Cameco, the largest western uranium producer.

Value Investing, finding Value this Month.

Obviously these ideas are not solicitations to invest, you should do your own research and get advice from a professional that can take into account your personal circumstances. I have lost money on many investments and will again in future.

It’s been a couple of months since I published my last list of things that I am finding interesting. I thought it might be useful to look at some of previous investments as some of these are correcting and I may again think about topping up these positions. The US markets still to be very frothy and I although I’m no market timer I sense with the election result in the US and the realisation that European politics is dramatically changing the market will soon break from it gentle sideways meander. Upwards or downwards I have no idea. Could a flight to safety drive the US markets and dollar higher or will a world falling apart and nosebleed valuations let it drop?

I own a large position in Gold miners and this has obviously performed very well over the last year. We are seeing a correction here, which I think is healthy, I expect the continuing trend to be positive albeit with setbacks over the next few years and for this reason I may again buy more shortly.  Picking individual gold stocks is not easy so I prefer to buy the GDXJ etf. It’s extremely volatile and not for widows and orphans or really anybody for that matter…

Something that crushes value investors who buy miners on the way down is the way the book value is crushed as management write down the value of deposits. On the way up though these assets can be revalued upwards as the price of the underlying commodity makes the deposits economically feasible once again. For this reason and the fact that I haven’t seen a return to normal earnings, I am still holding and still excited for potential larger gains ahead.

My coal investments have performed very well, my two largest positions in CNX Coal and Cloud Peak Energy have more than doubled while my small punt in Peabody might still come back positive. I did feel that the assets of Peabody far outweighed their liabilities and that if their incompetent management hadn’t filed for bankruptcy right at the bottom of the market this could have been a big winner for me. I’m glad I kept it to a very small position and didn’t start thinking about shooting for the moon on this one.

I’m debating cutting these positions and taking my profits; coal is dead in the long term and they are not as cheap as they used to be but it pains me to give up the yield of around 30% on cost that CNXC should hopefully be able to keep generating for me. David Einhorn still seems to holding on to his load although due to the amount he owns I don’t know if he would be able to sell easily even if he wanted to.

I am most excited this month about the plunging Uranium price and the associated equities and have been accumulating more shares as they drop. Cameco’s descent seems to have slowed even as the spot price has plunged and everything that could go wrong for the company has, so perhaps this could be sign that everyone who wants to sell has already sold. The developers have also come into a range where I am comfortable buying; they are exciting prospects. Fission and Denison are the ones I have been looking at, Fission is cashed up by the Chinese and will hopefully drill out it’s deposit slowly and cheaply waiting for the Uranium price to go back up before starting any  mine development. I like Denison due to a management team who hopefully will not do anything  stupid before the Uranium price advances meaningfully.

Uranium

I have been thinking about why the Uranium price has fallen so dramatically and I feel we should be looking at the largest miner in the world Kazatomprom, the state owned Kazakh miner. As we have seen over the last few years in oil, state controlled entities like those in the Middle east and South America have tried to make up for the fall in price by producing more. These countries have large social obligations to their population and need the revenues from the commodity to fund their budgets. As the western producers have cut back production the state owned companies have been furiously trying to produce more.

With Kazatomprom I believe there may be a similar situation but it is being played out differently. Uranium revenues play a large part in funding social programs in Kazakhstan and you can easily see how this could effect the decision making at the company. It is certainly not your typical western enterprise, have a look at their website. The Kazakh currency has dropped by two thirds against the US dollar over the last few years so this has helped the company just about stay profitable but I would guess have affected their ability to reinvest in equipment and personnel. In April this year Moody’s confirmed their Baa3 rating but from my limited understanding only because of the fact that their currency had depreciated and there was the continued strong likelihood of state support.” In my opinion when you have significant pain, cost cutting and restructuring in western miners and they still find it difficult to turn a profit, the pain in a government owned enterprise with social obligations, political pressure and workers whose pay has been eviscerated must be enormous.

With oil companies you can make up for the difference in price by producing more but as soon as you go below the point in which it is still profitable to pump you begin to lose money. At that point production overall has to come down as the highest cost producers go broke. In the case of Kazatomprom I’m fairly certain they will not want to sign new supply contracts at a price at which they will lose money so will either have to hike prices, idle some of their production, reduce costs further or ask for money from the government.

In the medium to long term I think it’s untenable for Kazatomprom to keep trying to increase production at these low prices so eventually the supply will come back to demand, notwithstanding a new overlooked global source of supply entering the marketplace. The demand will increase over the next decade as we have a huge amount of reactors being built or planned for construction in China, India and the middle east.

It’s a difficult situation to understand and I probably have overlooked a lot important factors but I know it’s very unlikely that Uranium can stay cheap over the next few years. Cheap prices are a cure for cheap prices.

Russia

Although Russia has bounced off the bottom and many stocks have rallied over 100% there is still a lot of great value present here. Huge monopolistic companies have P/E ratios below 10 and have dividend yields in the high single digits. People may get freaked out that the Kremlin is going to steal everything or send your investment to zero. Living in Russia I feel that it is a fairly stable place with good social cohesion, the young people work hard, don’t moan and the last thing the government wants to do at the moment is  to scare away foreign investment. I’m looking carefully at the very cheap power generation assets, monopolistic gas companies (any guesses?) while trying to find some smaller under the radar things that could have larger future returns.

Happy Hunting!

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