Investing In Uranium Juniors: Can Balance Sheets Shield Investors In A Down Market?

by: NEIG

It has been a challenging year for the uranium juniors. Market capitalizations shed close to 2/3 of their values from their 2011 pre-Fukushima highs, lagging the overall industry performance (URA -63%; NLR -48%) and considerably below performance of the larger uranium peers: Cameco (CCJ) -29%; Uranium One (OTC:SXRZF) -58%.

In an environment like this, investors should pay more attention to ability of companies to manage their capital conservatively. While uranium juniors can offer good value, particularly during periods of rising commodity prices, investing in juniors can also be a nerve wrecking experience during periods of weak uranium prices and negative investor sentiment.

Juniors with strong cash positions and low cash burn rates likely to be better positioned to navigate through the storm. Investors also need to be wary of companies with weak balance sheets and extended exploration programs that may require external funding over the next six to twelve months. Over the last 18 months financing options have been limited and come at increasingly higher costs. The equity offerings that have been completed have come with much greater share of dilution than would have been expected even a year ago.

We note that, while a strong balance sheet can offer some support for juniors in an ugly investment climate, by itself it does not guarantee share price outperformance. It is only one of many factors affecting company share performance. Our recent review of uranium juniors (see below) revealed that post Fukushima accident an average uranium junior with lower cash burn rate and higher cash balance (relative to their market capitalization) has outperformed, but only marginally.

And while other factors affecting share performance are at play for our sample set, we believe that, all else being equal, stronger balance sheet and conservative capital management should provide better protection to investors during periods of prolonged market weakness.

Click to enlarge Source: CapitalIQ, Bloomberg

Companies considered in this report: Denison Mines (NYSEMKT:DNN), Bannerman Resources, Fission Energy, Strathmore Minerals (OTC:STHJF, Strateco Resources, UEX Corp (OTCPK:UEXCF), Uranium Energy (NYSEMKT:UEC), Uranium Resources (NASDAQ:URRE), Ur-Energy (NYSEMKT:URG), Uranerz (NYSEMKT:URZ).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.