Investing in conservative blue chip stocks may not have the allure of a hot high-tech investment, but it can be highly rewarding nonetheless, as good quality stocks have outperformed other investment classes over the long term.
Historically, investing in stocks has generated a return, over time, of between 11 and 15 percent annually depending how aggressive you are. Stocks outperform other investments since they incur more risk. Stock investors are at the bottom of the corporate "food chain." First, companies have to pay their employees and suppliers. Then they pay their bondholders. After this come the preferred shareholders. Companies have an obligation to pay all these stakeholders first, and if there is money leftover it is paid to the stockholders through dividends or retained earnings. Sometimes there is a lot of money left over for stockholders, and in other cases there isn't. Thus, investing in stocks is risky because investors never know exactly what they are going to receive for their investment.
What are the attractions of blue chip stocks? 1. Great long-term rates of return.
2. Unlike mutual funds, another relatively safe, long term investment category, there are no ongoing fees.
3. You become a owner of a company.
So much for the benefits - what about the risks? 1. Some investors can't tolerate both the risk associated with investing in the stock market and the risk associated with investing in one company. Not all blue chips are created equal.
2. If you don't have the time and skill to identify a good quality company at a fair price don't invest directly. Rather, you should consider a good mutual fund.
Selecting a blue chip company is only part of the battle - determining the appropriate price is the other. Theoretically, the value of a stock is the present value of all future cash flows discounted at the appropriate discount rate. However, like most theoretical answers, this doesn't fully explain reality. In reality supply and demand for a stock sets the stock's daily price, and demand for a stock will increase or decrease depending of the outlook for a company. Thus, stock prices are driven by investor expectations for a company, the more favorable the expectations the better the stock price. In short, the stock market is a voting machine and much of the time it is voting based on investors' fear or greed, not on their rational assessments of value. Stock prices can swing widely in the short-term but they eventually converge to their intrinsic value over the long-term.
Investors should look at good companies with great expectations that are not yet imbedded in the price of a stock.
Blockbuster Miscalculated
Blockbuster (BBI) is a perfect example of what can go wrong when you misread the industry trends and then realizing it, try desperately to catch up. In the period from late 2001 to 2002, Blockbuster was the leader in the video rental business. Its shares were trading at nearly $30 a share and its market-cap was at around $5.75 billion.
But there was a trend developing towards movie rentals via the Internet. Blockbuster failed to recognize the growing significance of Internet video rentals, a very poor miscalculation on its part. The shares have steadily declined to the current $3.80 to $4.20 channel. Once a large-cap, Blockbuster is now a small-cap and struggling to regain any sense of direction. The company has entered into the Internet DVD rental business but it has a lot of catching up to do.
Fundamentally, Blockbuster has lost money in the last three straight quarters and struggling to grow its revenues, which are forecasted to increase a mere 1.1% in fiscal 2006. Its estimated five-year earnings growth rate is a mere 2.5% per annum, which is pitiful.
Blockbuster also has to deal with its massive debt load of $1.27 billion or a debt-to-equity of 2.73:1, which suggests a weak balance sheet. Couple this with poor working capital and you understand the high financial risk. Faced with stagnant revenue growth and losses, Blockbuster faces a difficult upside battle to regain its lost glory. The odds are stacked against it.
In the face of Blockbuster is online DVD rental company Netflix (NFLX), which debuted in May 200, trading at close to $40 in 2004 before sinking to the $10 level in 2005 before the rally.
Netflix saw the future for DVD rentals and it was online and not via the “brick and mortal” route that Blockbuster decided to maintain. In direct opposite to Blockbuster, Netflix is profitable and has been for the last three straight quarters. It has 4.2 million subscribers and growing. Its revenues are growing and expected to surge 32.5% in fiscal 2007 whereas Blockbuster is seeing non-existent revenue growth.
Blockbuster has entered into the online DVD rental arena but it is well behind Netflix. Moreover, Netflix also operates the online DVD rental business for Wal-Mart Stores (WMT), after the retail giant decided to shut down its own online DVD rental unit and instead let Netflix run it.
Trading at 36.73x its estimated FY06 EPS, Netflix is not cheap. But if it can continue its strong growth and earn the estimated $1.11 per share for the FY07, the valuation becomes more reasonable. The pressure is clearly on Netflix to deliver but it is on the correct path.
Note: you are welcome to post this article on your site if it is financial related. You must cut and paste the bio and make sure the web site link is live. Also please e-mail me to let me know.
But there was a trend developing towards movie rentals via the Internet. Blockbuster failed to recognize the growing significance of Internet video rentals, a very poor miscalculation on its part. The shares have steadily declined to the current $3.80 to $4.20 channel. Once a large-cap, Blockbuster is now a small-cap and struggling to regain any sense of direction. The company has entered into the Internet DVD rental business but it has a lot of catching up to do.
Fundamentally, Blockbuster has lost money in the last three straight quarters and struggling to grow its revenues, which are forecasted to increase a mere 1.1% in fiscal 2006. Its estimated five-year earnings growth rate is a mere 2.5% per annum, which is pitiful.
Blockbuster also has to deal with its massive debt load of $1.27 billion or a debt-to-equity of 2.73:1, which suggests a weak balance sheet. Couple this with poor working capital and you understand the high financial risk. Faced with stagnant revenue growth and losses, Blockbuster faces a difficult upside battle to regain its lost glory. The odds are stacked against it.
In the face of Blockbuster is online DVD rental company Netflix (NFLX), which debuted in May 200, trading at close to $40 in 2004 before sinking to the $10 level in 2005 before the rally.
Netflix saw the future for DVD rentals and it was online and not via the “brick and mortal” route that Blockbuster decided to maintain. In direct opposite to Blockbuster, Netflix is profitable and has been for the last three straight quarters. It has 4.2 million subscribers and growing. Its revenues are growing and expected to surge 32.5% in fiscal 2007 whereas Blockbuster is seeing non-existent revenue growth.
Blockbuster has entered into the online DVD rental arena but it is well behind Netflix. Moreover, Netflix also operates the online DVD rental business for Wal-Mart Stores (WMT), after the retail giant decided to shut down its own online DVD rental unit and instead let Netflix run it.
Trading at 36.73x its estimated FY06 EPS, Netflix is not cheap. But if it can continue its strong growth and earn the estimated $1.11 per share for the FY07, the valuation becomes more reasonable. The pressure is clearly on Netflix to deliver but it is on the correct path.
Note: you are welcome to post this article on your site if it is financial related. You must cut and paste the bio and make sure the web site link is live. Also please e-mail me to let me know.
Beyond the Brink
Penny stocks represent an excellent investment vehicle for producing gains, while the risks are equally as high. When you finally decide to get involved in penny stocks, to go 'Beyond the Brink,' there are some things you need to know.
In fact, whether you have been burned by penny stocks in the past, or have never even invested, the following theories are designed to give you an instant and significant advantage over all those inexperienced and uninformed traders. After all, to make money in stocks someone usually has to be losing money. Which side of the fence do you want to fall on?
Glass Jaw
Lots of people have made lots of money from trading penny stocks. Lots of people have lost plenty, as well. What is the difference between a successful micro-cap trader, and one who continually takes it on the chin?
Uses professional stock picks and research. Does their own due diligence. Observes patience. Takes lessons from past trades and stock activity. Takes lessons from other traders. Decides between 10 stocks at a time.
Uses tips at work, rumors, and so-called 'inside scoops' to pick stocks. Doesn't investigate financials and corporate position. Falls victim to negative emotions like greed, anger, and desperation. Makes the same mistakes more than once. Looks at one stock alone on its own situation.
So Let's Learn
The fact that you have taken the time to review this feature demonstrates that you have the characteristics of a successful trader, specifically the willingness to learn from experts and the experiences of other traders.
So let's learn. As mentioned above, you should always examine groups of stocks together when looking for a new issue to invest in. For example, make a chart and write down the revenues of each. In the next column list the earnings. Follow this by each of the subsequent criteria you think are important. With all of the data on one table and available at a glance, you can easily get a clear picture of which are the one or two strongest companies from your pool of potential investments.
However, understand that stock prices do not necessarily act in concert with the underlying fundamentals of a company. For example, there is nothing saying that the stock of the worst company on your list won't out perform the top ranked one.
For that reason you should also include factors such as trading volatility, your opinion of a potential break-through due to some new product, potential positive press releases, etc... This method is not intended to reveal the best stock, but instead to give you additional clarity about which are the best few and worst few according to your own weighting of the various factors you have chosen.
Available Advantages
Get a discount broker. Monitor your portfolio online, do your research online (and offline), and place your trades online. Embrace the technology, because it provides superior advantages all across the board. You can screen stocks, put those into comparative charts, instantly access the corporate press releases, check the latest industry news, and then place your trade... all for about $20.
Then you can monitor your trade order fulfillment, verify that the money and shares traded hands, track the progress of the stocks, get instant alerts for press releases... It is truly endless and complete, and each step that you take full advantage of leaves other traders one step behind you.
Keep small amounts of money in each stock, and only 'risk' money for penny stocks. While these low-priced, volatile investments can produce some truly incredible gains, they usually bounce among all sorts of price ranges.
On a related note, if you get 'freaked out' or worried about a stock you hold, you should consider selling your position. Try to invest in solid penny stock companies that have a low share price because they are small or undiscovered, not because they are having business troubles.
Be sure to read our related articles Falling in Hate, Fools Rush In, and Trading Myths, and our tools section on Choosing a Broker.
Beyond... And After That
Some of the most successful traders have a few things in common. Firstly, they have made some major trading mistakes in their day. However, they learned more from these mistakes than they ever did from any of their great trades. Don't squander your failures by trying to put them behind you.
Secondly, keep a journal with dates, specific trade amounts and prices, and even the stocks you were thinking of investing in but didn't. You can use this for a hundred different purposes as you become a more advanced trader, such as seeing opportunities you missed, or learning that your strategies are valid, or just to monitor your improvement as you become more experienced from month to month.
In fact, whether you have been burned by penny stocks in the past, or have never even invested, the following theories are designed to give you an instant and significant advantage over all those inexperienced and uninformed traders. After all, to make money in stocks someone usually has to be losing money. Which side of the fence do you want to fall on?
Glass Jaw
Lots of people have made lots of money from trading penny stocks. Lots of people have lost plenty, as well. What is the difference between a successful micro-cap trader, and one who continually takes it on the chin?
Uses professional stock picks and research. Does their own due diligence. Observes patience. Takes lessons from past trades and stock activity. Takes lessons from other traders. Decides between 10 stocks at a time.
Uses tips at work, rumors, and so-called 'inside scoops' to pick stocks. Doesn't investigate financials and corporate position. Falls victim to negative emotions like greed, anger, and desperation. Makes the same mistakes more than once. Looks at one stock alone on its own situation.
So Let's Learn
The fact that you have taken the time to review this feature demonstrates that you have the characteristics of a successful trader, specifically the willingness to learn from experts and the experiences of other traders.
So let's learn. As mentioned above, you should always examine groups of stocks together when looking for a new issue to invest in. For example, make a chart and write down the revenues of each. In the next column list the earnings. Follow this by each of the subsequent criteria you think are important. With all of the data on one table and available at a glance, you can easily get a clear picture of which are the one or two strongest companies from your pool of potential investments.
However, understand that stock prices do not necessarily act in concert with the underlying fundamentals of a company. For example, there is nothing saying that the stock of the worst company on your list won't out perform the top ranked one.
For that reason you should also include factors such as trading volatility, your opinion of a potential break-through due to some new product, potential positive press releases, etc... This method is not intended to reveal the best stock, but instead to give you additional clarity about which are the best few and worst few according to your own weighting of the various factors you have chosen.
Available Advantages
Get a discount broker. Monitor your portfolio online, do your research online (and offline), and place your trades online. Embrace the technology, because it provides superior advantages all across the board. You can screen stocks, put those into comparative charts, instantly access the corporate press releases, check the latest industry news, and then place your trade... all for about $20.
Then you can monitor your trade order fulfillment, verify that the money and shares traded hands, track the progress of the stocks, get instant alerts for press releases... It is truly endless and complete, and each step that you take full advantage of leaves other traders one step behind you.
Keep small amounts of money in each stock, and only 'risk' money for penny stocks. While these low-priced, volatile investments can produce some truly incredible gains, they usually bounce among all sorts of price ranges.
On a related note, if you get 'freaked out' or worried about a stock you hold, you should consider selling your position. Try to invest in solid penny stock companies that have a low share price because they are small or undiscovered, not because they are having business troubles.
Be sure to read our related articles Falling in Hate, Fools Rush In, and Trading Myths, and our tools section on Choosing a Broker.
Beyond... And After That
Some of the most successful traders have a few things in common. Firstly, they have made some major trading mistakes in their day. However, they learned more from these mistakes than they ever did from any of their great trades. Don't squander your failures by trying to put them behind you.
Secondly, keep a journal with dates, specific trade amounts and prices, and even the stocks you were thinking of investing in but didn't. You can use this for a hundred different purposes as you become a more advanced trader, such as seeing opportunities you missed, or learning that your strategies are valid, or just to monitor your improvement as you become more experienced from month to month.
first think if it is worth your time and money
That was the good news. The bad news is that those companies are selling you the tools and service only. They do not sell you any guarantees of success. It does not matter if you profit or lose money, the trading company will get its fee for each trade anyway.
Since you are considering going into the stock market, most likely you are planning to get a significant return on your investment which should also be better than what you would get buy investing your money into mutual funds (less risky than single stocks) or even no-risk certificate of deposits (CDs) where returns are guaranteed.
Well, how can you get such returns? The answer of course is simple and well known: buy low, sell high. If you do it most of the time you’ll be a successful stock trader. Now the first problem comes: how do you know when to buy? There are probably several ways to do that, we do not discuss this here, let’s assume that you know somehow or think you do know. Lets say you got lucky and the stock after you bought it is going up, just as you planned.
Now another problem comes: when to sell? After the stock is up 20%, what do you do? Sell now, or wait until it is up 50%, 100% or 200%? Do you listen to investor news and do what everybody else does: selling, buying more, or continue holding the stock? If you choose one of the first two options, how much of the stock you should buy or sell? Or if you hold the stock, are you sure it will continue to go up, or you may end up waiting until the stock price is back to the original and than lose it’s value resulting in your losses.
The truth is some people actually do know the answers to those questions most of the time and actually make profit. The question is, are you as good as those people? Most people are losing money guessing and trying to time the market. If you’re new in this game and not planning to spend much time on research, chances are you will lose. You will be competing with professional traders, big players and insiders who profit mostly because many others keep losing. Plus what are the chances that you can predict the market? The chances are very slim.
Some may argue: “I had that stock, I sold it when it was up 20%, but if I did not sell it at that time, now it would be up 300%. How stupid I was when I sold it, if I did not I’d made a lot of money. I have to do this again. It really proves that I can make a lot of money there and it’s easy!” That is right you can make a lot of money, but it is not that easy as it looks. Lets assume you did not sell the stock at the time it was up 20%. Then what makes you think you would wait until it is up 300%? You may have sold it when it was up only 25%. Or it may go down several times below 20% increase, you could have thought it was going down forever and sold it even with a lower than 20% profit.
The bottom line is that it is easy to look at the past and see all the mistakes you’ve made. However it is very difficult to do right things for the future. Unless you know market trends well, understand related industries and stock company financials, most likely you will not be able to make profitable trades. Even professional traders do mistakes and lose money. If you are not one of them or not planning to become one, your best bet would be investing into CDs, mutual funds or your own business.
Since you are considering going into the stock market, most likely you are planning to get a significant return on your investment which should also be better than what you would get buy investing your money into mutual funds (less risky than single stocks) or even no-risk certificate of deposits (CDs) where returns are guaranteed.
Well, how can you get such returns? The answer of course is simple and well known: buy low, sell high. If you do it most of the time you’ll be a successful stock trader. Now the first problem comes: how do you know when to buy? There are probably several ways to do that, we do not discuss this here, let’s assume that you know somehow or think you do know. Lets say you got lucky and the stock after you bought it is going up, just as you planned.
Now another problem comes: when to sell? After the stock is up 20%, what do you do? Sell now, or wait until it is up 50%, 100% or 200%? Do you listen to investor news and do what everybody else does: selling, buying more, or continue holding the stock? If you choose one of the first two options, how much of the stock you should buy or sell? Or if you hold the stock, are you sure it will continue to go up, or you may end up waiting until the stock price is back to the original and than lose it’s value resulting in your losses.
The truth is some people actually do know the answers to those questions most of the time and actually make profit. The question is, are you as good as those people? Most people are losing money guessing and trying to time the market. If you’re new in this game and not planning to spend much time on research, chances are you will lose. You will be competing with professional traders, big players and insiders who profit mostly because many others keep losing. Plus what are the chances that you can predict the market? The chances are very slim.
Some may argue: “I had that stock, I sold it when it was up 20%, but if I did not sell it at that time, now it would be up 300%. How stupid I was when I sold it, if I did not I’d made a lot of money. I have to do this again. It really proves that I can make a lot of money there and it’s easy!” That is right you can make a lot of money, but it is not that easy as it looks. Lets assume you did not sell the stock at the time it was up 20%. Then what makes you think you would wait until it is up 300%? You may have sold it when it was up only 25%. Or it may go down several times below 20% increase, you could have thought it was going down forever and sold it even with a lower than 20% profit.
The bottom line is that it is easy to look at the past and see all the mistakes you’ve made. However it is very difficult to do right things for the future. Unless you know market trends well, understand related industries and stock company financials, most likely you will not be able to make profitable trades. Even professional traders do mistakes and lose money. If you are not one of them or not planning to become one, your best bet would be investing into CDs, mutual funds or your own business.
Bear Market, Bull Market or Dead-cat Bounce
Over the last eight weeks [June, 2006] I've been spending a lot of time reading articles describing the current market conditions...trying to figure if it really affects penny stock investors.
Are we in a bull market...are we wading into a bear market. Or is the recent rally just a dead-cat bounce?
The dead cat bounce refers to a short-term recovery in a declining trend. There's a (relatively) old saying in investing: even a dead cat will bounce if it's dropped from high enough.
No matter how you slice it...I'm not sure it even matters to penny stock investors like you and me.
For example...stocks surged in Japan this week as reports showed growth in manufacturing and exports. Markets rose across Asia as investors were encouraged by Wednesday's gains on Wall Street.
Strong earnings reports from two bellwether stocks gave penny stock investors hope that rising interest rates wouldn't kill profits. The recent sell-off, said one economist was "just turbulence."
The turbulence, it seems, is continuing on this side of the pond. U.S. stocks traded flat to lower Thursday as the market took a breather as higher oil prices and downbeat economic data curbed Wall Street's momentum. So, what are we to believe, is the market heading up...or heading down?
How does the market look in general terms? As far as stocks are concerned, the S&P index is up just 0.3 percent for the year, the Dow is up 3.4 percent and the NASDAQ is down 2.9 percent. Not sparkling data.
But for penny stock investors, the recent roller coaster ride that many seasoned blue chip investors are reeling over, is just par for the course. We know that a penny stock is often volatile and just as unpredictable.
While a penny stock may be more vibrant when the market is upbeat, in general, a penny stock marches to its own tune. Why? Few investors venture into the field of penny stocks because they are either unwilling or unable to do the work required to accurately predict what these shares may do.
By their nature, it is nearly impossible to know what price a penny stock share should be trading at, and conventional financial ratios and industry comparisons are rarely effective measures for realizing a penny stock's value. Large one-day percentage gains and losses are not an uncommon occurrence for penny stock investors.
So really, bull, bear or cat...it's just another day at the computer screen for penny stock investors. The work may be fun...but it's not easy. Of the 14,000 public companies in the U.S., about 3,300 are considered penny stocks that trade on the OTC Bulletin Board operated by the NASDAQ.
Their visibility is low, chances are you've never heard of their CEO and I doubt they have any institutional following. And while they're highly speculative, the more promising ones have a targeted business plans, and solid positions in niche markets. And for now, they're flying under the radar of Wall Street
So what do you do in an unpredictable market like the one we're in? Continue applying the same principles you've always used when searching for that untapped penny stock. And enjoy the volatility.
Are we in a bull market...are we wading into a bear market. Or is the recent rally just a dead-cat bounce?
The dead cat bounce refers to a short-term recovery in a declining trend. There's a (relatively) old saying in investing: even a dead cat will bounce if it's dropped from high enough.
No matter how you slice it...I'm not sure it even matters to penny stock investors like you and me.
For example...stocks surged in Japan this week as reports showed growth in manufacturing and exports. Markets rose across Asia as investors were encouraged by Wednesday's gains on Wall Street.
Strong earnings reports from two bellwether stocks gave penny stock investors hope that rising interest rates wouldn't kill profits. The recent sell-off, said one economist was "just turbulence."
The turbulence, it seems, is continuing on this side of the pond. U.S. stocks traded flat to lower Thursday as the market took a breather as higher oil prices and downbeat economic data curbed Wall Street's momentum. So, what are we to believe, is the market heading up...or heading down?
How does the market look in general terms? As far as stocks are concerned, the S&P index is up just 0.3 percent for the year, the Dow is up 3.4 percent and the NASDAQ is down 2.9 percent. Not sparkling data.
But for penny stock investors, the recent roller coaster ride that many seasoned blue chip investors are reeling over, is just par for the course. We know that a penny stock is often volatile and just as unpredictable.
While a penny stock may be more vibrant when the market is upbeat, in general, a penny stock marches to its own tune. Why? Few investors venture into the field of penny stocks because they are either unwilling or unable to do the work required to accurately predict what these shares may do.
By their nature, it is nearly impossible to know what price a penny stock share should be trading at, and conventional financial ratios and industry comparisons are rarely effective measures for realizing a penny stock's value. Large one-day percentage gains and losses are not an uncommon occurrence for penny stock investors.
So really, bull, bear or cat...it's just another day at the computer screen for penny stock investors. The work may be fun...but it's not easy. Of the 14,000 public companies in the U.S., about 3,300 are considered penny stocks that trade on the OTC Bulletin Board operated by the NASDAQ.
Their visibility is low, chances are you've never heard of their CEO and I doubt they have any institutional following. And while they're highly speculative, the more promising ones have a targeted business plans, and solid positions in niche markets. And for now, they're flying under the radar of Wall Street
So what do you do in an unpredictable market like the one we're in? Continue applying the same principles you've always used when searching for that untapped penny stock. And enjoy the volatility.
Are There Any Great, New Mining Stocks Left?
Where are the hot and cold spots around the world for resource investors? The stampeding bull market in commodities has investors reaching for new ideas. Highly respected newsletter writer Lawrence Roulston of “Resource Opportunities” favors Canada, Alaska and China for investing in mining and energy companies.
StockInterview: Let’s get the cold spots out of the way so investors are forewarned about which countries to avoid.
Lawrence Roulston:
A lot of the (mining) companies that went overseas in decades back are recognizing the political difficulties with dealing in some jurisdictions. These include places like Indonesia, Columbia, and several of the African countries, such as Congo, Sudan and Eritrea. All of those places where there are great geological prospects, but are more and more risky to deal in. I think some of that mining is coming back closer to home, which is right here in Canada.
StockInterview: So Canada is on your “favorite countries” list?
Lawrence Roulston:
At the very top of the list would be Canada. As of right now, taking into account the geological potential, political situation, infrastructure and all the other issues, I would (highly) rate Canada and British Columbia. They have had decades of work. But for the last decade, there hasn’t been very much going on. The companies are just coming back and picking up with what’s been going on. Similarly, Ontario, Quebec – tremendous geological potential – and it’s been kind of ignored for a long time. Canada is now the most important place in the world for diamonds, representing 50 percent on exploration spending for diamonds.
StockInterview: Is there a specific mineral or metal that makes Canada especially appealing?
Lawrence Roulston:
It’s the whole gambit. Canada has always been one of the top metal producers, and it’s coming back to life. Of course, gold is at the top of the list, but also base metals and uranium. The Athabasca Basin in northern Saskatchewan is far and away the most important area to be looking at, geologically. It’s currently the biggest source of uranium and contains the highest grade deposit. There are other uranium prospective areas in Canada that are just emerging. The Thelon Basin in the Northwest Territories, north of the Athabasca Basin, is very similar, geologically, to the Athabasca Basin. It had some work done in the 1970s, and it’s been pretty much ignored until very recently. Going a little further north to Hornby Basin, it is a similar kind of situation. In Labrador, the central mineral belt is just emerging as a very important place to be looking for uranium.
StockInterview: Do you have any favorite companies, which you are following and which have good prospects?
Lawrence Roulston:
NovaGold Resources (TSX: NG; Amex: NG), for example, with the Galore Creek. It’s a billion ton deposit with enormous metal content. (Editor’s Note: Galore Creek has been called one of the largest and highest grade undeveloped porphyry-related gold-silver-copper deposits in North America.)
StockInterview: What is another of your favorite areas, which has gone largely undetected during this bull market?
Lawrence Roulston:
Nevada would be at the top of the list of anywhere in the world to be working and Alaska right behind it. There is huge potential in Alaska. Mining companies have only scratched the surface of exploration up there. Two of the largest metal deposits in the world are in Alaska. These are both discoveries going back decades, but work over the last couple of years has brought them to the point where they’re now recognized as among the largest metal deposits in the world: Donlin Creek, a 25-plus million ounce gold deposit, and the Pebble deposit, held by Northern Dynasty (TSX: NDM). The Pebble deposit is significantly larger than, and of comparable grade to, Ivanhoe’s (NYSE: IVN) Oyu Tolgoi (copper-gold) deposit in Mongolia. (Editor’s Note: The Donlin Creek project is a joint venture between NovaGold and Barrick Gold.)
StockInterview: Anywhere else in the world where you can find a great, but still “new” resource investment opportunity, in light of how hard the commodities bull has been stampeding the past few years?
Lawrence Roulston:
Often the better value to be had, or the better opportunity, is in being a little bit out of step with the crowd. One of the areas offering some outstanding opportunities is China.
China has done a tremendous amount of geological work, over the last few decades, but all from the perspective of finding, and then quickly developing, small deposits. There has been very little effort devoted to taking a bigger picture type look at China. The companies that have been able to take a kind of bigger picture look at China have begun to develop what I think are going to be some pretty spectacular results over time.
StockInterview: Isn’t it tough, though, doing business in China?
Lawrence Roulston:
There is still a perception out there that China is a difficult place to do business. Most people from the west walk into China cold and try to do a deal. It would be impossible for them. But, for western companies that are able to team up with groups that are well established within China – so that they’re able to find their way through the system over there – then there are outstanding opportunities. There are mountains of geological information – all in Chinese, of course. You’ve got to be able to work within that system and get the information, know how to put the deals together.
StockInterview: What do you mean by “knowing how to put the deals together?”
Lawrence Roulston:
If I was to go over to China and try to do a deal to get access to a coalbed methane property, I wouldn’t have a clue about how to begin. On the other hand, I could walk into the Petroleum Club in Calgary, and meet a half dozen guys and talk to them. I could build on my leads, and probably in a day be talking about a deal. When you go into China, unless you have somebody on your team that can get into the system and deal with the people, because of language issues, cultural issues and just having access to the information and knowing what sort of terms that they might be looking for… It’s a different culture from every perspective, and not the least of which is a different way of doing business.
StockInterview: In your April issue, you recommended one company, which overcame those hurdles, meets your criteria and already has a coalbed methane deal in China.
Lawrence Roulston:
Pacific Asia China Energy (TSX: PCE) established connections in China. They can draw on their contacts and their network. They can get into see the right people, where they can actually talk seriously about doing deals, and have an enormous leg up over somebody that walked in cold and tried to establish and build contacts and put a deal together. I think it is an absolutely outstanding opportunity that they’ve seized on.
StockInterview: There are many coalbed methane opportunities in Alberta. Why look to China?
Lawrence Roulston:
One of the things that makes China interesting is the entry cost to get into a coalbed methane (CBM) play in China is fairly modest. For example, to go to Alberta, or anywhere in the United States, and get access to the exploration rights, or exploitation rights, is enormously expensive. In China, they walked in and, for a fairly modest up-front commitment, obtained a control position in a CBM prospect.
StockInterview: How does Pacific Asia China Energy’s coalbed methane property in Guizhou, China rate against other coalbed methane plays?
Lawrence Roulston:
I think it’s an outstanding opportunity. Chinese government agencies have done an enormous amount of work at delineating the coal. To be able to step into that amount of data as a starting point to build up their CBM resource? The bottom line is that they’re not out there looking for coal. They know exactly where the material is, and they’re able to quickly start defining the issues like recoverability. They’re drilling in order to establish the basic physical parameters of the flow rates and the content within the coal. I think the companies which are able to effectively exploit the CBM technology in China are going to be the pioneers in that area.
StockInterview: To Americans, any business in China might appear to be “pioneering,” since most of still think of China as a third world country.
Lawrence Roulston:
I’ve been to China many times and I’ve been to parts of China where most people, as tourists, would never get anywhere near, because I go there to look at mineral exploration projects and mining projects. I’ve been to every corner of the country as well as the major cities. What I see happening everywhere I go is a pace of development that I’ve never seen anywhere else in my life, anywhere in the world. That is, 1.3 billion people are going from a basically rural farm-based economy to a modern industrial economy at a pace that has just never before been conceived.
StockInterview: How do you quantify that?
Lawrence Roulston:
This is a number that most people won’t get, and you won’t get until you’ve been over there and have seen it. There are 300 million people in China that are already well into the middle class. By middle class, I am comparing (the Chinese middle class) to the same absolute standards as we would apply in Canada or the United States in terms of dollars in your bank account, value of your house and your car, and everything else. There are 300 million people that have already achieved that status, which is more than the people at that status in North America. There are another 1 billion people who are busting their butts to get to that level.
StockInterview: But isn’t the rest of the world’s rural population just as industrious and ambitious?
Lawrence Roulston:
I’ve been in Africa, the Middle East, Asia and Latin America. If you go into any of those areas and you walk into the small towns, a lot of people are sitting around drinking coffee, crying the blues and complaining about how terrible life is. Go into a similar area in China, and the people are out working in the fields. In the middle of winter, they’re fixing up their fences, the dams and terraces, and clearing rocks, removing trees and stuff like that. It’s a high level of industry I’ve never seen in any other part of the world. So it goes from that ground level right up to the entrepreneurs, and the guys who are building the high rise condominium complexes in Shanghai.
StockInterview: How long will it take before American investors realize the impact China has on the global economy?
Lawrence Roulston:
It’s going to happen in a gradual way. I think those that keep their heads buried in the sand are going to get left behind as the world pulls ahead. I would suggest any investor in any company ask the question of the company: “Is that company involved in some way in China?” There are a lot of North American companies that have a very significant presence in China in terms of doing business over there, of getting established, of selling products or manufacturing products in China.
StockInterview: Why is China so important with regards to this commodities bull market, and are there still opportunities for investors?
Lawrence Roulston:
There is a lot of geological potential, and there is the perception that it’s difficult. Therefore, there isn’t yet a big crowd of people over there chasing after deals. The flip side of it is that China and its neighbors in southeast Asia, representing 3 billion people, are going through the modern industrialization process. That is going to continue to create a massive demand for metals for, I believe, a decade or probably even a couple of decades into the future.
StockInterview: And most likely, the U.S. investor is going to be left behind or the last one into the pond?
Lawrence Roulston:
The bottom line is that Americans tend to be more inward focused. The other evening I was having dinner with an oil man from Texas who had spent a lot of time in China. He had seen China first hand and was very bullish. I asked him, “How many of your countrymen do you think really get it about China?” And he responded, “Oh, about five.” Then he said, “Congress doesn’t get it, investors don’t get it and the man in the street doesn’t get it.” Americans just don’t understand what’s happening over there yet.
StockInterview: Let’s get the cold spots out of the way so investors are forewarned about which countries to avoid.
Lawrence Roulston:
A lot of the (mining) companies that went overseas in decades back are recognizing the political difficulties with dealing in some jurisdictions. These include places like Indonesia, Columbia, and several of the African countries, such as Congo, Sudan and Eritrea. All of those places where there are great geological prospects, but are more and more risky to deal in. I think some of that mining is coming back closer to home, which is right here in Canada.
StockInterview: So Canada is on your “favorite countries” list?
Lawrence Roulston:
At the very top of the list would be Canada. As of right now, taking into account the geological potential, political situation, infrastructure and all the other issues, I would (highly) rate Canada and British Columbia. They have had decades of work. But for the last decade, there hasn’t been very much going on. The companies are just coming back and picking up with what’s been going on. Similarly, Ontario, Quebec – tremendous geological potential – and it’s been kind of ignored for a long time. Canada is now the most important place in the world for diamonds, representing 50 percent on exploration spending for diamonds.
StockInterview: Is there a specific mineral or metal that makes Canada especially appealing?
Lawrence Roulston:
It’s the whole gambit. Canada has always been one of the top metal producers, and it’s coming back to life. Of course, gold is at the top of the list, but also base metals and uranium. The Athabasca Basin in northern Saskatchewan is far and away the most important area to be looking at, geologically. It’s currently the biggest source of uranium and contains the highest grade deposit. There are other uranium prospective areas in Canada that are just emerging. The Thelon Basin in the Northwest Territories, north of the Athabasca Basin, is very similar, geologically, to the Athabasca Basin. It had some work done in the 1970s, and it’s been pretty much ignored until very recently. Going a little further north to Hornby Basin, it is a similar kind of situation. In Labrador, the central mineral belt is just emerging as a very important place to be looking for uranium.
StockInterview: Do you have any favorite companies, which you are following and which have good prospects?
Lawrence Roulston:
NovaGold Resources (TSX: NG; Amex: NG), for example, with the Galore Creek. It’s a billion ton deposit with enormous metal content. (Editor’s Note: Galore Creek has been called one of the largest and highest grade undeveloped porphyry-related gold-silver-copper deposits in North America.)
StockInterview: What is another of your favorite areas, which has gone largely undetected during this bull market?
Lawrence Roulston:
Nevada would be at the top of the list of anywhere in the world to be working and Alaska right behind it. There is huge potential in Alaska. Mining companies have only scratched the surface of exploration up there. Two of the largest metal deposits in the world are in Alaska. These are both discoveries going back decades, but work over the last couple of years has brought them to the point where they’re now recognized as among the largest metal deposits in the world: Donlin Creek, a 25-plus million ounce gold deposit, and the Pebble deposit, held by Northern Dynasty (TSX: NDM). The Pebble deposit is significantly larger than, and of comparable grade to, Ivanhoe’s (NYSE: IVN) Oyu Tolgoi (copper-gold) deposit in Mongolia. (Editor’s Note: The Donlin Creek project is a joint venture between NovaGold and Barrick Gold.)
StockInterview: Anywhere else in the world where you can find a great, but still “new” resource investment opportunity, in light of how hard the commodities bull has been stampeding the past few years?
Lawrence Roulston:
Often the better value to be had, or the better opportunity, is in being a little bit out of step with the crowd. One of the areas offering some outstanding opportunities is China.
China has done a tremendous amount of geological work, over the last few decades, but all from the perspective of finding, and then quickly developing, small deposits. There has been very little effort devoted to taking a bigger picture type look at China. The companies that have been able to take a kind of bigger picture look at China have begun to develop what I think are going to be some pretty spectacular results over time.
StockInterview: Isn’t it tough, though, doing business in China?
Lawrence Roulston:
There is still a perception out there that China is a difficult place to do business. Most people from the west walk into China cold and try to do a deal. It would be impossible for them. But, for western companies that are able to team up with groups that are well established within China – so that they’re able to find their way through the system over there – then there are outstanding opportunities. There are mountains of geological information – all in Chinese, of course. You’ve got to be able to work within that system and get the information, know how to put the deals together.
StockInterview: What do you mean by “knowing how to put the deals together?”
Lawrence Roulston:
If I was to go over to China and try to do a deal to get access to a coalbed methane property, I wouldn’t have a clue about how to begin. On the other hand, I could walk into the Petroleum Club in Calgary, and meet a half dozen guys and talk to them. I could build on my leads, and probably in a day be talking about a deal. When you go into China, unless you have somebody on your team that can get into the system and deal with the people, because of language issues, cultural issues and just having access to the information and knowing what sort of terms that they might be looking for… It’s a different culture from every perspective, and not the least of which is a different way of doing business.
StockInterview: In your April issue, you recommended one company, which overcame those hurdles, meets your criteria and already has a coalbed methane deal in China.
Lawrence Roulston:
Pacific Asia China Energy (TSX: PCE) established connections in China. They can draw on their contacts and their network. They can get into see the right people, where they can actually talk seriously about doing deals, and have an enormous leg up over somebody that walked in cold and tried to establish and build contacts and put a deal together. I think it is an absolutely outstanding opportunity that they’ve seized on.
StockInterview: There are many coalbed methane opportunities in Alberta. Why look to China?
Lawrence Roulston:
One of the things that makes China interesting is the entry cost to get into a coalbed methane (CBM) play in China is fairly modest. For example, to go to Alberta, or anywhere in the United States, and get access to the exploration rights, or exploitation rights, is enormously expensive. In China, they walked in and, for a fairly modest up-front commitment, obtained a control position in a CBM prospect.
StockInterview: How does Pacific Asia China Energy’s coalbed methane property in Guizhou, China rate against other coalbed methane plays?
Lawrence Roulston:
I think it’s an outstanding opportunity. Chinese government agencies have done an enormous amount of work at delineating the coal. To be able to step into that amount of data as a starting point to build up their CBM resource? The bottom line is that they’re not out there looking for coal. They know exactly where the material is, and they’re able to quickly start defining the issues like recoverability. They’re drilling in order to establish the basic physical parameters of the flow rates and the content within the coal. I think the companies which are able to effectively exploit the CBM technology in China are going to be the pioneers in that area.
StockInterview: To Americans, any business in China might appear to be “pioneering,” since most of still think of China as a third world country.
Lawrence Roulston:
I’ve been to China many times and I’ve been to parts of China where most people, as tourists, would never get anywhere near, because I go there to look at mineral exploration projects and mining projects. I’ve been to every corner of the country as well as the major cities. What I see happening everywhere I go is a pace of development that I’ve never seen anywhere else in my life, anywhere in the world. That is, 1.3 billion people are going from a basically rural farm-based economy to a modern industrial economy at a pace that has just never before been conceived.
StockInterview: How do you quantify that?
Lawrence Roulston:
This is a number that most people won’t get, and you won’t get until you’ve been over there and have seen it. There are 300 million people in China that are already well into the middle class. By middle class, I am comparing (the Chinese middle class) to the same absolute standards as we would apply in Canada or the United States in terms of dollars in your bank account, value of your house and your car, and everything else. There are 300 million people that have already achieved that status, which is more than the people at that status in North America. There are another 1 billion people who are busting their butts to get to that level.
StockInterview: But isn’t the rest of the world’s rural population just as industrious and ambitious?
Lawrence Roulston:
I’ve been in Africa, the Middle East, Asia and Latin America. If you go into any of those areas and you walk into the small towns, a lot of people are sitting around drinking coffee, crying the blues and complaining about how terrible life is. Go into a similar area in China, and the people are out working in the fields. In the middle of winter, they’re fixing up their fences, the dams and terraces, and clearing rocks, removing trees and stuff like that. It’s a high level of industry I’ve never seen in any other part of the world. So it goes from that ground level right up to the entrepreneurs, and the guys who are building the high rise condominium complexes in Shanghai.
StockInterview: How long will it take before American investors realize the impact China has on the global economy?
Lawrence Roulston:
It’s going to happen in a gradual way. I think those that keep their heads buried in the sand are going to get left behind as the world pulls ahead. I would suggest any investor in any company ask the question of the company: “Is that company involved in some way in China?” There are a lot of North American companies that have a very significant presence in China in terms of doing business over there, of getting established, of selling products or manufacturing products in China.
StockInterview: Why is China so important with regards to this commodities bull market, and are there still opportunities for investors?
Lawrence Roulston:
There is a lot of geological potential, and there is the perception that it’s difficult. Therefore, there isn’t yet a big crowd of people over there chasing after deals. The flip side of it is that China and its neighbors in southeast Asia, representing 3 billion people, are going through the modern industrialization process. That is going to continue to create a massive demand for metals for, I believe, a decade or probably even a couple of decades into the future.
StockInterview: And most likely, the U.S. investor is going to be left behind or the last one into the pond?
Lawrence Roulston:
The bottom line is that Americans tend to be more inward focused. The other evening I was having dinner with an oil man from Texas who had spent a lot of time in China. He had seen China first hand and was very bullish. I asked him, “How many of your countrymen do you think really get it about China?” And he responded, “Oh, about five.” Then he said, “Congress doesn’t get it, investors don’t get it and the man in the street doesn’t get it.” Americans just don’t understand what’s happening over there yet.
Ancient Meteor Impact May Hold Key To Uranium Exploration
ESO Uranium to Angle Drill near a Promising 1970’s Hole
“I look at about 100 different projects a year, most of which go into the round filing cabinet on my floor,” said Tony Harvey, the senior technical advisor to ESO Uranium (TSX: ESO), and formerly a senior manager of Wright Engineers-Fluor Daniels, which was involved with the design and construction of 14 mines worldwide. Harvey quickly ticked off what is necessary to attract his eye, “I need to see history. I need to see signposts before I give it any credence.” So why is he advising little-known ESO Uranium, after a long, prolific career? Harvey helped found Amex-listed Azco Mining, and more recently was a director of Mexican mining firm, Cobre del Mayo, which sold two of its last three mines, which he helped discover, to Phelps Dodge (NYSE: PD).
“I believe this one has a huge amount of history,” Harvey argued. “Not only have you got the Cluff Lake mine, which already confirms the presence of uranium, but you have got the Shea Creek drilling intercepts which validate it. We have the conductors streaming onto our property. We have the boulders, which is also another sign post.” The boulders, of which Tony Harvey refers, are the six uranium-mineralized boulders near the ESO Uranium project on the company’s Cluff property. Near those boulders, a promising drill hole from the 1970s indicated 0.85% U3O8 over 2.3 meters. It was all but forgotten until the recent explosion of exploration activity in Saskatchewan’s Athabasca Basin, an area which has helped Cameco (NYSE: CCJ) grow into a company with a market capitalization of nearly $12 billion.
What ESO Uranium’s geological team will be looking for at the company’s Cluff property are Cluff Lake style uranium deposits in basement rocks with the Carswell structure close to the unconformity with sandstones of the Athabasca group.
Drilling in the Meteor’s Wake
“The value of the ore extracted at the Cluff mine, in today’s terms, would be equivalent to $2.6 billion,” explained Harvey. “That’s how much was extracted at the Cluff mine.” The company’s vice president of exploration, Benjamin Ainsworth, who is both a senior geologist and a mining engineer, helped explain the Cluff structure. “A meteorite probably impacted at this location and with sufficient force to break right through the layers of Athabasca sandstone on the surface. On rebound, basement rocks got lifted back up. In bouncing back out, it also lifted up the surrounding Athabasca rocks and tipped them up, if you can imagine, like an opening flower.” As a result, the basement got lifted up to the surface and made it easier to find and mine the uranium at Cluff. Ainsworth added, “The significance of that for me and our group is that shows very high grade uranium deposits in the western side of Athabasca.”
Drilling a property helps the geological team better understand the area. Since the Cluff property was mined out, two decades ago, additional scientific study has opened up new doors. At the 67th Annual Meteoritical Society Meeting, University of Quebec Earth Science professors presented a paper entitled, “A Re-Evaluation of the Size of the Carswell Astrobleme.” The Montreal scientists concluded in the 2004 annual conference held in Brazil, “The Carswell impact structure is therefore older and larger than previously estimated… the central uplift considered to be under the annular dolomitic unit would suggest a crater size in the basement of 118 to 125 kilometers wide.” While some believe the meteor hit about 478 million years ago, recent evidence suggests it may have been closer to 1.8 billion years ago.
Angle Drilling This Time
ESO Uranium plans a six-hole drill program to learn more about their Cluff property. The first hole hopes to confirm what was found earlier, “We’re going to drill right up against the CAR-425 hole drilled originally in the 1970s, which indicated uranium of about 0.85 percent U3O8 over 2.3 meters.” They will drill adjacent to the uranium-mineralized boulders. Ainsworth explained how the company’s strategy is different from previous drilling, “We’re drilling angle holes to give us a better opportunity to find more of the structures that can be carrying mineralization in that sort of system.” In the 1970s, holes were vertically drilled. Harvey added, “We’re going to be stepping out to the southeast, which bring us then closer to the original Cluff mine.” The company plans 150 to 200-meter holes. Ainsworth noted, “The CAR-425 drill hole, which we’re coming up close to, is 146.5 meters deep.”
Robert Beckett, ESO Uranium’s exploration manager, agrees about the 55 degree angle holes the company will be drilling at the Cluff property, “They were drilling vertical holes, and we’d like to go back and check it with an angle hole on the theory, which we interpret as some kind of subvertical system.” Beckett talked about additional drilling to the south, after the property had been explored, revealed “the structure extends from the edge of the basin all the way through Shea Creek.” He added, “We believe it extends onto our property to the north at 11 o’clock, just to the north. We see the extension of those conductors coming up through Shea Creek – conductors and by extension, structures, extending up onto our property. And the structures are the key thing – the destruction of the upper fold and the unconformity in the bedrock, it gives you the right kind of conditions for the deposition of uranium.” Before Beckett joined ESO Uranium, he had been district geologist for Esso Minerals and for the Saskatchewan Mining Development Corporation, which later merged with El Dorado Nuclear to become Cameco Corp. He was the exploration manager at Midwest Lake and the project manager of the Port Radium mine.
The Hook Property
Another property in the ESO Uranium portfolio, which requires additional preparatory geological work and exploratory drilling, is called the Hook property. It’s about ten miles south of the Shea Creek deposit and covers approximately 130,000 acres. The western one-third of the property has been minimally explored. ESO Uranium CEO Jonathan George said about it, “The Hook is one of the areas I’m particularly excited about, now that we’ve received the airborne geophysical survey, is because the conductors have shown up very strongly, coupled with dravite, which is an alteration clay, a key indicator to uranium deposits.” Mr. George believes his company may have a new targeted area. “Cameco is drilling right on the doorstep on another project they have,” he added. Cameco, he pointed out, is drilling just to the south and east of ESO’s southern rim, below the company’s border.
Ainsworth was also optimistic, saying, “That’s part of the reason why that ground was selected earlier – Cameco had that position, and I could see, in the available information that there were structures and good probabilities of other types of systems being available.” George said, “We’re going to be drilling because we see an intense alteration on surface, of which that source has never been found. The alteration coupled with the structure leads us to believe we’ve got a great shot down there.”
“I think we’re much closer to having a hit at Cluff immediately,” Ainsworth insisted. “It is probably a good thing to get some news on the table very early on.” He did warn that there is a lot of risk in drilling for uranium deposits. “The geometry of these things is damn small.” George pointed out that the world’s richest uranium deposit, McArthur River, hosting about 400 million pounds of uranium, had half of its deposit in an area about half the size of a football field. “I think that’s mind boggling,” he said, “that a $7 billion project would be on an area that small.”
Conclusion
Drilling is imminent on the Cluff property, depending upon ice thickness in Saskatchewan. News should be available fairly quickly. Ainsworth warns, “The individual deposits at Cluff are actually quite small.” While quite a bit of work has been done in the Cluff area, many have recognized it’s very easy to miss. But Ainsworth cheerfully exudes, “The key thing here is that the grade is so high that pursuing it further makes it worthwhile.”
Another key to ESO Uranium is the strength of their exploration team. Technical adviser Tony Harvey has numerous credits to his long career. Robert Beckett has spent decades exploring in Saskatchewan and for the precursor company to Cameco, he was the in charge of the northern half of the Athabasca Basin. Benjamin Ainsworth held numerous senior positions with Placer since 1965, having once served as president of Placer Chile.
According to ESO’s Corporate Communications Manager, Tom Corcoran, “We currently raised about C$4.7 million, which has been earmarked for exploration on and in the ground. If we don’t spend it on drilling or exploration work, we have to give the money back.” ESO Uranium planned to start drilling in early February, having had to slightly delay the start of drilling, according to Robert Beckett, until the weather got colder. Drilling is imminent, and results should appear fairly quickly. Ainsworth offered an insight about how soon we will know about drilling results, “One thing about uranium, unlike drilling for gold and other metals, you get a radioactive signal on a drill core as you’re logging it. So you get a pretty good idea if you’ve got something there or not. You’re not going to get a very precise assay at that point, but at least you can focus very quickly. You can see these uranium minerals with a naked eye.”
We’ll be looking forward to seeing those drill results shortly.
“I look at about 100 different projects a year, most of which go into the round filing cabinet on my floor,” said Tony Harvey, the senior technical advisor to ESO Uranium (TSX: ESO), and formerly a senior manager of Wright Engineers-Fluor Daniels, which was involved with the design and construction of 14 mines worldwide. Harvey quickly ticked off what is necessary to attract his eye, “I need to see history. I need to see signposts before I give it any credence.” So why is he advising little-known ESO Uranium, after a long, prolific career? Harvey helped found Amex-listed Azco Mining, and more recently was a director of Mexican mining firm, Cobre del Mayo, which sold two of its last three mines, which he helped discover, to Phelps Dodge (NYSE: PD).
“I believe this one has a huge amount of history,” Harvey argued. “Not only have you got the Cluff Lake mine, which already confirms the presence of uranium, but you have got the Shea Creek drilling intercepts which validate it. We have the conductors streaming onto our property. We have the boulders, which is also another sign post.” The boulders, of which Tony Harvey refers, are the six uranium-mineralized boulders near the ESO Uranium project on the company’s Cluff property. Near those boulders, a promising drill hole from the 1970s indicated 0.85% U3O8 over 2.3 meters. It was all but forgotten until the recent explosion of exploration activity in Saskatchewan’s Athabasca Basin, an area which has helped Cameco (NYSE: CCJ) grow into a company with a market capitalization of nearly $12 billion.
What ESO Uranium’s geological team will be looking for at the company’s Cluff property are Cluff Lake style uranium deposits in basement rocks with the Carswell structure close to the unconformity with sandstones of the Athabasca group.
Drilling in the Meteor’s Wake
“The value of the ore extracted at the Cluff mine, in today’s terms, would be equivalent to $2.6 billion,” explained Harvey. “That’s how much was extracted at the Cluff mine.” The company’s vice president of exploration, Benjamin Ainsworth, who is both a senior geologist and a mining engineer, helped explain the Cluff structure. “A meteorite probably impacted at this location and with sufficient force to break right through the layers of Athabasca sandstone on the surface. On rebound, basement rocks got lifted back up. In bouncing back out, it also lifted up the surrounding Athabasca rocks and tipped them up, if you can imagine, like an opening flower.” As a result, the basement got lifted up to the surface and made it easier to find and mine the uranium at Cluff. Ainsworth added, “The significance of that for me and our group is that shows very high grade uranium deposits in the western side of Athabasca.”
Drilling a property helps the geological team better understand the area. Since the Cluff property was mined out, two decades ago, additional scientific study has opened up new doors. At the 67th Annual Meteoritical Society Meeting, University of Quebec Earth Science professors presented a paper entitled, “A Re-Evaluation of the Size of the Carswell Astrobleme.” The Montreal scientists concluded in the 2004 annual conference held in Brazil, “The Carswell impact structure is therefore older and larger than previously estimated… the central uplift considered to be under the annular dolomitic unit would suggest a crater size in the basement of 118 to 125 kilometers wide.” While some believe the meteor hit about 478 million years ago, recent evidence suggests it may have been closer to 1.8 billion years ago.
Angle Drilling This Time
ESO Uranium plans a six-hole drill program to learn more about their Cluff property. The first hole hopes to confirm what was found earlier, “We’re going to drill right up against the CAR-425 hole drilled originally in the 1970s, which indicated uranium of about 0.85 percent U3O8 over 2.3 meters.” They will drill adjacent to the uranium-mineralized boulders. Ainsworth explained how the company’s strategy is different from previous drilling, “We’re drilling angle holes to give us a better opportunity to find more of the structures that can be carrying mineralization in that sort of system.” In the 1970s, holes were vertically drilled. Harvey added, “We’re going to be stepping out to the southeast, which bring us then closer to the original Cluff mine.” The company plans 150 to 200-meter holes. Ainsworth noted, “The CAR-425 drill hole, which we’re coming up close to, is 146.5 meters deep.”
Robert Beckett, ESO Uranium’s exploration manager, agrees about the 55 degree angle holes the company will be drilling at the Cluff property, “They were drilling vertical holes, and we’d like to go back and check it with an angle hole on the theory, which we interpret as some kind of subvertical system.” Beckett talked about additional drilling to the south, after the property had been explored, revealed “the structure extends from the edge of the basin all the way through Shea Creek.” He added, “We believe it extends onto our property to the north at 11 o’clock, just to the north. We see the extension of those conductors coming up through Shea Creek – conductors and by extension, structures, extending up onto our property. And the structures are the key thing – the destruction of the upper fold and the unconformity in the bedrock, it gives you the right kind of conditions for the deposition of uranium.” Before Beckett joined ESO Uranium, he had been district geologist for Esso Minerals and for the Saskatchewan Mining Development Corporation, which later merged with El Dorado Nuclear to become Cameco Corp. He was the exploration manager at Midwest Lake and the project manager of the Port Radium mine.
The Hook Property
Another property in the ESO Uranium portfolio, which requires additional preparatory geological work and exploratory drilling, is called the Hook property. It’s about ten miles south of the Shea Creek deposit and covers approximately 130,000 acres. The western one-third of the property has been minimally explored. ESO Uranium CEO Jonathan George said about it, “The Hook is one of the areas I’m particularly excited about, now that we’ve received the airborne geophysical survey, is because the conductors have shown up very strongly, coupled with dravite, which is an alteration clay, a key indicator to uranium deposits.” Mr. George believes his company may have a new targeted area. “Cameco is drilling right on the doorstep on another project they have,” he added. Cameco, he pointed out, is drilling just to the south and east of ESO’s southern rim, below the company’s border.
Ainsworth was also optimistic, saying, “That’s part of the reason why that ground was selected earlier – Cameco had that position, and I could see, in the available information that there were structures and good probabilities of other types of systems being available.” George said, “We’re going to be drilling because we see an intense alteration on surface, of which that source has never been found. The alteration coupled with the structure leads us to believe we’ve got a great shot down there.”
“I think we’re much closer to having a hit at Cluff immediately,” Ainsworth insisted. “It is probably a good thing to get some news on the table very early on.” He did warn that there is a lot of risk in drilling for uranium deposits. “The geometry of these things is damn small.” George pointed out that the world’s richest uranium deposit, McArthur River, hosting about 400 million pounds of uranium, had half of its deposit in an area about half the size of a football field. “I think that’s mind boggling,” he said, “that a $7 billion project would be on an area that small.”
Conclusion
Drilling is imminent on the Cluff property, depending upon ice thickness in Saskatchewan. News should be available fairly quickly. Ainsworth warns, “The individual deposits at Cluff are actually quite small.” While quite a bit of work has been done in the Cluff area, many have recognized it’s very easy to miss. But Ainsworth cheerfully exudes, “The key thing here is that the grade is so high that pursuing it further makes it worthwhile.”
Another key to ESO Uranium is the strength of their exploration team. Technical adviser Tony Harvey has numerous credits to his long career. Robert Beckett has spent decades exploring in Saskatchewan and for the precursor company to Cameco, he was the in charge of the northern half of the Athabasca Basin. Benjamin Ainsworth held numerous senior positions with Placer since 1965, having once served as president of Placer Chile.
According to ESO’s Corporate Communications Manager, Tom Corcoran, “We currently raised about C$4.7 million, which has been earmarked for exploration on and in the ground. If we don’t spend it on drilling or exploration work, we have to give the money back.” ESO Uranium planned to start drilling in early February, having had to slightly delay the start of drilling, according to Robert Beckett, until the weather got colder. Drilling is imminent, and results should appear fairly quickly. Ainsworth offered an insight about how soon we will know about drilling results, “One thing about uranium, unlike drilling for gold and other metals, you get a radioactive signal on a drill core as you’re logging it. So you get a pretty good idea if you’ve got something there or not. You’re not going to get a very precise assay at that point, but at least you can focus very quickly. You can see these uranium minerals with a naked eye.”
We’ll be looking forward to seeing those drill results shortly.
An Overview Of The Stock Market
When you are interested in investing in the stock market one of the first things you will need is a reliable and affordable stockbroker. At one point in time, a stockbroker was seen as a very high priced person that was extremely hard to understand. In today’s world, stockbrokers have become much different, they have begun to make their services cheaper to obtain and in such a way that is easier to understand. This is an extremely wonderful change for the simple reason that you will not be able to trade in any way, shape, or form without a stockbroker.
One of the major rules within the stock market is that no person is allowed to trade within the stock market unless they are a certified stockbroker. A stockbroker, within the United Kingdom twelve million investor’s trade in the stock market, performs every trade that occurs and each one has enlisted the services of a stockbroker.
So you are probably now wondering, what exactly can a stockbroker do for me? There is a wide range of abilities and services that any stockbroker can offer you, at the same time there are also various ranges of fees that will be collected from them. Typically, a stockbroker will charge a commission, a set fee, or some combination of the two. In regards to the services a stockbroker can offer you, there are three basic levels that include only execution, portfolio management, and advice.
When a stockbroker only deals with the selling and buying of particular shares, per the instructions you give them, this is generally called execution only or in softer terms dealing only. With this type of service, they do not offer you any type of advice on any action you want perform. Typically, investors that are experienced or novice in investing will use this type of service. Execution only is cheaper and extremely efficient the fees the stockbroker charges can range anywhere between £20 to hundreds of pounds, this will depend on the specific stockbroker you choose.
Portfolio management is extremely detailed and the most expensive type of service performed and dealing with advice is typically a little more expensive than execution only, because the stockbroker will offer advice and views on what is happening within the stock market. The stockbroker at this level of service will also take the time to explain anything you may not understand very well.
Within the portfolio management service, you can separate these into two other categories these are advisory and discretionary. When under the advisory category, the stockbroker will create a proposal of a portfolio for you; however, he or she will not take any action without express permission from you. Within the discretionary category, your stockbroker will completely run all aspects of your portfolio and will give you reports as needs on how the portfolio is working.
One of the major rules within the stock market is that no person is allowed to trade within the stock market unless they are a certified stockbroker. A stockbroker, within the United Kingdom twelve million investor’s trade in the stock market, performs every trade that occurs and each one has enlisted the services of a stockbroker.
So you are probably now wondering, what exactly can a stockbroker do for me? There is a wide range of abilities and services that any stockbroker can offer you, at the same time there are also various ranges of fees that will be collected from them. Typically, a stockbroker will charge a commission, a set fee, or some combination of the two. In regards to the services a stockbroker can offer you, there are three basic levels that include only execution, portfolio management, and advice.
When a stockbroker only deals with the selling and buying of particular shares, per the instructions you give them, this is generally called execution only or in softer terms dealing only. With this type of service, they do not offer you any type of advice on any action you want perform. Typically, investors that are experienced or novice in investing will use this type of service. Execution only is cheaper and extremely efficient the fees the stockbroker charges can range anywhere between £20 to hundreds of pounds, this will depend on the specific stockbroker you choose.
Portfolio management is extremely detailed and the most expensive type of service performed and dealing with advice is typically a little more expensive than execution only, because the stockbroker will offer advice and views on what is happening within the stock market. The stockbroker at this level of service will also take the time to explain anything you may not understand very well.
Within the portfolio management service, you can separate these into two other categories these are advisory and discretionary. When under the advisory category, the stockbroker will create a proposal of a portfolio for you; however, he or she will not take any action without express permission from you. Within the discretionary category, your stockbroker will completely run all aspects of your portfolio and will give you reports as needs on how the portfolio is working.
An Introduction To CFD Trading
Here's a really simple yet useful tutorial on CFD trading that will get you up and running very quickly if you're new to CFD trading.
By the time you finish this article, you'll know how CFDs work, what makes them highly profitable, and understand the costs involved in CFD trading.
CFD stands for Contracts For Difference, which is a derivative product, where you profit from changes in the prices of stocks and shares.
For example, if you buy a CFD on a stock that's $5.00 and the price rises to $5.50, then you profit from that change in price. So if you bought 1000 CFDs, then your profit is $500. That is, the value of the CFDs mirror the underlying stock prices, and you can profit on this movement.
The reasons why CFDs are a very popular trading product, and understandably so, are:
1. CFDs are traded on leverage, and this leverage is typically 10 to 1, with some CFD brokers providing 20 to 1 leverage. This means that a trader with a small float can make decent profits from trading the stock market by using CFDs. For example, you may have a stock trading system that makes a 30% return per annum. On a $5000 float, this is $1500 profit in one year. With CFDs, because of the leverage, the same system can now produce a 300% return, which is $15 000 profit in one year.
2. You can just as easily short sell CFDs as well, and therefore profit from falling markets. This greatly increases the profitability of a trading system because trading opportunities increase dramatically, and the fact that you can profit from both bull and bear markets.
3. The costs in CFD trading are relatively low when compared to stocks. This is especially so, since for a similar and often smaller cost per trade, you can gain 10 or greater times the results from a trade due to the leverage available. The 2 main costs in CFD trading are interest and leverage. We'll come to these in a moment.
4. You can set automatic stop losses. This means that it will take you less time to trade, remove the emotion from exiting a trade when you should, and allow you to exit as the stop is hit, not a day later. You therefore avoid the slippage due to getting out of a trade later than when you intended.
5. You can place all your orders in the evenings. With many CFD providers, you can place orders to enter a position the night before. For people who are working, this is a great advantage as they can do all their trading (place their orders to enter and their stop losses) in the evenings, and not need to be at the computer screen or call their broker during the day. Also, if they have any stop losses that need adjusting, they can do so in the evenings as well. Their trading routine with a mechanical system can be about 10-15 minutes per day.
So these are the advantages of CFDs that have made trading accessible to so many people because they provide large returns for a modest float, and can also be traded once a day as well.
Now, we mentioned that there are 2 main costs in CFD trading. Let's have a closer look now at each of them:
1. Commission. With some CFD providers, there is in fact no commission. This also greatly increases the profitability of your CFD trading systems, as well as the fact that you can benefit hugely from the leverage. With other CFD providers, there may be a commission of say 0.15% of the trade size or $15, whichever is greater, each way. These costs are similar or less than the commission associated with stock trading, especially when you consider that the multiplied profits that the leverage gives you.
2. With CFDs, there's interest charged for long positions that are held overnight. For short positions, the interest is paid to you. The amount of interest charged is usually a reference rate plus approximately 2%, and the interest paid is usually the same reference rate minus approximately 2%. And the reference rate is usually a major bank's overnight interest rate.
For example, the interest rate charged for overnight held long positions may be 7.5% or 0.075 per annum. To calculate how much this is for a trade, we need to make it "pro rata". That is, we'd need to divide the 0.075 by 365, multiply it buy the number of days in trade, then multiply it by the trade size. For example, for a trade size of $10 000, held for 14 days, the interest cost is about $28. Not a huge cost. For a short trade, the interest is paid to you, so will offset the cost rather than contribute to it.
So there you have it.
You now understand the benefits of trading CFDs and why they're a trading instrument that allows people with a modest float to make very decent returns, as well as understand the costs involved with trading CFDs.
To learn more about CFD trading, watch out for part 2 of this article.
By the time you finish this article, you'll know how CFDs work, what makes them highly profitable, and understand the costs involved in CFD trading.
CFD stands for Contracts For Difference, which is a derivative product, where you profit from changes in the prices of stocks and shares.
For example, if you buy a CFD on a stock that's $5.00 and the price rises to $5.50, then you profit from that change in price. So if you bought 1000 CFDs, then your profit is $500. That is, the value of the CFDs mirror the underlying stock prices, and you can profit on this movement.
The reasons why CFDs are a very popular trading product, and understandably so, are:
1. CFDs are traded on leverage, and this leverage is typically 10 to 1, with some CFD brokers providing 20 to 1 leverage. This means that a trader with a small float can make decent profits from trading the stock market by using CFDs. For example, you may have a stock trading system that makes a 30% return per annum. On a $5000 float, this is $1500 profit in one year. With CFDs, because of the leverage, the same system can now produce a 300% return, which is $15 000 profit in one year.
2. You can just as easily short sell CFDs as well, and therefore profit from falling markets. This greatly increases the profitability of a trading system because trading opportunities increase dramatically, and the fact that you can profit from both bull and bear markets.
3. The costs in CFD trading are relatively low when compared to stocks. This is especially so, since for a similar and often smaller cost per trade, you can gain 10 or greater times the results from a trade due to the leverage available. The 2 main costs in CFD trading are interest and leverage. We'll come to these in a moment.
4. You can set automatic stop losses. This means that it will take you less time to trade, remove the emotion from exiting a trade when you should, and allow you to exit as the stop is hit, not a day later. You therefore avoid the slippage due to getting out of a trade later than when you intended.
5. You can place all your orders in the evenings. With many CFD providers, you can place orders to enter a position the night before. For people who are working, this is a great advantage as they can do all their trading (place their orders to enter and their stop losses) in the evenings, and not need to be at the computer screen or call their broker during the day. Also, if they have any stop losses that need adjusting, they can do so in the evenings as well. Their trading routine with a mechanical system can be about 10-15 minutes per day.
So these are the advantages of CFDs that have made trading accessible to so many people because they provide large returns for a modest float, and can also be traded once a day as well.
Now, we mentioned that there are 2 main costs in CFD trading. Let's have a closer look now at each of them:
1. Commission. With some CFD providers, there is in fact no commission. This also greatly increases the profitability of your CFD trading systems, as well as the fact that you can benefit hugely from the leverage. With other CFD providers, there may be a commission of say 0.15% of the trade size or $15, whichever is greater, each way. These costs are similar or less than the commission associated with stock trading, especially when you consider that the multiplied profits that the leverage gives you.
2. With CFDs, there's interest charged for long positions that are held overnight. For short positions, the interest is paid to you. The amount of interest charged is usually a reference rate plus approximately 2%, and the interest paid is usually the same reference rate minus approximately 2%. And the reference rate is usually a major bank's overnight interest rate.
For example, the interest rate charged for overnight held long positions may be 7.5% or 0.075 per annum. To calculate how much this is for a trade, we need to make it "pro rata". That is, we'd need to divide the 0.075 by 365, multiply it buy the number of days in trade, then multiply it by the trade size. For example, for a trade size of $10 000, held for 14 days, the interest cost is about $28. Not a huge cost. For a short trade, the interest is paid to you, so will offset the cost rather than contribute to it.
So there you have it.
You now understand the benefits of trading CFDs and why they're a trading instrument that allows people with a modest float to make very decent returns, as well as understand the costs involved with trading CFDs.
To learn more about CFD trading, watch out for part 2 of this article.
An Inside Look At Cameco’s Smith Ranch Uranium Facility
Cameco Corp (NYSE: CCJ) is the 800-pound gorilla of the uranium sector. Cameco is to uranium what Wal-Mart is to retailing, and what Saudi Aramco is to petroleum. On a percentage basis, Cameco dominates its sector more so than either of the two. Cameco probably has more clout in turning off the electricity now powering your computer than any other company in the world.
This week, the spot price of uranium rose to $40/pound, for the first time since Ronald Reagan was president. That should help grow the uranium business in Wyoming by leaps and bounds. In Part 5, we look at the largest U.S. uranium producer, Cameco-owned Power Resources.
Understanding ‘In Situ Leach’ Uranium Extraction
“It took $284 million Canadian to build, and it operated with 546 people,” said Patrick Drummond, Plant Superintendent for Cameco subsidiary Power Resources’ Smith Ranch facility. He was pointing to Kerr McGee’s Smith Ranch underground mine on the wall across from desk, which was later converted into an ISL operation, first run by Rio Algom. “This operation cost US$44 million to build and 80 people to start.” Drummond was referring to the In Situ Leaching (ISL) uranium extraction facility, known as Smith Ranch. “That should give you the scale of the ISL versus an underground mine,” he explained.
The aging, but sprightly, Drummond knows his uranium. He’s worked in underground mines, open pit mines, and uranium mills since 1980. From 1996 to the present day, he’s worked in Wyoming for Power Resources at the company’s ISL uranium extraction facility. “I started off in the coal mines in Scotland,” boasted Drummond, who claims he can spot a coal miner in a bar, just by looking at the veins in his hands. “I worked up in Elliot Lake and the massive underground mines up there.” Clasping his hands and looking down, he seemed to apologize, “It’s also a massive environmental problem to clean up, a major undertaking. Quirk Lake was one of the bigger mines up there. It cost a lot of money to clean it up.”
The New Face of Wyoming’s Uranium Mining is the ISL uranium extraction method, also known as solution mining. The differences between mining uranium underground and an ISL operation are both minor and vast. Both methods mine uranium beneath the surface. So both methods are underground mining. However, that is where the similarities end. “With underground, you bring up the ore, grate it, crush it, and extract the uranium from the ore,” Drummond explained the basics of underground uranium mining. “That ore becomes waste, which is known as tailings. You then have to service these big tailings and then decommission.”
ISL is the new breed of mining. “With ISL, we don’t do that,” continued Drummond in his day-long lecture to our editorial team during a VIP tour of the Smith Ranch facility. “To mine underground with ISL, you drill the holes where the uranium is and extract the uranium from the underground ore,” he said. “Then, you process that into yellowcake.”
It’s not all wine and roses for Drummond, though. He pines away for his underground mines, “From a mining perspective, it’s not mining so it is not as exciting. Drummond laughs, “ISL is like a water treatment plant. We take water out and remove some ions.” He makes it sound so simple, “We remove the water from the underground and remove the ions, being the uranium ion. Then, we put the water back under the ground.” All of the water goes back into the ground? Actually no. Drummond explained, “We take our water out and we put 99 percent back in. The one percent we call ‘bleed.’ It’s a control function.”
Drummond cites more comparables, “To start an underground mine, it would take a year to do the shaft before you could start mining. Then, there’s the development cost of the mill complex. You have all that outlay of cost before you can get any benefit. It’s expensive to do underground -- $200 million plus – because of the upfront development costs.” From his perspective, the miner in Drummond has come to like solution mining. “ISL is easier. It is a lot cheaper: less expensive capital costs and less operating expenditures. It is less labor intensive.” Asked about the deadly radon emissions, often cited as a danger in underground mining, Drummond shot back, “This is a zero emission facility.”
Analyzing the two methods, he said, “You can start producing faster with an ISL operation. You start your first header house, and you can start producing and make money.” He added, “So you get a return on your investment faster.” What’s the downside? “We also recover less uranium with ISL,” Drummond admitted. “Some of Cameco’s mines in Saskatchewan are running around 5, 10, 15, and 27 percent uranium. In this area, or in an ISL, it runs less than one or two percent. It’s very low.” Plus the uranium ore body must be found below the water table. He added, “You can only do ISL in rock that’s porous and has water in it in the first place.”
To put it in the simplest terms, billions of years ago, the uranium found its way into the underground aquifers of Wyoming’s sandstones. “We add oxygen and get the uranium back into solution,” Drummond remarked. “We complex it with CO2 to keep it in solution, and then bring it to the surface. We extract it with an ion exchange base.” According to Drummond, extracting uranium works on the same principle as a water softener. “We add salts to the resin to get the uranium to back off from the resin. Then, we take that uranium and make it into a final product called yellow cake.”
And why it is called yellowcake? “Some of it is yellow; some of it is green or dark green. Some of it is black,” Drummond patiently explained. “The color is a function of how we dry it, not how we process it. There is a very definite correlation between drying temperatures of yellow cake and color.” It all depends on what chemicals you use while processing uranium. At Smith Ranch, we make uranium peroxide. It is very clean and yellow. We complex uranium with hydrogen peroxide to make our product. You can make different types of yellowcake. You can make a uranium diuranate, a complex made with ammonia.” Yellowcake can be made with other chemicals.
How is Wyoming’s ISL uranium dried? “We dry the uranium with vacuum dryers,” said Drummond. “The benefit of vacuum dryers is first of all, it’s a vacuum so everything is sucked inside the canister so nothing escapes into the environment. There are no gases that escape.”
Investigating the Environmental Issues
It was, at this point, we felt it appropriate to inquire about all the puzzling worries many of us might correlate when thinking about nuclear energy and uranium. How safe is all of this really? “When we first started uranium mining, we inherited people from the gold mines,” Drummond explained. “They were underground, and smoking, breathing in the dust. In the early days, we didn’t have good ventilation. In underground mining, you’ve got to keep the air moving.” Hard rock underground mining produces dust. “The shards of silicone you are breathing stick to the follicles on your lungs,” he noted. But that doesn’t happen during the ISL extraction process. No emissions, a farm of well fields with underground pipes and tubing, and very detailed safeguards explain they the lobby wall of Power Resources is lined with Safety Award certificates and plaques.
“On a daily basis, when we leave the facility, we are scanned for alpha radiation,” continued Drummond. “Depending upon your position here, you get urinalysis once per week or once per month. We also check for radiation levels.” How did Drummond fare on his most recent radiation check? “I was way below,” he laughed. “There are guys on the beach in Malibu that have higher radiations than I have.”
What precautions does Power Resources take to protect the environment during the ISL extraction process? “Since 1996, we have had zero excursions,” Drummond announced with steeliness in his voice. “We take very great pains to look at the topography, so if we do have an excursion, we make sure it does not enter what we call the ‘waters of the state.’ Any channel that could take that and move it into the ‘waters of the state,’ is something that we are very cognizant of.”
After the holes are drilled into the well fields, a company does a ‘baseline sample.’ Drummond said, “That’s a sample of the constituents in the water. When we mobilize the uranium, we mobilize other items. It is our duty here, after we start the well field, to return the aquifer back to baseline when we are done.” He added, “If we know what’s in the water before we start, then we know how to restore it to background.” Restoration of the underground tampering with Mother Nature can take anywhere from 18 to 36 months.
The company is meticulous in restoring the landscape as well. Any restoration work on the surface is called “reclamation.” That can involve farming. “When we start a well field, we have to, by license, remove the topsoil and store it somewhere,” Drummond explained. “When we go back to reclaim the property, we take all the pipes out, we take the houses down, and cut our wells off. It’s all identified. We put an ID marker on the well. In 50 years time, when Farmer Joe comes around and wonders what was there, the state can say, ‘That was a uranium well.’ From the time we’ve stopped mining, we put everything back to normal.”
It takes from two to four months, or up to seven years, to exhaust a well field, depending upon the roll fronts. While it can take up to 24 months to put in a well field, reclamation and restoration take longer. “We put back the topsoil on, depending upon the weather, as soon as we can,” said Drummond. “We re-seed, during the spring or the fall, which is the best time for seeds. The seed we use is dictated by the regulators so we use a certain amount of native vegetation.” Because it’s very dry at the Smith Ranch, nearly bordering on desert, and because it is also very windy, slapping down the topsoil won’t last very long. “First, we plant some fast-growing oats to establish a root bed,” he explained. “If we just planted grasses, it would all blow away. Because we plant the oats, we have fat antelope and fat deer.” From our observations, the sheep were well-fed and frisky.
How does Wyoming ISL mining compare to other places, such as in Texas or in Kazakhstan? “In Wyoming, the water is pristine, very clean, even compared to Texas, where they do ISL,” answered Drummond. “The water’s pretty clean down there also.” Is the uranium the same? “When we bring our uranium to the surface, it comes up as uranyl dicarbonate,” he responded. “In Texas, it comes up as uranyl tricarbonate.” What’s the difference? It’s in the processing of the uranium. “We get about 8.5 pounds of pounds of uranium per cubic foot of resin,” he explained. “In Texas, they get about 3 to 4 pounds of uranium per cubic foot of resin.”
Drummond described the Smith Ranch ion exchange operation, “We have two columns in the ion exchange, each with about 500 cubic feet of resin.” The resin costs about $200/cubic foot and, barring mechanical damage, can last up to thirty years, according to Drummond. The polymer beads – they look like tiny plastic ball bearings – capture the uranium during the processing phase. “In Kazakhstan, you get about two to three pounds of uranium per cubic foot of resin,” he continued. “They use hydrochloric acid because of the water conditions. Of course, you’ve changed the chemistry of the water and have all the acid to clean up.” Drummond described the water in Kazakhstan as very brackish, and yellowish. “The TDS (total dissolved solids) is very high,” he added. “The water’s not fit for human consumption anyways.” He laughed, “Using acid over there cleans their water up.”
This week, the spot price of uranium rose to $40/pound, for the first time since Ronald Reagan was president. That should help grow the uranium business in Wyoming by leaps and bounds. In Part 5, we look at the largest U.S. uranium producer, Cameco-owned Power Resources.
Understanding ‘In Situ Leach’ Uranium Extraction
“It took $284 million Canadian to build, and it operated with 546 people,” said Patrick Drummond, Plant Superintendent for Cameco subsidiary Power Resources’ Smith Ranch facility. He was pointing to Kerr McGee’s Smith Ranch underground mine on the wall across from desk, which was later converted into an ISL operation, first run by Rio Algom. “This operation cost US$44 million to build and 80 people to start.” Drummond was referring to the In Situ Leaching (ISL) uranium extraction facility, known as Smith Ranch. “That should give you the scale of the ISL versus an underground mine,” he explained.
The aging, but sprightly, Drummond knows his uranium. He’s worked in underground mines, open pit mines, and uranium mills since 1980. From 1996 to the present day, he’s worked in Wyoming for Power Resources at the company’s ISL uranium extraction facility. “I started off in the coal mines in Scotland,” boasted Drummond, who claims he can spot a coal miner in a bar, just by looking at the veins in his hands. “I worked up in Elliot Lake and the massive underground mines up there.” Clasping his hands and looking down, he seemed to apologize, “It’s also a massive environmental problem to clean up, a major undertaking. Quirk Lake was one of the bigger mines up there. It cost a lot of money to clean it up.”
The New Face of Wyoming’s Uranium Mining is the ISL uranium extraction method, also known as solution mining. The differences between mining uranium underground and an ISL operation are both minor and vast. Both methods mine uranium beneath the surface. So both methods are underground mining. However, that is where the similarities end. “With underground, you bring up the ore, grate it, crush it, and extract the uranium from the ore,” Drummond explained the basics of underground uranium mining. “That ore becomes waste, which is known as tailings. You then have to service these big tailings and then decommission.”
ISL is the new breed of mining. “With ISL, we don’t do that,” continued Drummond in his day-long lecture to our editorial team during a VIP tour of the Smith Ranch facility. “To mine underground with ISL, you drill the holes where the uranium is and extract the uranium from the underground ore,” he said. “Then, you process that into yellowcake.”
It’s not all wine and roses for Drummond, though. He pines away for his underground mines, “From a mining perspective, it’s not mining so it is not as exciting. Drummond laughs, “ISL is like a water treatment plant. We take water out and remove some ions.” He makes it sound so simple, “We remove the water from the underground and remove the ions, being the uranium ion. Then, we put the water back under the ground.” All of the water goes back into the ground? Actually no. Drummond explained, “We take our water out and we put 99 percent back in. The one percent we call ‘bleed.’ It’s a control function.”
Drummond cites more comparables, “To start an underground mine, it would take a year to do the shaft before you could start mining. Then, there’s the development cost of the mill complex. You have all that outlay of cost before you can get any benefit. It’s expensive to do underground -- $200 million plus – because of the upfront development costs.” From his perspective, the miner in Drummond has come to like solution mining. “ISL is easier. It is a lot cheaper: less expensive capital costs and less operating expenditures. It is less labor intensive.” Asked about the deadly radon emissions, often cited as a danger in underground mining, Drummond shot back, “This is a zero emission facility.”
Analyzing the two methods, he said, “You can start producing faster with an ISL operation. You start your first header house, and you can start producing and make money.” He added, “So you get a return on your investment faster.” What’s the downside? “We also recover less uranium with ISL,” Drummond admitted. “Some of Cameco’s mines in Saskatchewan are running around 5, 10, 15, and 27 percent uranium. In this area, or in an ISL, it runs less than one or two percent. It’s very low.” Plus the uranium ore body must be found below the water table. He added, “You can only do ISL in rock that’s porous and has water in it in the first place.”
To put it in the simplest terms, billions of years ago, the uranium found its way into the underground aquifers of Wyoming’s sandstones. “We add oxygen and get the uranium back into solution,” Drummond remarked. “We complex it with CO2 to keep it in solution, and then bring it to the surface. We extract it with an ion exchange base.” According to Drummond, extracting uranium works on the same principle as a water softener. “We add salts to the resin to get the uranium to back off from the resin. Then, we take that uranium and make it into a final product called yellow cake.”
And why it is called yellowcake? “Some of it is yellow; some of it is green or dark green. Some of it is black,” Drummond patiently explained. “The color is a function of how we dry it, not how we process it. There is a very definite correlation between drying temperatures of yellow cake and color.” It all depends on what chemicals you use while processing uranium. At Smith Ranch, we make uranium peroxide. It is very clean and yellow. We complex uranium with hydrogen peroxide to make our product. You can make different types of yellowcake. You can make a uranium diuranate, a complex made with ammonia.” Yellowcake can be made with other chemicals.
How is Wyoming’s ISL uranium dried? “We dry the uranium with vacuum dryers,” said Drummond. “The benefit of vacuum dryers is first of all, it’s a vacuum so everything is sucked inside the canister so nothing escapes into the environment. There are no gases that escape.”
Investigating the Environmental Issues
It was, at this point, we felt it appropriate to inquire about all the puzzling worries many of us might correlate when thinking about nuclear energy and uranium. How safe is all of this really? “When we first started uranium mining, we inherited people from the gold mines,” Drummond explained. “They were underground, and smoking, breathing in the dust. In the early days, we didn’t have good ventilation. In underground mining, you’ve got to keep the air moving.” Hard rock underground mining produces dust. “The shards of silicone you are breathing stick to the follicles on your lungs,” he noted. But that doesn’t happen during the ISL extraction process. No emissions, a farm of well fields with underground pipes and tubing, and very detailed safeguards explain they the lobby wall of Power Resources is lined with Safety Award certificates and plaques.
“On a daily basis, when we leave the facility, we are scanned for alpha radiation,” continued Drummond. “Depending upon your position here, you get urinalysis once per week or once per month. We also check for radiation levels.” How did Drummond fare on his most recent radiation check? “I was way below,” he laughed. “There are guys on the beach in Malibu that have higher radiations than I have.”
What precautions does Power Resources take to protect the environment during the ISL extraction process? “Since 1996, we have had zero excursions,” Drummond announced with steeliness in his voice. “We take very great pains to look at the topography, so if we do have an excursion, we make sure it does not enter what we call the ‘waters of the state.’ Any channel that could take that and move it into the ‘waters of the state,’ is something that we are very cognizant of.”
After the holes are drilled into the well fields, a company does a ‘baseline sample.’ Drummond said, “That’s a sample of the constituents in the water. When we mobilize the uranium, we mobilize other items. It is our duty here, after we start the well field, to return the aquifer back to baseline when we are done.” He added, “If we know what’s in the water before we start, then we know how to restore it to background.” Restoration of the underground tampering with Mother Nature can take anywhere from 18 to 36 months.
The company is meticulous in restoring the landscape as well. Any restoration work on the surface is called “reclamation.” That can involve farming. “When we start a well field, we have to, by license, remove the topsoil and store it somewhere,” Drummond explained. “When we go back to reclaim the property, we take all the pipes out, we take the houses down, and cut our wells off. It’s all identified. We put an ID marker on the well. In 50 years time, when Farmer Joe comes around and wonders what was there, the state can say, ‘That was a uranium well.’ From the time we’ve stopped mining, we put everything back to normal.”
It takes from two to four months, or up to seven years, to exhaust a well field, depending upon the roll fronts. While it can take up to 24 months to put in a well field, reclamation and restoration take longer. “We put back the topsoil on, depending upon the weather, as soon as we can,” said Drummond. “We re-seed, during the spring or the fall, which is the best time for seeds. The seed we use is dictated by the regulators so we use a certain amount of native vegetation.” Because it’s very dry at the Smith Ranch, nearly bordering on desert, and because it is also very windy, slapping down the topsoil won’t last very long. “First, we plant some fast-growing oats to establish a root bed,” he explained. “If we just planted grasses, it would all blow away. Because we plant the oats, we have fat antelope and fat deer.” From our observations, the sheep were well-fed and frisky.
How does Wyoming ISL mining compare to other places, such as in Texas or in Kazakhstan? “In Wyoming, the water is pristine, very clean, even compared to Texas, where they do ISL,” answered Drummond. “The water’s pretty clean down there also.” Is the uranium the same? “When we bring our uranium to the surface, it comes up as uranyl dicarbonate,” he responded. “In Texas, it comes up as uranyl tricarbonate.” What’s the difference? It’s in the processing of the uranium. “We get about 8.5 pounds of pounds of uranium per cubic foot of resin,” he explained. “In Texas, they get about 3 to 4 pounds of uranium per cubic foot of resin.”
Drummond described the Smith Ranch ion exchange operation, “We have two columns in the ion exchange, each with about 500 cubic feet of resin.” The resin costs about $200/cubic foot and, barring mechanical damage, can last up to thirty years, according to Drummond. The polymer beads – they look like tiny plastic ball bearings – capture the uranium during the processing phase. “In Kazakhstan, you get about two to three pounds of uranium per cubic foot of resin,” he continued. “They use hydrochloric acid because of the water conditions. Of course, you’ve changed the chemistry of the water and have all the acid to clean up.” Drummond described the water in Kazakhstan as very brackish, and yellowish. “The TDS (total dissolved solids) is very high,” he added. “The water’s not fit for human consumption anyways.” He laughed, “Using acid over there cleans their water up.”
Against The Top Down Approach To Picking Stocks
If you have heard fund managers talk about the way they invest, you know a great many employ a top down approach. First, they decide how much of their portfolio to allocate to stocks and how much to allocate to bonds. At this point, they may also decide upon the relative mix of foreign and domestic securities. Next, they decide upon the industries to invest in. It is not until all these decisions have been made that they actually get down to analyzing any particular securities. If you think logically about this approach for but a moment, you will recognize how truly foolish it is.
A stock’s earnings yield is the inverse of its P/E ratio. So, a stock with a P/E ratio of 25 has an earnings yield of 4%, while a stock with a P/E ratio of 8 has an earnings yield of 12.5%. In this way, a low P/E stock is comparable to a high – yield bond.
Now, if these low P/E stocks had very unstable earnings or carried a great deal of debt, the spread between the long bond yield and the earnings yield of these stocks might be justified. However, many low P/E stocks actually have more stable earnings than their high multiple kin. Some do employ a great deal of debt. Still, within recent memory, one could find a stock with an earnings yield of 8 – 12%, a dividend yield of 3- 5%, and literally no debt, despite some of the lowest bond yields in half a century. This situation could only come about if investors shopped for their bonds without also considering stocks. This makes about as much sense as shopping for a van without also considering a car or truck.
All investments are ultimately cash to cash operations. As such, they should be judged by a single measure: the discounted value of their future cash flows. For this reason, a top down approach to investing is nonsensical. Starting your search by first deciding upon the form of security or the industry is like a general manager deciding upon a left handed or right handed pitcher before evaluating each individual player. In both cases, the choice is not merely hasty; it’s false. Even if pitching left handed is inherently more effective, the general manager is not comparing apples and oranges; he’s comparing pitchers. Whatever inherent advantage or disadvantage exists in a pitcher’s handedness can be reduced to an ultimate value (e.g., run value). For this reason, a pitcher’s handedness is merely one factor (among many) to be considered, not a binding choice to be made. The same is true of the form of security. It is neither more necessary nor more logical for an investor to prefer all bonds over all stocks (or all retailers over all banks) than it is for a general manager to prefer all lefties over all righties. You needn’t determine whether stocks or bonds are attractive; you need only determine whether a particular stock or bond is attractive. Likewise, you needn’t determine whether “the market” is undervalued or overvalued; you need only determine that a particular stock is undervalued. If you’re convinced it is, buy it – the market be damned!
Clearly, the most prudent approach to investing is to evaluate each individual security in relation to all others, and only to consider the form of security insofar as it affects each individual evaluation. A top down approach to investing is an unnecessary hindrance. Some very smart investors have imposed it upon themselves and overcome it; but, there is no need for you to do the same.
A stock’s earnings yield is the inverse of its P/E ratio. So, a stock with a P/E ratio of 25 has an earnings yield of 4%, while a stock with a P/E ratio of 8 has an earnings yield of 12.5%. In this way, a low P/E stock is comparable to a high – yield bond.
Now, if these low P/E stocks had very unstable earnings or carried a great deal of debt, the spread between the long bond yield and the earnings yield of these stocks might be justified. However, many low P/E stocks actually have more stable earnings than their high multiple kin. Some do employ a great deal of debt. Still, within recent memory, one could find a stock with an earnings yield of 8 – 12%, a dividend yield of 3- 5%, and literally no debt, despite some of the lowest bond yields in half a century. This situation could only come about if investors shopped for their bonds without also considering stocks. This makes about as much sense as shopping for a van without also considering a car or truck.
All investments are ultimately cash to cash operations. As such, they should be judged by a single measure: the discounted value of their future cash flows. For this reason, a top down approach to investing is nonsensical. Starting your search by first deciding upon the form of security or the industry is like a general manager deciding upon a left handed or right handed pitcher before evaluating each individual player. In both cases, the choice is not merely hasty; it’s false. Even if pitching left handed is inherently more effective, the general manager is not comparing apples and oranges; he’s comparing pitchers. Whatever inherent advantage or disadvantage exists in a pitcher’s handedness can be reduced to an ultimate value (e.g., run value). For this reason, a pitcher’s handedness is merely one factor (among many) to be considered, not a binding choice to be made. The same is true of the form of security. It is neither more necessary nor more logical for an investor to prefer all bonds over all stocks (or all retailers over all banks) than it is for a general manager to prefer all lefties over all righties. You needn’t determine whether stocks or bonds are attractive; you need only determine whether a particular stock or bond is attractive. Likewise, you needn’t determine whether “the market” is undervalued or overvalued; you need only determine that a particular stock is undervalued. If you’re convinced it is, buy it – the market be damned!
Clearly, the most prudent approach to investing is to evaluate each individual security in relation to all others, and only to consider the form of security insofar as it affects each individual evaluation. A top down approach to investing is an unnecessary hindrance. Some very smart investors have imposed it upon themselves and overcome it; but, there is no need for you to do the same.
An Industry Blueprint To Stocks And Shares
In this day and age, a lot of things have changed from how they used to be, which can be new and exciting for most.
Because of the large size of the stock market, beginner investors appear to feel overwhelmed as to where to even activate investing their money. To most people, the stock market presents a messy web of options but does not reveal the highway map of clarity to guide their way along way in their investment adventure. The key to investing in the stock market is to become as educated as it is possible so that you know exactly what is taking place at all times. This helps people to make plausible and sound decisions about their money, thus, dropping the stress involved with investing.
The usual person, when beginning to entertain the idea of investing in the stock market, falls into one of two categories. Class one is the gambler who feels that investing is definitely a form of betting and no question what they do, they are certain that they will drop money slightly than make money. It seems that this opinion of investing in stocks is either formed from friends and family that have been baffled by the stock market or private experience and lost money. If someone has personally made losses in the stock market, it is pretty evident that they were not educated enough at the time of their investment in the stock market. Therefore, they must become educated as to what exactly the stock market is as well as how its system works in order to become a successful investor. Class two, on the other hand, represents the “go-getter” investor, which is an individual who knows that they should invest into the stock market for the safety of their monetary future, but they have absolutely no idea where to begin. The “go-getters” lean towards avoiding their monetary decisions and leave it up to professionals; therefore, they are powerless to justify why they own a certain stock. A usual “go-getter” operates in blind faith, as one stock goes up in value, they more than likely will hold it. The “go-getter” is in poorer shape than the gambler in that they will invest like everyone else and then wonder why they receive an unsatisfactory or devastating outcome. This just proves that the typical person should become thoroughly educated about the stock market as well as stocks before investment takes place.
Essential to every economy is business...businesses that started out as small operations that have grown to become money making giants, raising capital by promoting stock in them to people who want to invest to make their futures financially secure. As small businesses start to grow, one of the supreme obstacles is generating enough money in order to develop into a superior operation. Businesses either scrounge the money in the form of a offer from a bank or venture capitalist, or someone that will invest money into a business in which they feel they will receive a high rate of return, or a reap from their investment into a business, in order to create the currency to expand. The most common choice for a business to gain money for the view of expansion is to take out a loan; however, there is no agreement that a bank will offer money to any given business.
What we have explored up to now is the most important information you need to know. Now, let’s dig a little deeper.
In this case, business owners roam to the stock market for help in the form of issuing stocks. Firm owners relinquish a tiny fraction of control over their business and in reciprocation; the stock market provides that business money that does not have to be salaried back, in order to guarantee expansion. As an added bonus, the business is permitted to “go public,” a saying that means a brand is selling stocks for itself for the first time, so that business owners no longer are required to borrow money from banks because they can merely use their own stocks for getting monies to use for expansion. Thus, as the business grows and sells their stocks to people, the better chance a sponsor has on gaining a return on their investment as opposed to a loss.
As an investor, it is to your advantage to efficiently study each and every business in which you propose to hold stocks. The more facts you know about any certain business, the easier it is to make a plausible decision as to whether you should hold stocks or want a different business in which to work with.
Try searching for a particular keyword from the title of this article on your search engine and you are sure to find a wealth of knowledge.
Because of the large size of the stock market, beginner investors appear to feel overwhelmed as to where to even activate investing their money. To most people, the stock market presents a messy web of options but does not reveal the highway map of clarity to guide their way along way in their investment adventure. The key to investing in the stock market is to become as educated as it is possible so that you know exactly what is taking place at all times. This helps people to make plausible and sound decisions about their money, thus, dropping the stress involved with investing.
The usual person, when beginning to entertain the idea of investing in the stock market, falls into one of two categories. Class one is the gambler who feels that investing is definitely a form of betting and no question what they do, they are certain that they will drop money slightly than make money. It seems that this opinion of investing in stocks is either formed from friends and family that have been baffled by the stock market or private experience and lost money. If someone has personally made losses in the stock market, it is pretty evident that they were not educated enough at the time of their investment in the stock market. Therefore, they must become educated as to what exactly the stock market is as well as how its system works in order to become a successful investor. Class two, on the other hand, represents the “go-getter” investor, which is an individual who knows that they should invest into the stock market for the safety of their monetary future, but they have absolutely no idea where to begin. The “go-getters” lean towards avoiding their monetary decisions and leave it up to professionals; therefore, they are powerless to justify why they own a certain stock. A usual “go-getter” operates in blind faith, as one stock goes up in value, they more than likely will hold it. The “go-getter” is in poorer shape than the gambler in that they will invest like everyone else and then wonder why they receive an unsatisfactory or devastating outcome. This just proves that the typical person should become thoroughly educated about the stock market as well as stocks before investment takes place.
Essential to every economy is business...businesses that started out as small operations that have grown to become money making giants, raising capital by promoting stock in them to people who want to invest to make their futures financially secure. As small businesses start to grow, one of the supreme obstacles is generating enough money in order to develop into a superior operation. Businesses either scrounge the money in the form of a offer from a bank or venture capitalist, or someone that will invest money into a business in which they feel they will receive a high rate of return, or a reap from their investment into a business, in order to create the currency to expand. The most common choice for a business to gain money for the view of expansion is to take out a loan; however, there is no agreement that a bank will offer money to any given business.
What we have explored up to now is the most important information you need to know. Now, let’s dig a little deeper.
In this case, business owners roam to the stock market for help in the form of issuing stocks. Firm owners relinquish a tiny fraction of control over their business and in reciprocation; the stock market provides that business money that does not have to be salaried back, in order to guarantee expansion. As an added bonus, the business is permitted to “go public,” a saying that means a brand is selling stocks for itself for the first time, so that business owners no longer are required to borrow money from banks because they can merely use their own stocks for getting monies to use for expansion. Thus, as the business grows and sells their stocks to people, the better chance a sponsor has on gaining a return on their investment as opposed to a loss.
As an investor, it is to your advantage to efficiently study each and every business in which you propose to hold stocks. The more facts you know about any certain business, the easier it is to make a plausible decision as to whether you should hold stocks or want a different business in which to work with.
Try searching for a particular keyword from the title of this article on your search engine and you are sure to find a wealth of knowledge.
An Analysis Of stock market
Why is a value investor writing about an unprofitable internet company? Because value investing is about finding dollars that trade for fifty cents; with a market cap of less than 75% of sales, Overstock (OSTK) looks like it may be exactly that.
But isn’t it too risky?
The greatest risk in any investment is the risk of overpaying. So, the real question is: what is Overstock worth? I think it’s worth at least $1.5 billion. With Overstock’s market cap currently sitting around $500 million, my valuation certainly looks far fetched. But, there’s only one way to know for sure. Let’s take apart my argument piece by piece, and see if any of my assumptions are unreasonable.
First Assumption: Over the next five years, Overstock will neither generate truly free cash flow nor consume cash. In other words, its free cash flow margin will average 0%. Cash generation in some years will exactly offset cash consumption in other years. Obviously, this assumption is unreasonable, because there is almost no chance the cash flows will exactly offset.
That’s not a problem if it turns out Overstock does generate some free cash flow over the next five years. In that case, my assumption simply errs on the side of caution. If, however, it turns out Overstock actually consumes cash over the next five years, there is a problem – possibly a very big problem. So, which scenario is more likely?
Overstock’s revenues are growing quickly. Gross margins look solid at 13.3% in 2004 and 14.9% over the last twelve months. Overstock’s unprofitability is the result of its selling, general, and administrative expenses (SG&A) which have been growing exponentially. Will these expenses continue to grow? Yes, but not as fast as revenues. Over the last twelve months, Overstock’s spending on cap ex has been 5.6% of sales. That number is an aberration. In the long run, spending on cap ex should not exceed 3% of sales. Considering the business Overstock is in and the expected sales growth, the company will, more likely than not, generate some free cash flow over the next five years. Therefore, the assumption that Overstock will be cash flow neutral over the next five years is not overly optimistic.
Second Assumption: Over the next five years, Overstock’s sales will grow by 15% annually. Is this an unreasonable assumption? Again, I don’t think it is. Very few industries are expected to grow as fast as eCommerce. Overstock’s revenue growth in 2003 and 2004 was over 100%. In the past year, that growth has slowed. However, it is still closer to 50% than it is to 15%. Overstock isn’t in a cyclical business. So, there is no reason to believe current sales are abnormally high.
Also, all that spending on advertising is increasing consumers’ awareness of Overstock. A review of Overstock’s traffic data shows it has not only been gaining more visitors; it has also been climbing the ranks of the most popular web sites. While it is a long, long way from the Amazons, Yahoos, and eBays of the world (and will never reach those heights) Overstock is becoming a well known internet destination. This fact was most clearly evident in the weeks leading up to Christmas. Shoppers who visited Overstock during the holiday season obviously know it exists, and may very well return at some other point in the year. Analysts are predicting very high growth rates for Overstock; however, they are also recommending you sell the stock. I don’t put any weight in their estimates. But, for the other reasons given, I believe the assumption that Overstock will grow sales at 15% a year for the next five years is not unreasonable.
Third Assumption: Six to ten years from today, Overstock will have a free cash flow margin of 3%. Ten years from today, Overstock’s free cash flow margin will rise to 4% and remain at that level. Now, of all the assumptions I’ve made, this one is the most questionable. Sure, Amazon has that kind of free cash flow margin, but Overstock isn’t Amazon, and it never will be Amazon. Overstock’s gross margins are less than Amazon’s. In fact, Overstock’s gross margins are less than Wal – Mart’s. However, Overstock’s fixed costs will eat up a much smaller portion of its sales than is the case over at Wal - Mart.
If you compare Overstock to other online retailers, you will see that if Overstock does experience strong sales growth, a 3% free cash flow margin six years from now is not unreasonable. I assumed Overstock’s sustainable free cash flow margin will be 4%. There’s a case to be made that 4% is too high. I won’t make that case, because I don’t believe in it. Remember, that 4% number comes ten years out. That gives Overstock plenty of time to grow sales and thus reduce SG&A as a percentage of sales.
Fourth Assumption: Six to ten years from today, Overstock will be growing sales by 12% a year; eleven to fifteen years from today, Overstock will be growing sales by 8% a year; thereafter, Overstock will grow sales by 4% a year. Let’s see what this really means. According to these assumptions, Overstock’s sales will be as follows:
Today: $707 million
2011: $1.59 billion
2016: $2.71 billion
2021: $3.83 billion
2026: $4.66 billion
2031: $5.67 billion
2036: $6.90 billion
Seven billion dollars is not an unreasonable target – if you have thirty years to achieve it. To put that figure in perspective, Amazon.com currently has sales of about $8 billion. So, even after thirty years, these assumptions don’t lead to Overstock reaching the same size as today’s Amazon. Don’t forget these numbers assume some inflation. For instance, if inflation averages 3% a year over the next thirty years, Overstock’s projected $6.90 billion in sales only translates to $2.84 billion in today’s dollars. So, these assumptions only lead to a fourfold increase in Overstock’s real sales over a period of thirty years. I think that’s pretty reasonable.
If you take these four assumptions together, you get a value of $1.5 billion for Overstock. Today, Mr. Market is offering it for $500 million – that’s why I’m writing about an unprofitable internet company.
But isn’t it too risky?
The greatest risk in any investment is the risk of overpaying. So, the real question is: what is Overstock worth? I think it’s worth at least $1.5 billion. With Overstock’s market cap currently sitting around $500 million, my valuation certainly looks far fetched. But, there’s only one way to know for sure. Let’s take apart my argument piece by piece, and see if any of my assumptions are unreasonable.
First Assumption: Over the next five years, Overstock will neither generate truly free cash flow nor consume cash. In other words, its free cash flow margin will average 0%. Cash generation in some years will exactly offset cash consumption in other years. Obviously, this assumption is unreasonable, because there is almost no chance the cash flows will exactly offset.
That’s not a problem if it turns out Overstock does generate some free cash flow over the next five years. In that case, my assumption simply errs on the side of caution. If, however, it turns out Overstock actually consumes cash over the next five years, there is a problem – possibly a very big problem. So, which scenario is more likely?
Overstock’s revenues are growing quickly. Gross margins look solid at 13.3% in 2004 and 14.9% over the last twelve months. Overstock’s unprofitability is the result of its selling, general, and administrative expenses (SG&A) which have been growing exponentially. Will these expenses continue to grow? Yes, but not as fast as revenues. Over the last twelve months, Overstock’s spending on cap ex has been 5.6% of sales. That number is an aberration. In the long run, spending on cap ex should not exceed 3% of sales. Considering the business Overstock is in and the expected sales growth, the company will, more likely than not, generate some free cash flow over the next five years. Therefore, the assumption that Overstock will be cash flow neutral over the next five years is not overly optimistic.
Second Assumption: Over the next five years, Overstock’s sales will grow by 15% annually. Is this an unreasonable assumption? Again, I don’t think it is. Very few industries are expected to grow as fast as eCommerce. Overstock’s revenue growth in 2003 and 2004 was over 100%. In the past year, that growth has slowed. However, it is still closer to 50% than it is to 15%. Overstock isn’t in a cyclical business. So, there is no reason to believe current sales are abnormally high.
Also, all that spending on advertising is increasing consumers’ awareness of Overstock. A review of Overstock’s traffic data shows it has not only been gaining more visitors; it has also been climbing the ranks of the most popular web sites. While it is a long, long way from the Amazons, Yahoos, and eBays of the world (and will never reach those heights) Overstock is becoming a well known internet destination. This fact was most clearly evident in the weeks leading up to Christmas. Shoppers who visited Overstock during the holiday season obviously know it exists, and may very well return at some other point in the year. Analysts are predicting very high growth rates for Overstock; however, they are also recommending you sell the stock. I don’t put any weight in their estimates. But, for the other reasons given, I believe the assumption that Overstock will grow sales at 15% a year for the next five years is not unreasonable.
Third Assumption: Six to ten years from today, Overstock will have a free cash flow margin of 3%. Ten years from today, Overstock’s free cash flow margin will rise to 4% and remain at that level. Now, of all the assumptions I’ve made, this one is the most questionable. Sure, Amazon has that kind of free cash flow margin, but Overstock isn’t Amazon, and it never will be Amazon. Overstock’s gross margins are less than Amazon’s. In fact, Overstock’s gross margins are less than Wal – Mart’s. However, Overstock’s fixed costs will eat up a much smaller portion of its sales than is the case over at Wal - Mart.
If you compare Overstock to other online retailers, you will see that if Overstock does experience strong sales growth, a 3% free cash flow margin six years from now is not unreasonable. I assumed Overstock’s sustainable free cash flow margin will be 4%. There’s a case to be made that 4% is too high. I won’t make that case, because I don’t believe in it. Remember, that 4% number comes ten years out. That gives Overstock plenty of time to grow sales and thus reduce SG&A as a percentage of sales.
Fourth Assumption: Six to ten years from today, Overstock will be growing sales by 12% a year; eleven to fifteen years from today, Overstock will be growing sales by 8% a year; thereafter, Overstock will grow sales by 4% a year. Let’s see what this really means. According to these assumptions, Overstock’s sales will be as follows:
Today: $707 million
2011: $1.59 billion
2016: $2.71 billion
2021: $3.83 billion
2026: $4.66 billion
2031: $5.67 billion
2036: $6.90 billion
Seven billion dollars is not an unreasonable target – if you have thirty years to achieve it. To put that figure in perspective, Amazon.com currently has sales of about $8 billion. So, even after thirty years, these assumptions don’t lead to Overstock reaching the same size as today’s Amazon. Don’t forget these numbers assume some inflation. For instance, if inflation averages 3% a year over the next thirty years, Overstock’s projected $6.90 billion in sales only translates to $2.84 billion in today’s dollars. So, these assumptions only lead to a fourfold increase in Overstock’s real sales over a period of thirty years. I think that’s pretty reasonable.
If you take these four assumptions together, you get a value of $1.5 billion for Overstock. Today, Mr. Market is offering it for $500 million – that’s why I’m writing about an unprofitable internet company.