'Risk On' Is Back: Why Uranium Stocks Are Poised To Double

by: Matthew Smith

With Europe finally coming to its senses and doing what it should have done a couple of years ago, it now appears that the 'Risk On' trade is back in vogue. Euope's lenders may be out of game as they rehabilitate their balance sheets, but now the rest of the world's banks and lenders can get back to the business of providing financing for projects, deals and various investments. We also think that it is time to look at the places where we have made some of our 'killings' before, namely the uranium juniors and miners at this time.

All of the bears surrounding the uranium camp will tell you that the industry is dying as Germany walks away from the nuclear experiment and that demand vanishes from the world market over the next decade. They will also tell you that new nuclear plants will be slower coming online now that many are reevaluating their plans to make sure they are constructing safe projects as a result of Fukushima. All of this is true. If one takes a few steps back however, in order to see more of the big picture, one would see the biggest question facing the industry is none of the above, but rather where is all of the uranium going to come from once the 'Megatons to Megawatts' program officially ends in the next couple of years? That is the million dollar question at this point, and there is but one answer; from the ground!

This is not just my thinking but some of the brightest minds in the industry think this as well. I have been waiting to move back into uraniums since we sold out nearly all of our positions shortly before and after the Fukushima disaster. Waiting in the bushes is sometimes the hardest task when hunting as you wait for the most opportune time to pull the trigger, and as we waited for that opportunity with the uraniums we found the big boys moving in on our hunt! We are now faced with the realization that we are in the right place at the right time and that due to the likes of Cameco (NYSE:CCJ) and Rio Tinto (NYSE:RIO) joining in alongside the Chinese and Russians, the race is now on.

In the past month or two, some of the world's most exciting uranium discoveries in decades have been put into play. Cameco (CCJ) made a move on Hathor Exploration, a small Canadian outfit that made a discovery (now the Roughrider Deposit) in Canada's prolific Athabasca Basin right next door to Areva and Denison's Millenium Deposit, which saw Rio Tinto ride in at the 11th hour and become Hathor's white knight. We thought Cameco's offer was generous as this deposit will take years to develop, and if developed by itself and not part of a consortium with the other deposits that appear to be contiguous in the area marginal at best. Rio Tinto was the perfect buyer of this company as it has its own issues with their flagship uranium property facing mine life issues (declining) at just the beginning of the true 'Uranium Renaissance.'

The other deposit being eyed by vultures is Extract Resources's Husab Deposit in Namibia. Rio Tinto actually owns over 10% of Extract and Kalahari Minerals (largest shareholder of Extract) each, which makes it all the more interesting that it thought it needed Hathor. The Chinese are actually back for a second attempt at this deposit, and it seems the involved parties are content with the inevitable.

The industry is finally consolidating with the worthwhile deposits getting into the hands of those who can do something with them, namely develop them and create cash flow streams for investors. The lower borrowing costs of the bigger players will also enable the projects to be that much more economical once in production. We even saw earlier this week juniors merging with each other in order to better fund the development of their projects (see Energy Fuels and its friendly merger with Titan Uranium). The big picture is coming together, and American investors have the chance to partake in what we believe will be doubles for uranium players trading on their markets.

Cameco is obviously the best known uranium miner. It is one of the world's largest producers and the largest pure play uranium miner out there. It has been both a Wall Street and Bay Street (Canada's unoccupied Wall Street) and all along has been probably the most conservative uranium player in the field. The company does not do many joint ventures with juniors, let alone acquisitions. We think that due to its reserves, potential new supply coming online, and current production that CCJ could easily see shares recover to pre-Fukushima levels as the Russian uranium supply disappears from world markets. CCJ is one of the few entities in the world that has so many projects with sub $40/lb production costs, let alone the sheer capacity, that as its old contracts expire and uranium prices come more in line with the true costs of mining it will be a huge benefactor. Cameco is the most conservative of our picks in the sector with the lowest risk, and lowest reward; however as uranium prices (both the spot and long term) recover investors will move into CCJ as it is one of the few stocks the big money boys can buy (it happens each time uranium prices begin on an upswing).

The next producer we find worth a speculation is Uranium Energy Corp. (NYSEMKT:UEC) which beat many of its junior brethren to production thanks in large part to the locale of its projects. UEC plans to have a production base in South Texas, and already produces there via the Palanga ISR Project. The company is implementing a strategy with one centralized processing plant (Hobson) and multiple projects to feed it material. The plan currently is to have four projects feed the centralized plant and the company is drilling a 100,000 meter program to expand upon the 13 million lb U3O8 resource base it has in South Texas. As the company ramps up production at Palanga, and brings more of the satellite projects online, shares will rise. The company has a great capital structure with less than 80 million shares outstanding and just over $30 million in the bank. The low cost producer of U3O8 will rise further than CCJ in any U3O8 price recovery as it is less hedged and has ample room for news flow via offtake agreements, monetizations or joint ventures based on allowing others to use its historic database on drilling results.

If you want to rule a market, you need to own the means of production, and in North America that is Denison Mines Ltd. (NYSEMKT:DNN). The company is a merger of an explorer with the old Denison, and provided the assets to wake up this sleepy company. Denison is now a major player with ownership in two mills and effectively controls uranium mining in the US West with the mill it has there. In fact, Denison recently purchased one of the miners, an Australian company named White Canyon Uranium, and now rather than taking its ore and milling it, it owns the means of production. This now gives it a greater production base in the US West where it produces both uranium and vanadium.

Also adding to Denison’s allure is its Midwest Deposit, which is next door and contiguous with Hathor’s Roughrider Deposit. Denison is partnered with Areva, and another party – OURD (Canada) Corp., and has a mill nearby by the name of McClean Lake where it has the ability to process high grade uranium ore, which is what the Athabasca is known for. With ownership in 2 of the 4 mills in North America, strategically placed projects in the US, and Canada, and its expertise and relationships in the industry, Denison is well positioned to reward investors in the near to mid-term based solely on its current assets and not factoring in any takeover bid.

Ur-Energy (NYSEMKT:URG) was always one of our favorite uranium explorers due to its near-term production potential and the fact that based off of the timelines it was fully funded. It has since been moved down our favorites list, however we do believe that it will warrant an investment in the near term. We say this because it is our opinion when looking at its cash position and our experience with the start-up and ramp-up of these ISR projects that the company will need to raise money in order to finish the construction and have adequate working capital. Ur-Energy will have more production from its first project than most of its peers and extra capacity at its processing plant, which it can lease out for extra cash flow. But with a share dilution the most likely means of raising capital, we believe the time to buy is not now but rather after that announcement. Great company, but that one bad news release overhangs the shares right now and a dilution can really crush junior miners’ shares as we have seen in the past.

Like UEC, Uranerz Energy (NYSEMKT:URZ) is focused on the centralized processing facility with satellite projects to provide feed. The company has two advanced projects, Nichols Ranch and Hank, which it has advanced nicely over the years. Nichols Ranch has roughly 3 million lbs U3O8 in the measured & indicated category under the NI 43-101 reporting guidelines (Canadian) and Hank has roughly 2.23 million lbs U3O8 in that same category. Both projects have an average grade over 0.10%, and Nichols Ranch and Hank will be key to ramping up production for URZ. The company appears to have plenty of cash in the treasury to fund development and also has a great share structure. The company has less than 80 million shares outstanding and less than 90 million fully diluted, which is why it is always a favorite of day traders when the uranium mining sector heats up.

The company already has signed contracts to supply some of the biggest players in the nuclear generating sector lending credence to the belief that it will get into production and avoid many of the hiccups that some have had in the ISR industry.

What will really move the industry is if Rio Tinto and BHP Billiton decide to go on a buying spree and bulk up in their uranium segments of the business. RIO is faced with aging mines and the need to replace that capacity, while BHP is expanding its Olympic Dam mine and could potentially be enticed to further expand in uranium should a large, low cost mine and/or project suddenly be put in play. If they both decided to further invest in the sector and we see Cameco forced to join in as well, with the private buyers and the state buyers (think China and Russia) valuations could escalate to levels last seen in the uranium bubble of 2005-2006.

Regardless of buyouts however, we are convinced that the uranium juniors and miners with legitimate projects are buys right now based on skewed valuations currently assigned them by the market. The next few years will be telling, but a double from these levels is not unrealistic based on potential cash flow and improving economics in the industry as a whole. After the recent rally in the market we are buyers on dips.

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