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Yola Edwards

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Goldfinger

Yola Edwards

Itís 007ís year, but Goldfinger may take a backseat to uranium oxide or yellow cake this year and Pele Mountain Resources Inc., a gem of a company (GEM is its symbol) which trades on the TSX Venture Exchange is a stock to watch in the uranium space.

On October 16, 2006 Pele announced that it had acquired, the Pardee Uranium Property located in Elliott Lake, on which previous data compiled by Rio Algoma indicates that there is a "Measured Ore Estimate" of 27,181,000 tons grading 1.03 pounds per ton (lbs/ton) U3O8 for an equivalent of 27,996,430 pounds of U3O8. The new property is adjacent to Peleís original Elliott Lake claim block on which Rio Algomís previous drilling efforts confirm the continuation of the mineralized zone and indicate the potential for an additional 50 to 60 million tons of uranium conglomerates measuring 0.90 lb/ton to 1.14 lb/ton.

The Pardee purchase appeared to have vastly transformed Peleís mining complexion by giving it greater uranium exposure and the possibility of becoming a future uranium producer. Although the Elliott Lakeís resource grade may be lower than uranium found in other parts of the world, the Pardee uranium claim block is found at a much higher ground level then Peleís original claim block and offers a potential open pit mining possiblitiy.

On January 16, Pele released its commissioned National Instrument 43-101 (NI 43-101) report which not only substantiated the mineral resource but went further and increased the original estimate by 5 million pounds, recognizing it to be 33.05 million pounds of uranium oxide with a cut-off grade of 0.03 per cent. In addition the report confirms that two further possibilities exist to increase the size of the resource, first by 25 to 30 million tonnes grading 0.04-0.05 on the main Conglomerate Bed and "additional resource potential in the mineralized Basal and Upper conglomerate beds and in the lower-grade hanging wall of the Main Conglomerate Bed."

However for some fundamental comparative guidance, we might consider Denison Minesí proposed offer to purchase Australian based OmegaCorp Ltd. With 141 million shares outstanding, for C$154 million. Although also not confirmed by a NI 43-101, Denison indicates that OmagaCorpís Zambian project contains 16.4 million tons of uranium, which has been estimated to contain 13.7 million pounds U3O8 with a cut-off grade of 0.02 per cent and a 90 per cent recovery rate. It is difficult to compare properties as there are many variables which could considerably alter the comparability. However, the Denison Mines proposed acquisition gives the most readily available guidance or loose rule of thumb for pricing. The press release speaks to the possibility that "existing data supports resource upside potential here and elsewhere within the project." As such it would seem that Denisonís company officials are attributing a value of about C$11.24 per pound for uranium in the ground and might be paying a premium for consideration of further possible resources on the property.

If the same consideration were given to Peleís 33 million pound block it would appear that the stock should be valued at $4.95 on a fully diluted basis with about 75 million shares. However, since Rio Algom previously suggested a 70 to 90 per cent recovery rate we should at least consider discounting the value to represent a 70 per cent recover, which would suggest a share price of $3.47.

For simplicity, if the propertyís value is based on the reportís fundamentals we could infer a stock value of $2.52 on a fully diluted basis, based on US$65 uranium oxide operating costs and US$70 uranium oxide market price which would allow for a 7 per cent margin on a C$2.7 billon resource.

My October technical analysis report on Pele, when the stock was trading at about 20 cents suggested a 70 cent target, but that was before the company announced its major uranium acquisition. Technically, the share price appears to have completed intermediate wave 1, which subdivided into five minor waves. Corrective wave 2 completed on January 12 at $1.24, and third week of the New Year has begun with an explosive advancing wave 3 which is characteristic of wave 3ís. The stock has advanced on bullish rising gaps which suggests underlying strength and the possibility of a continuation to higher highs. Wave 3 should complete at about $2.53, coincidentally the exact fundamental value subscribed to the stock by the report. The fifth advancing wave should rally to about $4.08.

The stock is clearly trading at a discount to the NI 43-101 reportís fundamental value of $2.52 and the share price is not reflective of the reportís strong guidance of further potential increases in ore reserves. The company is not followed by any major brokerage firms and as such a select group of investors seem to be fortunate to have an undervalued and unrecognized speculative investment security in their portfolio. The stock should be considered a buy.

For disclosure purposes I do own stock in the company.

Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.

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