20% Of World's Uranium In Canada's Athabasca Basin: Here's How To Invest In It
When it comes to resource investing, focusing on certain geographical spots known to consistently yield minerals at economically viable rates is an imperative of mine. Such regions tend to have favorable pro-mining jurisdictions, necessary infrastructure (roads, water pipelines), and abundance of explorers, developers and prospectors that makes M&A activity - and the corresponding opportunities for shareholders - more likely.
And so, when it comes to geographical hot spots for the uranium sector, one area that quickly gets mentioned is Canada's Athabasca Basin. Athabasca contains 1.5 billion pounds of uranium, and currently produces approximately 20% of the world's uranium supply. In other words, it's a proven property.
Moreover, there appears to be more to come. Brad Wall, the Premier of Saskatchewan - the province in Canada where the Athabasca Basin resides - recently commented favorably on uranium trade agreements Canada and China have established. Wall expects uranium production in Saskatchewan to double by 2017, and with a deal with China already established, a serious buyer with the appetite and wallet for uranium has been secured.
From this perspective I find creating an investment portfolio targeting operations in the Athabasca Basin to be a worthwhile endeavor. Specifically, here's who I've got on my radar:
Cameco Corporation (CCJ). Cameco is the no-brainer for those who want to play this angle with minimal fuss. Cameco is the largest North American uranium miner, and the firm has been thoroughly exploring the Athabasca Basin for some time; it has a home field advantage here. I consider it likely that Cameco will continue to get outstanding uranium production out of Athabasca, and will likely have the opportunity to acquire some promising explorers as well. See my previous coverage for a more thorough explanation of why I'm long Cameco.
Denison Mines (DNN). Cameco is the no-brainer incumbent, which of course means it's likely to be the safer play in that its downside is more limited. But alas, it's upside is likely to be less than some of the smaller players operating in Athabasca Basin. Denison Mines is one such firm. Denison has a market cap of around $750 million in comparison to Cameco's $10 billion - over a 10X difference at the time of this writing. The two firms are joint partners in a venture in the Athabasca Basin, with Denison being the primary operator and a 60% owner. Denison also has joint venture relationships with Areva Canada, another big player in the nuclear market, so the firm seems to be well-connected and plugged into the industry value network. At the same time, its operations in Mongolia and its secondary focus on mining vanadium - a mineral that could enjoy great growth from greater demand for batteries needed to enable greater usage of solar and wind power - gives the firm some unique attributes I find favorable, particularly from the perspective of investors looking for quality, select diversification opportunities. Denison is currently trading at 1.5X book value. I think a price-to-book ratio under 2 constitutes a favorable opportunity for shareholders. But be forewarned: Denison does have a market beta of 3.13 at the time of this writing, meaning that it is over 3X as volatile as the market as a whole. I do believe its upside is potentially tremendous, but buying on weakness is especially important for high beta stocks.
UEX Corporation (UEXCF.PK). This uranium explorer operating in the Athabasca Basin has a book value of $150 million and a market capitalization of around $180 million at the time of this writing, which immediately drew it to my attention. When I saw that Cameco had a 22% stake in the company, I become even more interested, as this sets the stage for of value creation via collaboration between the two firms. The firm is also employing toll mining arrangements - meaning it will use the excess capacity of existing mills operated by Cameco and AREVA for some of its milling needs, rather than constructing a new mill. This is another example of an opportunity that can be created in a mineral-rich region that has attracted numerous players. The stage is set for collaboration that generates greater economic opportunities and corresponding profits for shareholders.
Fission Energy (FSSIF.PK). For the tiny uranium stock lover in all of us, Fission Energy may be one to watch in the Athabasca Basin. It has a joint venture with Korean Electric Power Company (KEPCO). A strong JV partner is something I regard as a must-have for investing in stocks with a market cap below $100 million. Fission's latest financials show a book value of around $48 million; with its current market cap of approximately $80 million, its price to book ratio is about 1.67. In the uranium sector as a whole, I find a price-to-book ratio below 2 to be a favorable buying opportunity. Also of note relating to Fission Energy is a recent statement from Marin Katusa, Chief Energy Investment Strategist of the esteemed Casey Research, in which he stated Fission is a likely takeover target, especially by Rio Tinto (RIO), another major firm operating in Athabasca.
There are a lot of other companies in this sector that are notable - Rio Tinto, Hathor (HTHXF.PK), Areva (ARVCF.PK) and JNR Resources (JNRRF.PK) come to mind - although the four mentioned in this write-up will be the ones that I'm most inclined to keep an eye on. Ultimately, though, I think the Athabasca Basin is poised to deliver great economic value via uranium production and corresponding profits for shareholders of firms operating in this region.
Disclosure: I am long CCJ.
Additional disclosure: I may initiate a long position in DNN shortly.
Subscribe to the RSD email list and get the latest resource stock activity directly to your inbox, for free.
@RSDigest ON TWITTER
Small Cap Stock Digest