Tuesday, July 17, 2012

Small-cap Payoff from Uranium Slot Machine

In June 2012, the Japanese government approved the restart of the two reactors at the Oi nuclear power plant.  The plants are located in Fukui Prefecture in western Japan, which  -  just so you know what you might have to lose  -  is renowned for its clean water and crops that produce delicious sake, rice and soba noodles.  The restart process of the Oi plant reactors is expected to be completed by late July.

The mining industry is enthusiastically applauding the Oi reactor restart as it signals a return of Japan as a large source of demand for uranium.  Why Japan is so crucial might be more a matter of psychology than real demand.  According to the World Nuclear Association, uranium production has not kept up with demand since the 1990s.  Unmet demand appears to be a bonanza for uranium producers.  However, to give uranium miners real comfort, they need some assurance that the winds favor nuclear power production and Japan is serving it up.

At least a dozen new uranium mines of significance are expected to go into production over the next six years.  Most are located in Africa.  Another is Cigar Lake Mine in the Athabasca Basin in Canada.  Cameco Corporation (CCJ:  NYSE) is majority owner and manager of the project, which is expected to go into production in 2013. Areva, SA (AREVA:  Paris) has a 35% share in the project.  Cameco and Areva are numbers two and three in the industry behind KazAtom Prom, a Kazakhstan miner.    For investors who are not interested in large caps or foreign operations, it will be necessary to go down the list of new mines a bit to Wyoming’s Powder River Basin to find a small company that is U.S.-based.  

Uranerz Energy Corporation (URZ:  NYSE) has drilled at least eighty holes at its Nichols Ranch mine in the Power River Basin and is in the midst of applying for a production permit.  Uranerz has an agreement with Cameco for final processing of the uranium-loaded resin it produces as a part of the in situ process its using at Nichols Ranch.  More importantly, Uranerz has two sales agreements in place, one with Exelon Generation Company and the other with an unnamed U.S. utility.

The heady talk of short supply and demand drivers might be enough for many investors.  However, small or large-caps a solid balance sheet is vital.  Cameco and Areva are strong companies.  Cameco holds enough cash to pay off its debt 1.4 times.  In the case of Uranerz we are concerned that the company has the financial resources to bring its Nichols Ranch to commercial production. 

Uranerz is one of the few micro-caps trading on the NYSE.  It is a developmental stage company with no revenue.  Uranerz has reported a total loss of $100.2 million since its inception. In terms of cash the company has used a total of $56.4 million to acquire properties and develop its mines.  Uranerz needs another $17 million to complete construction and apply for production permits at Nichols Ranch.  The good news is that the company has $26.6 million in cash on its balance sheet.  It is does not leave much cushion, but it is likely to enable Uranerz to reach commercial stage.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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