Many investors put their money into the Great Uranium Bull Market without much of a plan. During the strong rallies of the past two years, it was easy to follow a newsletter writer's advice. Quite a few did this, often using the "greater fool" strategy and hoping that the last and dumbest investor would give the early and quick speculator a way to get out.
We've made a 7-point rating system to help you figure out which companies might be best for you depending on how risky you want to be with your investments. You can use it as a guide, but we haven't given each item a weight. We haven't mentioned any uranium companies either. This is a do-it-yourself rating system that only needs you to do two things: (a) Keep asking each company the questions we've listed below to get the information you need, and (b) be honest when you look at this information.
Some of the pure exploration plays that are more risky might give up on their properties by the end of the year or in 2007. These would be companies that don't have enough money, have properties that are riskier, and don't do well in our ratings system. This list of criteria for rating would also work for the pure specs. We started with our article "How to Choose a Uranium Stock," which featured Sprott Asset Management Market Strategist Kevin Bambrough and Senior Portfolio Manager Jean-François Tardif, to make a more advanced rating system for you.
Uranium producers are likely to make a strong comeback as they switch to long-term contracts that pay better. But when the bull starts the next leg of its long run, the smaller but more stable uranium development companies could be the best ones to invest in. Now that we've had a shakeout and there may be another one coming, it's a good idea to look at the more serious uranium development companies and figure out what they do well.
In our new book, "Investing in the Great Uranium Bull Market: A Practical Investor's Guide to Uranium Stocks," we rate uranium companies based on a number of important factors. Here are some of the most important ones. Please check to see if your favourite company for exploration and/or development meets these requirements. This is one way to get enough information to get a picture of a company's prospects.
- The National Instrument 43-101. Using this independent geological assessment, a company can find out how many pounds of uranium are on its land. Even though this system has some flaws, it can still be used as a guide. Find out if your favourite company has at least 20 million pounds of uranium resources that are in line with NI 43-101. If you want to evaluate something, you shouldn't use historical information. They could also be misleading or exaggerated.
- Uranium District's track record. Athabasca, Australia's Northern Territories or South Australia, Grant's New Mexico, Wyoming, Kazakhstan, Niger, and Namibia are some of the best uranium districts that have a history of making a lot of uranium. Find out if your favourite company owns any property in these areas. Some companies have stakes in more than one uranium district, which may also turn out to be a smart move in the long run.
- Money in the bank. The longer a company can stay in business, the more cash it has in its bank account. Find out if the company you like has at least $20 million in cash. When a company has more than $30 million, it has some room to breathe. Exploration and development can cost a lot of money. It is very hard to get money when the market is down.
- Make use of databases. The big oil companies that used to live on the land and drill for uranium, spending tens of millions of dollars, made drill databases. Some companies got the land, but not the databases on how to drill. As part of their property deals, some companies bought the drill database. Find out if the drill database is also part of the company's main properties. What you find might surprise you.
- An account of the known deposits. A lot of the properties owned by uranium development companies used to be owned by the minerals or uranium divisions of big oil companies. During the 20-year uranium drought, some were held on to by one company or another. During the worst of the drought, they were given up. Find out if the main properties of your favourite uranium company were held continuously until 2000 or a little longer, but before the spot uranium market changed. The sooner a business bought its properties, the more likely it was that it got the best ones. People who joined the game late usually got the leftovers.
- The technical experience of the management. Uranium experience falls into three categories: exploration geologist, project geologist, and mine operations. Find out how much experience the geological team at your company has in each of these three areas. Those who have worked with uranium for less than 100 man-years may not know enough. Companies that are strong in all three areas could be the next ones to start making uranium.
- Risks that come from politics or the environment for primary assets. Lastly, you should look at the risk of the company's main assets based on where they are. The least risky uranium assets are those in North America or Australia's Northern Territories. The political risk is a little bit higher for companies that are exploring or developing in Niger, Namibia, or Brazil. Companies that want to do business in places like the Democratic Republic of the Congo, Kazakhstan, or Mongolia have more risk than some investors may be willing to take. Areas that don't allow mining, like Queensland, Western Australia, or the U.S. state of Virginia, are very dangerous and require a "Kierkegaardian leap of faith."
Now you can rate your favourite uranium company, and you can use this rating system to sort through the more than 300 stocks you might have thought about buying.
