Lessons from Labrador

I just got back from visiting a uranium mine in Labrador that’s so remote I had to hitch a ride from Goose Bay on the company’s helicopter.

The company’s a great illustration of what’s going on in the uranium industry these days. I learned some very important lessons. And I want to share them with you this morning.

To see the areas that the company’s exploring I had to take yet another helicopter ride. In these remote spots, the company has a fleet of drills chewing their way into the earth, mapping out a resource that could be as large as 80 million pounds by the end of the year.

Along the way, I hiked up and down some slopes that were steep enough to require ropes. I’m not exactly svelte (hey, I’m married to a world-class cook), so you should have heard me huffing and puffing like a steam engine. Meanwhile, my younger, slimmer companions skipped about like mountain goats. But I gotta’ do what I gotta’ do to investigate the company. Here’s what I found …

A Power Supply
Blast from the Past

The company is in its fourth year of defining one of Canada’s undeveloped uranium resources. This same resource was well along its way to being defined by a previous owner back in the 1970s. In fact, it went so far as tunneling through the area and putting in access roads. By 1979, everything was falling into place to make it a working mine.

But you know what else happened in 1979? Three Mile Island! Suddenly, nuclear power was about as popular as a wild dingo at a daycare center. Plans to build new nuclear plants were scrapped, the price of uranium fell through the floor, and the previous owner threw in the towel.

Now, nearly 30 years later, oh, how things have changed! According to the World Nuclear Association, there are 442 nuclear reactors operating around the world, plus another 28 being built, 38 on order, and 115 proposed. And that’s before counting new plants in the U.S. (the world’s largest producer of nuclear energy) or Britain, both of which have recently signaled that they’re ready to start building new atomic power plants.

It’s this tidal wave of future demand that has sent uranium prices to $48 a pound from just $30 a year ago.

Despite the price rise, uranium is still cheap. After adjusting for inflation, uranium hit $145 per pound in the 1970s, before Three Mile Island triggered a price meltdown. So now even after its recent rise, it’s still at one-third its peak level.

There are plenty of companies looking for new uranium resources. But it takes time — up to 20 years — to bring those new resources online. I believe anyone who can bring a new mine online in the next decade is in the sweet spot of uranium profit potential.

And that’s why this company is drilling holes — hundreds and hundreds of holes — around its uranium resources.

Rocks, Rads, and
Bears! Oh My!

The Vice President of Exploration was nice enough to show me around, and we went to the camp to get a good look at the rocks.

The camp is surrounded by a fence that’s designed to keep out black bears, delighted to have humans as neighbors and aggressive in seeking out food.

The VP told me that some time back, one of the helicopters broke down out in the woods. As the mechanic worked on it, he ate a fruit cup. But because he couldn’t finish the job before dark, he put the nuts and bolts in the empty container, and left it on the back seat of the chopper.

That night, a passing bear smelled the fruit cup, smashed through the windshield, and ate the fruit cup, bolts and all. The bear even came back the next night to eat more of the helicopter!

Anyway, while the bears were snoozing, the VP checked the rocks with a scintillometer — a modern-day successor to the old-fashioned Geiger counter — to measure radiation in the rocks.

To make sure that we wouldn’t come back from the trip glowing in the dark, the whole crew wears radiation badges to warn of potential danger. On only one occasion has one of these badges ever showed an abnormal radiation level: When it was accidentally left too close to a computer!

The crew has drilled hundreds and hundreds of core samples as they work to define how big the uranium resource is. They lay out the rock samples row upon row. Most of the rocks at the site are pink hematite with yellow stuff running throughout. The yellow material is oxidized uranium.

My Take on This Company

To give you a feel for what you should look for in a uranium company, here are four key things I like about this one.

• The deposits should go from resource to mine by 2012, maybe earlier. That will put it well within the sweet spot of uranium production.

• We’re talking about a defined resource of over 30 million pounds of uranium. But remember, that’s calculated using last year’s numbers. The company has been drilling like mad, so the size of the resource could easily double by the end of this year. The VP thinks it will be closer to 80 million pounds. Based on current prices, that would be $3.8 billion worth of uranium. And I expect higher prices for years to come.

• The company’s market cap is about a half billion. So assuming I’m right about the 80 million pounds of uranium, you can buy that resource for less than 15 cents on the dollar.

• Uranium in the ground isn’t the same as yellowcake in a drum. But the company has a respectable resource … more than respectable enough for one of the big boys like Cameco to potentially come in and buy it up, lock, stock and lead-lined barrel.

And to give you some hints about things to watch out for, here are some of the drawbacks:

1. In the first quarter of this year, the company had less than $25 million in the bank. That’s enough to keep it going for awhile, at which time I expect it to do a private placement (its initial offering was heavily oversubscribed). But the fact that it will have to do more financing could weigh on the stock price.
2. All that helicopter time costs money. This company goes through 6,000 liters of fuel a day for all its vehicles and operations, paying anywhere between C$0.94 and C$1.75 per liter. If the price of fuel goes higher, that will start to suck away the company’s cash. The company does not hedge its fuel costs.
3. It’s not a mine … yet. It still has to build a road access or arrange for some other kind of transport (boat or rail would be my guess), and it’s not even on a power grid yet. So, there is an aspect of this operation that conservative investors would consider “iffy.”

Bottom Line: That said, $25 million in cash is still pretty good, I believe fuel costs will remain manageable, and it has a dedicated team in place, with a real vision for profitability and the drive needed to get there. But is now the best time to buy?

Not exactly. The company’s share price has surged by nearly 50% in just the last few weeks. That’s a big move higher in a very short time. I believe we’ll see a pullback, so before I recommend this stock, I’m waiting for some weakness. Whenever you see that kind of a situation, whether in uranium or not, I suggest you do the same.

In the meantime, you may want to take a look at Uranium Participation Corp., a Canadian fund, which tracks uranium. The symbol up in Canada on the Toronto Exchange is U. In the U.S., the symbol is URPTF on the Pink Sheets. (On Yahoo, that would be URPTF.PK).

Yours for trading profits,

Sean

P.S. If you’re interested in uranium, you might want to read the special uranium report I’m sending to my subscribers on Monday, September 25. It will be chock-full of analysis of the uranium markets, and will include stocks and funds that should do very well as the uranium bull market really starts to roar.

I’ll be selling this report — including three follow-ups — for $199. I think it would be cheap at triple the price, but if you contact us at 1-800-400-6916, and mention my name, you can reserve a copy for the low pre-publication price of $99. On September 25, we’ll email you a PDF copy so you can jump on those red-hot recommendations as soon as they come off the press.

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