Now that the uranium bull market has reached a new level, a number of exploration stocks made huge percentage gains after the International Investment Conference, which was held in San Francisco at the end of November 2005. We asked Kevin Bambrough, Market Strategist at Sprott Asset Management, and Jean-Francoise Tardif, Portfolio Manager at Sprott Asset Management, for advice on how to choose among the more than 250 companies that explore, develop, and produce uranium. Who better to ask than a fund that has put about 6.7% of more than $2.5 billion that Sprott Asset Management manages into uranium stocks over the past few years? The Sprott team has put a lot of money on a renaissance in nuclear energy, and early signs show that their investments will give them very good returns.
Kevin Bambrough sent a few comments by email before our recorded phone interview, "We want to bring up the fact that the uranium industry has made some amazing progress. The number of names on the list is growing, but the quality is not, so investors should be very careful. As the price of uranium goes up and more money goes into exploration, we can expect to find some big things down the road. Things should be interesting."
Before StockInterview.com talked to Mr. Bambrough and Mr. Tardif, they made a list of ten tips for investors who want to learn more about uranium companies. After the list of tips, there is a long interview, first with Mr. Bambrough (in this instalment) and then with both Mr. Bambrough and Mr. Tardif (in the next instalment).
Ten Things Investors Need to Know
A project's previous owner could be one of the best ways to tell if it will be successful or not. The best time to buy mining stocks is at the beginning of the cycle. Try to buy properties that were worked on by majors during the last bull market but that dropped during the lows of the bear market. During the last uranium boom in the 1970s, many large companies decided to get out of the uranium business for good.
Find out how much an ore body is worth per tonne or how much metal can be taken out of it. Estimate the "all-in" costs and be happy with what you are paying. Risk-to-reward doesn't favour exploration for its own sake. Most of the time, we stay away from pure exploration plays unless the management is great, the company has a lot of good land, and it has a lot of money.
Look for management that has worked well in the past and has a good track record.
Look for solid shareholders. It's always nice to see that the people in charge have a lot invested in the business. Most of the time, this makes them value their paper more and makes them less likely to issue stock without thinking. If it has nothing to do with management, it makes me feel better to see that successful fund managers have big holdings. Even better is that a big company in a similar field has shown interest in the business.
Look at how the property is built. Find out how much exploration, development, and production will cost in terms of electricity and water. Find out about roads, trains, trucks, access, and how close a mill is.
Look for the company's hidden value. We always think about how important the infrastructure we already have is. We have been able to buy companies where the existing facilities, like a mill or shafts, are worth more than the company's entire market cap. It will save money to stop drilling for uranium. Some companies own properties with shafts and/or mills that cost a lot of money. There are also companies like Energy Metals Corporation (TSX: EMC) and Strathmore Minerals that have very large databases (TSX: STM). These databases of information about drilling on different properties in the past can be used to find more good prospects or sold in pieces. I think they will also be able to use the data to farm in on other properties or sell valuable drill-hole data to other property owners.
Buy emerging stories. It's great to find a company before analysts or even letter writers start writing about it.
Find out if the area around the property is good for mining. In the end, you have to mine. It's best to own a piece of land in a place where the government supports mining. Even so, we will still invest as long as this factor is already taken into account in the stock. Some countries want investment so badly that they will offer low tax rates and other perks to get it. This is very important because getting a permit can be expensive and take a long time.
Look into the project's capital costs and the currency of the country where the project is being done. Most of the time, the risk of a project goes down as the capital costs go down. The more likely a company is to succeed, the less time and money it takes to find out if a mine is profitable. Larger projects that need a lot of money to start usually take longer, and you could miss an important part of the cycle. I also like to think about changes in currency and how they might affect things. Costs can go up and profits can be lost if the local currency gets stronger. The project's finances can get a lot better if the currency falls.
