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Wednesday, September 10, 2008

uranium miner stock prices drop

Yesterday the price of just about every uranium stock dropped like a rock. Lots and lots of double digit percentages. The only relevant news would be the potential Western Australia win by the Liberal (which in the US would be considered conservative) party which prefers to lift the ban on uranium mining. I don't see this impacting the short term, obviously, and I don't think has that much impact on the long term, especially given how low the market caps of the solid uranium miners are at this point. Long term demand is increasing fast and shows every sign of even accelerating beyond that, over time. A lot of babies are being tossed out with the bathwater.

As much as I don't agree with charting people, they do keep good records of what happened. Merv's Daily Commentary has the gory details.
The Merv’s Daily Uranium Index closed lower by 19.24 points or 9.85%. The AVERAGE decline of an Index component stock was 10.54%. There were a few winners, 3 of them. Losers were running wild and numbered 44 for the most that I can remember since starting this commentary. Three stocks went nowhere but in this market one might call them winners. The best winner of the three was Uranium Power with a gain of 3.0% while the worst of the losers was Tournigan Energy with a loss of 36.4%, that’s in one day. Another not so nice statistic is the fact that 50% of the Index component stocks were double digit losers.
I've been buying more Strathmore Minerals lately and I expect to buy more if the price continues down.

I've been forwarding articles about the industry and Strathmore in particular to someone understandably nervous about the price of the stock. Basically, if you go back and look, everything that has played out in the industry and with Strathmore in particular has been exactly as Strathmore has predicted. Nothing has gone otherwise. A year ago, they were saying that nearly all of these uranium companies which sprung up like mushrooms (I don't think they used that term) are going to disappear. I think the market sees this now and it's abandoning all uranium stocks.

Meanwhile the price of uranium has been remarkably stable in the mid sixties price range ($80 long term). Having a higher long term price demonstrates, as one uranium insider said somewhere, that utilities are willing to pay more for long term supply because they believe prices will/may be going up. That's a 24% premium.

here's a news flash ,

Why would Sumitomo pay $50 million for a 40% stake in Rocha Honda when they can buy the whole damn company for $36 million ?

As we say in Cheyenne, " Sober up pard and got to Church"

That is all
Regardless of whether they buy the company (at a price which would probably be much higher than the current trading stock price), they would still need to invest the $50 million in development costs. It's not an either/or case.

Buying the company requires cash now. The $50 million is paid over several years' time.
It's not just a mine. The deal also involves a mill.

Hi Bruce,
I love your blog. Strathmore does indeed look like a an excellent investment with of course some risk. But the upside is indeed pretty huge. Do you know what the insider holdings are? I worry about companies that look very-very cheap but have no insider buying or insider holding.

I also do wonder why the stock would be this cheap. Someone could buy it all for$ 18MM by todays's price ($0.26). Then they could just liquidate it for probably a few hundred million at least. Why aren't there any aggressive takeovers?

Finally, I wonder what the effects of the credit crunch are on this? Obviously a company like this needs access to capital. But I guess they were not exactly planning on going to Goldman Sachs for funding. I imagine the mining world is different than Wall Street.

The stock plunge is probably just part of the great liquidation going on. Everyone is doing a mad dash to cash. Much of it is forced selling by hedge funds. I don't think this is rational selling. I think it will come back. I might take a small position soon.
Buried in the recently released Strathmore Minerals annual report is that they'll need roughly $16 million in cash for the Sumitomo joint venture (Roca Honda) for the feasibility study. They also mentioned that their source of funding is equity financing. Given the current stock prices and credit situation, this is not good news.
I am sure the credit markets will come back. Although I am just getting started on this one, it appears that they are not the kind of company that would be driven into Chapter 11 because of liquidity. They can just stop working and wait it out, right?

I also don't really understand the stock price. This must be distressed or force selling. Even if we go into a major recession, nuclear should still hold up. Actually, it might even benefit. A major recession would likely cause countries around the world to respond in, Keynesian fashion, with deficit spending on infrastructure. Nuclear power plants would be an excellent and likely thing to spend money on.

I haven't got a chance to understand these JV earn in things. Does that mean that the other party takes common shares on the company or just earns a percentage of the profits from one part of it? If they get the earnings then I don't think they care about the stock price. If they get shares, then they would be better off just buying up common.

As an investment, I don't think these issues matter that much consider where the stock price is. Even if they had to liquidate the land, it would be way above the $0.26/share price. Is there any real long term risk here? I suppose anything sending Uranium back to $10/lb would be a risk. But beyond that, it seems to me that it is just an illiquid investment which I would be fine with.

I am getting some research sent to me tomorrow. I will send it to you for putting up with my newbie questions.
Sorry. I didn't get any research yet. What do you think happens to Uranium prices in a depression? Is there any reason to think that they will fall will all commodities? I would not think so.

Again, this stock appears to be way, way below its intrinsic value. The book value per share is $0.51 and it is selling at half that. But that book value is mostly the land that they bought when uranium was $7-10/lb and it is now about $40. So it is surely worth a heck of a lot more. It looks like in a worse case scenario where they cannot raise the capital to go into production, they can sell their land to someone like Cameco. There doesn't appear to be any long-term downside risk besides illiquidity of the stock price.

On the other hand the upside looks huge. They have about 150 million lbs of uranium in the ground. That is Worth roughly 150*(40-20) = $3B with a 40/lb selling price and a 20/lb production cost. So they have a market cap of $14MM and their "in the ground" uranium is worth roughly $3B. What is wrong with that picture. Even if they have to raise say $300MM (probably way more than they need) to mine it and give away half of the profits to the capitalist, that is a $1.5B profit or 100 times the market cap. The capitalist would get a return of $1.5B on $300MM investment or five times their investment in just a few years. If it is 5 years, that is a 38% annual return.

Am I missing something? This seems like a very simple investment thesis. Like buying a dollar for a penny.
I agree about book value. There's a clear floor under the value of Strathmore. Of course, there's also the important matter of getting the uranium out of the ground. The critical resource today is cash and Strathmore needs to raise millions of dollars to fund the Roca Honda project. Will they do it? They're clever and resourceful people, but that guarantees nothing.

The global economic situation actually increases the eventual long term price of uranium, I believe. I think the price has gone down now because hedge funds have dumped their holdings to pay redemptions. I still see an even greater supply/demand imbalance than I saw a year ago or more.

My concern is that even with all that, Strathmore could have trouble that impairs a good portion of their value.
Well, the trouble with the hedge funds dumping uranium is that they liked dumped it to the actual energy companies that use it. That means that their inventories will likely be full for a little while which will lead them to refrain from signing any near term contracts.

However, I am sure that you agree that the time to buy anything is when it is illiquid and being mindlessly sold without regard to value. Since I or presumably you are in no great rush to realize the value of the investment, this should not present a problem. If the uranium is really worth upwards of $50/lb then the company should be worth several times the market cap.

I have a buddy who works for an investment bank who raises capital for uranium miners among other companies. He is convinced that the capital will return to do these kinds of deals. People won't remain in 2% yielding treasuries forever.

Do you have any idea of what happens to Strathmore in the case where no capital can be had? Can they mothball the operation easily and go into a low expense mode while they wait?
I guess you can follow insider trades here


There has been some recent buying.
Did you get the research that I sent you? Le me know if you want me to send you some more.

Yes I got it but haven't looked at it yet.
What does this mean? What terms?

That probably means they can't provide funding. In the annual report that was released not long ago, they revealed that the Sumitomo joint venture required them to provide a substantial amount of cash, which I don't recall seeing in any previous release of information. Raising cash nowadays is a problem, although not impossible. A few days ago, Hathor announced a private placement to raise $6 million.

What I would expect Strathmore to do in this environment is to fall back to the key properties, especially Roca Honda, and pull back from the other properties especially the ones with weak partners.
I have so far refrained from buying. I was going to buy at $0.17 and woke up to see that it had gone up 60%. Maybe I will get another chance.

I will try to call IR Monday about this. What wasn't clear from the PR was whether the deal was cancelled by Strathmore or the other party. The other company is public as well as doesn't appear to have any capital. This is also true of Yellowcake Mining as well. I don't really understand why they are doing these JVs with companies lacking capital. Isn't that the whole point of partnering. Do these companies have access to capital elsewhere? It certainly isn't on the balance sheet. Sumutomo looks like a much better partner. I read somewhere quite recently that they were looking to invest more in uranium mining. That would appear to be good for Strathmore.

Sounds like you think Strathmore has its own obligation to raise some capital. I wonder why they make deals like that. They have the uranium and the other partners (presumably) have the cash. Why does Strathmore also have to raise cash. Maybe it is something like a down payment on a house, a sign of good faith.

On another matter. Keep an eye on what is happening in the auto industry. If Obama comes in a saves the US auto industry he may attempt to move the industry in the direction of making electric cars. This would be in keeping with his campaigning. If the US shifts over to electric cars (say plug in hybrids) that would dramatically increase the need for electricity. Some people say that the only way that would be possible is to build more nuclear power plants. That would of course increase the long term price of Uranium not to mention set off a speculative craze for such assets.

Thanks again.
I was wondering about this also. Poorly worded press release IMO.

Looking at the 2007 AR on Strathmore's website (relevant text is on p. 19), it doesn't look like Strathmore was required to put up any cash for exploration in the Nose Rock or the Dalton Pass deals. So in these two cases maybe Strathmore pockets the initial fees from UIC and is free to enter a JV with someone else? Not that this is necessarily more desireable than having work underway by UIC.

The Sumitomo deal clearly requires a cash expenditure by Strathmore as part of an initial feasibility study, per AR.
I am now a STM.V shareholder. Bought at $0.25 yesterday. I am also looking at HAT.V. They are an exploration company but have already made some great finds. Perhaps more speculative still than Strathmore but their grades are very high. It might turn out to be a lower cost mining operation.

Uranium prices appear to have hit a local bottom. Other miners are still saying that the long term price is still around $60/lb which makes Strathmore "in the money". If we see another big wave of deleveraging, we might take out the $0.17 low.
There goes the other JV with Yellowcake. Not surprising given Yellowcake's flimsy balance sheet. The stock didn't move which indicates that no one is surprised by this.

Not much word from this company. The uranium spot price appears to be holding at $61 (Mar 2009) so the fundamentals still seem sound as an asset play. I continue to hold my shares.
Yeah, it's not surprising about the JV with Yellowcake.
The situation with Russia and Ukraine must be positive for nuclear. I wonder whether Europe really wants to become dependent on Russia for energy. I doubt it. If globalization continues to unravel, countries should put more emphasis on nuclear which makes them less dependent on imported energy sources.

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