Wednesday, August 18, 2010

Investors Guru Small Cap Stock Observer

Three Macro Trends Point To One Small Company

“If you stare into the Abyss long enough, the Abyss stares back at you”. – Friedrich Nietzsche

Last week the DJIA dropped 265 points (2.49%) - as the volatility index (VIX) – sometimes referred to as the “fear index” - spiked 13%. U.S consumer spending has flat-lined. The U.S. 2010 federal deficit is projected to reach $1.47 trillion. Earlier in the week noted economist Walter J. John Williams predicted that U.S. currency will soon implode giving way to the barter system. He suggests hoarding “food, water and canned goods”.

It’s hard to think straight when the “experts” are panicking. But there is one thing we know about our species: we are astonishingly resilient. Despite our frailties, our lusts, our capacity for violence and greed; humans are natural problem solvers and history suggests that we will emerge victorious from our current trials.

As investors, it is imperative that we stay calm, and catch the big waves as they roll in.

Right now, there are three macro trends which together create a unique opportunity for wealth creation.


China has just become the world’s biggest polluter. China’s energy usage is projected to double over the next decade. There are 1.3 billion Chinese. Per capita, their energy use is 20% of the average American. But they are catching up fast. Pollution from Chinese coal-fired electricity plants is costing the central government $200 billion a year in health costs. Finally, China gets it.

Just this week, the Chinese government ordered 2,087 energy-intensive factories shut down. It’s no longer just talk. The central government is sacrificing short term economic growth to achieve a healthier environment.

"These outdated polluters reflect a crude mode of economic growth," stated Li Yizhong, China's Minister of Industry, "They are also the cause of inefficiency and weak competitiveness of our national economic development”.

The factories on the hit list come from 18 industries including iron, steel, coke, metals smelting, paper production, cement and leather making.

China is determined to improve energy efficiency. The central government has started promoting local officials for meeting environmental targets.

Under pressure to convert to cleaner energy sources, China has quietly approved the construction of 28 new nuclear power reactors by 2020. Twenty of them are already under construction.

Each one of the one-gigawatt reactors will cost $2 billion dollars and power 8 million Chinese homes.

China’s new environmental resolve is going to cause a shock wave to global uranium supply. Each Chinese reactor will require 300 tonnes of uranium a year.


With the steady devaluation of the U.S. dollar, political unrest in Africa and South America, and regular euro-dollar meltdowns, global investors are looking for a safe parking spot for their money.

Until the 2008 global financial crisis, Canada had 12 straight years of budget surpluses. During the crisis, not a single Canadian bank failed. The World Economic Forum has ranked Canada's banking system as the safest in the world. By comparison, the U.S. banking system was ranked 40th.

Economists with CIBC World Markets are projecting Canada will record the fastest growth rate among the G-7 in 2010/2011. Sovereign Wealth Funds are taking notice and starting to invest in the Canadian dollar. In fact, in the last 12 months, net purchases of Canadian bonds reached a new record for 12 consecutive months, peaking at $95 billion.

The Fraser Institute conducts an annual survey of mining and exploration companies to assess factors such as taxation, geopolitical risk, legislation and regulation. In 2009, Canada continued its world leading performance with six Canadian provinces positioned in the top ten: Alberta, Newfound land & Labrador, New Brunswick, Manitoba, Saskatchewan.

Quebec occupies the top spot as the global leader.

Since 2002, the Canadian Dollar has risen from USD $0.62 to USD $0.96. If you invested USD $100,000 in a Canadian company eight years ago, made nothing on your investment, you’d still walk away with $155,000 – just on the currency gain from the strengthening Canadian dollar.

That’s a massive hedge that appeals to international investors.


“Buy on weakness – sell on strength”. Following this mantra, it looks like the right time to enter the uranium market, as the spot price has seen a steady decline for the last 3 years.

Global uranium demand is expected to surge 300% in the next decade. Obama has asked Congress for $36 billion for nuclear development in the 2011 budget, enough for eight more reactors. "Whether it is nuclear energy or solar or wind energy,” Obama stated, “if we fail to invest in these technologies today, we'll be importing them tomorrow.”

Currently, 30 nations representing two-thirds of humanity use nuclear power to produce about 15% of global electricity. Nuclear power is a proven, clean energy alterative to fossil fuels. It produces 75% of France’s electricity, 30% for Europe and Japan and 20% for America – the world’s largest energy consumer.

There are plans to build about 480 new reactors globally over the next 20 years. Russia, India and the U.K. all have escalating nuclear power programs. China, as we’ve discussed, is leading the way.

The spot price of uranium rose 10% last week to $46 a pound. Some industry observers are predicting $100 a pound U308 in the next 3 years.


The greening of China, the fiscal robustness of Canada, and a clean energy industry on the rise.

These three factors point to an advanced Canadian uranium explorer with real potential to produce.

For example, take a closer look at a company called Uracan Resources Ltd. (TSXV:URC). Uracan is in the business of exploring and developing bulk tonnage, near-surface uranium deposits with its two 100%-owned Canadian projects.

With only 50 of 1000 square km explored on the Quebec property, Uracan has discovered over 40.7 million lbs. of U3O8 since 2006. The 2009 Drilling Program produced encouraging results.

The project has excellent infrastructure with provincial highways running through the property, inexpensive hydro power, and deep sea port access. Uracan has an impressive management team lead by Chairman and CEO Gregg J. Sedun - an independent venture capital professional who has been a founder or director of many successful companies including Diamond Fields Resources Inc. (sold to Inco for $4.3 billion).

Uracan combines the industry expertise with the financial acumen of Endeavour Financial (TSX:EDV). Given the location of the property, the momentum of their resource development, the rebounding economic outlook for uranium explorers, and with the stock currently trading close to its 52-week low at $0.14, this all seems attractive to the contrarian in us that is always looking for good entry points in stocks like URC.

Reading the financial news it’s easy to feel that the world is coming to an end. But it isn’t. Turmoil is not destruction. Those who can see through the clouds will prevail and prosper.

As Nietzsche said, “The individual has always had to struggle to keep from being overwhelmed by the tribe”.

Investors Guru Small Cap Stock Observer publishes interesting articles by contributing writers, in addition to its own content. This article was written by Peter Cole and we have not verified its details.

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