Including the Right Juniors can Maximize your Returns
Rick Rule, President & CEO at Sprott US Holdings Inc., is quite proud to tell anyone who will listen that during his first foray into uranium investing his “worst” stock pick returned 22:1. During that run in the early 2000’s, uranium prices and related equities saw record heights and those who got in early saw outstanding returns. Six years later, uranium prices took off again and the money was made once more. Today, many uranium watchers believe uranium prices are poised to take us on that ride all over again.
The good news for investors putting together their portfolio is that, like in 2002, there are only a handful of uranium companies left to choose from. The last 5-6 years have been very hard on the sector.
As always, investors must do their homework in evaluating where the biggest gains may be hiding by assessing geography, the technical team, the management and the projects of their target investments.
JUNIOR EXPLORERS HOLD THE HIGHEST RETURNS
Equities that are supported by the price of uranium receive an extra special lift during these bullish times. Between November 2010 and February 2011, the long-term price of uranium moved from US$60.00/lb to US$73.00/lb or 22%. During that same time period, shares of blue-chip international uranium miner Cameco (TSX:CCO, NYSE:CCY) increased by 38%.
The spot price of uranium during that same four-month period moved from US$46.50 to US$69.75 or 50%. Here we saw Uranium Participation Corp (TSX:U), a company who buys and sells physical uranium, jump 67%.
The real excitement, however, was seen among the junior uranium companies that experienced share price increases of well over 200%. Some, such as one of our favorites Purepoint Uranium Group Inc. (TSXV:PTU), enjoyed increases of nearly 300%.
The selection of miners and developers for your uranium portfolio is a fairly short list. Besides Cameco Corp. and Uranium Participation Corp. you may be considering Uranium Energy Corp. (NYSE:UEC), Ur-Energy Inc. (NYSE:URG), or Denison Mines Corp. (TSX:DML).
More recent exploration success stories in your portfolio may be Fission Uranium Corp. (TSX:FCU) and NexGen Energy Ltd. (TSX:NXE) that have seen their share prices driven higher in recent years due to the excitement of their discoveries in Saskatchewan’s new Patterson Uranium District. Although they represent solid choices for uranium investment dollars, there may not be a lot of room for further extraordinary gains this coming year.
The more important component of your uranium portfolio may be the junior exploration companies that can exponentially improve your overall return. Here’s what you should be considering.
As with any resource, and in particular uranium, it is important that a company’s projects are in a region conducive to long-term support. Niger may be rich in low cost uranium resources; however, the political unrest of the region heightens the risk of significant operational disruption.
Some regions, like the Provinces of Quebec and British Columbia in Canada, have actually placed moratoriums on uranium mining – after certain companies have spent millions of dollars developing projects.
One may rather look to Mega Uranium Ltd. (TSX:MGA) with projects in Australia or Plateau Uranium Inc. (TSXV:PLU) who is opening up a new uranium district in the Macusani region of Peru – both safe and mature mining countries.
Of course, the highest marks always go to Saskatchewan Canada and its Athabasca Basin – home to the highest-grade deposits in the world. It is no wonder that most of the companies in our list operate there.
In 2017, the Frasier Institute ranked Saskatchewan as the top mining jurisdiction in the world for investing. Their survey, across 104 jurisdictions, acts as an invaluable resource to anyone evaluating their resource investments. www.fraserinstitute.org/categories/mining
The challenge with junior resource companies is knowing if the team can deliver on their promises. Are they familiar with the commodity or the jurisdiction? Do they have any experience or credentials worthy of your investment? Investors need to spend time evaluating the management and technical talent behind these ventures.
For instance, Fission 3.0 (TSXV:FUU) is a uranium project generator in Saskatchewan advancing more than 20 early stage projects. As the name would imply this is the team’s third kick at the can. During the last boom in the market, the Fission team discovered the “J Zone” uranium deposit that was subsequently sold to Denison Mines Corp. A few years later, the same group discovered Fission Uranium Corp’s world class “Triple R” deposit, opening up the Patterson Uranium District.
Another company with grade A credentials is Purepoint Uranium Group Inc. (TSXV:PTU). What makes this group unique is the fact that they operate their prospective Hook Lake project in the Patterson Uranium District on behalf of their majority partners – none other than heavy hitters Cameco Corp and AREVA of France. It is rare to see major mining companies entrusting millions of exploration dollars to a junior resource team but that trust seems to be well earned. Recent discoveries would point to a group that knows what it is doing.
The volatility and long-suffering nature of the uranium markets have made it a dangerous place for both exploration companies and their investors. How have these companies weathered the down cycle of the last 6 years, do they have the ability to see their businesses through to better times and are they positioned to make the most of a uranium bull cycle?
Some companies have demonstrated an ability to raise capital and maintain strong balance sheets, even during the worst of times. Companies such as Skyharbour Resources Ltd. (TSXV:SYH), Canalaska Uranium Ltd. (TSXV:CVV) and ISOenergy Ltd. (TSXV:ISO) all appear to have been able to raise new investment even in a difficult environment.
Some companies have had the good sense to prepare their businesses to thrive in both good and bad times.
When Fission 3.0 was spun from Fission Uranium Corp in 2013, it was armed with adequate funds to establish the new venture – funds which they have carefully managed. Their project generator model has allowed them to amass a large portfolio of small projects with the objective of advancing them down the road through partner earn-ins.
Purepoint Uranium, a long-time player in this area, has demonstrated an ability to operate at some of the lowest overheads in the industry. Focus has been placed on their Patterson area project where they earn management fees and the exploration is financed primarily by their partners Cameco and Areva. Meanwhile, their large 100% owned portfolio of advanced projects wait patiently for investment during better times.
PROPERTIES OF MERIT
Unless you are a geologist yourself, evaluating the technical merit of an exploration project can be a difficult, if not impossible, task. Investors must be very careful to fully understand the prospects of a company’s key projects and acquire the necessary assurances that any particular project has the potential to deliver a resource.
One of the more obvious uranium picks is UEX Corporation (TSX:UEX) and their recently optioned Christie Lake project. The Christie Lake project hosts a historic uranium resource and, since optioned by UEX in 2016, the company has delivered significant drilling results with grades exceeding 20%. What’s more, UEX has a large portfolio of uranium projects in Saskatchewan with many demonstrating uranium findings.
Over the past few years, over 300 million lbs of uranium have been identified in the Patterson Uranium District in northern Saskatchewan. Not only has Purepoint Uranium Group Inc. been able to demonstrate that their Hook Lake project shares the same geological structure as those existing resources, but early drill results have identified uranium discoveries with grades as high as 50%. Like UEX, Purepoint also holds a significant portfolio of prospective exploration projects.
The geological, geophysical and geochemical interpretation of exploration results is certainly one of the most problematic aspects of investing in resource stocks. In this area, investors should seek as much trustworthy assistance and advice as possible.
Fortunately for investors, the list of North American publicly traded uranium junior resource companies is not long. Our three favorite juniors have also been able to maintain excellent share liquidity providing us with greater confidence to include them here. They are presented in order of upside potential when uranium prices take off again.
Investors should ensure that their uranium portfolios holds a diversified balance of equities in order to match your risk/return profile.