Western Uranium WURNF
January 20, 2008 - 7:34pm EST by
kiss534
2008 2009
Price: 1.90 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 124 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

   Lithium breakthrough that allows laptops to run 20 hours and electric cars to travel 1000 miles adds to Western Uranium and its imminent spinoff  of giant lithium reserves; add size uranium reserves, package it with capital and Cameco, and you have one “special” situation.

 

   Uranium prices in 2000 averaged $7 and in December 2007 is trading around $93. Fans of the silvery metal are cheering while some old timers say there is no way for it to remain at this level. These same critics state that as new mines come online and more product reaches market, the influx will flood the system and punish prices.  Stories  abound about prospective gluts of uranium based on possible new mines opening. The fear of depressed prices is and will be just talk for the foreseeable future. We have seen just the reverse of the above scenario. Mines such as Cigar Lake in Canada flooded with water and delayed for over two years- this mine alone was expected to add 11% to the world supply of uranium. Environmental problems where locals are refuse to issue permits to drill. Native Americans who because of prior incidents have fought vociferously to stop any uranium mining. And raw materials shortages of sulphuric acid and water also delaying mine development.  With a slew of new nuclear plants confirmed for construction, the increasing demand for uranium is absolute and with the current limited supply of the metal, new inventory is desperately needed.

 

   China and India are in the midst of an unprecedented growth. Their energy usage is stretched to the limit and both have begun the process of adding more nuclear plants. China added in 2006 alone 100 gigawatts of capacity, which equals France’s total current usage,. has placed orders for three plants and has five more on the drawing board. This will double their capacity yet would still amount to only around 4% of that country’s demand. With their power demand growing about 15% per year, China has had no choice but to build one new coal fired plant per week until new sources such as nuclear are up and running. India is beginning work on eight new nuclear plants. India will need over 60,000 tonnes of uranium over 60 years just for the new plants. This will double what India currently needs yearly. In the interim, they have actually been turning off their plants several hours a day due to uranium shortages.

 

    Unexpected countries are also beginning the exploration of nuclear power as a replacement energy for oil. Egypt, Algeria, Libya, Senegal, Uganda, Nigeria , Jordan, Saudi Arabia, Arab Emirates, Brazil, Bulgaria and Mexico have all expressed interest and begun studies into opening plants within the next decade. Of course, this is addition to some of the current nuclear players such as France, Japan, Russia, China, United States, India etc. All these current and potential markets for uranium underline the need for new supplies.

 

   Knowing that the need is there is important, but the ability to actually search out and mine the mineral both economically and efficiently is even more crucial.

 

  About 30% of all new project ideas will not make it to the feasibility study and a bit less than 20% make it past that. When economics, accessibility, management and other decisions are included the number of mines that actually make it from idea to financing is between 5-10%. As such, it is imperative to find investment opportunities that offer the best chance for survival and eventual success. It should include solid management, good location with rich reserves, a feasible timetable to bring it to market, and enough cash in the bank to make it happen.

 

   Western Uranium (WURNF-US, WUC-CA)  is poised to become a leader in a land of many juniors. WUC easily stands out as a undervalued gem when looking at the three most important ingredients for valuation- product, cash, and management. Western Uranium has properties in Nevada, New Mexico and the Thelon Basin in Canada. The most exciting of these properties are in the Kings Valley area of Nevada which were previously discovered and worked by Chevron and Anaconda. WUC is currently evaluating their three sites - Kings Valley North, Kings Valley South, & Moonlight.  The potential for this area is so great and valued,  that giant miner Cameco signed a partnership agreement with WUC last year. This is only the third time in Cameco’s history that they have bought stock in a junior miner having purchased 10% of the company at $3.80 last summer. Cameco views the geology in this area as similar to a Russian project containing 600 million pounds of U308 spread of twenty deposits.

 

       Virgin Valley, Nevada also offers good prospects for additional discoveries. Originally prospected by Exxon, it holds historical reserves of 13 million pounds of uranium and several attractive prospects.

 

      Treeline, New Mexico explored by Conoco contains 2 million historical pounds of U308

with further exploration ongoing to expand the reserves.

 

       Also exciting is land in the Thelon Basin in Canada which is geologically similar to the Athabasca Basin- one of the most prolific uranium areas in the world producing over 30% of the world’s uranium requirements from high grade deposits- and is near the 130 million pound Kiggavik deposit.

 

      Total historical resources place estimates at around 31 million pounds of U308, which at current prices would have an insitu value of $2.79 billion or valuing the in ground reserves at $5 per pound results in a $155 million estimate.

 

 

     Recent financials indicate about  $50 million in the bank enough to fund operations for  the next few years. Western has approximately 65 million shares outstanding with little debt.

 

    The company has an in depth management team with over 100 years of mining experience and  is headed by Pam Klessig. A geologist by training, she has over 27 years in the business with companies including Homestake & Ivanhoe Mining.     

 

    Now for the gravy. Along with the uranium at the Kings Valley project is a sizeable quantity of lithium. Let me rephrase, a huge quantity of lithium- about 25 billion pounds. You read it right, 25 billion of pounds. To put that into perspective, estimates indicate that the current world supply of lithium is 100 billion pounds. If correct, WUC is sitting on about one-quarter of the worlds’ possible inventory of the metal.

 

   The market for lithium is a growing one as more products are designed to carry lithium based power sources. Lithium’s benefits are easily understood. It is the lightest metal known and can pack respectable power in an extremely light package. It is also “green” having the ability to be recharged numerous times. The market, however, has grown slowly  because of its cost to power ratio. Existing  technology, such as nickel cadmium offers slightly less battery life but at a lower percentage of the cost.

 

    That is about to change.

 

    Researchers at Stanford University have recently unveiled a process using “nanowires” that multiplies the life of lithium based batteries ten times. Simply put, where a laptop battery lasted two hours in the past, it will now last 20 hours. The implications are huge. Be it in laptops, cellphones, ipods, and eventually cars and buses, short lifecycles and multiple batteries will be a distant memory. General Motors, Ford, Renault, Honda, Nissan and Toyota are all working on plug in hybrids and electric cars with a 2012 goal. Indeed, General Motors’ Chevrolet division has a plug in car now in development called the Volt that will be rechargeable from any electric wall socket and expected to hit the market in 2010. The new technology due in 2012 potentially promises to extend the 100 mile range of ‘plug in’s” to electric cars capable of 1000 miles on a single electric charge. Instead of using four tanks of gas and $200 for such a trip, think one electric battery charge at an equivalent of paying well under $1 a gallon for gasoline. Solar powered systems would be able to use these lithium batteries to store the electricity generated by the solar cells.

 

      It is currently estimated that hybrid electric vehicles use about 8 pounds of lithium carbonate

for the current generation of hybrids. By 2012, it is estimated that about 2 million electric cars will hit the road using 16 thousand tons of lithium carbonate. And that is not including many other uses for the powerful rechargeable batteries including laptops, computer  and  generator

backups, solar panel storage, and literally hosts of other portable electronic devices as BlackBerrys, dvds, cellphones, digital cameras, flashlights, games etc. In 2006, the lithium

carbonate market was estimated at 85000 tons, growing at 10%.

      

       Johnson Controls the world’s largest supplier of lead-acid batteries, said it has started producing lithium-ion battery packs for an anticipated Mercedes hybrid at what the supplier

calls the first plant dedicated to making such batteries for vehicles. It went on to say that it was weeks away from delivering lithium-ion batteries for a fleet of demonstration vehicles to hit Chinese roads. Furthermore it was hired by GM to develop the lithium-ion batteries for a 2010 delivery of the Saturn Vue.

 

       WUC has to this point not looked at their lithium deposit as anything other then an extra. With this new technology and the fact that WUC might have the largest deposit in the country , a reassessment was warranted. Current plans are to spin off the lithium deposit under the name of Western Lithium Corp (WLC) in the first quarter. Valued at only a penny a pound in the ground ( less than 1% of it’s $3.60 a pound lithium carbonate selling price), the lode is possibly worth over $2 a share. Sort of explodes the story, one would think. If  we assume a one for one spin , and our new entity  trades at $0.50 then , Western Nuclear should go ex dividend a similar amount. But since we believe that little value is included in the parent company for the lithium, we feel WUC will regain this value shortly thereafter. 

 

       So let us put this all together. We have about 31 million pounds of uranium worth in the ground worth about $155 million. Some very exciting prospects still to be drilled in Kings Valley as well as in Thelon Basin, Canada. Almost $50 million in cash. A 10% investment by the big daddy of uranium- Cameco in a strategic alliance with Western Uranium mostly due to their interest in Kings Valley . And serendipity- a revolutionary Stanford University discovery that extends lithium battery life tenfold and promises to explode the use of lithium in the next few years. And they are sitting on one gigantic domestic reserve.

 

        Current potential value- $155 million uranium, $50 million cash, and lithium at one penny a pound -$250 million. With 65 million outstanding, we have $3.15 for the uranium and cash..

The lithium, well who knows –maybe another $2+ at present. Sometime by the end of January or February, Western Lithium should trade as a stand alone entity representing the only major domestic source of lithium and with the exception of Sociedad Quimica (NYSE:SQM), the Chilean chemical, the only other public way to invest in this rapidly growing metal.

 

 

 

 

 

                                                           

Catalyst

Imminent lithium spinnoff adds excitement to the well connected and financed uranium play with good reserves.
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