Published on Saturday July 27 2013 (AEST)
Big gains are rarely found by jumping on the bandwagon. Independent Analyst and founder of MockingJay Inc., Peter Epstein argues that market darlings won't reward latecomers; that's why he spends his time finding undervalued, under-followed junior resource companies.
In this interview with The Energy Report, Epstein shares his resource stock diamonds in the rough, including a uranium name commercializing a groundbreaking technology and a graphite company beating its competitors to market. The Energy Report: You've written that "a great company doesn't necessarily make a great investment." Are you implying juniors are better bets?
Peter Epstein: Yes—juniors are highly risky in that they can move up or down by quite a large amount, but if, for example, a junior is trading at its cash value, how risky is it really? At some point the upside outweighs the risk. Make no mistake: You still need good projects, cash in the bank and a strong management team, but if you're buying shares in a company that's trading below its cash value, you're basically getting its assets for free.
TER: What's an example of a great company that's not necessarily a great investment?
PE: Look at Cameco Corp. (CCO:TSX; CCJ:NYSE), a true leader in the uranium space and a great company. If underlying uranium prices rebound to $75 or $85 per pound ($85/lb), as many pundits expect, analyst price targets indicate that Cameco's stock might increase by about 25%. However, select oversold juniors in the space could return multiples of the amount invested.
TER: Your portfolio really runs the gamut of resource sectors. How do you choose which commodities to focus on?
PE: I read a lot and I speak with many management teams and industry experts. It's not necessarily difficult to pick the commodities that have strong core fundamentals. For example, iron ore fundamentals look challenging, as Rio Tinto (RIO:NYSE; RIO:LSE; RTPPF: OTCPK), BHP (BHP:NYSE; BHPLF:OTCPK), Vale (VALE:NYSE) and Fortescue Metals (FMG:ASX), together representing two-thirds of the iron ore industry, are ramping up production levels dramatically. On the other hand, uranium fundamentals appear quite strong. Japan is restarting a number of nuclear reactors early next year and China and India are building new reactors as fast as they can. China has little choice. Its major cities are choked with coal-related air pollution, not to mention the millions of new cars on its roads. India's coal market is hopelessly complicated and corrupt. Coal-fired electricity generation there can't possibly keep up with demand. India's stated goal is to get 25% of its power from nuclear energy, from which it currently gets just 3%. All of this suggests increasing demand for uranium. TER: What are some oversold juniors you're watching in the uranium space?
PE: Energy Fuels Inc. (EFR:TSX; EFRFF:OTCQX) is extremely well positioned in the U.S. It will have two of the top-five uranium development projects in the U.S. once it closes on its announced acquisition of Strathmore Minerals Corp. (STM:TSX; STHJF:OTCQX). Energy Fuels owns the only operating conventional uranium mill in the country. This mill has a replacement cost in the hundreds of millions, yet Energy Fuels' fully diluted market cap is just $125 million ($125M). Energy Fuels trades at a very substantial discount to peer uranium producers. The last time there was a major bull market in uranium stocks, Energy Fuels' stock was up by 400% within about nine months. This time around, the stars are aligning for big gains once again.
TER: How do you determine the top-five U.S. projects? Is it based solely on size?
PE: It's largely based on the scale of the projects. The U.S. is home to a number of emerging in-situ recovery (ISR) projects that should produce 2–8 million pounds (2-8 Mlb) of resource over the next four to eight years. These are companies like Ur-Energy Inc. (URE:TSX; URG:NYSE.MKT), Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT) and Uranium Energy Corp. (UEC:NYSE.MKT). The difference with Energy Fuels is that its projects are conventional mining operations as opposed to ISR, which some believe is a lower-cost method. However, if you have a conventional mining project that's three times as large as an ISR project, you're still going to make strong returns at that scale, even if it's at a lower margin. To be clear though, the economies of scale of Energy Fuels' major projects could easily even out the margins as compared to proposed ISR projects.
TER: Black Range Minerals Ltd. (BLR:ASX) has an unusual uranium ore concentrating technology called ablation. How does that method measure up to an ISR or conventional mining project?
PE: The technology concentrates uranium mineralization at the mine site by 90% or more by separating waste from ore in a low-cost, green, purely mechanical process. Therefore, instead of shipping 100 tons of ore to a mill that could be hundreds of miles away, only 10 tons of concentrate need be shipped. This translates into immense savings at every step of the mining operation. Ore is cheaper to transport and process and there are 90% less tailings!
The unique thing about Black Range Minerals is that in addition to its Hansen/Taylor Ranch uranium project in Colorado, which, at 91 Mlb, makes Black Range a top-five resource holder in the U.S., the company also has a 50/50 joint venture (JV) with a private company named Ablation Technologies LLC.
This JV has exclusive global rights to ablation technology, which could be a game-changer. The majors will be watching the deployment of a semi-commercial scale unit closely in coming months. This JV interest is a hidden asset that could be worth a multiple of Black Range's entire market cap.
5Ton P/hr Ablation Uranium Recovery Unit Under Construction June 23rd 2013