Monday, August 11, 2014

Gold Shell Play; Japan's Nuclear Reactor Restarts; Uranerz Energy Update - Small-Cap Stock Observer

Gold & Mining Stocks Shell Play—Maximum Leveraged Calls With No Set Expiry

I'm a contrarian value investor at heart. I mostly buy out-of-favour beaten-up companies with a proven track record of earnings and dividends, and/or a promising growth outlook. Long-term charts help me figure out when these stocks are finally washed out and worth holding for the big turnaround.

However I also use our site's Market Movers tables: Volume Actives, % Gainers, $ Gainers, and 52-Week Highs, whose symbols are scored after subjective review of their technical charts and news fundamentals, to come up with a few Momo plays worth following each day. Value stocks and longer-term shell plays are discovered more often on the % Losers, $ Losers, and 52-Week Lows tables.

Value stocks come in all sizes, from under-covered small-caps that I write about, to widely followed mega-caps. Here's five still on our Top 30 List: (NYSE: LVS) Las Vegas Sands at $2.85 now $68.13, (TSX: GC) Great Canadian Gaming $2.68 - $15.80, (TSX: AC.B) Air Canada $1.43 - $8.67, (TSX: BCB)(NYSE: COT) Cott $1.16 - $8.02, (TSX: SSL)(AMEX: SAND) Sandstorm Gold $0.63 - $6.44.

Gold remains around $1,300/oz., barely above the average all-in sustaining costs of production. Gold and mining stocks are now value plays, because if metals prices stay this low much longer, or go even lower, then exploration funding dries up and mines close. Markets can overshoot their lows for a while, but less supply with higher demand for cheaper gold eventually kicks in and supports prices.

Here's five of the mid-cap value gold stocks that we still track, mentioned in our October and March newsletters and first posted on our daily Hot Sheets last year: (TSX: CG) Centerra Gold at $4.98 now 6.02, (AMEX: TGD)(TSX: TMM) Timmins Gold $1.28 - 1.73, (TSX: TXG) Torex Gold $1.20 - 1.51, (TSX: CEE) Centamin $0.88 - 1.31, (AMEX: LSG)(TSX: LSG) Lake Shore Gold $0.38 - $1.21.

The stocks mentioned above are businesses, with assets, operations and revenues. Shells are not, at least not yet! You don't invest in shells, they are usually pure speculation plays that often go broke. Hopefully I've waved enough red flags and most reading this should skip to the next section.

I mention this mainly as a possible alternative for those trading their casino mad money on OTC or Pink Sheets shells and the likes these days. I see more and more posts about these sub-penny shells on our social pages, with quotes shown as big percentage gains only, because the price moves are a fraction of a cent. I don't trade these stocks as there is usually no value other than the poster's hype.

Similarly, TSX Venture shells have little value. They are usually mining or tech plays with hundreds of millions of shares outstanding that have failed and are out of money. However some of these shells are maintained for future projects to be rolled in, after their share structures are rolled back.

Recently I have been buying into a few TSXV shells with tight share structures, some under 25M shares out, with low to no debt and cash that exceeds the market cap. I also look for a market cap that is under half a million dollars because even if they salary away the cash it still may make more sense to keep the shell alive—versus starting a new public company that can take years and cost upwards of a million dollars or more to build a shareholder base and get funded, sponsored and listed.

Mining stocks are so beaten up that some of these shells have proven resources that have been totally discounted by the market, which may come back with higher metals prices. However I don't put much value in this as old projects are often disposed to focus on newly vended-in projects. Management is hard to assess for the same reason as the old guard is often replaced by a new slate of directors.

I typically buy under $0.05 a share as this was the minimum for TSXV private placements until exchange pricing relief measures started last year. In other words the cheaper and tighter the shell, the less likely they will consolidate again, nor dilute my share value by refinancing below my buy-price.

The last shell I bought into this summer had around 21M shares out and was on My Watchlist & Alerts for months. 200k shares were offered at a penny which I luckily picked up a few days before the company announced a change of management and shares for debt transaction. My goal is to get my cost back as soon as news flows about the new play, on higher volumes and prices. After this I assess if there is any real value in the company worth holding the balance of my shares any longer.

After the Bre-X debacle and the late 1990's bear gold market, many gold stocks became shells that turned into Dot-com stocks. Today we see a lot of mining shells turning into marijuana plays. Based on the news and the track record of the people now involved, I presume this last shell will remain alive as a mining company. It's too early to say and these extremely high risk/reward shell plays can take years to develop—hopefully to over $0.80 a share like some of the new crew's other companies.

First Japanese Reactor Restarts Receive Safety Approval

U3O8 spot prices are still around $28/lb., which we have not seen in 9-years. Why have uranium prices remained so low, for so long? We know that demand is growing as the number of nuclear reactors are set to double by 2030, and that there will likely be uranium shortages due to mine closures and less exploration. U3O8 prices are usually very volatile—so why are they asleep?

While the near to long-term picture seems more certain, short-term uranium prices have been stuck because investors see Japan's reactors restarting as a vital catalyst. In short, Japan was the world's third largest uranium consumer until Fukushima, and restarts have taken longer than expected. There is some restart debate, but I have always believed this to be a "when" not "if" situation.

Short-term prices remain under pressure due to secondary uranium supplies. Although 24Mlbs. per year from recycled Russian warheads came off the market forever in 2013, we haven't seen any U3O8 bullish price effect yet because of low centrifuge capacity in Japan that has bloated global inventories. As Japan's reactors restart, not only does uranium consumption rise, centrifuge capacity increases.

Other potential short-term catalysts may include more mine closures, further delays at Cigar Lake or at other new mines, or geopolitics such as sanctions on Russian uranium. However I remain focused on Japan's restarts as having the most meaningful and sustainable effect in moving U3O8's needle.

On July 16 World Nuclear News reported that Japan's Nuclear Regulation Authority (NRA) approved the upgraded design and safety features of Kyushu Electric's Sendai nuclear power plant—units 1 and 2. "This represents by far the major part of the licensing process which began on 8 July 2013 when NRA formally announced its new requirements."

Following the public comment period that ends this week, two smaller regulatory approvals and NRA verification remain before Sendai can restart and generate electricity again. October appears to be when the entire process may conclude.

The end of the article supports what I have always said, that Fukushima was a preventable accident due to outdated and inadequate safety equipment, and that for the foreseeable future Japan has no economic choice other than nuclear reactor updates and restarts. "The Fukushima accident exposed serious weaknesses in the previous nuclear safety regime. Creating the NRA, developing new standards and getting new licensing processes underway have caused the prolonged shutdown of Japan's nuclear reactors. Knock-on effects from the shutdown have included a widening trade deficit due to imported fossil fuels, higher electricity bills and increasing carbon dioxide emissions."

Restarts are needed as Japan deals with its first summer in 40-years without nuclear power. This last quote is about just those reactors already in the restart queue, with presumably many more to come. "Applications for 15 other reactors remain at the review stage with Takahama 3 and 4 said by the NRA to be the next most advanced." Investors need to recognize that uranium's rebound is near.

Uranerz Energy Summer Update—First Shipment, More ex-Cameco Hires, Financing

Over 80% of the USA's uranium production comes from Wyoming's Powder River Basin (PRB), with the nation's largest U3O8 processing plant located in the PRB. (AMEX: URZ)(TSX: URZ) Uranerz Energy Corp. controls one of the largest land positions in the PRB, with around 80k acres.

We started writing about Uranerz 3-years ago as a PRB-focused junior miner on the cusp of getting approvals to build an ISR uranium mine. A few months later Fukushima crushed uranium markets, and then gold and metals went into a 3-year bear market. While thousands of these companies died or became zombie stocks, Uranerz didn't miss a step and has proven that "skilled management" can be more than just buzzwords. I can't wait to see how URZ performs as U3O8 prices fly higher again.

As of April 15 Uranerz commenced In-Situ Recovery (ISR) uranium mining operations at its wholly-owned Nichols Ranch project. The start-up of the company's first mine marks the end of an arduous 10-year process from explorer, to developer, to producer. Most of the thousands of mining companies will never reach this stage, which is even more impressive when you consider that URZ now joins an elite group of only six publicly-traded, uranium-focused producers worldwide.

On June 16 Uranerz announced that it had sent its first shipment of uranium-loaded resin from its Nichols Ranch ISR project to (NYSE: CCJ)(TSX: CCO) Cameco Corp.'s Smith Ranch-Highland plant for final processing into uranium concentrates pursuant to a toll processing agreement between the two companies. Uranerz' milestone first sale is anticipated in the third quarter.

On July 14 Uranerz announced two more ex-Cameco key hires as it nears completion of the commissioning phase at the Nichols Ranch mine. Well production flow rates continue to outperform initial estimates, and URZ remains on target to reach commercial production this fall. Note that Uranerz' predecessor (also called Uranerz) was bought by Cameco in 1998, URZ' PRB properties are surrounded by Cameco and other major producers, and URZ' Senior Process Manager, Senior Geologist and its President and COO all came from Cameco recently—coincidence or Deja Vu?

On July 16 Uranerz announced a US$10M financing at $1.25 per share, with 1/2 share purchase warrants exercisable at $1.60 per share for 30-months. Two days later the company announced that due to high demand the offering was being upsized to $12M, which closed one week later. My understanding is there was even more demand. So why was this seen as bad news?

Apparently the market didn't like the timing or pricing of URZ' equity raise. For over a month prior to the financing news, URZ shares traded between a low of $1.35 and a high of $1.60, and were as high as $1.47 on the day before the announcement. URZ actually closed up on the day the news was released, but since then has pulled back sharply to now just $1.12, or down about -21%.

You can't blame the investors that put up the $12M for wanting a discount on 9.6M shares. It is not unusual to see discounts of around 15% for even large to mega-cap companies during good markets. With low U3O8 spot prices still around $28/lb., far from their $137/lb. highs 7-years ago, all uranium companies and especially small or mid-caps continue to struggle to raise money right now.

URZ closed at $1.39 the day before the $1.25 financing was announced, equal to a 10% market discount. The warrants only come into play if URZ trades significantly higher than the $1.60 exercise price, which may also provide the company a future source of quick and low-cost funding as they are subject to acceleration provisions. Investors in past financings should have made a profit as URZ has almost always triggered this clause. Overall this seems like a reasonable price with reasonable share dilution, better than some of the high cost debt financings or ill timed equity raises I've seen by others.

In any event Uranerz is now cashed up to more than it wanted to fund, without adding any debt. The company has been ramping up production without a hiccup since mid April, and is regularly trucking uranium-loaded resin to Cameco's nearby plant. URZ hopes to produce around 300k pounds of U3O8 this year to supply contracts with (NYSE: EXC) Exelon and another major utility. These premium sales contracts were probably signed in the $50-$60/lb. range—equal to $15M-$18M. In a month or so we should see Uranerz report its first sale, adding even more to its now $15M+ treasury.

The question is what does Uranerz plan to do with its cash to generate value for shareholders? Even with the expensive mine construction phase mostly complete, I would guess that operating costs during production ramp-up are still around $1M per month. However this cash drain may be offset as sales start soon—so why all the cash?

On May 21 Uranerz announced that it had submitted the source material license application under its existing U.S. Nuclear Regulatory Commission (NRC) amendment provisions, for its third PRB mining unit. This permit area is called Jane Dough, located immediately south of the Nichols Ranch mine. Uranerz only needs to install the wellfields and pipelines before starting production at Jane Dough, which is much faster, extends the mine life, and avoids the costs of another processing plant.

I wouldn't expect to see dividends, share buybacks or new exploration programs until U3O8 prices turn higher again. The company's low-interest $20M state loan does not require principal payments until next year. A better use of cash may be to take advantage of today's extremely low prices and acquire additional uranium resources. Some speculate Uranerz itself is a potential buyout candidate.

Another obvious value builder may be to construct the final processing plant at Nichols Ranch. This would cost around $5M added to the existing plant, which may make sense as the economies of scale build with production at Jane Dough—versus paying extra transportation and toll processing fees. As U3O8 positions for its next wave, Uranerz has lots of growth options—and cash.

Investors who have been watching URZ may be asking if this is a good entry point. At $1.12 per share, URZ' current price is now significantly below the recent share issue price. I might be a little worried if the financing had not closed, but it did close on July 25. URZ seems even cheaper when compared to its March 6th 52-week high of $1.97, or down -43%. With $12M of so called "smart money" now in at a higher price, I'm surprised URZ has not started trending higher again by now.

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