Why Invest In Mining Shares Versus Bullion Or ETFs?
During past gold cycles, mining shares outpaced the underlying commodity, and junior miners outpaced more senior issuers. However, over the last decade mining shares in general have not kept pace with the gains in bullion or ETFs.
Perhaps it’s different this time because of past scandals, or to keep things simple versus keeping up with company-specific risks. ETFs like (NYSE: GLD), (NYSE: IAU), (NYSE: DGL), (NYSE: GDX), (NASDAQ: PSAU), (NYSE: SLV) also provide traders more liquidity than some mining stocks.
I don’t believe it’s different this time, because it’s still true that higher commodity prices tend to leverage a mining company’s earnings. Higher earnings expectations should attract new share demand, moving share prices even higher as bullish sentiment for mining shares over ETFs result in P/E multiple expansions. When, only time will tell?!
As gold goes, so have the fortunes of the overall mining sector. We focus on all kinds of small-cap stocks, especially junior miners. To some, the charts of these stocks appear totally erratic and unpredictable. Mega-cycles can guide the way here too.
The following diagram is similar to one found in Pierre Lassonde’s “The Gold Book: The Complete Investment Guide to Precious Metals”. His well-known model shows what typically happens to mining shares at different stages.
Mining shares are a speculation during the Exploration Phase. Shares tend to rise as a function of drill results. If there is a discovery that indicates sufficient resources to bring a mine into production, feasibility studies begin to value the project and determine the funding needed to move forward.
During the Feasibility Phase reality sets in, and unless the company’s other properties are being drilled, speculators leave. With less drilling, as the company focuses on bringing its mine into production, the shares tend to drift lower over time.
During the Development Phase shares begin to rise again as mine construction is being completed, in anticipation of the start-up of production. Typically the best time to buy mining shares is early during the Exploration Phase, or at the end of the Development Phase - going into the Start-up Phase.
Speculators trade the high-risk Exploration/Discovery Phase, while institutional investors enter during the lower-risk Development/Start-up Phase. You can see the model’s shape in the stock charts of most of today’s major miners. Let’s look at a few examples.
See the similarities? (NYSE: HWD) (TSX: HW) Harry Winston Diamond was called Aber in the 1990’s, when it traded for pennies a share prior to their Diavik NWT diamond discovery. (NYSE: GG) (TSX: G) Goldcorp is close to $40 today but was well under $3 back then.
Hindsight Is 20:20 – What About Now?
Let’s apply this model to our Featured Stock (AMEX: URZ) (TSX: URZ) Uranerz Energy Corp. Uranerz is particularly interesting because it is near completing construction of its first mine - called the Nichols Ranch project, located in the Powder River Basin, Wyoming.
If you look at Uranerz’ news releases from 2006-2008, you see lots of activity to explain the speculative interest in URZ at the time – which peaked at over $7 in early 2007.
First, the company was vastly expanding its uranium property portfolio through staking, acquisition and partnerships, especially in the central Powder River Basin. For example, it acquired an 81% interest in 80,000 acres via the NAMMCO joint venture alone.
Second, Uranerz was drilling more back then, fuelling anticipation of results. The company has provided several NI 43-101 technical and resource reports, with the latest showing over 19 million pounds of U3O8 - from only a small percentage of their properties drilled so far. They also announced a TSX listing, various financings and new personnel etc.
From 2009 to late 2010, Uranerz transitioned from its speculative first Exploration Phase to the Development Phase, as it focused on getting the Nichols Ranch ISR Project licensed. Late in 2010 uranium stocks were in favour and URZ outperformed most - in anticipation of the regulatory approvals needed to build its first uranium mine.
In January 2011 Uranerz received its state WDEQ permit to mine, and the NRC determined no major environmental impacts precluded licensing. Early in March the company’s treasury swelled to $47 million, providing more than enough cash to build the mine, estimated to cost $35 million.
Then on Friday March 11, 2011, a devastating 9.0 earthquake hit western Japan and the Fukushimi nuclear plant. Uranium and related investments sold off sharply and didn’t start to recover until later in the year as (NYSE: CCJ) (TSX: CCO) Cameco and (NYSE: RIO) Rio Tinto started bidding to buyout uranium explorer Hathor Exploration.
All of this has been covered in our past reports, including the effects of Fukushima and why investors may have been given a second kick at the uranium bull market can. In URZ’s case, perhaps the dotted green line, more like the model’s shape, turned into the orange dotted line mostly as a result of Fukushima. Weakness in the overall market, as the US and other sovereign credit ratings were cut, plus a gold correction last fall, didn’t help either.
However, fundamentally Uranerz hasn’t missed a step during its Development Phase. In June 2011 it was included in the Russell Family of Indexes, in July it received final NRC approval, on August 1 mine construction started, and in November a Processing Agreement with Cameco was signed. Uranerz also has long-term contracts for the sale of uranium to (NYSE: EXC) Exelon and another major US utility.
You also have to credit management’s foresight, or at least good fortune, in raising the funds needed to build the mine when the stock was higher - just before Fukushima! I look at the solid orange line as URZ’ Development Phase with a lot of market noise factored in.
Uranerz To Enter Its Start-Up Phase This Year!
Uranium investments are showing bullish signs again. From the buyout of Hathor, to China stepping-up reactor construction timelines, to India and some Eastern European countries planning more reactors, to other European countries softening their anti-nuclear policies, to the NRC approving construction in Georgia of the first two nuclear reactors since 1978, to the lifting of uranium moratoriums recently - such as on Inuit lands in Labrador.
If the model holds true for URZ, shareholders may have something extra to look forward to this year. The Start-Up Phase is often the best time to own mining shares as institutional investment demand builds on anticipated revenue and profits, representing less risk.
Summarized from URZ’s March 29, 2012 news release, “Uranerz Reports Production Well and Development Update - The company continues to receive good uranium grades in holes drilled for well-field installation… including the best hole ever drilled by the Company. Using six drill rigs, a combined total of 165 monitor and production wells have been installed in Production Area # 1…
Development of the process and ancillary support infrastructure for the Nichols Ranch ISR Uranium Project continues on schedule. All buildings are fully enclosed with the maintenance shop approximately 97% complete. Interior wall framing is ongoing in the office, laboratory and processing plant buildings. The ion exchange vessels are currently being internally plumbed. Once this is completed, installation of process piping will be initiated. ‘We have been fortunate that the Wyoming winter weather this year allowed us to continue construction without stoppage and construction is proceeding as planned’, stated Glenda Thomas, Vice President, Production…”
Uranerz Energy anticipates ISR uranium production to commence sometime during the second half of this year!
I’m a big believer in fundamentals first; but I also believe in the power of identifying historical trends as tools to help indicate future price behaviour under similar conditions. If “The Trend Is Your Friend”, then getting these mega-cycles right can be your BFF!
Watch our recent Uranerz Energy Mine Construction Video at http://www.InvestorsGuru.com/CeoVideos.html or visit http://www.Uranerz.com .
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