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Now that the uranium bull market has gone to a new level, a
number of exploration stocks made spectacular percentage gains
after the International Investment Conference held in San
Francisco in late November 2005. We turned to Kevin Bambrough,
Market Strategist, and Jean-Francoise Tardif, Portfolio Manager,
at Sprott Asset Management for their advice on how to navigate
through the more than 250 uranium exploration, development and
producing companies available across the global investment
landscape. Who better to ask than a fund that has invested
around $175 million in uranium stocks the past few years, about
6.7 percent of more than $2.5 billion managed by Sprott Asset
Management? The Sprott team has bet heavily on a nuclear energy
renaissance, and early indications confirm very strong returns
in their investments.
Before our taped telephone interview, Kevin Bambrough emailed a
few comments, "We would like to make the point about some
incredible gains that have been had in the uranium sector. The
list is growing but not the quality so investors should use
extreme caution. As the uranium price rises, and money pours
into exploration, we can expect to see some sizeable discoveries
coming down the road. It should be exciting times."
Prior to StockInterview.com's interviews with Mr. Bambrough and
Mr. Tardif, they compiled a list of ten tips for investors
studying uranium companies. The tips are listed below, followed
by an extensive interview, first with Mr. Bambrough (in this
installment) and a second installment with Mr. Bambrough and Mr.
Tardif.
The Ten Tips Investors Should Know
1. One of the best indicators of a project's potential success
could be past ownership. It's best to try to buy any mining
stock early in the cycle. Try to pick up properties that were
worked by majors during the last bull market but which
eventually dropped during the lows of the bear market. During
the last uranium boom of the 1970's, many majors decided to
completely exit the uranium sector.
2. Study the value of ore body with regards to its value per
tonne, or its recoverable metal. Estimate the "all in" costs and
feel comfortable with what you are paying. Risks-to-reward
doesn't favor pure exploration. Typically, we avoid pure
exploration plays unless management is excellent, they have a
large prospective land package, and the company is well financed.
3. Look for good, proven management, which has been successful
in the past.
4. Look for solid shareholders. It is always nice to see that
management has a large stake in the company. Often, this makes
them value their paper more, and they will be less likely to
engage in reckless stock issuance. If not management, I get
comfort seeing that successful fund managers have large
holdings. It is even better to see that a major company in a
related industry has taken an interest in the company.
5. Look at the property's infrastructure. Find out about
electricity and water costs required for exploration,
development and production. Find out about roads, rail,
trucking, access and proximity to a mill.
6. Look for hidden value in the company. We always consider the
value of existing infrastructure. From time to time we have been
able to buy companies where existing facilities, perhaps a mill
or shafts more than justify the entire market cap of the
company. Past drilling for uranium will save money. Some
companies have properties with very expensive shafts and/or
mills. There are also companies with large extensive databases
like Energy Metals Corporation (TSX: EMC) and Strathmore
Minerals (TSX: STM). These databases of past drilling on various
properties can be used to continue to acquire good prospects as
well as sold in pieces. I would expect that they will also be
able to use the data to farm in on other properties or sell
other property owners valuable drill-hole data.
7. Buy emerging stories. It is great to find a company before it
has any analyst coverage or even covered by letter writers.
8. Find out if the property is in a pro-mining environment.
Ultimately, you need to mine. It's best to have a property in a
location where government is pro-mining. We will still invest,
though, as long as this factor is discounted in the stock. Some
countries are so hungry for investment they will offer favorable
tax rates and other incentives. Permitting can be costly and
take a long time so this is very important.
9. Study the capital costs for the project and the currency in
the country where the project is located. Typically, the lower
the capital costs, the less risk in the project. The less a
company risks, in time and money, to find out if the mine is
economic, the greater its chance of success. Larger capital
intensive projects usually take longer to bring on, and you
could risk missing an important part of the cycle. I also like
to consider currency moves and their possible impact. A
strengthening local currency can drive up costs and destroy
margins. A falling currency can dramatically improve the
economics of the project
10. Funding can improve the story or outlook. Make your cash
work. It's not really an option for a small investor but as an
institution we love to invest in companies when we think our
cash is going to make a huge difference. Examples include when
Aflease (now SXR Uranium One - TSE: SXR) had cash problems and
was being deeply discounted, or our recent Tournigan (TSX: TVC)
funding to pay for confirmation drilling and exploration on the
Jahodna uranium deposit in Slovakia.
About the author:
James Finch covers uranium and other stocks for
StockInterview.com. To read the entire interview with the Sprott
Asset Management team, visit http://www.stockinterview.com
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