David Segelov's  Instablog

Strathmore (TSX:STM) (OTC: STHJF)
Cheap and Unlevered and Inching Closer to the Goal as Permitting Comes into Clear View

Financial Details

Price: 0.70
Shares O/S Fully Diluted: 79.5m
Cash: 5.8m (before the pending proceeds from sale of 30m)
Debt: 0
Market Cap: 56m

Thesis

Late in 2009, a sale of land of Tree-Reno Creek in Wyoming Uranium Properties to Bayswater Uranium Corporation should complete thus netting $30m in cash to STM. There are further sales of land which will enhanced value.
STM has the two premium areas in the US for uranium mining. These two areas will have applications lodged in 2010 and 2011. These two sites contain some of the highest grade uranium in the world,and the risk is mitigated as the areas were extensively explored in the 1950's. Further, these projects require modest capital costs of $200m to get into production.


A Long Story

STM has been a long winding story. The senior executives who run STM are quick to point out that the USA was the largest uranium producer in the 20th Century. The key management people worked (as young men) for companies like Utah International who mined uranium in the 1950's. As uranium stockpiles from disarmament began to run-down and the uranium price bottomed out at $10lb in 2003, STM established itself to grab the best leases they could find based on historical data. STM has an incredible land position for uranium in the US. 

As uranium (U308) began to rise the interest in STM grew. The stock peaked at $5 per share as the commodity was cornered by large players (inluding Lehman) and the commodity price went to $130lb. Since then the commodity came back to $40lb (with the long term price still at $65) and a boom in building nuclear power plants in China and India provides a solid backdrop for a rising commodity price.

Meanwhile STM continued on and identified two key projects to apply for permits that represent the best potential economics:

a. Gas Hills, Wyoming
STM is the largest landhold in the area (34,000 acres) which was mined previously by five major companies including Areva. It has great existing infrastructure including paved roads, grid electric and natural gas. Its is less than 70 miles to the Sweetwater mill. Internally, STM projects that based on historical data using a surface pit that Gas Hills there is available at least 15m lbs of U308 and a potential 20m lbs from exploration lands. To put this into context, historically over 100m lbs was extracted from the area. 

There has only been one new uranium mine opened in the past 20 years and that was by Paladin Energy with its Langer-Heinrich mine in Namibia. The grades at Langer are around 2%.

To give you an idea of how rich the Gas Hills area is - the least grade found in the area is around 7%. This makes the economics of these mines compelling if they can get through the permitting process. STM estimates a capital cost of $200m.

b. Roca Honda Property, New Mexico

This mine will be located in the Grants Mineral District which was the largest uranium producing district in the US. Here over 340m lbs were produced historically. STM will lodge a permit application in Q4 2009. The history of STM at Roca Honda goes back to an agreement made in July 2007 with Sumitomo Corp. STM transferred 40% of its interest to Sumitomo in return for various exploration payment and a 50M commitment to the mine once feasibility was established. STM has released compliant measurements of 17.5m lbs of measured and indicated U308 and 15.8lb of Inferred U308. The grades in many of this areas are between 6 and 10%. The mine at Roca Honda would be a conventional mine.

Conclusion

STM represents the cheapest possible option on the choicest properties of uranium in the US with very limited downside and numerous key events unfolding in the next six months. Risks lie in the uncertainty of timing of the permitting process.

David Segelov CFA
21st Oct 2009

Varian Medical Systems, designs, manufactures, sells and services equipment and software products for treating cancer with radiotherapy, stereotactic radiosurgery and brachytherapy. The Company also develops, designs, manufacturers and services proton therapy products and systems for cancer treatment. 

Reasons for Shorting

More »

Virtusa (VRTU)

Alexco Resource Corporation (AXU) - Long $1.80
A Cheap, Unlevered & Near Term Silver Producer

Thesis

Alexco has by dint of history full ownership over one of the most prolific silver producing regions in Canada. It is funded to get to production and has no debt. AXU is a very clean simple story enabling the investor to have full access to a cheap, unlevered silver near-term to be producer. AXU will be producing as a low-cost producer in a well-proven high grade area.

AXU can be divided into two distinct parts:

* consulting and remediation business which does about $6m per year and is profitable.
* exploration and production company in an area which has full ownership of Keno Hill an area roughly 18 miles long by 12 miles wide. The mining is to be done by conventional flotation and the area is on the electric grid.

History of Keno Hill


Keno Hill and its entities were forced into government receivership in 1989. Burdened by environmental liabilities, the property sat abandoned, though significant resources remained at grades far in excess of most of the world's primary silver producers. Keno Hill. According to the Yukon Govt databases 1913 and 1989, the Keno Hill Silver District produced more than 217 million ounces of silver (5.37 million tons) with average grades of 40.52 oz/ton silver, 5.62% lead and 3.14% zinc, making it the second-largest historical silver producer in Canada. The silver grade at keno Hill is in the top 3% of all global silver producers.
In June 2005, Alexco was selected as the preferred purchaser of the assets of all of the United Keno mines. In December 2007, following receipt of necessary permits and approvals, the Yukon Government approved final close of the purchase agreement, giving Alexco 100% ownership of the assets. Alexco has no liability to the environmental issues (and is being paid by the government to clean it up) and has noundertaking to spend any amount of exploration dollars.


Financing with SLW


In October 2008 AXU signed a deal with Silver Wheaton (SLW). The terms were:
* that SLW will purchase 25% of the life of mine silver produced by AXU from its KenoHill District mineral properties, including the McQuesten mine.
* AXU receives payments totalling $US50m and a payment of the lesser of $3.90 (increasing by 1% per annum after the third year of full production) and the prevailing market price for each ounce of silver delivered.
* All deposit payments from SLW prior to commencement of production can only be used on the Bellekeno Mine.
* Once silver is produced, the balance of the $US50m is drawn down over 40 years by the excess of market price of silver and per-ounce cash amount paid by SLW at the time.
Risks in the deal with SLW include - a failure to meet certain Bellekeno mine construction milestones which would enable SLW to terminate and ask for a refund.

In December 2008, SLW funded AXU with a line of $15m. The other $35m will be paid out as infrastructure at Bellenko is completed and when SLW and AXU have all pre-conditions in place to start the processing facility.
The decision to go ahead and fund the $35M is expected in August/September 2009.


Financial Facts
* Cash stands at 22m. Burn per month is $1.5m
* Production expected in 2010.
* Significant interest in the Zinc offsets.
* All in cash costs expected to be $6-$7 per ounce.
* August/September final decision by SLW to fund the final $35m
* Management owns significant equity in the company (>10%).


What is It all Worth?
Will produce 3.3m ounces of silver, 30m pounds lead and 24m pounds Zinc annually over next 5 years from Bellenko mine.
I have assumed a $6 spread on the 2.4m ounces that are unpledged. This would amount to 15m per year in cashflow or roughly 30c per share. I have assumed the pledged silver acts like debt until it is paid. The off-takes have huge potential to generate cashflow as well.

Valuation

Stock Price 1.80
Shares outstanding - diluted 49.0
Market Cap 88.2
Cash + short-term investments 22.0
Debt 0.0
Enterprise value 68.2

David Segelov CFA
(