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Message: Fund Selling Creates Opportunity for Uracan Investors
Fund Selling Creates Opportunity for Uracan InvestorsBy James West
MidasLetter.com Wednesday, June 3rd, 2009
Flow-through financings, where Canadian investors get to write off the equivalent amount of an investment into eligible Canadian mining and exploration companies on their taxes, are both a blessing and a curse. They have become a fixture of the junior mining exploration industry in the last 25 years.
A blessing, because when markets cramp up (like they did at the end of 2008), many companies who needed capital at that time would have been more likely to shut their doors if it weren’t for the flow-through funds who were the only game in town for financing at that time.
But they are also a curse to the companies who accept financing from them, because they are notoriously indiscriminate sellers when the hold period comes off, and they liquidate their positions to lock in a 100% return on capital, even if they sell the shares for what they bought them for.
That’s because the profit doesn’t come from an increased share price – it comes from the tax benefit. So for investors in flow-through funds, they are participating in a tax-optimization product, not an investment product.
Uracan Resources (TSX.V:URC), a Canadian uranium exploration company specializing in near-surface, low-grade bulk tonnage deposits in Quebec, has recently experienced first hand the selling pressure that comes to bear when flow-through funds decide to exit.
In November of 2008, with capital markets completely frozen due to the financial meltdown, Uracan raised CA$5.69 million, of which $5.44 million was done by flow-through funds. The four month hold period on the shares issued for the cash expired during the period from February 25, 2009 to March 22, 2009.
Despite a 400% increase in average daily share volume since that time, Uracan shares have fluctuated in a range from $0.18 to $0.38. Investor buying interest is consistently met with flow-through fund sell interest, and the stock is therefore restricted from breaking out to the upside.
Uracan currently has a 43-101 compliant resource estimate of some 40 million pounds of Uranium, and continued drilling success is clearly going to take that number much higher during the next calculation. Although the grade is low compared to Saskatchewan’s Athabasca uranium production operations, the fact that it is in Quebec close to several major nuclear power producers gives the company an advantage when it comes to shipping.
The company also continues to expand the area of its deposit, and has made some new discoveries which dramatically enhance the potential for share price appreciation.
And therein lies the opportunity for savvy investors with an appropriate tolerance for risk. Willing flow-through fund sellers gives Uracan investors the opportunity to build a substantial position in the company at a fixed and relatively low cost compared to other explorers with similarly established resources.
Some investors are wary of the low-grade nature of Uracan’s deposits. It is important to consider the fact that both Tom Garagan and Clive Johnson, two of the company’s directors, previously held senior management positions with Bema Gold (now a unit of Kinross Gold). Their expertise was in successfully establishing production at Bema’s low grade gold mines. So there is ample in-house expertise to shepherd the company into production of low-grade assets.
Once the funds have stopped selling, what is there to drive the price of Uracan upward, you might ask.
One need only peruse the press releases since the beginning of 2009 to see that the funds raised at the end of 2008 are being transformed into shareholder value through exploration success. And two recent transactions amply demonstrate the interest major Uranium producers have in the acquisition of large, low-grade deposits in politically stable jurisdictions.
In 2007, Areva, one of the world’s largest nuclear power integrated companies based in France, acquired the Trekkopje Uranium Deposit in Namibia for US$2.5 billion. That deposit contained 239 million pounds of uranium at a grade of only 0.012% U3O8.
And in November 2008, Forsys Metals (TSX.V:FSY) was purchased by a private company in Africa for CA$579 million, equating to $7 per share. That deposit contained 51.4 million pounds of U3O8 at a grade of 0.012%, identical to Uracan’s grade for its 40 million pounds. (Forsys actually has a lower cutoff – 72 ppm vs Uracan’s 75 ppm) So there’s little doubt that interest will grow in Uracan’s deposit as it increases in size. And Quebec is a much easier place to do business and build mines than Namibia.
In fact, Uracan’s properties in Quebec are (in the case of the Double S deposit) less than 20 kilometers away from a proposed brand new hydro electric project to be built by Hydro Quebec, one of the least expensive vendors of electrical power in North America. That in combination with paved highway access to deep water ports along the St. Lawrence River, and plenty of water, make the location of Uracan’s growing resources extremely attractive.
And Uracan’s 990 square kilometer land position with its multiple deposits and blue sky exploration potential means the likelihood of additional discoveries is good. On its North Shore property, uranium mineralization continues at depth and along strike.
So yes, flow-through financings can bring unwanted negative pressure to bear on share prices, but when the funds they provide transform the company into a bigger and better takeout target, the short-term misery is well worth the opportunity it affords relative to the bigger, long-term picture.
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