Monday, January 19, 2015

Winter Rally In Gold & Metals Stocks; Energy Fuels & Uranerz Energy's U3O8 Merger - Small-Cap Stock Observer

Usual Winter Rally Set For Metals Stocks

Pick any metal and you will find its price down big time from its 2011 high: silver -64%, copper -42% and so on. Holding gold bullion or ETF's like the (NYSE: GLD) SPDR Gold Trust remain losers since gold peaked at $1,920 an ounce on September 6, 2011. Gold at today's $1,280 an ounce is -33%, which might not seem that bad considering its steady rise from $260 over a decade ago.

Mining stocks have done much worse. Major gold producers (NYSE: GG)(TSX: G) Goldcorp, (NYSE: ABX)(TSX: ABX) Barrick Gold and (NYSE: NEM) Newmont Mining are down between -52% to -77%, with most small-cap gold stocks either broke or barely alive and trading for pennies.

While the current metals cyclical downturn has been extremely bad, this should serve as a reminder that in order to survive and prosper from the wild swings of the resource sector, these stocks are meant to be traded. I can't name a single mining stock that would be ahead using a "buy and hold" investment strategy from 2011. Note that oil and gas investments started cycling down last fall.

However over each of the last three winters you could have made money in metals stocks if you had just taken a shorter-term view. For decades mining stocks have enjoyed significant tradable rallies from January to March or April, which repeated even as the metals markets turned lower after 2011.

Some say this seasonal bullish effect comes from year-end tax-loss selling which rebounds in January as investors buy back in or put their year-end bonuses to work into beaten down mining shares. Many mining companies have to wait for the winter freeze-up to drill resources found under lakes, and several large mining conferences also result in lots of news and investor buzz over the winter.

Last March I updated the 35 Bottom-Fish small- to mid-cap gold stocks listed in my October 2013 newsletter, showing an average gain of +41% to that point. Here's three interlisted and producing gold miners with a market capitalization of around $200M to $300M that I still follow. After the company name is the approximate 2011 high price per share, current price and percentage change, followed by the opening trade price on January 2, 2014, mid-March's high price and last winter's rally gain if sold.

(NYSE: MUX)(TSX: MUX) McEwen Mining $9.50 now $1.25 -87%, 2014 rally $1.99 to $3.74 +88%.
(AMEX: TGD)(TSX: TMM) Timmins Gold $3.00 now $1.11 -63%, 2014 rally $1.12 to $1.72 +54%.
(AMEX: LSG)(TSX: LSG) Lake Shore Gold $4.50 now $0.82 -82%, 2014 rally $0.47 to $0.91 +94%.
Whenever the gold sector finally turns higher these stocks may run for years, but if not traded and held from January 2014 until now then almost all of your seasonal gains were lost.

I see every reason for another winter rally this year in precious, base and rare earth metals mining stocks. The 2014 tax-loss selling season was especially harsh and now due for a bounce. Lower oil prices may help this year as energy is a major cost of mining. Many gold miners have cut costs and high-graded production to perform at even sub-$1,200 gold, but the most important catalyst for gold mining shares is for gold to rally and signal that the over 3-year gold bear-market has ended.

One of the signs of a beaten down market sector starting to turn is when you see lots of mergers and acquisitions (M&A). I had expected the stronger gold miners to be tripping over each other by now to take advantage of weaker cash-strapped players with great projects. We did see some of this last year with (NYSE: AEM)(TSX: AEM) Agnico Eagle Mines and (NYSE: AUY)(TSX: YRI) Yamana Gold's C$3.9B buyout of (TSX: OSK) Osisko Mining, followed by Agnico's C$205M buyout of (TSXV: CYD) Cayden Resources. The next wave of mining buyouts may signal gold's all-clear ahead.

While gold prices have been relatively stronger in some currencies, a toppy U.S. dollar needs to drop in recognition of stagnant growth due to overwhelming debt that leads to fear of deeper recessions or hyperinflation—freeing gold's next upturn. Until then, winter metals trading rallies still work for us.

Energy Fuels Buying Uranerz Energy—One Less Of Only A Handful Of Uranium Producers

I count only six publicly-traded uranium-focused producers worldwide. I'm not counting base metals producers with some uranium, like (NYSE: BHP) BHP Billiton or (NYSE: RIO) Rio Tinto, or miners like Uranium One that are now private or government owned. As more discover uranium's value there are only six pure-play producers to invest in, compared to hundreds of publicly traded gold stocks.

Uranium appears further along than gold in its recovery, perhaps because U3O8's sell-off occurred earlier in 2011—after the March Fukushima nuclear accident which resulted in Japan and Germany shutting down all of their nuclear power reactors. In any event gold continues to sputter around $1,200-$1,300 while U3O8 spot prices ran last fall from $28 to as high as $44, now $36.50 per pound.

After an almost 4-year bear-market, Japan is again changing market sentiment—this time positively—regarding nuclear power and uranium investments. Japan's approval last fall to restart two reactors at Sendai was the catalyst that popped U3O8 spot prices +57%. Last month Japan approved two more reactor restarts at Takahama, with 15 more reactors in the NRA's restart approval queue.

We have already seen waves of uranium M&A from majors (NYSE: CCJ)(TSX: CCO) Cameco and Rio Tinto's C$654M bidding war in 2011 over Hathor Exploration, to (AMEX: DNN)(TSX: DML) Denison Mines completing several smaller tuck-in acquisitions of JNR Resources, Rockgate Capital, to Fission Energy. Fission's western Athabasca Basin assets were then spun into (TSXV: FCU) Fission Uranium which then merged with its 50% Patterson Lake South (PLS) partner Alpha Minerals. Last week Fission reported PLS' initial resource of 79.6M lbs. Indicated and 25.9M lbs. Inferred, with near-surface high-grade uranium that many speculate may get M&A'd again.

(AMEX: URZ)(TSX: URZ) Uranerz Energy is my most closely followed uranium company. I have been writing about URZ since late 2010 as NI 43-101 resources were established, permits were approved, financings were completed, and throughout construction of its first In-Situ Recovery (ISR) mine, called Nichols Ranch—located in the prolific Powder River Basin (PRB) of Wyoming.

Nichols Ranch commenced ISR operations in April of last year, with around 200K lbs. of U3O8 produced for H2-2014 as it ramps up within the mine's permitted 2M lbs. per year. Uranerz should have healthy margins as it employs low-cost ISR production with good grades, coupled with premium sales contracts signed with two major utilities when uranium prices were around $60 per pound.

Uranerz is a growth story positioned in the right place at the right time. Wyoming and the PRB produce more uranium than any other state or mining district in the United States, with URZ having explored only 6 of its 30 uranium projects covering ~73K acres in the central PRB. At current U3O8 prices URZ' premium sales contracts and the country's newest operating mine offer less risk than a pure exploration play, while the company can also leverage exploration and production as prices rise.

(AMEX: UUUU)(TSX: EFR) Energy Fuels has a producing mine, mines on standby, and properties in various stages in the western U.S. states. Energy Fuels is America's largest conventional producer and its White Mesa mill is the only conventional mill operating in the U.S., with lots of capacity to expand. Q3 financial results show $3.1M in net income and increased working capital to $45.4M.

Energy Fuels has grown via several uranium properties and companies transactions, some including vanadium production. Over the spring and summer of 2013 I posted about the company's significant acquisition of Strathmore Minerals—Energy Fuels produced ~20% of the U.S.' uranium last year.

Uranerz Energy and Energy Fuels comprise two of the only six publicly-traded uranium-focused producers worldwide. While I had expected some of these six companies might be acquired by a major uranium producer someday, hopefully at much higher U3O8 and stock prices, I didn't expect to see a merger between a conventional underground miner and an ISR producer. I'm looking into the synergies of this merger, from mining process to geographical cost savings, to write about later.

Quote UUUU or URZ at our site for the January 5th news release, "Energy Fuels and Uranerz to Create the Largest Integrated Uranium Producer Focused on the United States". Uranerz Energy shareholders receive 0.255 common shares of Energy Fuels in an all-stock deal that works out to a 37% and 46% premium for URZ shareholders—based on January 2 NYSE MKT closing share prices and 20-day volume-weighted average prices. URZ will own ~55% and UUUU will own ~45% of the merged company.

On January 8 the companies hosted a joint conference call to discuss the merger. The webcast of the call is still at and the transaction PDF presentation is at . During the Q&A several analysts asked a lot of good questions I had not even thought about. Here are some bullet points:

- The consolidation of the two companies should produce ~$2M in annual overhead savings.
- Q: Focus of the consolidation, ISR or conventional production? A: Energy Fuels is already a consolidation story per past deals. No leaning either way, focus is on a case by case basis. This allows the merged entity to have the management and skill expertise in either mining discipline, which creates an attractive platform for further accretive growth and consolidation within the U.S. uranium sector.
- Q: Change of control impact questions: flexibility or restrictions on sales contracts out to 2020? A: One contract has to be negotiated, should not be a big deal.
- Q: Analyst thinks the deal will be done and asks about the valuation with Uranerz shareholders receiving 55% of the merged entity? A: Typical 36.6% change of control premium is on the low end, a fairness opinion was provided, URZ has good assets, ISR knowledge with key people—this all comes at a price.
- Q: Nichols Ranch toll processing agreement with Cameco? A: No change of control issues.
- Q: How many candidates were looked at before choosing Uranerz Energy? A: Many on the radar, lots of discussions, Uranerz was the best fit.
- Q: Synergies not seen right now? A: Several Energy Fuels and Uranerz properties were mentioned as to proximity, permitting and expansion plans; more financing options with higher market value.
- Q: Transaction timing? A: Subject to regulating restrictions and NRC approvals, U.S./Cdn. stock exchanges with cross border issues, F4 registration, proxy materials, shareholder meetings by both companies to approve the deal—probably May, June closing. No foreseen regulatory issues.
- Q: Board changes? A: Energy Fuels to expand by 3 to 12 directors, to represent URZ shareholders.
- Q: Will this deal lead to expanding the Nichols Ranch plant? A: Best use of funds to be determined.

News of this merger came as U.S. major markets were selling-off, and as all six of the aforementioned publicly-traded uranium-focused producers were near their 52-week lows. Closing prices prior to the Januray 5 merger news until yesterday show: CCJ -12%, DNN -9%, URG -2%, UEC -32%, UUUU -25% and URZ -6%. All of these stocks had big runs last winter but are still on standby so far in 2015.

The U.S. is the world's largest consumer of uranium and needs all the domestic production it can get. Its 100 nuclear power reactors supply ~20% of the country's power, demanding ~50M lbs. of U3O8 per year while only producing less than 5M lbs. per year. Energy Fuels' CEO and Uranerz Energy's Chairman closing remarks express their excitement in forming a much bigger U.S. focused uranium company. Both companies have meetings this week to explain the deal to utilities, regulators, analysts and institutional investors.

Sign-up at (or for our Small Cap Stock Observer newsletter, and to set-up your own My Portfolio, My Watchlist & Alerts and News by Email preferences, or quote to comment at our Bulletin Boards. Free!

Please note that nothing in this report should be taken as a recommendation in any way, and that everything from is subject to the terms of our Privacy Policy and Disclaimer.

No comments:

Post a Comment