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    Saturday, October 25, 2008

     

    Strathmore Groundhog Day

    See my previous posts on STM here, here and here.

    It is worth looking at the previous, savage, bear market in Strathmore's stock to understand why things will work out ok this time around. Yahoo has STM weekly price records back to late 1997. It started trading at about $3.85 in late '97.

    In March 2001 it dropped below 30c for the first time. It then bounced around reaching a low of 6c and didn't definitively break back up above 30c until October 2003. That is about 2.5 years.

    It rose to $5.18 in May 2007 and first broke 30c again in October 2008. If history repeats we could go nowhere for 2.5 years and we'd be looking at 2011 before Strathmore's stock price recovers. Though keep on reading to see why I don't think it will even take that long.

    March 2001
    In March 2001 Uranium was trading around $7 per pound. At that time STM "elected to sharply reduce its expenditures and conserve cash. The Company eliminated all exploration and pared back on the non-essential properties decreasing the number of claims held ". As of December 31st 2001 they had $119,000 cash and equivalents. They periodically sold shares to raise a few hundred thousand dollars primarily to stay in business. In the year 2000 the loss for they year was $400,000.

    2002
    By the end of 2002 they had $11,784 in cash and equivalents and used $213,735 in cash for the whole year 2002. By this point there were about 8M shares outstanding.

    2003
    By June 30th, 2003 they had $5,308 in cash and equivalents and were spending annuazlied about $300,000 a year.

    October 2008
    In October 2008 STM broke down below 30c. Spot uranium is down to $44 but according to Resource Capital Research's September 2008 review, long term contracts are still priced around $80. The spot prices in the low $40's are "driven by the emergence of distressed sellers and others driven by cash flow requirements according to TradeTech."

    This time around STM has around $11M in cash and equivalents. They may have a current burn rate of up to $800,000 a month to meet current exploration commitments.

    Future Budgets
    The CRITICAL question is what comes next. It seems obvious that once cash gets down to $4-$5M they will dramatically reduce expenses and move into maintenance mode just like they did last time. Even if maintenance costs $1M now instead of $200-$300k last time around, then they will have 4-5 years cash. When they get down to the last couple of million then they can fire everyone and pair back their claims to bring expenses down to the 0.5M level which stretches out their life even more.

    It is ridiculous to think that STM is going to keep spending $800,000 a month until all their cash runs out. They have been through exactly this experience before and they have a track record of putting the company on hold while they wait for things to improve.

    Similarities to last time
    Differences to last timeBottom Line
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    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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