All In!

For quite some time we have been saying that our Canadian uranium stocks had a good chance of going lower by 10% to around 245 for -theinvestar's Canadian Uranium Average. We just closed at 245.9636 after the past two trading days gave many stocks a good haircut. Now we are buyers, strong buyers and believe that buyer's remorse is something that we need not worry about at this time. Many of the stocks which have just led the index down are the 'Blue chips' of the industry, thus indicating to us that for many investors they have, sadly, moved on. Now we invision that over the next week stocks will bottom out and move higher, and over the next month will move higher still. Our guess is that the index will rise by 10% in the next month, based not only on the index and its history but also the individual stocks within the index and their tendencies.

Now we have had our doubters recently, but we are sticking to our guns. Our guess was that Australia would lead us ahead, just as they led us downwards earlier this summer. If you look at the chart, it appears that -theinvestar's Australian Uranium Average has bottomed and in fact is attempting to move forward at this time. So quite honestly, we may be in our lag period and shortly going to follow the Australians higher. Right now news seems to be horrible for uranium, the commodity, but our guess is that it will only get better as fears ease regarding Japan and plans are laid out regarding the Nuclear Renaissance here in North America and abroad. This news is weighing heavily on uranium stocks, much more than it should be, and the problem will be corrected in the near future.

One stock we will be adding to our portfolio will be Energy Fuels (EFR.TO) which has been beaten down recently over mill concerns. They announced that they will seek permitting to build their own mill as Denison seems to be bullying them around (along with BRD.v which is also in our portfolio), but this should work itself out. First Denison has a monopoly on the geographic area, so they better behave or they could face the wrath of the Justice Department. They are operating in a very vital sector to the US economy (nuclear power accounts for roughly 20% of electricity capacity), so one could imagine that the Government has an interest in keeping supply flowing from these new mines and thus increasing supply to the US nuclear plants. In the long run, Denison would be wise to let EFR and BRD piggy-back on their milling capacity so as to avoid competition. EFR has already stated they want to build a mill now, and we hear rumors that BRD may be looking into doing the same. Also, STM is permitting a mill in New Mexico which will be built in part by a Global Fortune 500 company and SXR is bringing its mill in Wyoming online in the near future. EFR has options, and at this price we think it is a buy, so at C$2.38 we will take our initial position.

Our other trade will be the purchase of Universal Uranium at C$1.40, a stock we had looked at before but one in which we own the company it is merging with Silver Spruce Resources. Now we had added shares earlier to our portfolio, but at this point we see the spread between the two stocks widening, so this is our arbitrage play. Should the SSE gold company spin-off be worth much more than the UUL US uranium company spin-off, then the trade will be a wash. Our math indicates that the gold assets are worth more, but not this much more, thus our buying at this time. If you do not like the trade based upon that information, check out the Two Time Zone drill results and you will be a fan if not already.

Mawson Resources will be added to give the portfolio some more exposure to European uranium as well as take advantage of the current price of the stock. At C$1.95 the stock is a bit off of its support, and a distance away from its next support, however with its low float and great properties it could rise higher in dramatic fashion as was seen recently.

Our final addition will be Santoy Resources (SAN.v) at C$.80, which is already in our portfolio as well, however the stock is unloved right now. They may have the southern extension of the Two Time Zone area (the SSE/UUL property) and the market to this point has been unreceptive to those drill results. The company has a JV with Mega on some highly prospective ground in the CMB, including an area which is believed to host an extension of Crosshair's 'C-Zone'. The company will begin drilling south of Two Time Zone at the end of August, and the geologists believe that they have a handle on what the geology of the area looks like.

We are going to flash our buy signal here, and add to our portfolio here with these stocks. We like SXR, DML, PDN, and LAM at these prices as well, however we go for the home runs and believe that our new additions will provide us with the next group of large percentage gainers for our portfolio. These purchases will leave us with 0% allocated to cash at this time as we believe the bottom is at this point, give or take a few points of course!

Born to Run

We must say that last Thursday we were pleasantly pleased to see the news regarding Oilsands Quest (BQI) a company we have been bullish on for over a year. The company released management's estimate for the Axe Lake Discovery Area as well as surrounding exploration areas. Management believes that the Axe Lake Discovery Area (Axe Lake) holds 1.4 to 1.5 billion barrels along with an estimate of 0.7 to 1.3 billion barrels as an additional resource. This will serve as our estimates going forward until the independent consultant's estimate comes out in Fall 2007. Regarding the company's other Saskatchewan permits (those to the south and northeast), management estimates that there is a potential 3.0 billion barrel resource present. In the new permits that the company obtained in Alberta (these permits being adjacent to BQI's Saskatchewan permits) the company estimates that on two townships the resource potential is approximately 4.5 billion barrels. So, if one were to take management's estimate for Axe Lake (2.5 billion-when rounded, as suggested by management through their press release) and add it with the estimated potential for the south and northeast areas (3.0 billion) with the Alberta estimates to-date (4.5 billion) we arrive at the potential for 10 billion barrels of oil! Personally, I believe that Oilsands Quest is worth $20 per share, as stated numerous times over the past year. With this resource estimate we could be on our way to that very number, however getting to $10 is going to be a very tough feat in itself.

My philosophy regarding investing is that sometimes you have to read between the lines, as well as have a long-term memory. Many people possess only a short-term outlook and do not believe in their research or ability to buy stocks based on future trends. These are the people who are going to make going through the $4, $5, and even $6 ranges much more difficult than should be. Many investing books (those from the great traders of times past) tend to portray stocks crossing $100 as uptrend stocks and on their way to $120. Well my bet is that this stock will have some tough times crossing the $5 barrier, but after $6 it should be on its way to $10. Once at $10, the stock should spend some time on its way to $20.

Now every time I make a prediction like this, my mailbox gets filled with emails saying how crazy I must be. But please hear me out. First, the company has mentioned in conference calls that they are looking for a Joint Venture partner for the Axe Lake area and I think that this partner may get a decent deal in return for a large cash buy-in. In other words, BQI will get some cash in return for a smaller portion of the project, but this first project is key. With this project, a plant will be built along with a pipeline to connect to the main lines in Alberta. This infrastructure for Axe Lake will lower the costs on further projects that the company can bring online through continued drilling (what the cash could pay for), thus making more areas of their exploration land economical. This is all hypothetical, because neither I nor the company has any idea of how a JV will or should be structured at this time, and will probably only know when the JV is finally put together.

When people finally begin to discover this stock, which currently sports a market cap of almost $1 billion, I think they will fall in love with it. Currently each of these barrels is worth only $.10, but for patient investors we could see this increase dramatically over the next few months. In any natural resource stock, resources are valued at their lowest level after first discovery. However, as those resources near production their value grows exponentially as investors have reason to believe that they will be extracted and thus monetized. Look no further than our uranium stocks, any company that has, or soon will be, bringing new mines into production saw their price skyrocket in anticipation of this. We shall be patient regarding BQI because we see some good news ahead. Here is what we see in the months ahead:

1.) Independent Consultant's estimate for Axe Lake
2.) Potential JV
3.) Further Drilling (keep in mind that all drilling to date has been over 70% successful!)

We have been nibbling at BQI over the past few months and increased our position by 10% over that time. Although these barrels are worth only $.10 at this point, I can take comfort in the fact that the company reported last year that they are adding each barrel at a cost of $.02/barrel. A final thought regarding BQI is that their reserves last year were worth much more than at current levels, and even if the stock were at its all-time high right now, it would still be undervalued based on previous valuations afforded it by investors within the past 18 months. Now one could argue those valuations were in the hope of huge bitumen reserves being discovered, but is that not what we have now done? Only time will tell, but from now until December will be a very telling time for the stock.

Another story that we have our eye on is in Japan. A recent earthquake caused a fire and water leak (the water contained radioactive material) which went into the Sea of Japan. This is the second fire at a nuclear power plant in roughly 2 months (the other being in Germany) with both resulting from acts of nature. In Germany the fire was a brush fire and quickly taken care of, and the German government (currently run by those who wanted to kill all the German nuke plants, before realizing that this was not a viable solution to solving the energy/greenhouse problems) deemed it to be of non-importance, as they have not really mentioned it at any news conferences or in interviews. In Japan however, we now have to take into account whether these plants have been nature-proofed, because we already know that they are human-proofed. We shall keep our eye on this and see how the environmentalists seize this opportunity to proclaim nuke plants unsafe. The water was within the legal limit (by a billionth) for release, so legally there is not a problem here, but once again this is quite important as to how the public perceives nuke plants and their environmental impact.

Forgotten Risks to the Market

The market seems to have treated us quite well over the past week, with investors rushing back into uranium stocks due to geopolitical risks in Africa becoming front page news as well as more bad news regarding Cameco's Cigar Lake. Other good news for metals/mining stocks was the Rio Tinto/Alcan deal, which was at a 38% premium to Alcoa's all stock deal. It now seems apparent that miners are more than willing to shell out their cash to buy assets, which to us indicates a very strong commodities market for years to come.

The Chinese seem to have put an emphasis on investing in African resources over the years, our first memory of this was their investment in Sudanese oil years back, but now they are focusing on African uranium. They recently had a senior mining executive kidnapped, and even shut operations down until the problem could be resolved. Today, the executive has been returned, most likely for a ransom, and it is now business as usual. This is a fairly commong practice in Africa, but one which could become quite annoying as well as much more dangerous in the years to come. Hopefully with these countries getting a second chance with their resource wealth with the currrent booming commodities market, they will invest their money into helping enhance the quality of life of the citizens rather than seeing how much money they can swindle into their own personal sluch funds. Maybe we will see the mining companies do this to an extent, much as the oil companies have done in areas around the world with similiar problems. Investors became complacent about the risks associated with African uranium, but had a rude awakening with this news. African uranium should be discounted as problems such as these can arise at any moment, just think about every time Shell has to shut operations in Nigeria due to rebels interfering with operations. One bright spot for now is Namibia, which we have pointed out numerous times for its uranium wealth and geopolitical stability. Currently the country does not have the same problems as the rest of Africa and is possibly even a better place for business than South Africa (due to SA's rules requiring minority ownership in projects, which is usually just given to an empowerment group).

Cigar Lake is a situation which could get much worse before it gets any better. In fact, one would have to assume this is the case right now, which is why we are not adding to our very small position in the company. We keep that position as a hedge to the general uranium industry as well as to keep some exposure to the market leader. However, our ideal time to buy will be when the company is beginning to actually mine the project, not any time before that. Do we think that the stock has upside potential, of course! This will be due to earnings increasing as a result of their expiring long-term contracts which are grossly under the current long-term market price. I do suspect however, that SXR (now named Uraniumone, but we are using the ticker symbol here) will overtake Cameco as the most profitable uranium pure play miner in the next few years. The Cigar Lake news seemed to be priced pretty well into Cameco's share price, however the general market seemed to have been caught off guard. It allowed for a very interesting correction in valuations as Cameco stalled out, and the newer producers and future potential producers zoomed ahead. It must be noted that SXR and DML led the way upwards from the early morning, and it is only a matter of time before they begin to catch the eye of Wall Street.

We were one of the first people to say that uranium could go to $500/lb., as it was still economical at that price but said a realistic top could be the $400/lb. level as it would still allow for profits from the huge capital requirements for the plants. We took some ridicule for that prediction, that is until others (who admittedly are and were more established began beating the drum to $500/lb. uranium, and even $1,000!!!!) came on board and the price rose from $50 to $130 over the past few months. Our next idea is not that groundbreaking or even going that far out on a limb, however we forsee a boom cycle in the commoditities sector for years to come. Why do we see this? Well, probably because the companies see this although Cameco management would have you believe otherwise. With the most recent merger announced, Rio Tinto will purchase for $43 Billion, Alcan, the Canadian aluminum concern who was in search of a white knight in order to fend off Alcoa (the world's second largest concern). Now usually white knights need not worry about dramatically outbidding the unwanted suitor, but Rio bid up 38% higher the buying price for Alcan, thus chasing away Alcoa. Oh yea, and did we forget to mention it was an all cash deal? Add all of this together and one can understand that Rio's management believes that they can make this acquisistion work, and work very well in the short term as well. After all, if you use your own cash to do a deal rather than stock, one has a reasonable expectation that the cash will be replaced within the near future. Mining stocks have further to go, as do uranium stocks. In the next 3 years we should expect Rio and BHP to move into the uranium sector in a big way, and as only these two companies could.

At this time we are still bullish on SSE (although playing it through their merger partner Universal Uranium), MAW, and adding Continental Precious Metals (CZQ) to our portfolio at the current price of C$2.83.