Junior resource companies are in the bargain bin these days. Debt financing is scarce and risk-averse. Raising equity is akin to chopping off a hand caught in a trap and then hoping you don't bleed to death. For many of these outfits it's a question of hanging on until the object of their affection comes back into vogue. Uranium juniors certainly have been waiting a long while. One of these long-suffering companies is featured here.
Laramide Resources (website)
Laramide (OTCQX:LMRXF), based in Toronto (NB: Rob Ford has no connection to this company), is an exploration and development junior with properties in Australia and the U.S. Incorporated in 1980, it listed on the TSX in 2006 with an additional listing on the ASX in April of 2013, trading as LAM on both exchanges. Its current market capitalization is approximately $33 mil (CDN). Average three month daily volume is 178k shares in Toronto, 34k on the OTC market in the U.S., and very thin volume on the ASX. They have a number of promising projects on the books:
- Project Outlook: With the uranium market still in a depressed state, Laramide is adopting a go-slow strategy, spending only what is critical to maintain its stakes in its properties. As stated in its most recent MD&A for Mar 31, the company anticipates a cash requirement of $2.8 mil over the next year, $1.2 mil of which will be spent at its Westmoreland project. With the recently completed private placement for $2 mil along with other capital sources, Laramide should have adequate financing in place for the next year. If the price of uranium cooperates the company should be able to raise more funds before the piggy bank is empty. The stock traded over $16 in 2007. Imagine the brokers lining up for an equity issue if it trades at $2-$3. Note that the December private placement went out the door at $.40 with some warrants thrown in as a sweetener.
Westmoreland Project (Queensland, Australia):This is the crown jewel in Laramide's portfolio and is 100% owned by them. Discovered in 1956, the property was acquired in 2005 from Tackle Resources by Laramide for $150k plus 4.5 mil shares. Purchased primarily for its uranium content, it also has gold and copper deposits. Some points that make this an attractive holding:
- It's a large property (979.4 sq. km) in a mining-friendly jurisdiction. With this large an area there may be more U3O8 than current estimates.
- It contains 36 mil lbs of Indicated Resources (.089% grade) and 15.9 mil lbs in the Inferred category (2009). These are NI 43-101 compliant resources. Keep in mind that a Resource estimate is a reasonable guess as to what a property may contain. It is not a Reserve, which is a high-probability estimate of the actual economic value of the ore in the ground. (For more detail on this see Wikipedia). As the company points out on its website:"Mineral resources that are not mineral reserves do not have demonstrated economic viability."
- The preliminary estimate (2007) of yearly production is in the 3-4 mil lbs range using open pit mining. At today's spot price this translates into $105 mil to $140 mil in annual revenue. Higher values would of course result from a higher spot or longer-term contracts.
- Strip ratio is low at 2:1 which implies a low operating cost.
- 80% of the ore is within 50m of the surface so extraction would be relatively economical.
- Regional infrastructure consists of nearby roads, an airport and a sea port, providing low-cost access to and shipping from the project.
- A preliminary assessment report from 2007 projected a total start-up investment of U.S. $247 mil to open a mine. The cost today would naturally be higher.
- In the same report, operating costs were pegged at U.S. $19-$25/lb. Extrapolating to today, these figures might be $23-$30. Margin is thin in today's market but with the consensus price forecast for uranium rising, the mine should look robust by the time it starts.
- As mentioned above, the company plans to spend only $1.2 mil on those activities which are necessary. These include a new scoping study (last one from 2007) with updated costs and some environmental work. The scoping study is expected to be completed by the end of June, 2014. A scoping study, by the way, uses inferred resources and contains a much higher degree of economic uncertainty than a feasibility study.
- Commencement of permitting is also expected to start this year as well as searching for a partner to share in the development costs of bringing the property into production.
- The company has entered into a joint venture agreement with Rio Tinto (RIO) Exploration for the Murphy property which is adjacent to Westmoreland. Laramide would earn a 51% interest by spending $10 mil AUD over the next four years. This JV has the potential to significantly expand the resource estimate for Laramide through combining the two properties.
- Laramide is also considering a gold resource estimate for the property. The most recent data is from 2011 and 2012. Drilling program is ongoing.
- Westmoreland looks to have great potential based on the preliminary information available. More work needs to be done in order to establish the value of the property. This will require Laramide to raise additional capital through equity, debt or taking on a partner.
- USA: The underground La Jara Mesa project in New Mexico is awaiting the usual permits before beginning production. It has Indicated Resources of 7.2 mil lbs and Inferred of 3.1 mil lbs (2007 data). The project received a draft EIS (environmental impact statement) from the U.S. Forest Service in 2012. Awaiting approval from U.S. agencies on a final EIS and a Record of Decision in order to continue development. These regulatory processes were expected to be completed in 2013 but now it's more likely some time this year. Once in production in 2015 or 2016, the mine is expected to yield approximately one million pounds per year over a 6 to 8 year life. La Sal, in Utah, is closest to starting production although there isn't an NI 43-101 estimate of resources. All the necessary paperwork is in for the commencement of mining. It is currently undergoing a bulk sample program to determine the viability of the property although the company notes that completion of the bulk sample is not a near-term objective and production may not occur for some time. It was partially developed by Homestake Mining in the early 80's, leaving behind some infrastructure including a ventilation raise and a 1200 meter access drive. Laramide has signed a toll milling agreement with Energy Fuels' nearby White Mesa mill in Jan 2013. The property holds the promise (not the certainty) of near-term small-scale production. Churchill Royalty Agreement: Laramide has a royalty agreement for up to 25% of the revenue (based on the spot price of uranium) from a project owned by Uranium Resources (URRE). URRE still needs $35 mil and permits to start production, anticipated at a total of 4.4 mil lbs over 6 years. This could provide some cash flow for LAM but start-up for the project has been delayed due to the low price of uranium. URRE anticipates production starting in the next few years.
Financials (Cdn. dollars)
- Current ratio as at March 31, 14 was 2.23, an improvement from the 1.69 as at Dec. 31, 13. Cash and short term investments were about $692k plus additional investments consisting of junior resource stocks with a value of $4.4 mil, an increase from $3 mil as at Dec. 31, 13. The value of these holdings is highly volatile (as at Dec. 31, 2013 a drop of $3.6 mil from Dec. 31, 2012) and some could be written off entirely. About half of their portfolio is 4.662 mil shares of Treasury Metals (OTCQX:TSRMF), a gold exploration company, with a current value of approximately $1.6 mil. There is going to be a need to raise more cash in the near future if Laramide is to continue their exploration and development work.
- In July 2013 the company also considered an optional financing arrangement whereby it could issue $150,000 of shares per month for 18 months to CSOF (Canadian Special Opportunity Fund) raising a minimum of $2.7 mil up to $5.25 mil for the issuance of $300,000 worth of shares per month. The company announced in its year-end MD&A that it will not proceed with this financing, perhaps due to the uncertainty of share dilution that such a flexible plan would entail.
- Laramide anticipates funding the $2.8 mil cash outlay this year from working capital which as of March 31 was $3.3 mil. In order to complete their activities for 2014 they will need to decide where the money is going to come from: sales of stock from their holdings, new equity issuance, joint ventures, royalty agreements, or other property asset sales. They have been successful in raising new money through equity sales and believe that, with the La Sal project nearing production and the progress at Westmoreland, there will be adequate funds to carry out plans for 2014. As many have stated, it's all about Japan. And general market conditions, of course. A few reactor restarts and a bullish stock market climate would almost guarantee a successful year for Laramide.
Potential potholes (sinkholes?)
- In the past, Laramide made some financial commitments that now need to be dealt with. In May 2011 they signed an agreement with Rio Tinto Exploration to earn a stake in a property located next to Westmoreland. The term of the agreement was four years and required the spending of several million dollars on exploratory work. On March 5 this year the miner announced a 12 month extension to all stages of the earn-in, granting Rio Tinto 151,500 shares as consideration. The first stage will require Laramide to invest $1 mil by Nov. 13, 2014 in order to comply with the agreement. They anticipate meeting this deadline.
- In August 2012 Laramide signed on with Anglo Pacific Group for a loan of $5 mil, granting them an option for a 5% royalty on property owned by Uranium Resources (URRE). The agreement required Anglo to pay $15 mil in order to exercise the option. Anglo has security in the form of a claim on all the shares of Laramide Resources (USA) as well as a claim on Laramide's obligations to its parent. The loan is due Dec. 31, 2015. As part of the loan, Laramide agreed to deposit in escrow 25% of any asset sales, equity issues, or debt financings. Given the scarcity of excess cash, the company has yet to deposit anything into escrow. They have yet to reach an arrangement with Anglo on the outstanding funds and are attempting to negotiate a favorable revision to the terms of the original deal. URRE projects an NI-43-101 study of the property by the end of this year so the royalty stream is quite a ways off. Anglo can either wait for the loan to be repaid or claim the royalties (paying $15 mil) and wait for those to begin. The outcome of their deliberations are anyone's guess but obviously they are not too upset or they would have already taken over the royalties.
- Laramide is currently obligated to spend about $5 mil in 2014 on exploration activities in order to maintain its tenement rights to its Australian properties. As this would represent a significant burden, they will be asking the Queensland authorities for additional time to fulfill the required expenditures.
Management: CEO, VP Exploration, CFO and GM Australia all have years of mining experience, mostly from Aquiline Resources which was acquired by Pan American Silver (PAAS) in 2009. Pay packets look conservative.
- Insider Enthusiasm: Three insiders (the CEO, VP Exploration, VP Corporate Development) have been active buyers on the TSX over the last year. The CEO bought 100k shares in November and 200k in October, a total of about $107,000 worth. He obviously thinks the company has a bright future. One director has been an active seller, disposing of approximately 166,000 shares since the start of the year. Management owns 11% of the company.
- Technically Speaking: After a swoon in mid-October 2013 from a .56 high, the price settled into a range of .34 to .38 until the end of December. It rose steadily through January 2014, turned back a little in February, then spiked to around .90 in early March. The infatuation didn't turn into love, unfortunately. We're back to about .40. Chaikin Money Flow (one of my favourite indicators) is still mildly positive implying that cash is still moving into the stock. The RSI (Relative Strength Indicator) is on the verge of moving into oversold. The price is at a 9 year low, having hit $16.70 in March 2007. Colossal irrational exuberance.
- Rating-Accumulate: With over 60 mil lbs of resources Laramide could be a target. The market is assigning a value of only .55/lb to the firm's resources. Rio Tinto paid $10/lb for Hathor in 2011. Granted, Hathor was sitting on a much higher-grade holding. Applying a 70% discount to the Hathor deal yields $3/lb, i.e., $180 mil for Laramide. For 79 mil shares that's about $2.25 per share, +$1.84 from Friday's close. Scale into this company as there may be further weakness as regulatory hurdles persist in Japan and general bullish enthusiasm takes a breather.
Conclusion
Laramide certainly looks undervalued here. With over 50 mil lbs of NI 43-101 resources at Westmoreland alone, it wouldn't be surprising for a major (Rio Tinto, Cameco (CCJ)?) to make an offer. The company has the financial resources in place to continue their low-key strategy of sticking to only what is absolutely necessary in terms of spending money. Investing in any junior miner is, of course, extremely risky. Here you're buying "pounds in the ground" at around 55 cents. If you're drawn to high-risk speculation Laramide is worth a look.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LMRXF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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