Have you heard the expression "flavor of the month" with regard to stocks? One group can get into vogue, be pushed sky-high by speculators and then be dropped like a hot potato for no apparent reason.
Right now, you can barely give away a good uranium stock like the explorer Crosshair CXZ CXX.TO or the producer Dension DNN DML.TO.
Meanwhile, pig in a poke coal stocks in Saskatchewan are flying high. Other current flavors, understandably, are potash for making fertilizer and of course oil and gas plays of every stripe.
It shouldn't take too long for uraniums to come back into vogue, considering that uranium will be the most important fuel of the 21rst century and that a relative handful of companies, some publicly traded, have seized large claims covering many of the world's best potential supply sources of this energy metal.
Here is a chart of a closed end fund that provides a convenient way of making an intermediate to long term investment in this arena - Uranium Focused Energy. Middlefield of Canada, a major fund operator that also has a fund for il sands stocks, came out with this one at the height of the uranium stock fever of spring 2007.
Here is the stock chart that shows its downhill waddle.
stockcharts.com
The fund's net asset value started 2008 at c$7.45 and as of june 5 is it just $6.00, after getting as low as $5.24 on May 1. The fund itself is trading on the Toronto at a discount to that NAV.
Current price per share is c$5.60, for a discount of 6.7 percent off the net asset value. that is not an unsually large discount for a closed end fund, fairly normal.
In its Uranium Market Update of May 5, management provided a list of its top ten holdings.
Cameco 10%, Paladin Energy 9%, Areva of France 9% (try buying that one yourself!), Uranium Participation Corp. 8 %, Denison Mines 8%, UEX COrp. 5%, Major Drilling Group Intl. 5%, energy Resources of Australia 5%, Uranez energy 4%, First Uranium Corp. 4%.
middlefield.com
The share holdings are quality issues! it is just that the uranium mining industry is out of favor right now. Instead, the natural resource speculators this spring and summer are favoring coal, potash, oil and gas.
That creates an opportunity in my view.
According to Middlefield's web site, the fund is scheduled to liquidate on Dec. 31, 2013. The fund trades as UF-UN.TO. On Stockcharts it is UF/UN.TO.
Did I mention there were warrants on this stock?
Well there are.
You can buy and sell them on the Toronto just like a stock.
Each warrant gives its holder the right to buy a share of Uranium Focused energy at 8.00 a share utnil expiration on Dec. 15, 2009. So they have 17 clear months, not counting the month we are in or the expiration month. The warrants closed last week at 56 cents apiece. They are of course way out of the money. The stock would have to go up 2.40 from the current 5.60 just to get to the breakeven point of 8.00.
But after that the leverage is nice.
Say the stock gets to 12.00. that would be a 114 percent return for a shareholder buying at Friday's close of 5.60.
But what if, instead of that, you bought the warrants for 56 cents, which turns out to be one-tenth the price of the stock?
At 12.00, each warrant would have a built in value, called intrinsic value, of 4.00, right?
that works out to a profit per warrant of 3.44 and a return on investment of roughly 600 percent.
Of course there is additional risk. The warrants could run out before the stock goes up. But with this type of fund, I would submit that you face that kind of risk anyway with the fund itself. After all, this fund is scheduled for termination
at the end of 2013. Is that not just a longer-term more expensive warrant, in a way?
Michael |
