(Steve Saville comments on Uranium stocks):
Update on Uranium Stock Selections
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(Note: To review the complete list of current TSI stock selections, logon at
http://www.speculati...arket_logon.asp and then click on "Stock Selections" in the menu. When at the Stock Selections page, click on a stock's symbol to bring-up an archive of our comments on the stock in question)
We usually won't consider adding an exploration-stage stock to the TSI Stocks List unless we believe that a) there is a good chance of the company being able to achieve strong growth in its resource base, AND
the stock is under-valued or, at worst, fairly valued based on the resources that have already been defined to measured-and-indicated status. In other words, good exploration potential is generally not enough by itself; we usually want the downside protection provided by a proven resource base that is currently being priced at a discount to fair market value. There's also the issue that we have no idea how to assign a dollar value to a company that has nothing other than the POSSIBILITY of its exploration activities finding something valuable.
Occasionally, though, we make an exception, and today's new inclusion in the TSI Stocks List is an exception in that the company has not yet officially proved-up (defined to NI 43-101 or JORC or SAMREC requirements, that is) any resources. The new inclusion in the TSI List is Mawson Resources (TSXV: MAW), a company focused on exploring for uranium and gold in Sweden.
MAW's primary focus is on uranium and the company has several prospective uranium projects in Sweden. The company reports a POTENTIAL resource, based on historical data, of 130M pounds of uranium oxide (U3O8) across three of its projects. Here's the breakdown:
- Tasjo: 116M pounds
- Duobblon: 11.6M pounds
- Klappibacken: 2M pounds
None of the above resource estimates currently meet NI 43-101 requirements so they should not be relied upon for valuation purposes. They are, however, based on extensive exploration work carried out in the past. The resource potential estimated for the Tasjo project, for example, is based on the results of 190 drill holes.
The main reason we are going to add MAW to the TSI Stocks List at this early stage of development is that the company's market valuation is low enough that it will be a value proposition even if the actual resource proves to be only one-quarter the current 'guesstimate'. To be specific, MAW's current market cap is US$26M (26M shares at C$1.16/share), so if the resource turns out to be only 30M pounds of U3O8 then MAW would still be trading at less than US$1 per pound of in-ground uranium. This is much lower than most exploration-stage uranium companies.
Another reason to be adding MAW to the Stocks List at this time -- in the face of considerable general market risk -- is that the stock does not look risky from a technical perspective. As evidenced by the following chart, MAW rocketed higher between the beginning of November and the middle of January but has since been consolidating. It has retraced about 50% of its spectacular run-up and has strong support within 15% of Friday's closing price. Barring a total collapse in the resource sector of the stock market, a drop back to support at around C$1.00 probably describes the maximum downside potential over the next few months.
In our opinion, the two main risks associated with MAW are:
1. Geological: At this early stage we can't be confident that the quantity or quality of the resource will be sufficient to enable uranium to be profitably mined.
2. Political: Sweden's current government does not favour uranium mining.
Taking into account the opportunities and the risks, we think MAW is a reasonable speculation within 10% of Friday's closing price (C$1.16).
Mawson Resources, discussed above, is the third uranium position in the TSI Stocks List. The others are USEC (NYSE: USU) and SXR Uranium One (TSX: SXR).
USEC, a uranium enrichment company, is a conservative way to play the energy bull market. It generates around 1.5 billion dollars of annual revenue and trades at low price/earnings and price/sales ratios.
It would be reasonable for long-term investors to accumulate USU near the current price. In the short-term we think the stock's upside potential and downside risk are both around 20%.
SXR is a development-stage uranium producer with near-term production potential (the company is scheduled to begin producing uranium at its Dominion project in South Africa in early 2007). It also has significant development-stage gold assets and some current gold production. We like SXR as a long-term investment, but from a technical perspective the stock is presently 'overbought' (the following chart shows that it is at its channel top). As a result of the extended technical situation we wouldn't be doing any new buying at this time, but we also wouldn't be inclined to take any profits. Our opinion is that current owners should continue to hold and prospective new owners should wait for a pullback to near the 200-day moving average before buying.
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