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"The market can remain irrational longer than you can remain solvent" - John Maynard Keynes
Tuesday, July 12, 2005
A Gift (of uranium)
I haven't written much about Strathmore minerals except for a short mention in a list of buy recommendations. I can't help but mention it now because it seems to be trading at about 10% of it's intrinsic value - 10x upside.
I've mentioned my option based valuation methodology before. The idea is, for companies with large reserves but no feasibility study, we just look at the option value of the reserves and assume that production costs are equal to sales price. Therefore the entire value of the reserves is the option value. The reason that this is ok is because the company could sell calls going out over the years of life of it's reserves, take the money now and return it to the shareholders (Not that I'm advocating this). The key thing is a reasonable belief that revenues will be equal or greater than the cost of production.
In the end the model thinks of strathmore as owning a giant vault full of 244 Million Pounds of Uranium that they bought on the market at today's $29 price. Of course selling calls would mean that they wouldn't participate if Uranium went to $50 a lb but that's why it's a pretty conservative valuation methodology.
To calculate the total pounds I've used the historical analysis provided by strathmore and taken 70% of those reserves. Which leaves 170.4M lb. The option value is $5.72 per lb, calculated using a volatility of 8% and an average 1300 days to expiry. Finally using public statements over the last few years I'm assuming at $29 uranium, 70% of STM reserves are profitable or breakeven.
So we are calculating
Total reserves * 70% recovery * 70% breakeven * $5.72
Which leaves us with a share price of around $17.57 CAD per share. STM is currently trading at $1.49 CAD a share!
Even varying the assumptions widely you have a very undervalued stock.
If you assume you are valued on calls based on a three year duration at $2.98 you still have 500% upside.
Taking another valuation approach, the company has said over 10% of their reserves would be profitable at $20 uranium. That means around 10% of reserves are worth $9 profit a pound ignoring the upside to selling calls using a discount earnings model the company is worth nearly $3.6 CAD ignoring the other 60% of reserves that are at varying degrees of profitability between the $20 and $29 uranium prices.
I started buying STM at $2.8CAD and have bought all the way down. It has by far the highest upside right now of all of my stocks and it's getting better by the day (Kitco metals is reporting that Uranium is now trading at $29.5 but uxc.com is still reporting $29). There are many great links on the bullish case for uranium based on the supply and demand fundamentals and it's not just a China story! Strathmore is traded in Canada as STM.V or in the US as STHJF.PK but as I've said before don't buy the pinksheet version. (Ameritrade among others, will trade directly on the Canadian exchange for the cost of a broker based purchase).
Lead Inventories and Ivernia (IVW IVW.to)
Well for the first day in a long time, Lead Inventories dropped 500 tonnes in LME storage. Anyone who is following the IVW fundamentals is probably watching this like a hawk, as nothing is more important that the price of lead to IVW's value!
Still Lead dropped from 39.1c to 37.6c. If this is the turning of the tide then we could have put in a bottom. 37c was the Apr-Jun low of 04 and may offer some support especially if it's combined with falling inventories. Also interesting is that inventories reached about 53500 (almost today's level) in mid september 04 and started dropping, though last time it happend over a few days, this time it's happened over a month and a half and has really erroded confidence. Though a day does not a trend make!
At these lead prices I only see about 20c upside to IVW (given they don't find any new reserves) and if lead drops much more, IVW is about to become overvalued. I'm not selling until I can understand what lead is doing but 37c isn't good news and I wouldn't be adding or taking a new position in IVW now.
Disclaimer and Disclosure
Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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