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Insiders Awaken Sleeping Giant in the Uranium Industry

By Michael Brush
Exclusively for InvestorIdeas.com
April 26, 2007

Uranium Resources (URRE), a U.S.-based uranium mining company, looked like a buy back in November at around $6 because of some insider purchasing, but we missed it.

Now the stock has risen to $10. And another recent insider purchase at $9.59 signals further gains once again – so let’s get on board this time.

The long-term pricing trends for uranium look favorable, and this company seems well positioned with extensive uranium deposits in New Mexico and Texas.

To be sure, this stock will be volatile. Here’s why.

It has gone up five fold since last September.
A good chunk of the company’s earnings potential lies in the distant future.
The price of uranium will bounce around a lot.

But the long-term fundamentals for uranium look good and this will help Uranium Resources, which has these factors going in its favor.

This company is not just a “hole in the ground surrounded by liars” – a standard knock on emerging mining companies. Uranium Resources has been around for 30 years, even if it was dormant for several years when uranium prices were weak. The company has both assets and mining experience. A lot of its uranium is near mineshafts drilled decades ago by major energy companies which plugged them when uranium prices weakened. Having mineshafts in place should speed start up time for mines.
The company claims to have 91.7 million pounds of uranium on its New Mexico properties. It hopes to produce 10 million pounds a year by 2014 -- a sharp increase from the 260,000 produced last year.
The company is under new management.

Before we take a closer look at Uranium Resources, here’s a summary of the big-picture outlook for uranium.

Demand drivers

China , India, Russia and many other countries plan to put in lots of nuclear power plants, and they are locking up uranium supplies now.
Concerns about the environment are converting many people over to the concept of using nuclear power, which does not produce carbon.
Western nations want to reduce their dependence on petroleum imports from unstable parts of the world.
Global energy consumption will double by 2030 according to the U.S. Energy Information Administration.

All these factors are driving demand for nuclear power and uranium (http://moneycentral.msn.com/content/P116569.asp). According to International Atomic Energy Agency, 169 nuclear-power plants will be built in the next 15 years, compared to around 440 in operation today. That could boost annual demand for uranium to 300 to 400 million pounds by 2025 or 2030, from around 190 million pounds now, says David Clark, chief operating officer of Uranium Resources.

Supply constraints

Worldwide production of uranium in 2005 (the most recent numbers available) was at about 108 million pounds. The difference is being made up by conversion of Russian and U.S. military-grade uranium for commercial use. But Russian supplies will cut off in 2013.

“We’re going to need to replace 400 million pounds each year by 2030,” says Clark. “But we are not seeing any new discoveries, and it takes 10 to 15 years to develop something that has been discovered.”

That’s a big problem. Nuclear energy expert Thomas Neff of the Massachusetts Institute of Technology Center for International Studies puts it this way: "Just as large numbers of new reactors are being planned, we are only starting to emerge from 20 years of underinvestment in the production capacity for the nuclear fuel to operate them.”

All these factors help explain why uranium recently traded above $110 per pound, up from $10.75 in early 2003.

Reviving a dormant company

Uranium Resources produced a lot of uranium in Texas from 1988 to 1999, but then shut down because uranium prices plummeted. When prices perked up again in 2003, the company restarted production. But it made the blunder of signing long-term contracts to deliver uranium at what today would be considered laughably low prices.

So the company spent $12 million to buy out those contracts last year, and it renegotiated them at more favorable rates. It now gets around $70 per pound, compared to $25 to $30 per pound at a major competitor. Costs on new production are down to about $25 to $30 a pound.

Looking ahead, the strategy is to use Texas profits to develop New Mexico properties. “We expect to make a lot of money in Texas, but the future of the company is all in New Mexico,” says Clark. Uranium Resources has several potentially lucrative properties in the northwest corner of the state. Here’s a sampling.

Its Nose Rock property was originally developed by Philips Uranium Corporation in the late 1970s or early 1980s. It has two 3,300 foot shafts sunk to the ore zone. Back then, projections called for production of 2.5 million pounds of uranium a year.
Two projects called Roca Honda and West Largo were partially developed by Kerr-McGee in the late 1970s. Roca Honda was expected to produce one million pounds a year. Development was halted in 1981, but there’s still a mineshaft at Roca Honda, plugged at the surface. There are six mine shafts in place at various New Mexico properties, which should cut start up times.

Besides these three projects, the company has several others in New Mexico, plus an extensive data base of logs, feasibility studies, mine development plans, and ore reserve analysis to work with. All told, Uranium Resources thinks it can produce 10 million pounds a year by 2014 and build its reserve base to between 200 and 300 million pounds. You can hear or read a recent interview with Clark on the company's outlook here (http://www.meettheceo.com/).

Financial strength

The company raised $48 million last April. It had $20 million in cash at the end of last year with minimal debt. It doesn’t look like it will need to dilute the shareholder base by raising capital in the near term. “Our operating and capital requirements for 2007 will be met through existing cash and cash generated from operations,” the company said in a recent filing.

Some challenges

It’s not all clear sailing, though. With the price of uranium skyrocketing, there is intense industry-wide competition for personnel, exploration and development tools. Water is essential to a mining process the company uses called “in situ recovery.” (Essentially, treated water is run through ore to oxidize out uranium in slurry which is later reduced to the pure product.) In Texas, getting water is not a problem, but in New Mexico Uranium Resources may face problems because of obstacles put up by Indian tribes.

What’s more, the Navajo Nation has an outright ban on uranium mining – and that may block production at some Uranium Resources properties. “We believe that the ban is beyond the jurisdiction of the Navajo Nation,” says the company. “However, the ban may prevent us from developing and operating the properties until the jurisdictional issues is resolved.” The issue is in the courts, and it could go all the way up to the Supreme Court.

Another potential risk, of course, is that a repeat of Chernobyl or Three Mile Island somewhere could put a damper on plans to develop nuclear energy for years.

The bottom line : Barring that horrible risk, world demand for energy, and pollution problems linked to oil, mean that nuclear energy is probably at the start of a decades-long revival. If so, this relatively undiscovered uranium play could make for a great long-term buy and hold stock. I’d buy right here.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorI deas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp . InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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