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Forgotten Risks to the Market
Friday, July 13, 2007

The market seems to have treated us quite well over the past week, with investors rushing back into uranium stocks due to geopolitical risks in Africa becoming front page news as well as more bad news regarding Cameco's Cigar Lake. Other good news for metals/mining stocks was the Rio Tinto/Alcan deal, which was at a 38% premium to Alcoa's all stock deal. It now seems apparent that miners are more than willing to shell out their cash to buy assets, which to us indicates a very strong commodities market for years to come.

The Chinese seem to have put an emphasis on investing in African resources over the years, our first memory of this was their investment in Sudanese oil years back, but now they are focusing on African uranium. They recently had a senior mining executive kidnapped, and even shut operations down until the problem could be resolved. Today, the executive has been returned, most likely for a ransom, and it is now business as usual. This is a fairly common practice in Africa, but one which could become quite annoying as well as much more dangerous in the years to come. Hopefully with these countries getting a second chance with their resource wealth with the current booming commodities market, they will invest their money into helping enhance the quality of life of the citizens rather than seeing how much money they can swindle into their own personal slush funds. Maybe we will see the mining companies do this to an extent, much as the oil companies have done in areas around the world with similar problems. Investors became complacent about the risks associated with African uranium, but had a rude awakening with this news. African uranium should be discounted as problems such as these can arise at any moment, just think about every time Shell has to shut operations in Nigeria due to rebels interfering with operations. One bright spot for now is Namibia, which we have pointed out numerous times for its uranium wealth and geopolitical stability. Currently the country does not have the same problems as the rest of Africa and is possibly even a better place for business than South Africa (due to SA's rules requiring minority ownership in projects, which is usually just given to an empowerment group).

Cigar Lake is a situation which could get much worse before it gets any better. In fact, one would have to assume this is the case right now, which is why we are not adding to our very small position in the company. We keep that position as a hedge to the general uranium industry as well as to keep some exposure to the market leader. However, our ideal time to buy will be when the company is beginning to actually mine the project, not any time before that. Do we think that the stock has upside potential, of course! This will be due to earnings increasing as a result of their expiring long-term contracts which are grossly under the current long-term market price. I do suspect however, that SXR (now named Uraniumone, but we are using the ticker symbol here) will overtake Cameco as the most profitable uranium pure play miner in the next few years. The Cigar Lake news seemed to be priced pretty well into Cameco's share price, however the general market seemed to have been caught off guard. It allowed for a very interesting correction in valuations as Cameco stalled out, and the newer producers and future potential producers zoomed ahead. It must be noted that SXR and DML led the way upwards from the early morning, and it is only a matter of time before they begin to catch the eye of Wall Street.

We were one of the first people to say that uranium could go to $500/lb., as it was still economical at that price but said a realistic top could be the $400/lb. level as it would still allow for profits from the huge capital requirements for the plants. We took some ridicule for that prediction, that is until others (who admittedly are and were more established began beating the drum to $500/lb. uranium, and even $1,000!!!!) came on board and the price rose from $50 to $130 over the past few months. Our next idea is not that ground breaking or even going that far out on a limb, however we foresee a boom cycle in the commodities sector for years to come. Why do we see this? Well, probably because the companies see this although Cameco management would have you believe otherwise. With the most recent merger announced, Rio Tinto will purchase for $43 Billion, Alcan, the Canadian aluminum concern who was in search of a white knight in order to fend off Alcoa (the world's second largest concern). Now usually white knights need not worry about dramatically outbidding the unwanted suitor, but Rio bid up 38% higher the buying price for Alcan, thus chasing away Alcoa. Oh yea, and did we forget to mention it was an all cash deal? Add all of this together and one can understand that Rio's management believes that they can make this acquisition work, and work very well in the short term as well. After all, if you use your own cash to do a deal rather than stock, one has a reasonable expectation that the cash will be replaced within the near future. Mining stocks have further to go, as do uranium stocks. In the next 3 years we should expect Rio and BHP to move into the uranium sector in a big way, and as only these two companies could.

At this time we are still bullish on SSE (although playing it through their merger partner Universal Uranium), MAW, and adding Continental Precious Metals (CZQ) to our portfolio at the current price of C$2.83.


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