Pink Sheets

Not much is going on right now. I haven't been posting because I really don't have much to say. Shengda Tech has been taking off, but it's only a small investment. D'oh! CVU won a significant order valued at $15.9 million. The whole uranium market has been going well. For the Cigar Lake mine, analysts are now saying that even 2011 is unlikely, which is good for Strathmore Minerals and other uranium players. It also looks like the Rabbit Lake flood is going to be worse than I had thought. There's a lot of speculation about where the price of uranium is going. I'm fine with it staying roughly where it is. But a lot of the hedge fund uranium has been loaned out to utilities. CFRI has been going up, but it's still down significantly from where I bought it, so that's not particularly wonderful.

Basically, I'm waiting for these things to play out. I've been busy with other stuff and I'm happy to have these investments stewing for a while. I don't expect to be doing much posting any time soon. Not unless I find something interesting and very cheap.

I've been sifting through the pink sheets again looking for diamonds in the rough. I'm finding a whole lot of rough and not a lot of diamonds.

DPSY: This is actually a disaster itself. Looking at the most recent quarterly report for the period ending Aug 31, 2007...


Let's look at the balance sheet where we see forty-four dollars in cash and $1,090 due from a related party.

During the nine month period ended August 31, 2007, the Company advanced $1,077 (2006 - $Nil) to a relative of a director. The amount is unsecured, non-interest bearing and due on demand. [Note 7 c]

Dude, pay the damn loan back!

That's all the assets of the company: less than fifty bucks and a measley IOU from a relative!


Now how about those liabilities?
$161K accounts payable
$30K accrued liabilities
$146K due to related parties (Ok, I take back that jab I mentioned above)
$68K promissory notes to related parties
$95K license fee payable
$106K convertible debentures
Total CURRENT liabilities: $604K

How about the income statement?
Total cumulative revenues since inception three years ago: $38K
Total cumulative expenses since inception: $1.7 million

Hey, I think I found where QBID went to? :-)

Now let's look at total cumulative cash flow to see what happened?
Operations burned up $521K (non-cash expenses were various fees, liabilities due, and $59K of donated services).
Financing essentially raised all this cash: $352K from stock, $138K from convertible debentures (that's when you know you're in trouble), $58K net in promissory notes. They actually paid back $44K on the convertibles.

There is no guarantee that the Company will be able to raise sufficient equity financing or generate profitable operations.

I never would've figured that one out.

Inventory consists of a hydraulic unit used for fire fighting and is valued at the lower of cost and net realizable value. Cost is determined on a first-in, first-out basis.

It's gone now; they must have sold it at a pawn shop or something. I like that "first-in, first-out" statement. Think about it: there was only one thing in inventory!

Effective July 7, 2006, the Company and Duck entered into a Technology Transfer Agreement (the “Transfer Agreement”) relating to the above licensed proprietary technologies and products.

Duck? They entered into an agreement with "Duck"? Let's back up here. "Duck" here means Duck Marine Systems, Inc. Aren't ducks non-marine waterfowl? Do they really hang out around the ocean? I thought the gulls really dominated that niche. [let me check this out....] Ok, so there is a "sea duck" that exists. How about Goldfish Marine Systems.

So anyway, this Disaster Preparedness company paid 8 million shares and $600K total to develop, manufacture, and market, (and presumably sell) certain proprietary products developed by Duck in the homeland security area for military, fire fighting, shipping, mining, transportation, and environmental stuff. There motto was going to be, "ALL THINGS TO ALL PEOPLE". Just kidding.

Here's an interesting note:

Effective December 30, 2004, the Company entered into Employment Agreements (the “Agreements”) with two executive officers of the Company for annual salaries of $120,000 for each of the executive officers. Each of the Agreements is for a term of 5 years from the effective date...

Let's go back to that cumulative income statement and look at some interesting lines:
Auto and travel: $33K
Consulting and mgmt fees: $776K (looks like $519K was paid, based on cash flow)
Professional fees: $193K
R&D: $68K

Maybe I'm missing something here, but it seems like consulting and management was paid $519K in cash while operations overall only burned up $521K.


So what's the plan?

We currently believe we will require approximately a minimum of $3 million over the next twelve months in carrying out our plan of operations, subject to the availability of additional financing. To date we have had limited revenue to provide incoming cash flows to sustain future operations. The ability of our company to emerge from the development stage with respect to any planned principal business activity is dependent upon our efforts to enter into the market place, sign distribution and joint venture agreements, raise additional equity financing and generate revenue, cash flow and attain profitable operations

Did they do anything these last three years?

This is your basic garden-variety corporate startup disaster for which they were ironically unprepared. Underfunded and ended up with nothing, not even the fire hydrant. I've seen these things, I've lived through them. The only ones who win are those who can draw lots of salary and walk away unscathed with a useful business education.

I often think of those idealistic intellectuals all over the world, denouncing us dirty wealthy capitalists, but never seeing the dirty poor capitalists who generously paid salaries while hoping those exploited workers getting paid would bring in a return on the huge risky investment.

Disasters happen. Be prepared.

Ok, so it's time to take a look at what's going on with the [non-weapons grade] uranium market: supply and demand to see if I'm still happy with my investment in Strathmore Minerals.

Paladin claims to be the only uranium mining company to achieve their 2008 forecast. And even Paladin had to struggle with problems in Namibia.

Commenting on market movements in the third quarter, [Paladan's founder John Borshoff] notes that "July to October have been very interesting months, confirming Paladin's long-held belief that uranium shortages are assured".

He says it is clear the global supply ramp-up will take longer than expected, while the demand for nuclear energy and, therefore, uranium, remains healthy. [emphasis added]

Borshoff believes the uranium market will have a long-term supply shortage and that the industry is in disarray and will likely continue to be that way for years. Russia, India, and China are going to be competing with the West for uranium. India right now is effectively shutting down reactors for lack of fuel, but that's because no one will sell to them, not because of any truly critical shortage.

Borshoff says that the industry needs to find an additional 150 million pounds of uranium within the next 12 years to meet demand.

It's worth noting that Paladin's costs in the mines discussed in the article are $19/lb to $23/lb. That's roughly in line with Strathmore Minerals' costs for many of their mines. I don't want Strathmore to be a high cost provider because if there was any sort of downturn, they could get priced out of the market.

Neal Froneman, CEO of Uranium One, predicts the price of uranium will be $150/lb within the next year due to supply/demand issues.

"The fundamentals are better than six months ago. Production is not reaching levels that were expected and demand is increasing", he said.

The article mentions that Cameco reduced output from the Rabbit Lake mine due to increased water flows, but when you look at the details, I think that particular incident is a non-event. The water is seeping in at a rate that would take two days to fill an Olympic sized pool, which is significant, however...

The company has the ability to get the water out, but a surface pump is in the middle of an upgrade so Cameco is scaling back work in some areas of the mine.

There's the question of whether this is actually correct. Without additional details, I'd take it on face value. The upgrade should be done in a week, they've had "similar situations in the past and dealt with them successfully." The mine should produce a bit less than 4 million pounds this year.

Another article about Froneman is here. It mentions the shortages of sulphuric acid needed in uranium milling. We saw this with the delays expected in Kazakhstan due to a lack of sulphuric acid.

Uranium One's stock had taken a beating from investors over the past month after it released lower production forecasts, owing to start-up problems at its Dominion mine, in South Africa, and sulphuric acid shortages at its Kazak operations.

China has been dealing with Kazakhstan to get more uranium. China's is investing in a Kazakh uranium mine while Kazakhstan is investing in China's nuclear power industry. If I understand that correctly, what's really going on is that China will essentially be buying uranium from Kazakhstan in exchange for part ownership of China's power industry. Note that China is planning 40 new reactors by 2020 and wants to line up the uranium well in advance. To start up a nuclear plant requires around a million pounds of uranium, so there's about 40 million pounds of new demand right there.

Analysts in Beijing say the urgency for wrapping up long-term uranium contracts around the world is partly driven by the potential competition with Japan and India, which have ambitious nuclear power programmes and are also scouting for uranium reserves.

The players who have supposedly been lethargic are the US utilities and perhaps the rest of the West. If we're going to have a game of musical chairs, I want the US utilities to be the ones left standing and trying to buy their way out of the mess. The reason is because they'll probably have the most access to the largest amount of money. Incremental uranium from new players like Strathmore would be extremely valuable.

There was a short article that mentioned the bear argument against uranium.

One of these factors is the high number of new projects in the pipeline that could come on line in the next few years. More projects likely means the market will be less sensitive when individual shortfalls occur.

UxC also estimates that speculators currently hold 16 to 18 million pounds of uranium. They may decide to get out if new projects look like they will meet demand.

It takes a very long time for new projects to get through the pipeline. Strathmore has been a few years ahead of the curve on this and they're still not bringing uranium online for a while.

As far as speculators are concerned, I wonder how much of their uranium has been loaned out to utilities who will need to buy back uranium to close the deficit? There were articles on hedge funds doing this, and doing it makes a lot of sense.

I noticed recently that Strathmore Chairman and CEO Dev Randhawa's predictions about the future of the uranium industry actually start to come true.

Khan Resources Inc. stock fell more than 20 per cent Tuesday after the Toronto-based mining company (TSX:KRI) warned that political changes in Mongolia could jeopardize its majority ownership stake in the Dornod uranium project.

"It is not certain whether or on what terms Mongolia would seek to acquire additional equity in the property, or the amount of such additional equity," Khan said.

Randhawa had said in the interview that these 3rd world mines have political instabilities and the big problem is losing your investment by a lack of good property rights. That is likely to make other companies less likely to rush into other 3rd world mining deals, especially since it involves allocating mining engineers and equipment which are in short supply, rather than money (which typically isn't).

This article captures the uranium story.

I'm quite happy with how the uranium industry is playing out right now.