could higher-grade uranium still be in the gas hills?...strathmore is not only a canadian company...

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Companies mentioned in this

report:

Cameco (CCJ)

Korea Electric Power Corporation or

KEPCO (KS-KOSPI)

Southern Company (SO)

Strathmore Minerals (STM-TSX;

STHJF-OTCQX)

Products mentioned in this report:

UX Uranium

CL Light Sweet Crude Oil (WTI)

RBOB Gasoline

Keystone Pipeline

February 23, 2012

Could higher-grade uranium still be in the Gas Hills? Author:

John J. Licata

Chief Commodity Strategist

Blue Phoenix Inc.

212.346.9161

[email protected]

Executive Summary

Post Fukushima the nuclear industry had been turned upside down.

Governments clamped down on issuing new permits, environmental

activists chants surged, investors bailed and miners saw market

caps plunge in the neighborhood of 60-70% in 2011. All of this

occurred just as investor sentiment was again gaining traction and

spot uranium (now $52.15/lb) were fetching above $75/lb. Blue

Phoenix Inc. (BPI) believes all is not lost though when it comes to

the nuclear space. In fact, there is a quiet reversal in sentiment that

simply can’t be ignored within the nuclear industry and that makes us

excited the Gas Hills region of Wyoming, a former hotbed of uranium

mining, is about to see a renaissance.





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Background

In recent weeks the uranium sector has seen more positive headlines than it has over the past few years

combined. News included the Nuclear Regulatory Commission (NRC) giving Southern Company (SO)

the green light to build two new nuclear reactors at its existing Vogtle Plant in Waynesboro, Ga likely to

come online in 2016 and 2017 respectively. This news was fascinating and quite a positive surprise in an

industry that has languished in the aftermath of Fukushima. What makes the Voglte plant news even more

special is the fact it was the first federal approval for a new reactor in the U.S. in 33 years and it was

accomplished even without the support of NRC’s Chairman Gregory Jaczko.

Then China, the fastest growing nuclear market on the planet and backed by its government, announced

a new trade deal that will allow it more access to Canadian uranium. This deeper alliance with Canada

should only solidify China is again moving forward with plans to boost its nuclear energy initiative

after pulling back slightly post Fukushima. China, India and the UAE will have strong growth in

uranium demand through 2020 based on BPI analysis. China still aims to boost its nuclear power capacity

from 10.8 gigawatts to 40 gigawatts by 2015. That means China could ramp up nuclear initiatives in 2012

in order to take advantage of overall weaker commodities, especially nuclear pricing, as China moves

forward with the goal to boost nuclear from 1% to 15% of its total energy arsenal by the end of the decade

and add 100 reactors by 2030 and 197 by 2050. This should bode well for the UxC Uranium futures

contract on the NYMEX.

Then we have uranium miner Strathmore Minerals (STM-TSX; STHJF-OTCQX), a client of Blue Phoenix

Inc., who announced Korea Electric Power Corporation (KEPCO) acquired nearly 14.6mln common

shares at C$0.55. This move now makes KEPCO the largest shareholder in Strathmore (~14% stake). But

wait, there’s more…on completion of the first development phase at Gas Hills, historically the second

largest U.S. uranium district behind New Mexico’s Grant’s Uranium belt, KEPCO will have the right to

participate in a second phase of Strathmore development. This would allow the giant Korean utility to take

up to 40% in a limited liability project company set up to further develop the Gas Hills properties in return

for a total of $32 mln of funding for the program over three years. Thus KEPCO could wind up investing a

total of $40 mln in Strathmore as per the recently consummated deal.

Thesis

Despite the enthusiasm post the NRC Vogtle reactor approval, many miners still need UxC Uranium U308

Futures contract prices to be in the mid $65/lb range to be profitable (spot is now trading at $52.45/lb and

long-term contracts are $61). Therefore the time to be more efficient as well as to exploit synergies

in the space is now (especially as some juniors struggle to raise capital for new projects—

something that may in fact change after the Vogtle plant getting the first green light for a new

reactor in over 30 years).

This leads us to speculate 2012 could very well be the rebound year for the nuclear space. Also, it is our

view that margins for uranium players will expand strongly considering our expectations for uranium

prices. In a world that hasn’t had much to feel energized about economically, it is our view that

uranium needs to remain a vital component to our energy independence since the golden age of

uranium may still be in front of us.

Canada, likely still a bit perturbed by the U.S. actions or shall we say inactions regarding moving forward

with the Keystone oil pipeline, decided it may be better served to seek more energy alliances elsewhere.

This may have prompted Canadian Prime Minister Stephen Harper to allow the sale of uranium





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yellowcake to China. With Canada, the second largest exporter of uranium behind Kazakhstan, more

willing to open up it energy resources to China, we believe there will be increased opportunity for

Canadian mining companies to compete with present Chinese suppliers such as Australia, Kazakhstan

and even Russia. Strathmore CEO Dave Miller recently told BPI, “China is in a learning phase when it

comes to nuclear power and when China likes something, they really have an impact on the global

marketplace. Just look at how China went from being mildly interested in gold to now challenging

India as the world’s top consumer of the metal. I am expecting a similar Chinese mentality when it

comes to uranium which means uranium prices look like a bargain when thinking long-term. So

the Canadian/China cooperation announcement is a teaching moment and the next phase of that

teaching is the Chinese finally realizing uranium is fungible and they can do direct deals in the

U.S.” To put into perspective what that bargain Miller is referring to could mean to players in the space,

Cameco’s (CCJ) Chief Executive Tim Gitzel said he was "delighted" with the agreement between China

and Canada. Of course he is. His company can now deliver 52 mln pounds of yellowcake this spring to

China. That yellowcake could fetch up to a whopping $3 bln.

The expected surge in electricity demand through 2030 due to increasing global population and higher

living standards makes investing in clean electricity sources very attractive. With BPI forecasting soaring

NYMEX WTI crude oil and RBOB gasoline prices through 2013, we believe it may make sense to refocus

on the uranium space, a sector badly battered post Fukushima. Considering it is really the private

companies that hold most of Canada’s uranium in Canada, our attention is focused more on public

companies/assets we consider to be in the right location with higher-grade uranium exposure.

With China, South Korea and India all looking to secure diverse nuclear energy sources from

around the world to meet longer-term energy needs, we believe some of the uranium to offer

foreign countries will actually come from the Gas Hills, Wyoming. This has us also thinking

uranium miner Strathmore Minerals (STM-TSX; STHJF-OTCQX), owner of the largest acreage

(~35,000 acres) of minerals claims in the Gas Hills region, could be in a very sweet position. Why?

Strathmore is not only a Canadian company that can benefit from its government’s bi-lateral

energy deal with China for uranium. Additionally, they own strategic acreage in the Beaver Rim,

Wyoming (South Gas Hills area) which has some suggesting possesses similar resource

characteristics to the historic Gas Hills district which produced in excess of 100 mln pounds of

uranium concentrates from 1957-1989 before the uranium price collapse of the 1980’s. In our view,

the potential for the Beaver Rim properties to become its own world-class uranium ore body is

likely why KEPCO of South Korea recently announced a completed strategic investment in

Strathmore’s Gas Hills assets (which include Beaver Rim).

The fact that KEPCO is supporting Strathmore in an area that previously produced a large amount of

uranium, has us thinking this same Gas Hills may see a uranium revival today thanks to Beaver Rim and

expectations a combination of in-situ recovery and deeper conventional mining methods which could see

uranium grade levels move up to 0.30% with ISR or underground mining at the potential higher grades.

Maybe that’s why uranium giant Cameco (CCJ) is itself moving forward with its own in-situ recovery (ISR)

uranium mine nearby Beaver Rim with a start date planned for 2014 (the expected life of that asset to be

near 20 years). Thus, it seems the Beaver Rim could be a very exciting long-term uranium acreage play.





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The appeal of Beaver Rim properties is not lost on major players in the uranium space. KEPCO recently made a

strategic investment in Strathmore Minerals, a majority owner of acreage in the region. Above is a photo of

Cameco’s drill rigs near Strathmore Beaver Rim property in the Fall of 2011. Source: Strathmore Minerals

Where do we go from here? We believe Strathmore is in a strong position to leverage its dominant

position in the Gas Hills to foster even more Asian alliances, including ones in China. Keep in mind

Sumitomo of Japan already has an existing JV agreement to advance Strathmore’s Roca Honda, New

Mexico property so one can make a bullish argument that Strathmore already having two high-profile

Asian alliances (Sumitomo and now KEPCO) is in a better position than many rivals to attract Chinese

partners.

Special Disclosure: Blue Phoenix Inc. is a consultant to Strathmore Minerals and does seek to do

business with companies covered in its research reports; John J. Licata owns options in Strathmore

Minerals.

Disclaimer: The information and views set forth in this report may be subject to change for numerous reasons, which may

include changes in market conditions. Blue Phoenix shall have no obligation to provide any further research reports on any of

the matters covered in this report. The publication of this report is not to be construed as, and does not purport to be, a

solicitation of an offer to buy or sell any security or other financial product. Blue Phoenix expressly disclaims any responsibility

for any decisions made with respect to the securities covered by this report or for the suitability of any security or transaction

based on it. By accepting this report, you agree not to hold Blue Phoenix liable for any possible claim for damages arising from

any decision you make based on the information and/or views set forth in this report.

could higher-grade uranium still be in the gas hills?...strathmore is not only a canadian company...

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