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    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 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).
    I'm curious... what is wrong with the pink sheet version? I have a reasonably large chunk of Strathmore in pink sheets. It is a less liquid market, but it costs me only $9.95 to trade, vs $100+ if I have Schwab trade it directly on the Canadian market.

    I'm about even on Strathmore... it's now below my purchase price, but I sold a portion when it peaked recently.
    Hi Jamie!!
    There is nothink really wrong with the PK version they just demand a wider spread of 1-1.5%. Ameritrade will trade directly for 29.99 I think, which makes it a pretty easy choice, I guess it depends on your size as to wether $100 is expensive as 1.5% is about $150 on a 10k trade each way.

    STM is well below my average purchase price. I'm always thinking about trying to trade these things but I guess it's just not my style. With SO much upside I just couldn't bear to be out when it counts.
    I read the following news article and wondered if this was anything to worry about?

    Sell Strathmore
    Recently a company called Uranium Power Corp. was forced to revise its resource estimate at one of its properties under National Instrument 43-101. They had estimated their resource at Sheep Mountain Wyoming under "historic resources". The much more stringent 43-101 requirements basically nullified their resource. Unfortunately Real deal portfolio member Strathmore minerals seems to have most of their properties in this category. As the exchanges seem to be cracking down we are advising the sale of Strathmore Minerals. Although the company is sitting on a ton of cash they will have to use it to prove up their reserves and comply with 43-101.
    Anonymous said...
    I read the following news article and wondered if this was anything to worry about?

    If Strathmore has to restate their reserves in some way it will only be on paper. The fact is that they have an estimate developed under old rules. This estimate is not the same estimate that a company would make under current rules but it wasn't just a wild ass guess either! STM's exploration has shown that these resources do exist when they have done their own exploration. The question is what % do you assign to the non compliant reserves.
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