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May 2007

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Commodity posts on Infomine

May 30, 2007 – Comments (0)

As of yesterday my blog posts on commodities are being carried by Infomine.  [more]

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Thompson Creek Metals -- Ahead of itself?

May 22, 2007 – Comments (2)

Blue Pearl, aka Thompson Creek Metals, TCM-TSX, has made more than a few investors a lot of money. In the fall of 2005 the share price was at a low of $0.60. Today they have a share price of $16.63 for a whopping 2700% return.

Futher, they made 45c/eps in Q1/07. Extrapolate that by multiplying by 4 and add at least 10% for the price of molybdenum going up and you get a rough estimate for 2007 eps of about $2, or a P/E of about 8.3.

Their molybdenum production is 21 million pounds per year, increasing to 27 million pounds, and molybdenum prices are up at least 10%, so earning should go up, making this a buy right?

Wrong, very wrong, and here's why.

For this quarter where they report 45c eps commodity prices were so strong, in their opinion, they reduced their inventory levels and they sold 10.5 million pounds for the quarter, twice their level of guidance. They do not have the inventory levels to repeat this feat, so production sales for Q2-Q4, indeed until they build a new mine, should be about half of Q1.

Further, the US dollar is declining so their Canadian costs will go up, about 10% over last quarter just based on the recent strengthening of the Canadian dollar. That increase in molybdenum prices will offset some of the increased costs due to currency losses, but trying to make up for having half the sales simply isn't going to be covered by the increase in molybdenum price.

Then there is share dilution. They earned $47.7 million dollars, and that is over 105,395,000 shares diluted, so they calculated 45c/share. Currently they have 111,749,000 shares, 24,644,000 warrants and 6,943,000 options for fully diluted share capital of 143,336,000 shares, or about 36% more shares then reported. Average the earnings over the full dilution and you get 33c/eps. There will be a substantial difference between earnings and dilute earnings for Q2.

Thompson Creek metals, is highly unlikely to repeat its Q1 earnings for a very long time, and it isn't unrealistic to expect half the Q1 earnings for Q2.  [more]

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Goldcorp: The Oxymoron of Fiat Creation

May 20, 2007 – Comments (0)

 I could have sworn I posted this, but the blog appears to have disappeared, that and Motley Fool does not allow pictures, which makes this post anyway.   [more]

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Looking At Uranium - What a hedge.

May 02, 2007 – Comments (2)

As an investor uranium has made me very uncomfortable. There is no question that there is a huge gap in supply and demand and that uranium mines take longer to get the approval process to build them than other mines, so there should continue to be a gap for some time, but it has all the appearance of a bubble.

So, I've been looking deeper into uranium because the spot is very, very, very high, and any one in a position to take advantage of that spot price is going to make a lot of money. The question is, have investors fairly valued the potential, under valued or over valued it?

So, I've been reading Cameco's management an analysis. Cameco has 513 million pounds of uranium reserves. At that spot price of $113/lb, well that's $58 billion dollars!!! And their market cap is only $17.8 billion US, fully diluted. And heck, they also have 100 million pounds of resource and another 316 million pounds of inferred resource. They also have 3.6 million ounces of gold reserves. And then they have the electrical part of the business.

Actually, the numbers do not excite me. Certainly if they were able to sell their uranium at those prices they would make so much money because the profit margin would be incredible.

But, these are things that I found. Much uranium is bought and sold through long term contracts. In 2006 the cost per kWh for energy produced from nuclear power was 1.66 cents, from coal was 2.28 cents, 6.60 for gas and 9.64 cents from petroleum.

So nuclear energy costs only 1.66c/kWh (average 2006) when spot prices are $49.60 (average 2006), right?

Wrong, time to choke, Cameco's average price was $20.62/lb, about 41% of the actual spot price. The industry tends to make contracts 2-4 years prior to delivery and have those contracts in place for 4-6 years. Cameco has 60% of its uranium hedged. Looking back to just 2003, well that was the first year the average spot price exceeded $11 US, that's the price range for 60% of it uranium. That's only about 90% short of the current spot price...

At $20.62 that 513 million pound uranium reserve is worth about $10.6 billion.

Currently their production volume is about 21 million pounds per year, and they have a fully integrated business in converting the uranium from what's pull from the ground to what nuclear reactors actually use. They actually ended up selling 32 million pounds, but they purchase other uranium concentrate, process it and then sell it. They do not gain from the bull run on uranium for those 11 million pounds.

It seems Cigar Lake had production commitments for 2007. It seems like these contracts at low prices are being extended for 5-7 years.

I didn't find guidance on the price of the hedged uranium, but it seems only an inflation increase is in order.

It sure changes the dynamics of what a stock might be when they are only getting about 10% of the current spot price for 60% of their production.  [more]

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