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Christopher Wallace
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Former private equity fund manager, now full time private investor.
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  • GoviEx Uranium: 97% Price Drop Leaves Stock Excessively Discounted

    GoviEx Uranium is a Niger-based, pre-production uranium miner. This article will examine the extraordinary 97% decline in its stock price since its IPO in June of 2014 and what that means for investors today.

    The Good

    GoviEx is the creation of Govind Friedland, son of legendary mining financier, Robert Friedland. If Govind reads this article, I am sure he will cringe, simply because he must be sick to the death of being referred to as Robert's son. Govind has a degree in geology and geological engineering from the Colorado School of Mines and has built this company on his own. Robert Friedland is not on the board of directors, nor is he a shareholder. My apologies to Govind, but having one of the most famous miners as your father is context, however irrelevant to the rest of the story it may be, and I owe it to my readers to provide them that information.

    Daniel Major, CEO, is a mining engineer from the Camborne School of Mines in the UK. His career spans over 25 years in the mining industry where he has established a solid track record initially with Rio Tinto at the Rossing Uranium Mine in Namibia and later as a mining analyst with HSBC Plc followed by JP Morgan Chase & Co. in London. More recently Mr. Major was Chief Executive and later Non-Executive Chairman of Basic Element Mining and Resource Division in Russia, and held leadership positions in several Canadian listed mining companies with exploration and producing assets in Canada, Russia and South America.

    GoviEx was started in the BVI in 2006 and continued as a corporation in British Columbia, Canada in 2011. As a private company, GoviEx acquired its main asset, the Madaouela uranium mining project in Niger, in May, 2007. Funding has come from the issuance of common shares, a convertible debenture now converted to common shares and a uranium loan. Major shareholders of GoviEx hold over 60% of the shares and are:

    Govind Friedland 20.99%

    Toshiba Corporation 19.42%

    Cameco Global Exploration Ltd. 8.55%

    THL Resources Investment Limited 6.84%

    Semafo Ltd. 6.70%

    Since inception, over $150 million has been raised and expended on their projects in Niger.

    Since acquiring the project, exploration and drilling to date have developed a total resource of 120.32 million lbs. of U3O8, comprised of 98.22 million lbs of measured and indicated and 22.10 million pounds of inferred. Average grade is 0.14%. Cash operating costs are estimated to be $26 per lb. while total costs (including initial capital) are estimated to be $40 per lb. The Madaouela Project is located near a highway and electric power lines and in close proximity to Areva's uranium mine which has been continually producing uranium in Niger for over 50 years.

    GoviEx is focused on getting its Mining Permit application for the project filed by end Q2, having already filed their environmental and social impact assessment (ESIA).

    The parts of the Madaouela project that have been explored so far represent only a fraction of the land that GoviEx has in Niger. Considerable upside exploration potential exists.

    A good overview is provided in the GoviEx corporate video: https://www.youtube.com/watch?v=9xgwGMWgul4&feature=player_embedded

    This review so far reveals plenty of good things: very strong shareholder group with substantial commitment, experienced management team, large resource in the ground and a decent grade, favorable cash costs, exploration upside potential and access to already in place infrastructure. Why then haven't the shares rallied?

    The Bad

    The price of uranium has suffered a massive drop since the 2011 incident in Japan causing that country to shut down all of their nuclear reactors. Spot prices fell from nearly $140 down to a low of $28 in 2014. They have since recovered to $38.

    The country of Niger poses certain geo-political risks. Since obtaining its independence from France in 1960, Niger has had a succession of governments and experienced a military coup d'état in February 2010 after the previously elected president refused to leave office at the expiration of his term. Since the coup d'état, a new constitution has been adopted by round of elections held on March 2011 and resulted in a victory for Mahamadou Issoufou. The handover of power from the military junta to the elected government took place in April 2011, and stable government has remained in place since. Political instability is more common than not in Africa and poses greater or lesser levels of risk throughout the continent. Still, violence remains a concern in Niger.

    A significant issue is the capital cost of building out the project which has been estimated in GoviEx' Preliminary Economic Assessment at $340 million. In today's mining market, $340 million is a lot of money to raise.

    Goviex has one loan remaining on its balance sheet. The loan is for approximately $10 million and has been advanced by Toshiba in the form of uranium. It bears interest at 12% compounded and is not due until 2020. It can be repaid in uranium or in cash. One issue with this loan is that it requires a definitive economic study to substantiate total costs of Madaouela to be under $44 per lb. Goviex Integrated Development Plan (IDP) substantiates the number but it is not "definitive", it is preliminary. Such a study will be expensive and is money GoviEx presently does not have. Goviex will need to negotiate a waiver to that covenant to maintain the loan in good standing, which it has achieved previously.

    Notwithstanding the enormous drop in the price, management and the board have done negligible insider buying.

    As of October, 2014, Goviex had approximately $4,000,000 of cash, enough to provide a runway into the middle of Q4, 2015.

    The Ugly

    GoviEx has seen a precipitous decline its stock price since the IPO in June of 2014. Performance has been horrendous:

    YTD

    -83.33%

     

    1 Month

    -73.68%

     

    3 Month

    -83.33%

     

    6 Month

    -93.33%

     

    1 Year

    -97.50%

     

    Shares have fallen from the IPO price of $2.15 to today's price of $0.05.

    GoviEx trades on the Canadian Securities Exchange, a lesser known Canadian exchange that was set up in 2003 with a focus on reducing the cost of capital for Canadian public companies. This exchange targets exploration and start up companies, and currently has 244 listed companies and is expanding.

    Where to From Here?

    GoviEx is trading like it is going broke. But is it? And if it isn't going broke, is it good value now that its stock price has been decimated?

    First of all, the company fundamentals would suggest that it is likely not going broke. The uranium loan is the only funded debt on its balance sheet. Toshiba made the loan and is GoviEx' second largest shareholder and has invested in this company to have access to uranium supply. While anything can happen, it seems unlikely that it would want to put the company under and chances of renegotiating the covenant or obtaining a waiver seem to make sense. The company sold the last of their uranium inventory after the September 30 quarter end and have sufficient liquidity to see themselves through the end of Q3, 2015. It is not a lot of runway, but when you look back on the shareholders list, one would think that a rights offering should have some chance of success.

    Looking at the trading, which historically had been very light, it would appear as if there is a committed seller. Bids seem to get hit almost indiscriminately. I have spoken with GoviEx and they do not know who the seller is and further, no one has approached them about trying to sell a block. But volume has picked up in the last month. At some point a seller will run out of shares. An uptick would indicate that bids are not being hit and may portend some form of rally.

    In general, I am a believer that the market usually gets it right. After all, the market is the sum of all opinions about an investment. Occasionally the market gets it wrong, and mis-prices and asset, often when the asset has been orphaned by the investment community at large. At present no analysts cover this story. Combine that fact with trading on a junior exchange and you have the right condition for the market to mis-price an asset.

    Has the market mis-priced GoviEx? The answer lies in doing a comparison of values relative to other junior uranium exploration plays to see if GoviEx shares have been unfairly punished and if an investment opportunity exists. A comparison of key metrics to 8 other publicly listed junior uranium explorers provides some indications of relative value.

    Company NameResources (lbs of M&I)
    Forsys103
    GoviEx98
    Denison80
    Fission80
    UEX70
    Toro61
    Laramide43
    Berkeley32
    Kivalliq-

    As can be seen above, GoviEx has a significant uranium resource.

    M&I Only
    Market Value / Total Resource
    Denison5.21
    Fission4.63
    Toro1.57
    Berkeley1.02
    UEX0.73
    Laramide0.39
    Forsys0.23
    GoviEx0.07

    When market value is compared to the uranium resource, GoviEx is significantly under-valued. The average of the peer group market value to pounds of M&I uranium is 1.73; GoviEx, at 0.07, trades at only 4% of that average.

    Grade
    Fission1.50%
    Kivalliq0.70%
    UEX0.30%
    GoviEx0.14%
    Laramide0.10%
    Toro0.05%
    Denison0.04%
    Berkeley0.04%
    Forsys0.02%

    GoviEx grade is decent; not high and not low either.

    Not everyone in the peer group has completed their Preliminary Feasibility Study and so initial capital costs to build their mines have not been determined. But of those who have, costs are roughly comparable to GoviEx:

    GoviEx

    $ 340.00

    Laramide

    $ 431.28

    Toro

    $ 269.00

    Berkeley

    $ 178.60

    Forsys

    $ 460.00

    Average

    $ 335.78

      

    Total costs per pound of uranium produced for GoviEx are projected to be in-line or slightly better than the peer group average, and GoviEx is working on improving these numbers:

    GoviEx

    $ 40.55

    Laramide

    $ 52.79

    Toro

    $ 58.04

    Berkeley

    $ 32.03

    Forsys

    $ 39.89

    Average

    $ 44.66

    The country risk that GoviEx faces in Niger is not unique; much of the mining world finds themselves in lesser developed countries. Even in "developed" countries, political decisions can adversely affect mines as recent experience in Quebec (Canada) and Queensland (Australia) has demonstrated. The violence in Niger and many West African countries remains a problem.

    One way to put a value on GoviEx is to take the peer group market value to M&I Resource ratio (as shown in the second chart above) and then adjust it with discounts or premiums for GoviEx relative performance in the other metrics. When one considers that GoviEx has a slightly larger resource than average, an average grade, an average capital cost, and slightly better total costs per pound, not much of any discount seems appropriate. If GoviEx were to trade at the peer group average its share price would be $1.25. It becomes very subjective as to how much importance you place on the factors of resource size, ore grade, capital cost, total costs and country risk. Some individuals will discount some factors more than others. The junior exchange that it trades on and the relative low trading volumes should serve to further discount the stock.

    Catalysts that could potentially benefit the stock in 2015 appear to be:

    1. The "committed seller" exhausts his position or otherwise stops selling
    2. GoviEx restructures the uranium loan with Toshiba
    3. A financing occurs adding cash and runway and removing worry
    4. The stock moves to a more senior exchange
    5. The insiders purchase stock in a meaningful way
    6. The spot price of uranium, already up $10 from its low, continues to move up
    7. The stock could receive analyst coverage
    8. GoviEx gets its ESIA signoff and its Mining Permit

    The conclusion that I have drawn is that at the current price, GoviEx is suffering from an excessive discount which truly leaves multi-bagger potential in the stock. I am long the stock.

    Mar 30 3:31 PM | Link | 5 Comments
  • A Perspective on WTI's drop: Chart Comparing 2014 to 2008

    Dec 16 10:19 AM | Link | Comment!
  • What Tekmira Investors Are Missing

    Tekmira is the Vancouver-based drug company who has seen its stock price soar this month due to the outbreak of Ebola in West Africa. Tekmira is developing a drug to treat Ebola utilizing its RNA interference methodology. Long investors in the stock have doubled the value of their shares since the outbreak became front page news, less than a month ago. They have over-estimated what effect the outbreak will have on Tekmira.

    What has changed is that new attention has been focused on drug manufacturers who are attempting to develop a cure for the disease. There presently is no FDA approved drug that has proven efficacy in treating Ebola.

    What has NOT changed is that it takes time and money to develop and receive approval for a commercially viable drug. Three phases of trials on humans is the standard protocol, a process that takes years and would cost ordinarily in excess of $100 million. The recent outbreak may allow some drug to be used before completing that process for humanitarian reasons. Ebola is a deadly disease.

    The problem for the bulls right now is they think that somehow if the outbreak spreads or worsens, that will be good for TKMR. Simply wrong. The outbreak has put additional attention on its experimental drug. It may even sell a few vials, if it has any inventory on hand. But the outbreak is not going to accelerate their approval process to overnight. Large commercial sales of the drug will not happen until it gets its approval in the ordinary course. The longs somehow see a 1 to 1 correlation between new patients in West Africa and money for TKMR. That just is not the case. We all of course hope their drug works, or someone's drug works. But that can only be determined over time, perhaps less time as a result of the outbreak, but we are still talking years, certainly not weeks.

    The other aspect to note is that the outbreak does not increase the market size for the drug. The outbreak will surely have been contained by the time any of the experimental drugs currently in use receive their approvals. Once approved, governments and health organizations will buy and stockpile some drug. But that amount is based upon their constituent population, not the size of the West Africa outbreak. The amount they will buy is unlikely to be materially larger than if the outbreak had not occurred. Like flu vaccine, it is bought and stored in quantities based upon the statistical probability of it being needed.

    Tekmira could become a much more valuable company if and when its Ebola drug is eventually approved. It is the approval that will add value to the investment. The outbreak will neither increase nor diminish its chances for approval. Only time and trials will impact that outcome. Tekmira's likelihood for success has not increased as a result of this outbreak, nor will those chances diminish if it is brought under control. As the outbreak is eventually brought under control, this reality will be realized by retail investors, who will then appreciate that little has changed with the development of this drug as a result of the outbreak.

    The rush to get in the stock has become a frenzy, with price and average trading volume soaring in the month of August. You would think the outbreak occurred in August, wouldn't you? It actually first occurred in Ghana in December 2013 and by March of 2014 the World Health Organization had acknowleged that an outbreak had occurred in Ghana. By mid-April, cases had shown up in Liberia, Sierra Leone and Mali. And on July 26, the WHO reported the disease had spread to Nigeria. What happened with the outbreak in early August is unclear to me as to why the stock would take off at that point. Possibly that it occupied more of the headlines. But if the existence of an outbreak truly does impact the fortunes of a drug stock, the stock should have been moving at the beginning of the year, not the beginning of this month.

    Tekmira recently reported quarterly results which were below market expectations, and those results do impact the stock in a very real way.

    I am short the name via puts, as I expect investors to realize that an outbreak does not affect the development of a drug to treat the outbreak. I expect most of the gains due to the Ebola frenzy will be given back.

    Tags: TKMR
    Aug 20 12:54 AM | Link | 12 Comments
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  • GoviEx up 70% since my instablog post 2 weeks ago. Still a long way to go to reach my target. http://bit.ly/14vMfOU
    Apr 15, 2015
  • Orphaned uranium miner GoviEx is extremely discounted: http://bit.ly/14vMfOU
    Mar 31, 2015
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