Says James Faulkner of specialist small cap website WatsHot.com

Nuclear power is back on the cards, and companies like Vane will be at the forefront of the next stage of nuclear development. Assets like Vane’s breccia pipes in Northern Arizona will be sought after by power companies looking to vertically integrate supply and production capacity. Ominously, China has begun stockpiling Uranium. Vane has net cash and receives regular cashflow from producing precious metals assets in Mexico. Together with its partner, Uranium One, it is looking to prove up its uranium assets, and grab the attention of the market. This is an overlooked asset in a strengthening market. The shares are a buy at 5.25p.

The case for Uranium

At around $51 per lb, the uranium price is still a long way off June 2007 highs of around $136 per lb; but after a pretty consistent downward trend since then prices seem to have stabilised and are beginning to consolidate. Indeed, it seems nuclear energy is heading for something of a come-back, especially given that nuclear remains the only truly reliable and practicable major source of environmentally friendly energy.



During the next 15 years around 70 new nuclear plants are expected to come online, which would almost double global capacity. Currently, around 40 reactors are under construction in 11 countries, including China, Russia, South Korea and Japan. Ominously, China has announced its intention to stockpile uranium in the future. The country is currently building 11 new reactors, and has plans to build another 98! The implications of this dramatic expansion for the uranium supply/demand balance are hard to over-emphasise.



Supply is already outstripped by demand. Current estimates put 2009 demand for uranium at between 171 million and 184 million pounds, while only 125 million pounds is expected to be produced. All this has prompted RBC Capital Markets to comment recently: “We believe the uranium market is in the early stages of a bull market rally that could last three or four years.”

Vane Minerals

Vane was founded by the former exploration team of Freeport McMoRan Copper & Gold Inc, one of the world’s largest producers of copper and gold. The firm’s management team have a proven track record, having defined large scale mineral deposits such as Mount Keith, Santa Cruz and Escondida during their careers. Vane has built up an exciting uranium portfolio in the US, whilst it also owns producing gold and silver assets in Mexico which provide useful cashflow (around £1 million every six months or so) to help finance exploration.

Uranium Assets

Together with its joint venture partner Uranium One, Vane holds 68 breccia pipe targets in Northern Arizona, 11 of which are confirmed pipes. For your information, breccia pipes are vertical cylindrical bodies of broken sedimentary rock (breccia), down-dropped into caverns in underlying massive limestone. Uraninite, a reduced uranium ore mineral, can be found accumulated within the permeable column of broken rock. Although it is true that these uranium grades are dwarfed by those of the Athabasca Basin deposits in Canada, breccia pipe mining costs are significantly less for the Arizona deposits, and typical ore grades of 0.4-1% are as high as or higher than any other global uranium-deposit type. With Vane’s deposits typically showing 1% grades, the breccia pipes would still be economical if (in the unlikely event) uranium prices were to fall back to $35 per lb.



Recent activity has been centred on the Wate pipe. Drilling encountered 30.5 feet of 1.87% uranium and 12 feet of 3.67% uranium. Vane has been trying to negotiate the release of exploration data from Taiwan Power, who used to own much of Vane’s portfolio. However, the Taiwanese have been prevaricating on the deal, and Vane has no intention of sitting around and waiting for the information to be divulged. Indeed, it has the resources to take the project to pre-feasibility stage itself, but obviously this will take a little longer than if it were to be just handed the data. Its relationship with Uranium One is crucial here, as Vane possesses the exploration expertise, while U1 will take over at feasibility to develop and operate the project.



To put things into context, as a rule of thumb a nuclear power station uses around 500,000 lbs of uranium per year. An economic breccia pipe would conceivably produce that amount per year for around six years. There is a school of thought within the nuclear industry that the way forward will be vertical integration. This would mean that companies like Vane would get snapped up by the power companies in order to guarantee future supply as well as protect against future price rises.



In south-eastern Utah, the company has also acquired the Happy Jack Mine and the North Wash property, which have combined existing drill indicated resources of 320,000 pounds of uranium oxide. The Happy Jack Mine offers near-term production potential.

Mexico

One of the attractions of Vane is that, unlike most exploration companies, it also has existing cashflow from an operational mine. At Diablito, its gold and silver mine in Mexico, it plans to ramp up production to around 280,000 ounces of silver and 2,600 ounces of gold per year. Currently, capacity is full at 100 tonnes of ore per day, but Vane is looking to double that in the near future. Although this is no big deal as precious metals mines go, it means that Vane, with net cash of around £3.3 million, is not a firm that will have to keep tapping investors for fresh cash.

Paraguay

Vane also exclusive mineral rights to three large blocks of land in south-eastern Paraguay, each considered to be prospective for the discovery of gold and possibly copper mineralisation. Anomalous concentrations of gold have already been outlined on a reconnaissance scale during an extensive program of stream sediment sampling. Those three blocks, which are held as “Investigation Permits”, cover a total area of 3,445 square kilometres. They are located in a relatively under-explored corner of the mineral-rich Brazilian Pre-Cambrian Shield. However, exploration work is at a fairly early stage, and we need not concern ourselves here. Vane’s main focus is its uranium assets.

Conclusion

This is something of a speculative tip, as Vane’s uranium assets cannot be properly valued until it can produce a resource statement. It could do so immediately if it can secure the historical data from Taiwan Power, but if not it may take a while longer. However, it seems to me that the market is completely underestimating the potential of Vane’s breccia pipes. If we subtract net cash of £3.3 million, we arrive at an enterprise value of £7.7 million. I would attach a conservative valuation of 2 times cashflow for Diablito, meaning that Vane’s uranium assets are valued at just £3.7 million, with Paraguay thrown in for free. If all Vane’s breccia pipes were proved economic, they could fuel around two thirds of US nuclear power output for six years. Surely that is worth more than £3.7 million? Vane Minerals is a Buy at 5.25p.

Key Data

EPIC: VML
Market: AIM
Spread: 5p -5.5p (9.09%)

WatsHot.com is THE site for those wishing to make money out of fast-moving small caps. If you are looking to make money from hot tips and rumours from outside the FTSE 350 this is the site for you. For more on the site click here.