Thursday, September 6, 2012

Metals Stocks Poised To Move - Gold & Silver, Uranium Activity; (AMEX/TSX: URZ) Uranerz Energy -

Gold And Silver Set For Fall Rally?

As the "sell in May and go away" crowd focuses more on their golf-swing, instead of their swing-trades, market volumes and prices tend to sag until the "Summer Doldrums" end, sometime after Labour day. If history serves, while a lot of these funds and day traders remain in sleep mode, the time is right-now for savvy patient investors to quietly build positions in metals and metals stocks in anticipation of a seasonal rebound.

Gold made new all-time highs of $1,923 an ounce this time last year, when it was technically extended and due for a correction. It did, falling back to as low as $1,528 by May 16th of this year. Since then gold has remained flat at around $1,600 for months, well off its highs, now going into the fall and winter seasons when metals and metal stocks are usually strongest. Gold is currently $1,693 and seems to have formed a nice base to build on, trading solidly above $1,600 for over a month now.

Silver peaked over the winter in 2011 at close to $50 an ounce before correcting, pushed even lower this year as gold and the markets in general sold off. Almost cut in half, silver traded as low as $26.30 at the end of June, but for the first time in four months silver is again over $30 an ounce. We are even more bullish on silver than gold, for a variety of reasons from silver's lower price (especially with the "Gold / Silver Ratio" at 52, compared to its historic ratio of as low as 15), to its many more uses as both a precious and industrial metal, to silver's higher demand and much smaller above ground physical supply (in ounces), and the potential leverage all of this may represent compared to gold.

However, most gold and silver stocks have not kept up, not even close, with the great returns seen in precious metals bullion and ETFs over the past decade. Many believe, us included, that mining stocks are overdue to outperform their underlying metal. While some mining stocks may not be as liquid to trade and can be complicated to value, at some point institutional investors should start to recognize how much mining stocks have been discounted, and how much cheaper gold and silver can be bought in the stock market versus owning bullion or their ETFs.

We believe in the long-term uptrend in precious metals; and in silver over gold; and in quality precious metals stocks over bullion or their ETFs. We hope to feature a few emerging precious metals producers and junior explorers this fall and over the winter. To drill-down your own research of individual or groups of companies, search our Small-Cap Directory that lists each stock's market data, news, contact info and description - for close to 500 resource and non-resource stocks.

If proven right that gold can take out its 2011 highs over the next year, then gold's recent 20% selloff will seem like a gift. From a timing-perspective some of the current strength in precious metals ETFs, or what I call e-gold (NYSE: GLD) and e-silver (NYSE: SLV), has to be due to seasonal positioning.

How Can Uranium Prices Stay This Low Much Longer?

Last month we looked at worldwide uranium macro-events from Japan's restarting of its nuclear power fleet, to Germany's recent softening stance going into next year's elections. This report focuses more on the recent developments of specific uranium mining companies.

Uranium metal is the fuel used in nuclear reactors. Uranium and its related mining and exploration stocks sold off dramatically last year after the Fukushima reactor accident. While reactors worldwide had to be stress-tested, 170-million pounds of uranium were still consumed while only 140-million pounds were mined.

This begs the question how can U3O8 prices remain at around $50 a pound much longer? I mean if current mined supply can't even meet demand in a year when many of the world's reactors are shut down, how can demand be met at these prices as the world moves from 435 to 820 reactors?

And new uranium supply keeps getting delayed! For example, flooding has caused Cameco's (NYSE: CCJ)(TSX: CCO) huge high-grade Cigar Lake mine to be delayed a few times, now targeted to open in 2013. Due to low uranium prices, BHP Billiton (NYSE: BHP) just announced delays and that it needs lower cost designs for its massive (world's 2nd largest) Olympic Dam mine in Australia.

Are Utilities Scrambling For Future Uranium Supply?

Uranium is radioactive. For investors, this means they simply need to look at uranium mining stocks, ETFs the like the Global X Uranium ETF (NYSE: URA), or holding companies like Uranium Participation Corp. (TSX: U), as U3O8 can’t be held like bullion.

or ETFs like Uranium Participation Corp. (TSX: U), as U3O8 can't be held like bullion.

The exploration, mining, sale, use and disposal of uranium are also highly regulated. For utilities, this results in long lead times, meaning they have to secure uranium supply years in advance. For competitive reasons, deals between utilities and uranium producers are often secretive, not disclosing certain terms to the public such as prices or even the name of the purchaser.

Uranium prices hit $137 a pound in 2007, but the spot price for U3O8 is only $48.00 today! You might be thinking with prices that low, there must be lots of supply available right now. Just look at how far some utilities will go to secure their long-term uranium supply!

Paladin Energy (TSX: PDN)(AMEX: PDN) recently announced a long-term uranium supply contract with an unnamed major utility. What has raised many eyebrows is that the off-take agreement includes a huge US$200 million pre-payment; potentially solving any liquidity issues in ramping up production, and adding to PDN's takeout potential.

Why would a conservative utility accept all the risks with putting up such a landmark pre-payment, for uranium hopefully to be delivered over years, with uranium prices seemingly stuck around $50?

Activity In The Uranium Space Shows Interest Is Steadily Growing

Several analysts have resumed or increased their uranium industry coverage lately. Many of these stocks have seen upgrades because of higher uranium price expectations in general, or because of positive developments with specific companies that are producing uranium, or transitioning to the production stage. A few notable updates:

Cameco has a "Double U" plan to double its annual uranium production to 40M pounds by 2018. On August 26 they announced acquiring the Yeelirrie deposit from BHP Billiton for $430M. Yeelirrie is near the smaller Kintyre deposit that Cameco is currently developing in Western Australia.

Cameco is the world's largest public uranium company and should know when uranium stocks are undervalued. Cameco has completed 17 acquisitions since Fukushima - versus only three in the preceding two years!

One deal that got away from Cameco last year was Hathor's 57.9M pound Roughrider project. Rio Tinto (NYSE: RIO) won that fight by outbidding Cameco. Now RIO has a toehold to build-on in Canada's uranium-rich Athabasca Basin region - that Cameco still dominates.

The question is who's next on these uranium giants' menu? Keep an eye on Denison Mines (TSX: DML)(AMEX: DNN) that recently sold its U.S. mining interests, potentially making it more attractive to a company looking to acquire significant uranium assets in the Athabasca Basin.

Denison also owns a significant chunk of the Midwest JV: Areva (PA: AREVA) 69.16%, Denison Mines 25.17%, OURD Canada 5.67%. This 43.3M pounds of uranium open-pit project just received Canadian Federal Minister of Environment approval of the Midwest Environmental Assessment.

URZ Reports Further Good Uranium Grades And Q2 Financials

Another company to watch closely is our featured stock Uranerz Energy (AMEX: URZ)(TSX: URZ) that is constructing its first ISR uranium mine - targeted to open by the first half of next year! Uranerz has reported NI 43-101 resources of over 19M pounds of U3O8 from only 7 out of over 30 projects explored so far, and has recently reported finding a new uranium trend on their Monument Project.

From URZ' news release on August 28, "Uranerz Reports Production Well and Development Update - is pleased to report the receipt of further good uranium grades in wells drilled during the Nichols Ranch production well-field installation. As of August 15, 2012 the Company has drilled and cased 205 recovery and injection production wells in Production Area #1 of the Nichols Ranch ISR Mine, located in the Powder River Basin of Wyoming. To date, 22.5% of the installed production wells have resulted in a grade thickness ("GT") near or above 2. This is the third news release issued this year on the continued receipt of good uranium grades as development at Nichols Ranch continues.

Examples of some of the best drilling results from the wells drilled since April 1, 2012 are provided ...

'A hole with a GT of 1 is usually considered good in the ISR uranium mining industry thus we are very encouraged to see that we have been receiving GT's as high as 4.7 in these most recent drill results,' stated Kurtis Brown, Senior Vice President, Geology & Development.

Construction of the central processing plant and installation of the environmental monitor and production wells for ISR mining are proceeding. Concurrently, the Company is pursuing the final authorizations required for commencement of uranium production, including the permits for waste water disposal facilities." ...

Uranerz Energy's Nichols Ranch Mine, Ion Exchange Columns & Sand Filters
- Board of Directors Site Visit, June 2012.

See URZ' mine construction photos:

On August 9, Uranerz announced their 2nd Quarter 2012 Financial Results ended June 30, 2012, which showed over $19M in cash, almost $17M in working capital, and no long-term debt. This appears to be a healthy cash position as the cost to construct the Nichols Ranch mine was projected to be around $35M, and my understanding is that the plant is near completion, with the timing of a production start tied mainly to the approval of the company's Deep Disposal Well (DDW) permit.

All I have to say about the DDW permit process is that there has never been an application denied that I know of, and that URZ’ DDW would tie into the same stratigraphy (rock layers) used by DDWs of two other uranium producers in the region. One can only presume that "any day now" is a best guess.

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