Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Why do mining legends Rick Rule, Doug Casey, and Marin Katusa obsess over uranium when it is such a small component of the commodity market?
Billionaires Mark Cuban and Robert Friedland have their chips stacked in the trade. Even Hong Kong’s richest man Li Ka-shing is making a bet that uranium prices are set for an epic comeback.
So what makes uranium so appealing? Let’s break it down into five main points.
2016 has been a strong year for many commodities. The price of vanadium is up 88%, iron ore 86%, even zinc is up a whopping 61%! The Bloomberg Commodity Index, which measures a basket of indexes is up 11%.
Yet, uranium, which started the year at $32/lb, fell to nearly $18 per pound by November, 2016. This is despite the fact that demand for uranium is expected to increase dramatically over the next few years, with 60 reactors under construction and 160 in the planning stages.
As a contrarian investor, nothing is more exciting than buying something cheap that has every reason to go up. After all, the cure for low prices is low prices!
What happens when thousands of investors decide to rush into a trade? They must find a place to put their money.
When it comes to deploying capital in uranium stocks, investors are limited in options. In the precious metals arena, investors have hundreds of companies to choose from. However, the uranium space is comprised of a select few, a situation further exacerbated by the destructive force of the bear market.
Mining is the most volatile sector in the public markets, and as a subset, uranium takes the crown. That is because uranium stocks are scarce – very, very scarce.
Currently, there are only about thirty companies for a North American investor to choose from when looking to get exposure to uranium. Cameco is the lone billion-dollar producer, followed by companies like Paladin, Energy Fuels, Uranium Energy, and Ur-Energy. Below the producers are the explorers, a truly volatile set of stocks that historically have risen by 100-fold and collapsed in value by 99% in the down-cycle!
So what happens when thousands of investors rush into a space that only contains about thirty names? Well, the entire sector will experience hundred percent returns in a very short time frame.
Just look at Energy Fuels, a company that went up by 45 times in 2006 alone! Imagine a $10,000 investment being worth $450,000 in just 12 months!
The uranium stocks are a leveraged bet on uranium. From 2002-2007, the uranium spot prices rose from $7 per pound to $160 per pound, a 23-fold increase. Despite the rise, the cost of base load power generated by nuclear fuel did not markedly increase.
Uranium is truly a peculiar commodity. Imagine if the price of oil went up 23-fold! You would probably be riding a bike around town. Or what if coal went up twenty three times? The heat in your house would be turned off.
But not nuclear…
The cost of fuel for a nuclear power plant is infinitesimal. In fact, it is estimated to be just 2% of the cost of operating a nuclear reactor. Building a reactor takes nearly a decade and billions of dollars in upfront capital investment. Once it is constructed, the cost to fuel it is next to zero.
There is no other commodity on the planet that has such a lack of price sensitivity. For investors in the uranium stocks, that means the upside is almost unlimited.
For mining investors, it is common knowledge that building a mine does not happen overnight. Permitting is a tedious task; governments are difficult to navigate; locals want their piece of the pie.
Uranium has a negative connotation surrounding it because of its use in nuclear bombs. Handled incorrectly, nuclear fuel could be put to nefarious use. Therefore permitting a uranium mine does not happen quickly.
In fact, the time from a production decision to production is almost a decade. Once uranium supply is in a deficit, production can take years to bring prices back down. That is why uranium bull markets last so long and never stop giving.
But the number one reason that the top players are so heavily invested in uranium is because they have made so much money on it in the past!
When you ask any of the leading speculators about uranium, like clockwork, they will regale you with uranium war stories that include making a 1,225% return on International Uranium or seeing over a 10,000% return on Paladin Energy!
The reason why so many of the greatest mining investors love uranium is because they can attribute the majority of their wealth to it.
Follow the money…
There is a saying in the mining business that when in doubt, follow the smart money. The smart money is currently positioning into the best of the best uranium companies.
It is true that in a uranium bull market, all boats will rise. But how does a legendary speculator like Rick Rule make 10,000% on Paladin, when other market participants are stuck in the hundreds of percent? That takes proper selection – great assets, proper jurisdiction, and fantastic management. Luck should be added in there as well!
The train is leaving the station
On December 8, 2016, Palisade Research came out with a bold prediction – the bottom for uranium and uranium stocks was in. You can read about why here – http://palisade-research.com/the-bottom-for-uranium-stocks-is-in/
Since then, the spot price of uranium is up nearly 30% and the associated uranium stocks are on a tear! Many of the biggest names have already experienced 100% moves. Sure enough, many industry newsletters have followed suit on our call, confirming the call for the bottom.
We believe that this is just the beginning of a multi-year bull market in uranium stocks. And the best part is that many of the small junior uranium stocks have not moved much yet.
Historically, these junior uranium companies are where mining titans like Rick Rule and Robert Friedland have made much of their fortunes! That is why we have scoured through all the publicly listed uranium companies to find the most compelling.
We have identified three companies poised to be the darlings of the upcoming uranium bull market.
We believe that we have identified a company that will excel in the months and years ahead and could become the darling of the uranium bull market.
In fact, Rick Rule himself just led a financing with the company that was wildly oversubscribed. Billionaire Lukas Lundin is a major shareholder. Robert Friedland’s Ivanhoe group is one of the largest shareholders. In fact, Robert’s son Govind Friedland is Executive Chairman and founder of the company!
Denison Mines, Canada’s premier uranium development company has so much faith in management and its backers that they recently spun all of their African assets into the company and now own 21% of the company.
Cameco, the world’s largest publicly listed producer of uranium maintains a 4% interest. Multinational technology conglomerate Toshiba Corp. holds 9% of the outstanding shares!
We are talking about GoviEx Uranium. The company was founded in 2007 by Govind Friedland with the goal of discovering and building Niger’s next uranium mine.
In just a few short years, Govind and team were able to drill up over 100Mlbs of uranium and transition into development stage.
Uranium mining giant AREVA has been mining in the country of Niger for over 40 years, but reserves are running low. The country has an abundance of mining expertise and is eager to continue producing yellow cake. That is why they permitted GoviEx’s Madaouela uranium mine in just under 6 months!
So let’s break down the main drivers. GoviEx holds over 200Mlbs of uranium in the measured, indicated, and inferred categories across four assets in Africa. According to management, that makes the company the 5th largest holder of uranium out of any publicly listed company in the world! In mining, size is key.
Next, the company’s flagship asset, Madaouela, is located adjacent to AREVA’s Cominak and Somair mines, in north central Niger. The project already has 100Mlbs of uranium and as Executive Chairman Govind Friedland pointed out, the company stopped drilling to focus on developing a mine, but a lot more uranium likely exists.
We believe that GoviEx is just 3 years away from commercial production, which makes it one of the soonest companies to market.
But what excites us most about this opportunity are the players involved and in mining, players are everything!
Aside from the billionaire Friedland family at the company’s helm, the Lundins are also major shareholders. Lukas Lundin runs an $8B family office, representing one of the largest family mining fortunes in the world.
Denison Mines, led by David Cates, holds significant interest in GoviEx by way of their divestment in their African assets. And thanks to the recent financing led by Sprott Inc., Rick Rule and his clients own a significant stake in the company.
For a company valued under $100M, it is hard to find a more compelling company poised to pop than GoviEx.
The United States produces 20% of its base load power from nuclear energy, yet produces only a fraction of the fuel required to run its reactors. We have found a company that will help to fill the void of US production and could become the star of the uranium bull market.
First of all, this company is relatively unknown to investors, a major reason why the stock is so deeply discounted. Western Uranium Corp. was created just two years ago by way of a reverse takeover of Pinion Ridge Mining LLC.
Legendary uranium CEO, George Glasier, as well as fund manager, Russell Fryer, founded Western Uranium.
Before going any further, it is key to understand the legendary status of George Glasier. George was the Founder and CEO of Energy Fuels (NYSE:UUUU) back in the uranium bull market of the early 2000s. In 2006, with George at the helm, EFRs stock led the entire Canadian exchange by a landslide, increasing 45-fold!
This is a point that George will never relate because he is far too modest in his success. What is key to understand is that George knows uranium like the back of his hand. He has a business acumen exceeding most mining executives. Further, he is one of the only uranium CEOs who can claim he has brought a mine into production and his contacts are second to no one.
In forming Western Uranium, George leaned on his network to acquire non-core assets from Energy Fuels during depressed markets in 2014, and is now sitting on 100 million lbs uranium, all located in the United States!
WUC’s market cap is C$35 million, giving its uranium a value of US$0.33/lb, or one of the cheapest among its comp group.
The company’s property holdings and associated resources are shown in the below table.
It is worth noting that Western Uranium has significant vanadium credits in its resources. Unbeknownst to most investors, vanadium was 2016s strongest performing commodity, up an astounding 88%!
To recap, Western Uranium has a top-notch management team, controls over 100 million pounds of U308, holds significant vanadium credits, and is situated in a prime mining jurisdiction.
But what truly differentiates Western Uranium from the others is it is only $2 million away from commercial production!
Ablation Technology – Unlocking Major Value
Western Uranium owns the rights to game changing Ablation Mining Technology (AMT), a method of mining mineral deposits from host rock. AMT is able to disassociate, or mine, mineral coatings from sand grains in sandstone hosted uranium mineral deposits. That sounds really confusing, but in actually it is quite simple to understand.
Inside a mine, uranium hosted in sandstone is pulverized in a grinding machine. This is a very easy process – think of rubbing sandstone in between your fingers. Next the ground sandstone is mixed with water to form a slurry. Finally the slurry is fed into two hoses that blast the material at itself at high speed.
This allows the coarse sand grains to be released from the mineral fines (uranium and vanadium), resulting in cleaned sand grains and uranium/vanadium rich mineral ore fines. The cleaned sands are left inside the mine, while the uranium and vanadium bearing ore is brought to surface.
Thanks to ablation, the mineral ore is upgraded by 10-fold! That means a lot less ore to be shipped and processed.
So where will this technology be applied? Western Uranium’s flagship asset is the Sunday Complex, a past producing set of mines, which is fully permitted for production.
The Sunday Complex is in mint condition and can be re-started at anytime for just $2M. The company needs around $30/lb uranium prices to justify starting up. That is 50% less than the average cost of production, reported to be around $60/lb!
In the first year of production, we anticipate production of 200,000 to 300,000 pounds of uranium, ramping up to 1 million pounds in a year and half. WUC will process its ore at the White Mesa Mill, owned by Energy Fuels. But wait, there is more to the story!
Another reason that the price of production for WUC is so low is because of the company’s vanadium credits, a commodity that has increased 88% in 2016. While most uranium developers and producers have suffered from uranium’s 50% fall in 2016, Western Uranium has seen that decline offset in a major way by vanadium.
The Sunday Mine Complex is laden with vanadium and uranium veins. Because they are both hosted in sandstone, ablation technology works equally well for both!
On a side note, we expect vanadium to continue its torrid run. It appears the hype around vanadium redox batteries (VRBs) is real, and demand from the steel sector is expected to grow. This is accompanied by a limited feedstock.
In Summary – America’s Leading Uranium Company
Western Uranium is the purest/cleanest United States uranium optionality play in the market. It is undervalued compared to all exploration and development peers – and also comes with the ‘X’ factor in its Ablation Mining Technology and the increasing need for vanadium.
Legendary uranium CEO George Glasier is at the helm and he is dead set on bringing Western into commercial production.
Western has 100 million pounds of 43-101 compliant uranium resources, a very large number!
Add on that the new Trump administration, which is decidedly pro-nuclear and an emerging bull market in uranium, and we think the opportunity could not be more obvious.
Western Uranium recently completed a financing, meaning the coffers are full. Palisade Global Investments participated in the most recent financing. This is not the first time we have invested either.
We are positioning ourselves for the coming uranium bull, and Western Uranium is our largest investment thus far!
What if you could rewind the clock to 2007 and get behind the exploration geologist who discovered the Arrow deposit? Had you invested in Nexgen back in 2013, you would be up 743% on your money, and that is despite a historic bear market in uranium!
Today, Nexgen has a $1B market cap! The Arrow deposit at their Rook 1 property in the Athabasca Basin has been described as the “best uranium discovery of the past 25 years” by investment firm Raymond James.
That is because the sheer size is astounding and the grades are in the top one percent of the World. When compared to gold, the high-grade core of Nexgen’s deposit is comparable to 6 ounces per ton material!
The most recent resource estimate put out showed 200 Mlbs of U308 delineated. Some experts are estimating the deposit could reach 500 Mlbs.
The problem is that while Nexgen should perform well in the years ahead, much of the investor gains are behind it.
So we tracked down the guy responsible for making the discovery and we found out that this wasn’t any fluke.
James Sykes is a uranium deposit finding wizard. Just take a look at his track record.
In 2007, he played an integral role that led to the Wheeler River discoveries, a 106Mlbs behemoth that remains as Denison’s flagship asset.
Then in 2008 James moved over to Hathor, and helped to delineate another 100Mlbs of U3O8at the Roughrider Deposit, which was bought by Rio Tinto for $654M!
In 2010, Fission Energy became the benefactor of James’ work when they lined their drill rigs up with Hathor’s deposits and discovered the J Zone. Fission’s deposit went on to have 13.0Mlbs and was acquired for $70 million by Denison Mines in 2013.
Then in May 2013, James began a job that would permanently place him on the walls of the mining hall of fame. Mega Uranium, a publicly listed company, sold their Athabasca assets into a little company called NexGen. James was given the lead role to manage the exploration efforts. What followed was the discovery of a lifetime! 200Mlbs later and the rest is history.
Enter Appia Energy Corp., a little known company that we believe has the potential to make waves in the business.
With just a $10M market cap, and little attention, Appia has the ability to fly. As an anchor, the company owns 100% of the Elliot Lake Uranium Project, a 200Mlbs low-grade uranium and rare earth deposit in historically producing uranium town of Elliot Lake.
We don’t see production coming from here for some time as the grades are low. However the size is massive, and in a rising price environment, investors will begin to give value to this asset again. Remember, size is key.
What has us truly excited is Appia’s Athabasca portfolio of projects. In all, the company has four projects in the Athabasca, hand selected by James Sykes. Currently the company is focused on the Loranger Project.
Having just recently secured $1.2M in financing, the company is preparing for a 15 hole drill program on Loranger. A discovery can’t be touted before it is made, but what we can say is this – James Sykes is excited!
James is convinced that all the ingredients are in place for a massive Athabasca uranium discovery to be made.
In fact, he is calling one target a triple threat:
The combination of these three factors indicate an environment that can host uranium. Uranium-rich fluids migrate along the faults to the jog, where uranium precipitates. The gravity low of this target has the same shape, size, and amplitude of NexGen Energy’s Arrow, the 201.9M lbs U3O8 deposit that James discovered.
Drill results could come in as early as PDAC, or the first week of March. But that depends on several variables, including the provincial government giving the OK for an ice road and when Appia gets the assays back.
However, if this target hits, the share price of Appia Energy is going to go ballistic! This is the underdog story of the bull market. A discovery is a long shot, but who better to bet on than an Athabasca rock star?
Palisade Global Investments Limited holds shares of GoviEx Uranium, Western Uranium, and Appia Energy. We receive either monetary or securities compensation for our services. We stand to benefit from any volume this write-up may generate. The information contained in such write-ups is not intended as individual investment advice and is not designed to meet your personal financial situation. Information contained in this report is obtained from sources we believe to be reliable, but its accuracy cannot be guaranteed. The opinions expressed in this report are those of Palisade Global Investments and are subject to change without notice. The information in this report may become outdated and there is no obligation to update any such information. Do your own due diligence.
