Uranium Equities: Time to Test the Water
Monday November 3, 2008

For the first time in many, many months we saw some strong buying in uranium stocks which was not met by even stronger selling.  For some time we had been speculating that the hedge funds had exited the uranium equities and then began the slow and painful exodus out of their physical uranium yellowcake holdings.  Never could we have imagined that it would take this long to reach this point, nor the thought of some companies’ market capitalizations being below that of their cash-on-hand levels.  Sadly many of the uranium companies were not only hit by the hedge funds exiting the uranium arena, but also by investing alongside hedge funds in commercial paper and mortgage backed securities.  Generally when you venture outside your field of expertise, you get stung and this experience fell in line for many of those firms who were exploring for the best yield on their cash reserves rather than exploring for uranium.

Many thought that this credit crisis would be well done by now, but months ago when people thought they saw the light at the end of the tunnel we argued otherwise.  We thought that things would get far worse before they got better, and believed that they were not seeing the light at the end of the tunnel, but rather that light denoting the passing of our financial system as we know it.  We hate red tape, because in the history of red tape it has fixed nothing.  When the market cannot fix itself however, we must accept the fact that those who backstop the system must step in and do what is needed, which has happened.  Which brings us to the point where are at today.

Months ago, we said that uranium stocks would generally do as financials.  Our belief was that to fix the problem you needed to re-inflate and pump money into the banking sector.  By doing this and unfreezing credit markets, companies would once again feel comfortable investing in the capital intensive projects like nuclear power plants and hedge funds could stop liquidating portfolios and maybe even return to making long-term investments.  We may have reached the inflection point with the TARP plan funds now being doled out to America’s various financial institutions.

Throughout this whole fiasco we have held steady in our belief that nuclear is in fact the way the world will meet its energy needs in the future.  It seems that more and more nuclear reactors are announced around the world each month and those who build them keep announcing larger and larger back-logs of those wanting to construct the plants. 

We have been very pleased with the recent price action on Ur-Energy, Inc. (URG- AMEX, URE- Toronto) which recently rose to trade closer to that all important cash-on-hand level.  Still the company’s market capitalization trades below that of its cash stockpile, but we view this as a true bargain.  We recently had the opportunity to sit down with Bill Boberg, Chief Executive Officer of Ur- Energy, and he explained that although the uranium price is off of its highs, the company is comfortable moving forward as their total production costs (capital expenses and production expenses) will come out around $35 to $38 per pound.  As long as the price stays in the low $40s, the company believes that they can turn a nice profit off of their ISR production at Lost Creek.

Another company which caught our attention recently was Cameco Corp. (CCJ- NYSE, CCO- Toronto) which is trading at levels not seen in many years.  The stock recently got down as far as $12, and although we do not particularly like Cameco due to the tendency of their mines in Saskatchewan to flood with no prior notice, the value at these levels is real and should be paid proper attention.   

Cameco still has long-term contracts at lower prices and is phasing them out as they come up for renewal, increasing profits dramatically in the process.  Even though uranium prices have collapsed dramatically over the past year, Cameco’s profits should increase based solely on their higher realized pricing power in new contracts.  At these prices the market has fully priced in the fact that Cigar Lake is not coming online soon and that the uranium market has cooled leaving investors with an attractive entry point based on current earnings per share and forward earnings (assuming they are successful in renegotiating contracts at current prices and do not offer what we shall refer to as “discounts” as they had in the past).

We feel comfortable with these two companies as one provides tremendous value based on the fact that it trades below cash and the other because of its potential future earnings power.  Even with a lower uranium price for producers, both companies will make considerably more money for shareholders as they are low cost producers and well financed during this credit crisis.  Uranium is the fuel of the future, and with stockpiles worldwide dwindling more will be needed in the coming years to fuel not only our nuclear power plants currently in production, but those being built and planned as well.  The uranium investing thesis still holds true, and for those willing to accumulate shares of these companies at current prices, the profits could once again be extraordinary.