Monday, January 16, 2012

Investors Guru Small Cap Stock Observer

(Amex/TSX: URZ) Uranerz Energy - Why Uranium, Why Uranerz Energy

Why Uranium

With the ballooning of US deficits and debt since the start of the new millennium, it was no surprise that most commodity prices were going higher and higher at the same time the US dollar trended lower and lower. Put simply, obvious overprinting of money dilutes its perceived value, requiring more of it to buy something of real value.

As a result most food and energy prices, to base and precious metals, started making new highs in the mid 2000's. For some of these commodities, especially energy prices, this uptrend reversed swiftly in 2008 as the US housing and financial crisis caused the worst recession since WWII. This so-called Great Recession resulted in all-time high oil prices of US$147 a barrel plunging to US$32 a barrel, while uranium sank from its US$137 a pound all-time high in 2007 to US$40 a pound.

Worldwide financial markets finally started bottoming in March 2009, and soon after most economies started to recover. Typically, strength in commodities prices follow a recession. Many agriculture and mining commodity prices have since exceeded their 2007 highs, with most precious metals for example making new highs again last year. We perceived a possible opportunity in uranium in 2010 because it severely lagged up-trending oil and gas prices compared to their relative values just a few years earlier.

Energy demand and oil prices continued to trend higher late in 2010, and sure enough uranium started to make its move. However uranium futures don't provide the liquidity of most other commodities, and you can't hold it like gold. We were instead looking for a pure-play uranium company with an established resource already in development, and with potential further upside from active grass-roots exploration and drilling.

Our 2010 timing for uranium, and shares in uranium explorers, developers and producers seemed a great call going into 2011. Oil was again around US$100 a barrel and as anticipated uranium outperformed on a percentage basis, trading around US$74 a pound. Then the uptrend again halted as Japan was hit on March 11, 2011 by one of the worst earthquakes ever, followed by a tsunami and the Fukushima nuclear accident. This tragic nuclear accident appears to have been caused by a combination of outdated equipment and extreme natural events, however the world's nuclear operators have taken or are taking measures to ensure the safety of current reactors. See our past Small Cap Stock Observer newsletters mentioning Fukushima and uranium markets going forward.

Meanwhile last spring some economists contemplated a worldwide Japan-related recession. However short-term energy demand remained stable. This is evidenced by 2011 being the first year that oil prices averaged over US$100 a barrel. Long-term energy demand growth should also remain robust due to emerging economies like China and India. In other words the long-term bullish fundamentals for energy commodities have not changed, and we believe this especially for uranium and nuclear energy as still the only abundant, efficient, low cost and clean energy alternative to burning dirty fossil fuels.

Regardless, in the short-term anything uranium sold off hard after March 2011. U3O8 bottomed just under US$40 a pound again and has still not fully recovered, now trading around US$53 a pound (US$21 a pound lower than before Fukushima). The bright side for those who missed the first uranium wave in 2010 is that governments and investors who initially over-reacted are starting to come back to nuclear energy's many advantages, including safety. Therefore we continue to prefer uranium going into 2012 as a possible second kick of the oilcan uptrend play, especially on a relative basis.

Why Uranerz Energy

Our focus is always on small-cap, with a stock market value under $500 million, because share prices tend to be impacted more by positive news than for large-cap companies. In addition to comparing common valuations of peer companies of a certain market sector, and looking at near-term objectives of individual companies for lots of activity, we also consider management experience, funding, political risks etc.

Uranerz Energy's current market capitalization is US$170 million at US$2.21 per share, based on approximately 77 million common shares issued and outstanding, which seems relatively tight for a small-cap with such advanced mining projects. Insiders own close to 10% via 6.6 million shares and options. The short interest is also over 6 million shares currently, representing additional share buying at some point.

URZ Top 10 Institutional Holders: Global X Management Company LLC, BlackRock Fund Advisors, State Street Corporation, Northern Trust Corporation, BlackRock Institutional Trust Company NA, The Vanguard Group Inc, CQS Cayman Limited Partnership, Royal Bank of Canada, Andreeff Equity Advisors LLC, TIAA-CREF Investment Management LLC.

URZ Top 10 Mutual Fund Holders: Global X Funds-Global X Uranium ETF, IShares Russell 2000 Index Fund, SunAmerica Focused Small Cap Value Fund, Vanguard Total Stock Market Index Fund, IShares Russell 2000 Growth Index Fund, College Retirement Equities Fund-Stock Account, Valic Company II-Small Cap Value Fund, IShares Russell Micro Cap Index Fund, EQ Advisors Trust-EQ/Alliance Bernstein Small Cap Growth Portfolio, Bridgeway Funds Inc-Ultra Small Company Market Fund.

The company's shares are relatively liquid and trade on multiple stock exchanges and currencies. Uranerz trades most actively on the NYSE Amex ticker symbol URZ, averaging close to four hundred thousand shares per day. Uranerz also trades on the Toronto Stock Exchange under TSX symbol URZ, and on the Frankfurt Stock Exchange under symbol U9E.

The next three things we look for in small-cap mining stocks are our three P's - Positioning, Properties and People. Why uranium vs. other resources was already explained and Uranerz Energy qualifies as it is a pure-play uranium company. This means uranium exploration and development is all Uranerz does - no other base metals, precious metals, gem-stones, oil or other resources, like some of their competitors.

URZ became one of our Featured Stocks in December 2010 at around $3 a share. Going into 2011 the company made several key announcements:
  1. December 29, 2010 - completes $20 million financing,
  2. January 4, 2011 - WDEQ state approval of one of the first new commercial uranium permits in almost 20 years,
  3. January 24, 2011 - US NRC final SEIS permitting green-light,
  4. January 26, 2011 - accelerated expiry of US$12.7 million in warrants.

Most uranium-related investments were up at that time, with URZ outperforming most other small and large-cap uranium stocks. The company was completing its stated near-term objectives on schedule and the stock was responding accordingly. URZ peaked at US$5.93 on February 7, 2011. Then on March 11 the Japan earthquakes, tsunami and Fukushima nuclear accident occurred, wiping out most uranium related recent gains and knocking URZ under $3 per share.

This is a great example why we consider both technical trading and fundamental values. Short-term price trend momentum can break down at any time, and most often for unexpected reasons. Unless you can accurately predict earthquakes and tsunamis, your company better have great management and cash on hand to meet its near-term fundamental objectives, or else how can you expect to recover.

As of March 2, 2011, Uranerz' treasury had $47 million and no debt. On May 10 the company initiated its 2011 Power River Basin Drilling Program, and on June 28 announced inclusion in the Russell Family of Indexes (3000, 2000, Global & Microcap). The big news came on July 20 when Uranerz received its final NRC approval, and then on August 1 with the commencement of construction of their first ISR uranium mine at their Nichols Ranch project. URZ was trading in the low to mid $3's per share around that time.

Then came last summer's 'AAA' US debt downgrade, followed by multiple European sovereign debt fears, together causing a general market sell-off into the fall 2011. On top of this gold retreated $300 an ounce from its September US$1900+ highs, further punishing anything resource related. Uranerz Energy's fundamentals never seemed better, but market momentum was even worse than after Fukushima and URZ sank to a 52-week low of US$1.17 on October 4, 2011.

Typically as short-term players throw in the towel, long-term investors make their move. The biggest of all uranium investors recognized a value opportunity last year that resulted in a bidding war over (TSX: HAT) Hathor Exploration and its high-grade Roughrider uranium deposit located in Canada's Athabasca Basin. After the fourth bid (TSX: CCO)(NYSE: CCJ) Cameco Corp. gave in to (NYSE: RIO) Rio Tinto's C$654 million offer (C$4.70 per share). The uranium market started turning around as investors wondered who's the next Hathor?

Uranerz Energy also has advanced uranium projects with both proven resources and significant exploration potential, plus near term production with experienced management and millions in the treasury. Currently URZ trades at around $2 and technically seems like a Goldilocks stock; nowhere near last winter's $6 highs, and well off the bottom of last fall's lows.

Market momentum is always hard to predict, but fundamentally Uranerz continues to deliver. From the November 30, 2011 news release, Uranerz Signs Processing Agreement with Cameco ... Uranerz will deliver uranium-loaded resin produced from the Company's Nichols Ranch in-situ recovery ("ISR") mining operations to Cameco's Smith Ranch Highland uranium mine for final processing into dried uranium concentrate packaged for shipping to a converter. The processing of Uranerz' loaded resin at Cameco's facility will not change the Company's production plans. "Uranerz will retain the regulatory and physical flexibility to install a full processing plant at the Nichols Ranch ISR mine at a later date if it chooses to do so", explains Uranerz Executive Vice President and Chief Operating Officer, George Hartman. - This agreement may help Uranerz start production earlier and cheaper than waiting for the full processing plant to be installed. Cameco is the world's largest publicly-traded uranium company, that did not succeed in acquiring Hathor.

December 19, 2011 news, "Uranerz Provides ISR Uranium Mine Construction Update ... Construction is well underway and is currently on schedule. The Company's focus is on the construction of the processing plant, the office and laboratory, the maintenance facility, and the installation of monitor and production wells required for ISR uranium mining. Six drill rigs are engaged in production well installation." - Key milestones are listed in the full news release.

All of the company's uranium properties are within the prolific (PRB) Powder River Basin Wyoming area of the United States, which means Uranerz shouldn't have the political risks, infrastructure, security, bribes, transportation and repatriation issues etc. that miners regularly have to deal with when developing projects in far-away lands. We expect 2012 to again be an active year for URZ in the PRB, with lots of mine construction, additional projects permitting, financing, new resource drilling and production updates.

One of the most impressive features about Uranerz Energy is their management team - see bios for Uranerz Energy's Key Personnel. The background statement says it all: In July 2005 management changed its corporate name to "Uranerz Energy Corporation". Uranerz is an identity that most of the current management had worked with before, as former officers, senior management and employees of the original Uranerz Exploration and Mining Limited and related companies (the "Uranerz Group").

The Uranerz Group was the world's third largest uranium producer when it was acquired in 1998 by Cameco, the world's largest primary uranium producer. This management team has the experience, the contacts, the ability, the competency and the desire to build Uranerz into a significant producer of uranium. The Company also has an advisory board that consists entirely of ex-Uranerz Group professionals.

Uranerz Energy remains one of our Featured Stocks going into 2012. We look forward to updating our subscribers as the company completes construction and commences production at its first ISR uranium mine. Construction is currently on schedule and on budget to start producing at their Nichols Ranch project in H2 2012. See Uranerz' photo gallery by clicking on this January 2012 mine construction picture.

Keep in mind this is only the first of Uranerz Energy's 30 uranium projects in the Powder River Basin area of Wyoming, U.S.A. As additional resources are discovered, this nearby feedstock could expand the economic size, cost efficiencies and overall value of the entire project, and should also extend the Nichols Ranch mine life significantly. These additional resources can potentially be added to the company's existing permits and produced under the license amendment provisions.

On November 10, 2011 Uranerz reported drilling a total of 186 uranium exploration holes for a total of 140,000 feet, with three drill rigs during the third quarter. See the company's attributable NI 43-101 Resources of over 19 million pounds of U3O8 as of October 14, 2010 by clicking on this January 2012 drilling picture.

(TSX: CCO)(NYSE: CCJ) Cameco Corp., (Paris: AREVA) Areva and (TSX: UUU) Uranium One are three of the world's largest primary uranium producers with market caps of US$8 billion, E$7.4 billion and C$2.3 billion respectively. (NYSE: BHP) BHP Billiton and (NYSE: RIO) Rio Tinto are two diversified resource producers, including uranium, with market caps of US$200 billion and US$106 billion respectively. Other uranium producers include (TSX: PDN) Paladin Energy, (TSX: DML)(Amex: DNN) Denison Mines and (AMEX: UEC) Uranium Energy with market caps of C$1.3 billion, C$619 million and US$259 million respectively. Uranerz Energy is not quite yet producing and has a market cap of US$170 million.

It is obvious the company's projects are much further ahead than they were in 2007 when URZ traded as high as US$7.50, or last February when URZ traded just under US$6 per share. Is the market valuing Uranerz Energy as just an exploration company, a development phase company, or with some future producer premium built-in? The company's website lists financial analysts already covering URZ who are better qualified to answer these types of questions.

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