Uranium One Undergoes a Resurrection

When we saw the news regarding Kazakhstan’s announcement that some foreign uranium deals were illegal, and named one of Uranium One’s (SXRZF.PK) mines in their probe we simply shook our heads. It was hardly surprising considering all that we have been through before. Although it's one of our favorite companies because of its commitment to bringing supply online and aggressively expanding its operations, it conducts business in risky areas and seems to consistently bet the farm.

This all brings us to today. The Kazakhstan government has said that they will not renegotiate any contracts after talking with their partners in the country, but investors seemed hardly moved by this announcement and the damage was done. Many still felt that the government was going to somehow increase its grip on the mines in the country and that its previous announcement indicated that the Kazakhs were interested in not only being the world’s largest producer of uranium, but owning the production as well.

It seems that Uranium One has raised the stakes. It entered into an agreement to purchase half of another uranium mine in Kazakhstan, which will increase the company’s production in 2010 by 35%. In exchange for this ownership stake, Uranium One will issue 117 million shares and US$90 million to JSC Atomredmetzoloto, a Russian state-owned uranium miner (another US$60 million payment is contingent on whether certain tax issues can be worked out). The other 50% of the mine is owned by JSC Kazatomprom, the Kazakh state-owned uranium miner, who also holds stakes in Uranium One’s other mines.

Our perception is that Kazakh officials were sincere in their announcement that they would not change the terms of any contracts and they have already blessed the transaction. The transaction could be the reopening of Kazakhstan to capital and the house cleaning will only take part within the government and not harm those companies operating there.

Either way, Uranium One has solved one of its biggest issues, which is that there was no one to go to bat for the company. As a Canadian company, it was hardly Canadian with its assets in Kazakhstan and the supposed “flagship” property in South Africa. Truly it was a South African company, based in Canada, with neither country appearing willing to go to bat for it. Now the company has a real backer with the Russians, and our guess is that should Kazakhstan have any more issues, the Russians will straighten them out. The Russians also should allow for the sure closing of the Japanese deal by December of this year, if not sooner.

Uranium One will be a true international player with the Russian-Japanese backers, assuming all deals close. Its backers will be some of the largest uranium consumers in the world and will provide it with buyers upfront. The Japanese are investing to lock-up supply for their country’s nuclear reactors. Russia is locking up supply of U₃O₈ to sell along with their reactors; they believe it is easier to sell a reactor if you can guarantee the fuel supply as well.

Uranium One has once again risen above its 200-day Moving Average, now it must take out C$3.00/share in order to move higher. C$3.00 has been a very important level for the stock both on the way down (where it twice provided support) and on the way up, where in the past three months it has provided resistance four times.

We were pleased to instruct our subscribers and clients to purchase shares below C$1.80, which provided two windows of opportunity for accumulation, albeit during Uranium One’s darkest days. Those are the opportunities that provide investors with some of the greatest buying opportunities, but even today our stance is that Uranium One is a great buy as it is destined to be a serious international uranium producer. In the next few years it will have uranium production from Australia, Kazakhstan and the United States and should have a strong pipeline in place of projects coming online.

Disclosure: Matthew B. Smith has a position in Uranium One which has been held for years.

Comments

[Mad Hedge F...:]

This is a sector that is coming back from the grave. There is absolutely no way we can deal with our energy crunch without a huge expansion of our nuclear capacity, which sits at a lowly 20% of our power generation. France has already achieved this, getting 85% of its electric power from nuclear, followed by Sweden at 60%, and Belgium at 54%. Unless you’re a nuclear engineer, you are probably unaware that the technology has moved ahead four generations. The first one produced the aging behemoths we now see on coasts and rivers, which used high grade fuel that would melt down if someone forgot to flip a switch. Generations two, three, and four never got off the drawing board. Generation five is not your father’s nuclear power plant, relying on a new form of fuel embedded in graphite tennis balls that is just strong enough to generate electricity, but too weak to risk a disaster. This eliminates the need for four foot thick reinforced concrete containment structures, which accounted for 50% of the old design’s cost. Low grade waste can be stored on site, not shipped to Nevada or France. The permitting process is being shortened from 15 years to four by confining new construction to existing facilities instead of green fields, urged on by a less fearful public and even some CO2 conscious environmentalists. At least 30 new reactors are expected to start construction in the US over the next five years, and over 90 in China. There has got to be an equity play here. The Market Vectors Nuclear Energy ETF (NLR), which has jumped an impressive 78% to $25 since March, is the easiest way in. You can also buy its largest components, like Cameco (CCJ), the world’s largest uranium producer, or Électricté de France (EDF SA) which has the monopoly in France and is developing a major export business.

Jul 02 11:15 AM

[Bill Herbert:]

Forget Kazakhstan. Way too risky - think about it.

It's a remote Asian nation, with a flaky government, rife with corruption, and an Islamic fundamentalist population. It's not Turkey.

They will screw all foreigners eventually, but especially the yankees. We may do OK buying the ore from them after they dig it out and clean it up, ready for processing. But I wouldn't touch a company that purports to own miones in that country. No way.

Instead, try DNN (Denison Mines) for an easy triple over the next few years. Buy and hold - don't trade or get cute with it - just hold it for a while, 'cause before long Uranium will soar over $100 and DNN will fly.

I also like CCJ, but there is more upside in DNN at the present price range. If you want to do a pairs trade, that may be a lower-risk way to profit - short 1,000 CCJ and buy 15,000 DNN - you won't be sorry, and you'll be hedged against a big market selloff, should we go into the tank again. You may make some money even if the market tanks and both stocks crater - I seriously doubt we will see DNN go below $1.50 USD ever again.

Jul 02 02:14 PM