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How To Choose A Uranium Stock
By: James Finch
Now that the uranium bull market has gone to a new level, a number of
exploration stocks made spectacular percentage gains after the International
Investment Conference held in San Francisco in late November 2005. We turned to
Kevin Bambrough, Market Strategist, and Jean-Francoise Tardif, Portfolio
Manager, at Sprott Asset Management for their advice on how to navigate through
the more than 250 uranium exploration, development and producing companies
available across the global investment landscape. Who better to ask than a fund
that has invested around $175 million in uranium stocks the past few years,
about 6.7 percent of more than $2.5 billion managed by Sprott Asset Management?
The Sprott team has bet heavily on a nuclear energy renaissance, and early
indications confirm very strong returns in their investments.
Before our taped telephone interview, Kevin Bambrough emailed a few comments,
“We would like to make the point about some incredible gains that have been had
in the uranium sector. The list is growing but not the quality so investors
should use extreme caution. As the uranium price rises, and money pours into
exploration, we can expect to see some sizeable discoveries coming down the
road. It should be exciting times.”
Prior to StockInterview.com’s interviews with Mr. Bambrough and Mr. Tardif, they
compiled a list of ten tips for investors studying uranium companies. The tips
are listed below, followed by an extensive interview, first with Mr. Bambrough
(in this installment) and a second installment with Mr. Bambrough and Mr.
Tardif.
The Ten Tips Investors Should Know
1. One of the best indicators of a project’s potential success could be past
ownership. It's best to try to buy any mining stock early in the cycle. Try to
pick up properties that were worked by majors during the last bull market but
which eventually dropped during the lows of the bear market. During the last
uranium boom of the 1970’s, many majors decided to completely exit the uranium
sector.
2. Study the value of ore body with regards to its value per tonne, or its
recoverable metal. Estimate the “all in” costs and feel comfortable with what
you are paying. Risks-to-reward doesn’t favor pure exploration. Typically, we
avoid pure exploration plays unless management is excellent, they have a large
prospective land package, and the company is well financed.
3. Look for good, proven management, which has been successful in the past.
4. Look for solid shareholders. It is always nice to see that management has a
large stake in the company. Often, this makes them value their paper more, and
they will be less likely to engage in reckless stock issuance. If not
management, I get comfort seeing that successful fund managers have large
holdings. It is even better to see that a major company in a related industry
has taken an interest in the company.
5. Look at the property’s infrastructure. Find out about electricity and water
costs required for exploration, development and production. Find out about
roads, rail, trucking, access and proximity to a mill.
6. Look for hidden value in the company. We always consider the value of
existing infrastructure. From time to time we have been able to buy companies
where existing facilities, perhaps a mill or shafts more than justify the entire
market cap of the company. Past drilling for uranium will save money. Some
companies have properties with very expensive shafts and/or mills. There are
also companies with large extensive databases like Energy Metals Corporation (TSX:
EMC) and Strathmore Minerals (TSX: STM). These databases of past drilling on
various properties can be used to continue to acquire good prospects as well as
sold in pieces. I would expect that they will also be able to use the data to
farm in on other properties or sell other property owners valuable drill-hole
data.
7. Buy emerging stories. It is great to find a company before it has any analyst
coverage or even covered by letter writers.
8. Find out if the property is in a pro-mining environment. Ultimately, you need
to mine. It's best to have a property in a location where government is
pro-mining. We will still invest, though, as long as this factor is discounted
in the stock. Some countries are so hungry for investment they will offer
favorable tax rates and other incentives. Permitting can be costly and take a
long time so this is very important.
9. Study the capital costs for the project and the currency in the country where
the project is located. Typically, the lower the capital costs, the less risk in
the project. The less a company risks, in time and money, to find out if the
mine is economic, the greater its chance of success. Larger capital intensive
projects usually take longer to bring on, and you could risk missing an
important part of the cycle. I also like to consider currency moves and their
possible impact. A strengthening local currency can drive up costs and destroy
margins. A falling currency can dramatically improve the economics of the
project
10. Funding can improve the story or outlook. Make your cash work. It's not
really an option for a small investor but as an institution we love to invest in
companies when we think our cash is going to make a huge difference. Examples
include when Aflease (now SXR Uranium One – TSE: SXR) had cash problems and was
being deeply discounted, or our recent Tournigan (TSX: TVC) funding to pay for
confirmation drilling and exploration on the Jahodna uranium deposit in
Slovakia.
About the Author:
James Finch writes about investing in uranium companies on http://StockInterview.com.
The entire interview accompanying these tips can be viewed at http://www.stockinterview.com
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