production vs consumption of uranium over the years. There are two things that jump out from the chart. 1) Production dropped off a cliff in the late 1980s and hasn't really come back all that much. 2) Consumption continued climbing and has mostly climbed upwards over time.

We know that consumption is going to start rising faster with all the nuclear reactors being developed and planned. China alone plans 2 new reactors per year. Their energy needs are enormous and their pollution from burning coal is terrible. India is also adding a lot of nuclear reactors. Lots of other countries are, as well.

It takes many years to go from uranium exploration to actual production. Those companies who are farther along the curve will do well. It will be very difficult to get new production online very fast. If anything, production has suffered from long-term neglect and whatever increases in production that have occured have been the result of trying to squeeze more out of what's already in place, which eventually runs into problems and bottlenecks. There's a reason why Cigar Lake wasn't developed until just recently (the exploration was done a long time ago). The mine floods show why.

Compared to coal/oil/gas, fuel costs for nuclear are not the biggest costs to run the plant. If uranium prices rise to $200, nuclear plants are unlikely to consume less.

Inelastic demand + inelastic supply + huge demand/supply imbalance = higher prices

It's basic economics. It's also basic economics that whoever owns the cheaper production going forward will have great margins because, even when supply and demand equalize, the prices will be set by the costliest suppliers.

Monday, March 12, 2007

Ranger Mine Flood Update

StockInterview has another short article about the Ranger mine flood. I had been adding updates to this prior post, but I've reached a point where it's probably best to create a new post.
After Cameco Corp’s Cigar Lake flood at the company’s northern Saskatchewan uranium mining project rattled analysts and utilities who previously expected sufficient uranium would be available to meet the needs of nuclear utilities, along came another mine flooding.... While Cigar Lake effectively removed uranium mining supply in 2008, ERA’s ‘force majeure’ announcement withdrew supply anticipated for this year.
Emphasis added.

Uranium supplies have been reportedly dwindling at utilities to low levels. Right after the Cigar Lake mine flood in October of last year, James Finch wrote this about Cameco's invocation of the force majeur clause:
U.S. utilities should panic. Less than one month ago [Sept or Oct 2006], we challenged Rajiv Kundalkar, Vice President of Nuclear Engineering for Florida Power and Light, about Cigar Lake and other significant uranium supply sources at a Platts-sponsored nuclear fuel conference. We asked him if he was aware of the risks at Cigar Lake and else where. Calmly, he answered that he was.
This new Ranger mine flood adds to the problems from Cigar Lake:
The impact of this flooding has not yet been evaluated. Preliminary estimates for the first quarter 2007 could mean a loss of nearly one million pounds. Because of the company’s force majeure announcement and the company’s official statement that “production will be impacted in the second half of 2007,” TradeTech’s Gene Clark estimated the loss of newly mined uranium could run much higher.
And utilities are surprised, to say the least:
TradeTech announced that ERA’s force majeure ‘stunned’ nuclear utilities. Active demand for uranium is currently running more than two to one. More utilities want to buy uranium than what is presently offered. Utilities, which were locked-in ERA contracts, were paying the Australian subsidiary of Rio Tinto about $22/pound. Now, utilities will be forced to pay about five times the price for the same uranium.
You've got to wonder about potential buyers who had been sitting on the sidelines waiting for things to cool down. What's going through their minds? And how many utilities have contracts with ERA? They're probably wondering how much they're going to be losing that needs to be replaced this year. Will it increase over time?

Think about the incentives for ERA right now in minimizing the impact of this flood (see here for pictures). Any heroic efforts they make to limit the impact or accelerate production merely allows them to sell uranium for $22. I don't know the details of the contracts, whether they're required to sell the uranium later on to the same people for the same price. Or can they sell the uranium for what might be well over $100?

TradeTech says the spot price is now at $90.

When Cigar Lake flooded, the severity of it took a few days to become clear, and there was a hint from someone in the industry that it might still turn out to be even more severe, given the difficulty of the mine. Industry insiders who looked at the Ranger pictures made it seem like this is a very bad flood.

I'm thinking this is going to be a good week for uranium stocks.

article about the frothiness right now

UPDATE March 17, 2007:
Here's a map of the Ranger mine. You can see Pit #3 in the upper center and it matches fairly closely to the photo here. RP1 through RP4 are presumably the retention ponds. The Ore Stockpile contains low grade ore that's mixed with higher grade ore to keep an optimum grade going into the mill. With the flood, they'd be feeding poor grade ore directly into the mill until at least one active pit gets cleaned up. Apparently, Pit #1 is now the tailings dam.

Here's a map of where Ranger is. You can see that the Arnhem Hwy is a major road. Looking at the photos, I'd say the whole area is in very bad shape.

Sunday, March 11, 2007


Jones Soda (JSDA, sec) jumped 22.8% on Friday to $17.13 on news of a 15% increase in revenue over the past year and earnings which increased to 8 cents per share for Q4 (more than 10% of it is from interest income). Their operating cash flow seems a bit weak. In the past two years, cash flow from operations has been $656K and $881K respectively (vs $4.6 million in earnings in 2006 and $1.3 million in 2005).

They took in $28 million from a PIPE in 2006 and no doubt they have great plans for growth. Personally, I can't drink much of their soda. It's too heavy.

Big Apple Bagels (BABB, sec) announced a quarterly cash dividend of 2 cents. The stock remains under a dollar. I was somewhat impressed by how they've run the business over the last 5 years. It might not be growing, but they're managing it for good cash flow.

I just think it's interesting to compare these two stocks.

There are a lot of reasons to like Jones Soda more than Big Apple Bagels. It's growing. It seems to have a glowing future. Is it worth over 17 times more than BABB? Personally I don't think so. This is what a lot of people consider a "growth" vs "value" thing, although Buffett made a very good argument for why that's a bogus difference.

Saturday, March 10, 2007

Bakbone Software (BKBO) firings

Jeff, in the comments, points out this article saying that BakBone Software admits they fired three top executives. There's also rumors of Sun buying them out. To me, the firings would have nothing to do with a buyout, but I could be wrong.

In any case, the firings are evidence of something bad, I'm not sure what. But I continue to own the stock.

UPDATE March 21, 2007:
This 8-K BKBO just issued covers these same people and just says they're gone.
As of February 28, 2007, Douglas Spencer ceased to be Vice President, Research and Development of BakBone Software Incorporated (the “Company”) and is no longer an employee of the Company. As of March 6, 2007, Mark Milford ceased to be Senior Vice President, Worldwide Sales and Customer Service, and is no longer an employee of the Company.
These are two of the three. My wild guess is that perhaps the accounting digging that's been going on turned up something foul. That's just a guess.

Wednesday, March 07, 2007

Another major uranium mine flood

StockInterview.com has this article about how Energy Resources is declaring a "force majeure" (called "Act of God" in the old days before the French term was imported) on its uranium contracts. Q1 production will fall 20% to 30% below the prior year due to massive rainfall at the Ranger mine, Australia's highest producing mine which produces 11% of the world's total production. More utilities are going to be scrambling for uranium whever they can get it at a time when it's getting very hard to get. Watch the spot price.

Heavy rains in the past month halted mining on Feb 27, 2007 until today. Processing is delayed until next week. During 2007, they've received 63 inches of rain! More than 2 feet of that was during a 72-hour period. That's pretty damn majeure.

So now the mine is fairly flooded, though obviously not as seriously as Cigar Lake. Also, production will be impacted during the second half of 2007.

More info here and here.
First quarter production is estimated to be 20-30% lower than in the corresponding period last year. The impact of the water level in the operating pit is still being assessed, however production will be impacted in the second half of 2007.
This takes roughly 188,000 pounds of uranium out of production this year not counting the slowdown in the second half.
The bureau is also monitoring a second cyclone, Jacob, which has developed to the southeast of Christmas Island.
All of this is good news for Strathmore Minerals and other uranium mining companies.

UPDATE same day:
And now Forbes has an article about uranium investing. I'm thinking this indicates the next phase of the uranium bull market.

UPDATE Friday March 9, 2007:
StockInterview.Com has photos and more details/rumors:
How bad can it get? TradeTech roughly estimates that 2007 production – relying only on stockpiled ore at historically low, but acceptable head grades – could reach as low as 7.5 million pounds U3O8. According to Clark, “This could represent a loss in production of up to 4 million pounds U3O8, compared to an average year for Ranger.” This amount represents about four percent of worldwide uranium production in 2006. At the recent spot price, the production loss could be valued at US$340 million.
Read the comments further down the page to get a sense for how bad this really is.
We showed the photos of the Ranger open pit mine flooding to several mining experts, who asked to remain anonymous for this article, but who have all been involved in open pit and/or underground uranium mining. Feedback ranged from “This is a nightmare!” to “They have big problems: It will take lots of time and lots of money to fix this.”
And also read the part about the low grade stockpiled ore that isn't going to do much good without higher grade ore coming from the mine, which is now flooded. These guys are saying 2nd half production could drop by two thirds.
An expert, with twelve years experience in U.S. mining reclamation told us, “They might have to re-apply for permitting and overcome regulatory hurdles. The water in the pits may have to be pumped, tested and treated before it can be allowed downstream.” He explained the company may have to use barium chloride to precipitate out the radionuclides. All of the experts agreed ERA would probably have to re-build the retention pond in order to treat the radioactive water in the pit. Perhaps a new retention pond might need to be constructed.
And there's also this:
A mining engineer with more than 30 years of mining experience – including open pit uranium mining, some of which included de-watering – warned, “ERA will need multiple pumps on a large barge with high pressure pumps.” He added, “Any solids in the water could destroy the pumps so they will have to change the pumps frequently, possibly as often as every 24 hours.” He believed it would take at least two to three months to dewater the open pit. Others speculated the entire cleanup could take six months or longer.
There's a lot of worse things that are also considered in the article, such as the potential loss of equipment with very long lead times.

And it's probably worth mentioning that, as a rule, I avoid mining stocks. When I'm done with Strathmore and uranium, I'm extremely unlikely to move to the next big thing in mining such as molybdneum. The whole thing with uranium is one of those extremely rare massive supply/demand imbalances. And even those are easy to get wrong. Level 3 Communications was supposed to be a bandwidth supply/demand imbalance, but it hasn't happened yet after 5 years of waiting. Warren Buffett was betting on a silver supply/demand imbalance years ago and I think he gave up. Uranium just happens to have very inelastic supply (except over very long time periods) and very inelastic demand and it just happens to have an enormous imbalance and increasing demand in many countries due to many factors and mother nature just keeps throwing in things like this.

UPDATE Sunday March 11, 2007:
According to this updated article and this article, TradeTech reports the spot price of uranium is now at $90 following the Ranger mine flood.
Long-term market demand remains strong and is “strengthening even further,” according to Klingbiel. She forecast several utilities would enter the market to secure long-term uranium supply in the coming weeks. Nineteen utilities are either seeking, or evaluating offers for, more than 55 million pounds of U3O8 equivalent.
And more ominously, this:
TradeTech’s Nuclear Market Review asked, “How can this lost production be reasonably accommodated?” Active demand for U3O8 equivalent overwhelms active supply by 220 percent. TradeTech defines active supply as ‘uranium that could be offered for sale in the coming month’ and active demand to include those ‘currently seeking uranium in the market.’

Klingbiel warned, “Doubling the active demand from the addition of ERA’s customers would obviously have an impact on uranium prices.” The magazine reported, “It seems clear the market is rapidly headed to the triple-digit level.” An evident conclusion was also asserted in this week’s magazine, “The uranium market must learn to deal for a while with the uncertainty of production schedules for Ranger.”
Emphasis added.

A blogger who attended the recent 75th Annual Prospector’s & Developer’s Conference noticed an absolute mania surrounding uranium.
I was standing in line at the airport to check my luggage and to receive my boarding pass. The gentleman in front of me was obviously with a Uranium exploration company, judging by the nature of the conversation he was conducting on his cell phone. No sooner had he concluded his call than people ahead of him in line began shouting at him. They had apparently overheard his cell phone conversation and were now demanding to know his ticker symbol and the nature of any recent drill results. I have never seen anything so manic in my life. But if the tech bubble of the late 1990’s is any measure of performance, I say we have not yet seen the end of this mania. The madness of crowds can run harder, faster and longer than we all expect. Eventually though, the madness will subside with many retail investors getting hurt. But until I see evidence of that happening, I will be following a number of Uranium exploration stories with an eye to making trading profits.
[update 3/17/07] Same story carried here.

Seems crazy. I'm wondering if we'll see a bubble and it will break at some totally unpredictable time (a week? a month? a year?) followed by a lot of malaise and then the real bull market will take place.

yellowcake shows up in a pawnshop! Heh.

Monday, March 05, 2007

Conforce International (CFRI) collected entries

CFRI, CONFORCE INTERNATIONAL, INC., website, unaudited financial statements, yahoo, chart, Com ($0.0001)

This is a development stage company (formed on May 18, 2004) in the container shipping business. Top management has a lot of experience in the repair and selling of containers. Their main focus is a new flooring called EKO-FLOR for containers based on composite materials rather than the usual wood planks.

First post
, Jan 5, 2007 (this has a lot of comments)
New Vice President, Feb 6, 2007
Oceanex trial order, Mar 5, 2007
Looking at financials, Mar 15, 2007
2007 and 2008 projections, Mar 22,2007
Conference call questions, Mar 31, 2007
Conference call, April 28, 2007
Conforce "interview", May 22, 2007
Another field trial, June 26, 2007
Conforce not in IICL list, Aug 6, 2007
ATC Evaluation, Jan 9, 2008
Interview, Jan 11, 2008
Field trial update, May 21, 2008
Conforce says nothing, July 31, 2008
Q1 results (ending June 30, 2008), Aug 27, 2008

Google Ban

It appears that Google has done to this site what it did to a lot of sites on its China service: made it disappear. Even on a blog search. Even if you're not searching for "pink sheets". It's a total ban. A couple weeks ago, this was on the front page of both of these searches. It still is front page over at Yahoo and MSN.

It's obviously entirely within Google's rights to show or not show any given site. My guess is that Pink Sheets LLC complained to them saying that this blog somehow infringes on the Pink Sheets name. Fortunately, not being "google-able" doesn't really make any difference. I already have the regular readers that I was looking for and, besides, Google's evil.

UPDATE next day:
Thanks to Jeff (in the comments), I went through the webmaster tools of Google and hopefully everything will clear up. I still don't know why the blog was removed, but it could be because their tools viewed it as spam with nothing but search words. That would be funny because this blog tends to be a bit terse and obscure. I added their recommended meta identifier to the template.

But looking at Google's statistics, this is at #8 when searching for "pink sheets", #1 for "pink sheets blog", and #8 for "Strathmore Minerals Corp".

UPDATE March 16, 2007:
The blog is back up on Google. "pink sheets" or "pink sheets blog"

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