Five months ago, in an alert titled “Warning! Glass Half-Full! Buy These Three Stocks,” I urged subscribers to buy three beaten-down mining stocks. Since then, those stocks have soared 87%, 168%, and 248%.
Gains of this size rarely materialize in a short, five-month window. But rather than pat myself on the back, I’ll give a nod to Mr. Market and say “Thanks.”
Obviously, I recommended these specific stocks because I expected them to deliver outsized returns over time, but I didn’t expect gains of this size to develop in such a short period.
My recommendations benefited from fortuitous timing. The date was March 19, just two trading days before the overall stock market bottomed out. At that moment, fear reigned supreme in the stock market and many investors had shifted into full panic mode. But as I stated in that March 19 trading alert:
FOLM might soon become FOMO. At this moment, the fear of losing money (FOLM) is the prevailing investor sentiment. But I would not be surprised if this sentiment flipped soon to the fear of missing out (FOMO).
That’s exactly what happened… much to the benefit of the stocks I recommended that day:
- Ivanhoe Mines Ltd. (IVPAF)
- Karora Resources Inc. (KRRGD) – then Royal Nickel Corp. (RNKLF)
- Galaxy Resources Ltd. (GALXF)
But timing, alone, does not explain the 161% average gains these stocks have achieved during the last five months. The rip-snorting rally in precious metals, copper, and many other commodities also deserves an honorable mention.
The unique, company-specific attributes of these three companies also helped to propel their stocks to superior gains. On that score, all three of them continue to make steady progress on their respective mining projects.
That’s the main reason I expect all three of these stocks to build on their recent stock market gains to produce even more exceptional results over time. That said, I will not be adjusting my buy-up-to prices on any of them.
Instead, I am recommending three new small-cap mining stocks for your consideration. Like Ivanhoe, Karora, and Galaxy, these new recommendations are unquestionably speculative.
But these new recommendations share at least two key traits with the stocks I recommended previously: They have outstanding growth prospects and debt-free balance sheets.
When I recommended Ivanhoe, Karora, and Galaxy, I referred to them as the “Dazed and Confused Trio” of mining stocks because their prices were so depressed. I also pointed out that they shared four compelling attributes. All three of them:
- Possessed a net-cash balance sheet.
- Owned a significant interest in one or more world-class resource deposits.
- Had share prices that had tumbled more than 50% from their 2019 peaks.
- Had share prices that were trading below where they were in 2016.
In other words, these stocks were clearly dazed. They had been hit so hard that they seemed to reflect none of the unique investment attributes each of them possessed.
Today’s recommendations are similar, though not identical.
Their share prices are fairly depressed, but not at the extremes of last March. Even so, I consider all three stocks to be offering “bargain pricing,” relative to their growth potentials.
Let’s dive right in…
Tesla Needs Nickel – and This Company Has It
Western Areas Ltd. (WNARF) is an Australian nickel producer with two of the highest-grade nickel mines in the world. More importantly, it is the largest publicly traded pure play on battery-grade nickel. (i.e., Class 1 nickel).
The company emerged from the successful discovery of two high-grade nickel ore bodies at the Western Australia project it calls “Forrestania.” Western Areas produces about 23,000 tonnes of nickel per year from its mining operations there, at a cash cost of about $2.30 a pound. That cost is about half the industry average and is well below the current nickel price of $6.63/pound.
Western Areas is also conducting ongoing exploration at Forrestania, with the expectation of “proving up” additional nickel reserves.
The company’s second major project is the Cosmos Nickel Operation. This project will support the new Odysseus mine in Western Australia that should enter production in late 2022. Like Forrestania, Cosmos also offers excellent exploration potential.
In addition to these two projects, Western Areas is conducting early-stage exploration on another project called Western Gawler. The company’s initial drilling results showed excellent potential. Western Areas discovered over 200 meters of nickel and copper-bearing sulfides at the Sahara prospect within the Western Gawler Project.
Bottom line: Western Areas will be mining a lot of battery-grade nickel for a lot of years. Which brings us to the main reason to invest in Western Areas: Nickel is entering a new cycle of surging demand.
As the world increasingly adopts electrification technologies like electric vehicles (EVs), batteries become the foundation that makes it all possible. And increasingly, nickel is becoming the foundation that makes EV batteries possible.
One month ago, Elon Musk, founder and CEO of Tesla Inc. (TSLA), implored the world’s mining companies to boost their nickel production. Said Musk:
I’d just like to reemphasize, any mining companies out there, please mine more nickel. Wherever you are in the world, please mine more nickel and don’t wait for nickel to go back to some high point that you experienced some five years ago or whatever, go for efficiency… Tesla will give you a giant contract for a long period of time if you mine nickel efficiently and in an environmentally sensitive way. So, hopefully, this message goes out to all mining companies. Please get nickel.
Musk’s offhand comment echoed a previous comment from Sarah Maryssael, global supply manager for battery metals at Tesla, when she stated, “Tesla expects global shortages of nickel, copper, and other EV battery metals due to underinvestment in the mining sector.”
For the moment, nickel supplies are sufficient to meet current demand. But industry insiders expect a growing supply deficit to develop in the nickel market within the next two or three years.
“There has been a surge in demand for nickel sulphate in recent years,” notes Andrew Mitchel, head of nickel research at Wood Mackenzie. “Global consumption increased by 28% in 2019, primarily driven by the electric vehicle (EV) market. And as the EV revolution gathers speed, demand for battery materials will accelerate.”
The resulting demand growth for nickel could be mind-boggling.
Bloomberg New Energy Finance (BNEF) expects total global nickel demand to jump about 16-fold from 2018 levels to 2030. Based on that forecast, the research group states that even a doubling of nickel production capacity through 2030 would not be sufficient to satisfy demand.
If this forecast is anywhere close to the mark, the nickel price should trend higher over the next few years… to the benefit of companies like Western Areas.
But the company isn’t counting on a soaring nickel price to justify investment in its mining projects. It is producing solid cash flow at current prices.
Western Areas has produced positive operating cash flow for seven consecutive quarters and continues to add to its considerable balance-sheet cash.
At the end of the second quarter, the company’s cash, plus receivables and liquid assets, totaled US$139.1 million – equal to 29% of its market capitalization. This sizable cash hoard gives Western Areas plenty of resources to continue exploring and developing its projects.
Somewhat surprisingly, the company’s stock has not been tracking the nickel price as closely as it has in the past. Therefore, a bit of “catch-up” may be in the cards, even without a meaningful uptick in the nickel price from current levels.
Based on Western Areas’ current nickel production and the current nickel price of $6.65/pound, the company should produce net income per share of about $0.11 over the next four quarters.
At that level of profitability, the stock would be selling for 16 times earnings. But if the nickel price returned to its 2019 high of $8.45/pound, Western’s net income could triple, and the stock could easily trade back up toward its 2011 high above $6.
Action to Take:
Buy Western Areas Ltd. (WNARF) buy below $2.10. The current offer price is $1.77. Be sure to use a limit order and not a market order. Although this stock trades very actively in Australia, it trades much less actively here. But if you are patient with your limit orders, you should have little problem getting them filled.
A 21 Million-Ounce Exception to the Rule
Western Copper and Gold Corp. (WRN) is a gold stock that functions more like a long-term gold call option. A colleague of mine refers to stocks like these as “options that never expire.”
Although the company has no producing assets, it owns 100% of a very large copper-gold project in the Yukon territory of Canada.
For 14 years Western Copper had labored to explore, define, and develop this project, which it calls “Casino.” As recently as June, Casino’s official resource estimates totaled 9.4 million ounces of gold and 5.4 billion pounds of copper.
That’s big, but not nearly as big as the updated resource estimate the company revealed in July. The revised estimate essentially doubled the project’s resources to 21 million ounces of gold and nearly 11 billion pounds of copper.
Specifically, Western Copper announced that its “measured and indicated” gold reserves increased to 14.5 million ounces, while its “inferred” ounces grew to 6.6 million. Similarly, the project’s “measured and indicated” copper reserves increased to 7.6 billion pounds, while its “inferred” pounds grew to 3.3 billion.
“By more than doubling the measured and indicated mill resource, the Casino project is clearly one of the largest copper-gold projects in the world,” beamed Paul West-Sells, president and CEO of Western Copper.
The stock price more than doubled to a high of $1.53 in the days following that press release. But it has settled down a bit since then and now trades below $1.30.
Typically, I would steer clear of early-stage mining companies like Western Copper, simply because a lot can go wrong on the road from discovery to production. In particular, high-flying metals prices can become low-flying metals prices during the many years it takes to move a project like this into production.
Western Copper is certainly susceptible to that risk. That said, the company may be an exception to the rule for one big reason: It has a very big deposit of copper and gold.
Twenty-one-million-ounce gold and 11-billion-pound copper projects don’t come strolling down the sidewalk every day. A project of this size is one that few major mining companies can afford to ignore.
And Western Copper’s market value is just $150 million, which would be a rounding error for many would-be acquirers.
In other words, Western Copper has become a compelling takeover target.
Yes, it will cost about $3 billion and several years to bring the project into production. But Casino’s large future output of copper and gold would be a valuable asset for any major mining company.
Probably Western Copper would belong to a larger firm already, if capital had been readily available to the mining sector. But that hasn’t been the case… until recently.
As Warren Buffett’s surprising $500 million investment in Barrick Gold Corp. (GOLD) earlier this month shows, large dollars are starting to trickle into the precious metals sector.
Gold and silver mining companies raised $2.4 billion during the second quarter, which is the highest level since 2013 and seven times the tally from one year ago.
Not surprisingly, merger-and-acquisition activity is picking up noticeably in the precious metals industry. We’ve seen 10 acquisitions this year in the first six months of this year, which is a big jump from the 10 buyouts that took place in all of 2018 and 2019 combined.
The price that an acquiring company might pay for Western Copper is anyone’s guess. But acquiring companies often pay as much as 10% of the in-situ value of the target company’s metal reserves. In other words, the buyer pays $0.10 on the dollar for the metal the target company has in the ground.
But so many different variables come into play that acquisition prices fall in a very broad range.
So just for kicks, let’s take that 10% number and slash it by 70% so that an acquiring company would be paying just $0.03 for every $1 of metal Western Copper has in the ground. Then let’s assign a value of $0 to all the metal that sits in the company’s “inferred” resources category.
After applying these “haircuts” to the calculation, Western Copper’s theoretical acquisition value would still be $1.56 billion – or more than 10 times the company’s current market value.
Don’t get me wrong. I’m not predicting a takeover at 10X the current stock price… I’m simply pointing out that there’s a lot of blue sky between the stock’s current level and any reasonable takeover price.
In the meantime, the company has net cash on the balance sheet of $4.5 million.
Action to Take:
Buy Western Copper & Gold Corp. (WRN) below $1.60. The current offer price is $1.24. Use a limit order, not a market order.
A “Quirky” but High-Potential Speculation
Energy Fuels Inc. (UUUU) is the largest U.S. uranium producer. It has three licensed facilities with capacity of 11.5 million pounds of U3O3 per year. Only one of them, the White Mesa mine in Utah, is currently producing.
Energy Fuels is also the leading U.S. producer of vanadium, although that’s not saying much. No other U.S. company is mining vanadium.
Lastly, the company is in the process of developing the capacity to process rare earth elements at its White Mesa mill.
Incremental success at any one of these three mining/processing endeavors could produce a higher share price. Success at all three could produce a much higher share price.
But for now, the company’s three main activities are producing little more than yawns from investors.
Let’s take a closer look at each of them.
Uranium is the Big Kahuna for Energy Fuels. It is producing about 165,000 pounds of uranium per year. However, it has made the “strategic” decision to move that production into inventory, rather than selling it into the market.
As a result, Energy Fuels is producing modest quarterly losses on its income statement while simultaneously strengthening its balance sheet.
During the first half of the year, for example, the company reported a gross loss of $718,000. But at the same time, it moved $2.5 million of uranium into inventory.
So far, the strategy seems prudent, as the uranium price has gained 20% year-to-date. Obviously, the strategy would look less prudent if the uranium price fell.
Generally speaking, uranium mining in the United States has been a miserable business for many years, due mostly to the fact that subsidized uranium production from overseas has driven U.S. producers out of business.
In his August 5 testimony before Congress, Paul Goranson, president of Uranium Producers of America and chief operating officer of Energy Fuels, detailed the dire straits of the domestic uranium industry:
Today, commercial reactors in the U.S. import more than 90% of annual demand and less than 1% of the uranium they use is mined in the United States… U.S. mined production in 2019 was the lowest since 1949. The U.S. mined only a fraction of the uranium needed to fuel even one of our 95 commercial nuclear reactors…
We are almost entirely dependent on imported uranium, and we rely heavily on strategic competitors to sell us uranium. Uranium imports from countries in the former Soviet Union: Russia, Kazakhstan, and Uzbekistan, represent almost half of the fuel used by America’s nuclear reactor fleet…
China is increasingly dumping underpriced uranium onto the global market. Data from the Departments of Energy and Commerce show that tens of millions of dollars’ worth of Chinese uranium has entered U.S. reactors in recent years.
Despite these challenging conditions, Energy Fuels hasn’t simply been sitting on its hands waiting for a turn of fortunes. It has actively petitioned, lobbied, and agitated to reconfigure the U.S. uranium market in ways that would benefit the company.
A broad summary of its interactions with the federal government would include:
- January 2018 – The company petitioned the Commerce Department to levy tariffs on imported uranium under Section 232 of the 1962 Trade Expansion Act. This provision is the same one that enabled the president to slap tariffs on steel and aluminum imports, citing national security risks.
- July 2018 – The Trump administration opened an investigation into whether uranium imports are harming national security.
- December 2019 – A White House task force called the U.S. Nuclear Fuel Working Group recommended that the U.S. Defense Department purchase uranium from domestic producers.
- April 2020 – The Trump administration released a fiscal 2021 budget request that recommended spending $150 million a year for 10 years to create a national uranium reserve.
- July 2020 – U.S. Bob Latta (R-Ohio) and Liz Cheney (R-Wyoming) introduced H.R. 7814, the Nuclear Prosperity and Security Act, to create a national uranium reserve.
The proposed uranium reserve has not yet become law, and it might not. But in the wake of the coronavirus crisis, we Americans have become more alert to the vulnerability of foreign supply chains, especially those that originate in places like Russia and China.
Therefore, I expect the government to approve building a modest uranium reserve soon.
Meanwhile, global uranium demand isn’t going away. Despite its “bad boy” reputation, worldwide nuclear power generation has increased for seven straight years. As a result, the current level of uranium consumption greatly exceeds the annual mine supply.
For now, aboveground inventories have been sufficient to cap any dramatic rise in uranium prices. But the supply-demand imbalance should push the uranium price higher over time.
Energy Fuel’s second area of focus is vanadium, a metal used to strengthen steel. The global steel industry consumes more than 90% of the global supply. A new energy storage technology called “vanadium redox flow batteries” consumes most of the rest.
A couple years ago, when the vanadium price was flying high, Energy Fuels capitalized by initiating production of the metal from its tailings ponds. But as the vanadium price collapsed from $33 a pound to $7 a pound, vanadium lost its appeal and the company shut down its production.
If/as/when the vanadium price recovers, Energy Fuels could ramp up production once again. And in an environment of sustained high prices, the company possesses significant deposits of vanadium that it could develop and mine.
But that’s off the table for now.
Rare earths are the newest corporate focus of Energy Fuels. The company hopes to land a government contract to process rare earths for the Department of Defense.
To briefly review, rare earths are a group of 17 elements on the periodic table. Generally speaking, these elements are not actually very rare, but they do not typically appear in concentrated, economically feasible ore deposits. They are dispersed, which means that large, commercial quantities of these elements are relatively rare.
Although a wide variety of commercial applications use these elements, they are conspicuously present in several high-tech and military applications. Stealth technology, for example, requires samarium, while military guidance systems use neodymium.
And yet, despite the essential roles these elements play in numerous high-tech military applications, 97% of the world’s rare earths come from China.
That extreme dependence looks like a risky vulnerability to many Pentagon insiders. As a result, the DoD is advancing plans to minimize our reliance on China for rare earths.
Energy Fuels is hoping to capitalize on this new initiative by upgrading its uranium-processing facilities to process rare earths.
As you may recall, Lynas Corp. Ltd. (LYSCF), which I recommended on August 3, is the lead pony in this race. On July 26, Lynas landed a contract from the DoD to begin initial design work for a heavy separation facility in Texas, for which the Pentagon will provide initial funding.
The facility will process heavy rare earths sourced from Lynas’ flagship Mount Weld mine in Western Australia, which the company says will be the “only source of separated heavy rare earths outside China.”
Lynas expects to finish the planning and design work for the facility in fiscal year 2021.
But the DoD’s contract with Lynas does not preclude an additional one with Energy Fuels. To the contrary, it seems likely the DoD would move ahead on multiple paths at once.
To make its case to the government, Energy Fuels points out:
- The White Mesa mill is a flexible facility that can easily be reconfigured to process individual rare earth ores.
- The mill is already licensed and constructed, avoiding long permitting lead times and development costs.
- Many rare earth ores contain uranium that must be recovered before further rare earth processing and separation can occur.
- Rare earth ores present similar health and environmental issues to the uranium ores the mill has responsibly handled for 40 years.
- As you can see, Energy Fuels is a quirky kind of speculation. While it is nominally a uranium company, it has other irons in the fire. Even quirkier, that “fire” is ultimately the U.S. government.
As a result, the unpredictable course and timing of federal policy will wield a greater near-term influence over Energy Fuel’s share price than any other factor. Even then, the future value and income-generating potential of these ventures is impossible to quantify.
For these reasons, Energy Fuels is an especially speculative speculation. But the company’s tiny $200 million valuation does not reflect any of its upside potential.
It is certainly possible that domestic uranium production remains a miserable, money-losing business, that the vanadium price never recovers, and that Energy Fuels never plays any significant role in the U.S. government’s rare earth production ambitions.
On the other hand, any favorable development in any of these areas should power Energy Fuels’ share price to much higher levels.
While awaiting favorable developments, the company is building up cash and cash-like inventories quarter by quarter. It is essentially “investing” in uranium and vanadium, rather than selling it into the market.
At the end of the second quarter, the company held about $28 million worth of uranium and vanadium concentrate and about $12 million of net cash. That $40 million of cash and cash-like assets is equal to 20% of its market value.
Actions to Take:
Buy Energy Fuels Inc. (UUUU) below $2. The current offer price if $1.67. Use a limit order, not a market order.
Regards,
Eric Fry
The Speculator
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