Profiting from the Next Big Uranium Discovery
Source: Marin Katusa, Casey Energy Speculator (7/16/07)
". . .here’s the good news: a major discovery in uranium is now all but inevitable, due to the unprecedented amount of money that has been spent in uranium exploration programs over the past few years. And when the long-awaited discovery does come, accompanied as it will be by stories of shareholders striking it rich overnight, it promises to kick start another bull run for the sector as a whole. And especially for anyone fortunate enough to have invested in a company with holdings near the discovery."
But lately, the sector has stalled out, as we had predicted it would in the pages of the Casey Energy Speculator. It was inevitable, given that the number of companies claiming to be uranium related had exploded from a small handful at the time of my original recommendation, to well over 400 today. Most of these companies are not worth the ink, let alone the paper, their certificates are printed on.
Does that mean that the uranium stock bull market is over? Hardly. The fundamentals still line up well in the favor of higher and higher uranium prices, as Marin Katusa discusses below, and there is an overarching reason why the sector may be about to surprise the nay-sayers.
As you’ll read, there is still big money to be made, and probably sooner than you’d expect.
The current uranium bull market has seen it all: land rushes, promises of immense wealth, millions of dollars poured into drill programs, and a uranium spot price that has galvanized the investment community by smashing through $130/pound.
But amid the brouhaha, one thing has remained elusive: a major uranium discovery. Everywhere from Australia to Zambia, exploration results have been largely underwhelming. The most interesting results so far have come from a grassroots project; the Cameco/Strateco joint venture at Matoush, Quebec. But even this project is not fresh, much of the drilling to date has simply been twinning of historic holes.
In short, the investment world is still waiting for a big find in this exploration cycle. And discoveries will be key to the uranium story going forward. Here’s why: the considerable gains made to date in uranium stocks have been largely triggered by the appreciation of U3O8 as a commodity.
But riding the commodity price of uranium won’t be the easy ticket to success for juniors it was in the recent past. With the uranium spot price doubling in 2006, investors crowded into the party, indiscriminately pouring money into exploration stocks, creating a rising tide that lifted all boats. In the first half of 2007, the uranium spot price has doubled yet again, yet uranium stocks have languished, with many stocks trading at levels last seen when uranium was half its current price.
Will continued increases in uranium price (a sure thing despite the recent $2.00 step back) ensure investors stay interested in the uranium sector? Probably. Will it generate another buying spree in uranium stocks? Maybe not.
The question then is, is there still big money to be made in the uranium stocks? In a word, yes. .
Phase One Is Done, But the Bull Has Just Begun
The uranium stock bull market to date has been unusual in that it has been driven solely by the price of the underlying commodity, with no major new discoveries to date. In almost all previous resource bulls, the junior explorers have been propelled by the announcement of a major find.
Pyramid Mines’ lead-zinc discovery in 1965 sent the entire Vancouver Stock Exchange into a buying frenzy. Likewise, DiaMet’s diamond discovery in 1991 sent its stock from pennies to $60, and sparked a follow-on mania as investors rushed into any and all companies with diamond properties in northern Canada. In Labrador, the Diamond Fields Voisey’s Bay nickel discovery in 1993 sparked one of the largest and most profitable resource share bull markets to date.
And here’s the good news: a major discovery in uranium is now all but inevitable, due to the unprecedented amount of money that has been spent in uranium exploration programs over the past few years. And when the long-awaited discovery does come, accompanied as it will be by stories of shareholders striking it rich overnight, it promises to kick start another bull run for the sector as a whole. And especially for anyone fortunate enough to have invested in a company with holdings near the discovery.
The Place to Be
For that reason, our Casey Energy Speculator has focused on identifying the uranium companies that have the land, management expertise and the cash needed to give them a real shot at the next big find. That will be the single best way to earning life-changing returns.
In addition, we are investing in companies working in zip codes where elephants might be found – and that zip code, or postal code as would be more apt, can be none other than Canada’s Athabasca Basin.
The Athabasca Basin has been the world’s premier uranium district for the past half-century, and accounts for one-third of the world’s uranium production.
Since 1968, 18 deposits totaling over 1.4 billion pounds of uranium have been discovered in the region. The total value of Athabasca's remaining uranium deposits is on the order of US$30 billion, putting the region on par with the world's other major mining districts – Nevada's Carlin trend (US$35 billion), Ontario's Timmins Camp (US$21 billion) and Hemlo (US$6.6 billion).
The first major uranium discovery in the Athabasca Basin was made at Rabbit Lake in 1968, producing 120 million pounds of U3O8 over twenty-five years. In 1975, the richest open-pit deposit in the world was discovered at Key Lake. Over its 15-year life, the Key Lake deposits produced more than 190 million pounds of U3O8. These early discoveries of relatively near-surface deposits were found by traditional prospecting of mineralized boulders and current-day radiometric geophysical techniques.
In the early 1980s, deeper discoveries were made of so-called “blind deposits” that had no surface expression. The MacLean, Midwest and Sue Deposits as well as the giant, high-grade Cigar Lake deposit all fell under this category. In 1988, the highest-grade uranium deposit in the world was found beneath 500 meters of sandstone at McArthur River.
In short, the Athabasca Basin has and continues to be uranium’s ground zero and the likely address of the next big discovery.
But which of the many companies working in the Basin is most likely to grab the prize? There are a couple of key factors you need to look for.
Land Alone Does Not a Discovery Make
A favorite tactic of promoters in all resource bull markets, past and present, is to stake huge land positions and then proudly point investors to the map, saying, “We’re the largest landholder in such and such area.”
Such land grabs are a dubious exploration strategy at best. And in the case of Athabasca, they’re downright ridiculous. Many of the basin’s most significant deposits are just a few tens of meters wide and hundreds of meters long. Thus, such deposits can be entirely covered by a land parcel just a few hectares in area – a virtual postage stamp compared to many of the gargantuan claims that exist in the basin today. It’s not having the most land that matters, it’s having the right land.
Pre-2004, there were only a few companies working in the Athabasca. These companies took advantage of the fact that uranium was out of favor to accumulate properties that, by virtue of the exploration work done in earlier uranium rushes, were known to be the better prospects. Post-2004 the staking rush began in earnest, although it was quickly apparent that much of the land picked up late in the day was likely little more than moose pasture.
So the first question you need to ask about Athabasca-based uranium companies you own is exactly when they acquired their land. If it was at any point after 2004, then some (fairly high) level of skepticism is warranted.
You can further narrow down the likely discoverer by looking at management and their experience with using modern technology to explore for uranium at depth. Advanced technologies like electromagnetic (EM) geophysics are tools the big players didn't have back in the days when they passed over "uneconomic" sections of the basin.
EM geophysical methods were what originally identified graphite in the basement fault structure at McArthur River, helping guide a drill program that eventually located the main ore zone. Such high-tech prospecting in unclaimed areas toward the center of the basin could potentially unearth new discoveries. .
Gentlemen, Start Your Drilling Engines
To come up with a find, would-be discoverers will need drilling – and lots of it. As we’ve noted above, the Athabasca Basin is not an easy place in which to zero in on uranium deposits. A quick example: Cogema’s Midwest Lake uranium deposit in the northeastern Basin was discovered in the late 1970s only after nine years of field work at a cost of $4.35 million (roughly $13.4 million in 2007 dollars).
Outside of the majors, very few companies are currently carrying out extensive drill programs in the Basin. The others may be loathe to drill because, so far, they’ve been able to promote themselves on land package size and potential resource – the key words here being “so far.”
The initial buzz and excitement is over and now it is time for real results.
Drilling is how properties are put to the test, and only the true contenders, the ones who know they have a shot at finding something, are willing to pull drill core from the ground. A breakdown of 2007 drill programs in the Athabasca reveals who these contenders are.
There are 59 junior uranium companies in the Athabasca Basin. The top 5 Casey Research uranium stocks are drilling 73,000 meters, the other 54 juniors are drilling a combined 64,645 meters. So, 8% of the junior uranium explorers working in the area will account for 53% of the drilling. It is these companies who are serious about making a discovery, not simply riding the uranium wave. While nothing is guaranteed, it’s clear who has the best chance of claiming the Athabasca’s next monster deposit.
How You Profit
In 2006, the rising tide of interest in uranium lifted pretty much all junior uranium stocks, including those we follow in the Casey Energy Speculator. In 2007, our stocks have taken their lumps along with the rest of the sector, although some of our picks continue to charge forward (including one that is up 74% year-to-date, and over 350% since our original recommendation). We are not concerned, because we are invested in companies we are comfortable holding for their exploration – as opposed to promotional – promise.
With many of the best uranium juniors selling at bargain prices, investors with strong contrarian instincts now have a brief window of opportunity to get in before the true frenzy begins – so long as they choose the right juniors in the right district. Choosing the right district is the easy half of the equation. For all the reasons outlined above, it’s clearly the Athabasca Basin.
As for cherry picking the right companies out of the dozens that now exist, based on our analysis, you only need to buy 5 of the 59 companies drilling in the Athabasca Basin this season to gain exposure to more than half of the entire drilling programs for the whole region. That reduces the task of building a portfolio of the right stocks to an easily manageable level.*
As more and more money is poured into the ground, the likelihood of a new mega-discovery grows daily. It’s even possible that the 2007 drilling season will see more than one major discovery in the Athabasca, sending the companies responsible on a phenomenal rise, and in the process, lifting all those who happen to be exploring nearby to new highs.
[* Ed. Note: Sharing the names of the five Athabasca Bain explorers identified in the Casey Energy Speculator would be unfair to current subscribers. However, if you subscribe today, you’ll also receive our updated special report “The Top 5 Uranium Juniors in the Athabasca Basin.” As new subscriptions come with a full six-month money-back guarantee, you have nothing to lose by giving it a try. Just click here to learn more.
Marin Katusa is the chief investment strategist, Energy Division, of Casey Research, publishers of the Casey Energy Speculator and Casey Energy Confidential Alert Service. An accomplished investment analyst and former professor of advanced mathematics, Marin specializes in uncovering early-stage opportunities in the junior resource sector using a combination of boots on the ground and a proprietary diagnostic tool that analyzes and compares hundreds of investment variables.