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Tuesday, August 07, 2007

Strathmore Minerals (STM.V, STHJF) reality check

First of all, it appears that Fission Energy, the Strathmore spinoff company containinng all the Canadian and Peruvian properties, is now on the Pink Sheets with the symbol FSSIF. It last traded at 66 US cents. Unlike the Canadian Fission Energy stock, FIS.V, this one is in US dollars, like STHJF for Strathmore itself. Strathmore last traded at $2.371. Strathmore+Fission traded for almost the same price back in Feb/Mar of 2005 when the spot price was $29 and there was no progress on permitting, joint ventures, or anything.

Strathmore has 77 million shares fully diluted. Fission Energy would have 1/3 of that, or 25.7 million shares. Strathmore now has a market cap of around $183 million.

Looking at their latest investor relations presentation from May 2007.

Strathmore is currently permitting the following properties:
Sky, Wyoming: estimated production 2010
Church Rock, NM: estimated production 2012
Roca Honda, NM: estimated production 2012

Roca Honda resource (500-600 meter depth, est. 94% to 97% recovery, operating cost estimate $17 to $20 per pound):
measured and indicated: 17.5 million pounds at 4.63 pound per ton (0.23%)
inferred resource: 15.8 million pounds at 3.48 pounds per ton (0.17%)

Roca Honda has a paved road and power within 2 miles and a good climate for conventional mining. "Not located in 'Indian Country'"

Remember that Strathmore ends up with only perhaps 40% of the profits in the joint venture with Sumitomo.

Ok, so let's say they recover 90% of the uranium at Roca Honda. That would be 30 million pounds. Note that this is a conventional mine, so there are going to be milling costs, but Strathmore is working to open a mill nearby. Will they be able to open it? They're going to need that mill, but even if they get it, it will take a long time before it's in production.

Definitely read this article on milling issues.

Based on Denison's recent ore schedule, Roca Honda's ore would only fetch $150 per ton, not including transportation costs (the article on milling mentions 25 cents per ton mile). That would translate to about $37 per pound. If it costs $20 to mine, you end up with $17 per pound, not counting transportation costs. The White Mesa mill is 280 miles away, which would mean roughly $17.50 per pound with Roca Honda's uranium grades and we're losing 50 cents per pound!

Fortunately, it doesn't work that way. With roughly 30 million pounds, Roca Honda would get a toll milling agreement, which is way better. Sumitomo/Strathmore would pay milling costs plus around 20%.

Here's an interesting article about milling in the Grants region of New Mexico, including details about Strathmore's plans for a mill.
In an email message, Strathmore Mineral’s David Miller told us, “We have now completed independent scoping studies for the Roca Honda Project.” A registered professional engineer completed an independent evaluation on the mill’s capital and operating costs. While the name of the engineer was not disclosed, Miller said, “This gentleman has 40-plus years of experience and has designed many mills in the U.S. and the world.” Miller told us, “Mill operating costs for various-sized mills range from the low $20/ton of feed to the high $200/ton of feed. The Roca Honda ore runs from five to six pounds per ton. Per ton-to-pound milling cost is at $30/ton operating cost (20 percent higher than the lower number in the evaluation) with a grade of five pounds per ton.”
So if Strathmore owns the mill, the milling cost is perhaps $10 per pound? Let's assume $20 per pound. So now we have costs of $20 per pound to mine and $20 per pound to mill. Tack on $5 per pound for transportation and whatever and we have a cost of $45 per pound. Of course...
Miller [from Strathmore Minerals] emphasized that milling costs could be as low as $6/pound of U3O8.
If the long term price of uranium remains above $80 per pound of U3O8, then Roca Honda would clear $35 per pound, 40% [oops 60%, see UPDATE below] of that owned by Strathmore which is $14 [$21]. Extracting 30 million pounds results in $420 million [$630 million] or over $5.45 [$8.18] per share. If the milling cost is only $10 per pound, then we're looking at $7 [$10] per share (that rolls in over a number of years).

That's just one property, although it's the best property.

NOTE: It should be clear from this simple exercise that the little players, the exploration companies that end up finding modest quantities of uranium in the middle of nowhere 300 miles from a mill are going to be worthless. Strathmore scooped up these properties early on, based on huge amounts of database information they own. Typical mining costs are going to be more like $50 per pound if you're lucky. Add in milling, transportation, and finance and there's no way they'll be able to operate without getting $90 per pound of yellowcake.

And then there's the mining in places like Khazakhstan with issues of infrastructure, corruption, and often political stability.

A lot of people talk about the uranium prices dropping to some low level like $30. The market prices are going to be set by the higher cost providers among a given level of consumption. In other words, how much does it cost to mine the 150 millionth pound?

The latest news articles talk about the excess supply in the spot market today, which means nothing.

UPDATE Aug 13, 2007:
An anonymous commenteer pointed out a mistake: Strathmore gets 60% rather than 40% in the Roca Honda deal (see the link in the comment).

Check your split on the Roca Honda deal with Sumitomo. I believe that it is 60% Strathmore and 40% Sumitomo, opposite of what you have in your discussion.
You're absolutely correct as we can see from this article. Thanks for pointing that out.
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