Western Prospector WNP CN
September 03, 2006 - 10:13pm EST by
2006 2007
Price: 1.90 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 81 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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At around $2 Canadian per share, Western Prospector is both a value investment and a warrant with multi-bagger potential. They own the Gurvenbulag uranium deposit in Mongolia. Sizable uranium deposits, such as Gurvenbulag with near term (’09) production potential are both extremely rare and valuable in today’s market. But two overhanging issues (one of which is quite frightening), the stock would probably be trading closer to $10-15 and be a takeover target. The two issues are 1) a lawsuit disputing ownership of the deposit, which appears to be stretching at best and 2) whether Mongolia will expropriate a portion of WNP’s deposit via either taxation or claiming ownership. The later is a very serious risk.


The deposit:


The Gurvenbulag deposit was originally discovered by the Russians who abandoned it when uranium priced fell after the HEU deal (in which the Russians flooded the market with uranium from decommissioning its nuclear arsenal). The historic resource there was 42 million lbs and the deposit was open ended, but it wasn’t measured to western standards. Note: Russian geologists tended to be conservative, as they risked the gulag if the minerals weren’t there!


Western Prospector reassembled this deposit from a number of local claims and is in the process of proving the deposit to western standards and expanding the deposit. WNP has set a target of having 100 million lbs. uranium resource, which I think it too ambitious in the near term, but think 50 million lbs is a reasonable near term target leaving upside for the future. Under the following rough assumptions, you get a NAV of just under $10 (in CAD).


Ux to sell: 50 mil lbs.

Mine life: 10 years

Cap Ex: $200 million

Cash Costs: $12/ lb.

Royalty: 5%

Tax rate: 35%

Mongolian “strategic stake”: 34%

Production: 2010 is first full year

Ux Price: $51 (the current term price)

FD shares: 47 million


The market seems to value uranium mining companies, particularly those with near term production potential at a premium to NAV of 1.25-1.75x, so if we use a slightly more conservative range of 1.0-1.5x we could get to a $10-15 stock price, absent the two issues above. WNP is fully funded thru feasibility with a cushion, so there’s probably no need for dilution before mine development. The company will be coming out in a few months with a scoping study and the final feasibility study is expected mid ’07, with a preliminary feasibility study in early ’07. This is inherently rough, but my goal is to get people in the ball park and can get more precise in the Q&A, if necessary. The stock trades at such a low percentage of our intrinsic value that laser precision isn’t as relevant.


Maximum lawsuit:


            On the surface this looks scary, but we don’t feel this will amount to much at all. Maximum is claiming that that had a verbal agreement with Ken de Graff to give them a chance to buy the portion of the Gurvanbulag deposit he owned (30-40%) and that he breached that agreement in selling it to WNP. Sounds a bit frightening that WNP may not own 100% of the deposit, however, if once you understand Canadian law (where this is being tried), you’ll see that this probably won’t amount to much. Our understanding is that there are several critical flaws to Maximum claims


-         these agreements need to be in writing, not verbal

-         if these claims are in fact true, Maximum may have breached disclosure obligations (as it is a public company and never mentioned any of this)

-         Maximum should have come forward with these claims earlier, e.g. at the time of several of WNPs prior offerings. This is both a legal point as well as for credibility.


Even if Maximum were to win its case (which we think is a very long shot), it’s seems its Ken de Graf who’s liable for damages, not WNP. WNP should have good title to the assets unless they were aware of the agreement with Maximum and conspired to get around it. As WNP says that Ken de Graf represented at the time of sale that there were no such agreements, this looks like its de Graf’s issue not WNP’s and Maximum is just including them to get leverage on de Graf. We’d encourage you to hire your own legal counsel to evaluate this. We found it very amusing. In addition, WNP’s website has all the relevant docs on its website in a very user friendly manner.




            Mongolia seems in the last few months of having gone from first to near worst in terms of their mining laws. The old system of mining laws was very favorable to foreign mining companies, with reasonable royalties (2.5%) and tax breaks to encourage development. Recently, Mongolia has passed a windfall tax on copper and gold mining (no impact on Uranium, thankfully) and a revised mining law in which the government could take up to a 34% equity interest in “strategic” mining projects. Unlike the Maximum lawsuit, we feel that this is a real issue.


That said, it looks like the worst news is out there now and the strategic mineral clause was very controversial even among Mongolian ministers, as many of them realized that these laws would destroy the future of mining, their biggest industry (see interview with MP S. Oyun below; Note this was before the final law was passed, but note further that the strategic clause was struck by a sub committee). Mining executives feel that existing deposits that are still economic under these new conditions will still go forward, but new exploration will cease.


While I’m using the 34% in my modeling, there is some chance that Mongolia will understand the longer term impact on their country and be more reasonable when they negotiate the mining licenses. By the new law, the Mongolian government can negotiate anywhere between a 0% and 34% interest. In addition, just prior to the passing of the law, the Mongolian government had one of those multi-page paid advertisements in Business Week, holding itself out as having one of the best mining laws in the world for foreign investors. I also pasted in a clip about local protests against the windfall profit tax on copper and gold. While unrelated to uranium, it shows that these laws are not universally popular with the Mongolians.


Ux Prices:


The long term price of uranium is debatable.  Some say high 20s others say high 30s or mid 40s. While I’m more in the latter camp, it not that important as the investment will be driven by the current contract price, at which WNP can lock in sales as far as a decade out. Last I checked (and the market has strengthened in the interim), it was fairly easy to get a market based contract (to capture any Ux spike in the near term) with no ceiling and a $45 floor. The most recent term price from UX Consulting was $51 and this is the official number that the market is using. They noted however, that that this was the floor of a market based contract (i.e. no price to use in their index) and if a utility wanted a plain vanilla base escalated contract, they’d pay $10 more, indicating the real market price might be $61.




Until and unless Mongolia changes its behavior to western mining companies, I just don’t think we’ll see the $10-15 price where this would trade absent these issues, but I do think that you could see NAV less 34% or around $6 (in CAD) as they move forward with feasibility studies, mining agreements with Mongolia, and ultimately enter production. I’d only take a small haircut, say 2-3%, to make the Maximum suit go away. I note that we have only assumed 50 mil lbs of UX, leaving upside to our assumptions. You could get a target in the $20 range if you assumed a negotiated outcome with the Mongolians, increased reserves, and the UX Consulting base escalated rate, none of which is unthinkable.


Sanity check on valuation: Just to show that our NAV #s are reasonable, I crossed checked these with what the sell side had. The national bank analyst had a NAV of 9.54 @ $30 UX discounted by 10% and Sprott (Nov ’05) had a $7.65 NAV using a 13% discount rate. Given the delta between the stock price and our calculation, I want to show that we weren’t in a different zip code.




Sept-Oct ’06 scoping study

Discovery of additional resources

Mining agreement



DISCLOSURE:  We and our affiliates are long Western Prospector, and may buy additional shares or sell some or all of our shares, at any time.  We have no obligation to inform anyone of any changes in our views.  This is not a recommendation to buy or sell shares.



Interview by MP S. Oyun, published at mongolia.neweurasia.net

LD (Interviewer): Now there is only a week and a half left in this spring session of Parliament, are the ’97 mineral law revisions going to be finished this session?

SO (Mongolia MP): I think it is better if they are done because there is so much uncertainty around it, it is just better to have it done. We had the first hearing a couple of weeks ago and it was postponed by a week because some MPs wanted to have a look at the so called “compromise,” version which was made by two parallel bills that were submitted. Yesterday we had the continuation of the first hearing and from the very beginning there was a lot of debate over the “strategic deposit,” and at least at the standing committee the majority of the members decided to do away with this, “strategic minerals,” term and everything related to it. But that was with a small majority in the standing committee. However now it will go to the session and then whatever the majority of the session decides will be it. I think it will be the same in the session, I don’t think that is too hopeful. But it is good to see that now people are starting to look and understand these issues and some of the bad potential consequences. Also we have the issues of royalties and after the windfall profits tax I think people now see that if the royalties are too high it could be detrimental to exploration. Again we haven’t gotten to that point yet because when we were discussing the strategic deposits it went past 6pm so it was postponed. Now tomorrow afternoon if there is no session, than a meeting of the standing committee will take place, but that is not my decision, it is Gantomor’s and he might call a session. As I understand there may be a standing committee meeting and if not tomorrow, then next week.

LD: When we were just talking about the ’97 mineral law revisions and the windfall profits tax, many people talk about foreign or western companies leaving. Now there is really heavy interest from the Russians concerning Tavan Tolgoi, and Chinese as well, what happens if western companies leave?

SO: This is really about foreign policy. One of the aspects of Mongolia’s foreign policy is this so called, “third neighbor,” policy. But this needs to be not only about the diplomatic third neighbor, but the economic as well. We don’t want to be overwhelmed, Mongolia as a country, by the presence of only one country. We don’t want to be overwhelmed by the economy of only China for example. We need to balance the influence, let’s say political influence, of our two neighbors. We are trying to introduce this notion of the third neighbor and I think if we can do this in an economic way we can diversify the presence of investment, the presence of more companies being responsible in Mongolia. If we can get these companies that have proven their track records with environmental standards and safety standards, and also bring modern know how and technology as well as a responsible attitude toward the local communities it will be very good. We know that these companies exist. So at least we know that if we attract these companies than all of the standards will be maintained. Where as, I’m not quite sure if…well I don’t want to name names, but if we get companies that aren’t responsible and have no previous records than there is no guarantee. Then you end up with just some ninjas. We have ourself [Mongolians] a 10 year history of destroying our nature, our streams and valleys. Most of them were our own alluvial mining companies. So nobody argues that we have to introduce and enforce very high environmental standards, whether it is a foreign or Mongolian company it should be just the same.

Protests Return to Sukhbaatar Square in Mongolia

Posted by Luke | in Politics, Mining, Development, Life, Mongolia, Safety/Health, Business, Crime | on June 28th, 2006

After weeks of minimal protest activity in Mongolia, some civil movements have once again resumed activities on Sukhbaatar square.

Today Eagle TV and Montsame both reported on the developing protests and the setting up of another ger on the square.

The Healthy Society civil movement, the former stallholders of the burnt SAPU trade center, the victims of the savings-and-credit cooperatives, the national miners, and the Free Union of Mongolian Senior Citizens held together a protest demonstration on Wednesday on the Sukhbaatar Square at 12 p.m. The demonstrators demanded to dissolve the Parliament.

While protesters have been calling for the resignation of the Government since January, there have been no changes in Parliamentary seats.

These latest protests are being spearheaded by O. Magnai, leader of the Healthy Society civil movement. Even though the protests that started in April and lasted through most of May were led by other civil movement leaders, Magnai has recently entered the media spotlight on more and more occasions. Today, he stated:

“The law on savings-and-credit cooperatives was adopted by the MPRP, when it was ruling the state in 2000-2004. Due to this rough law, more than nine thousand citizens have been harmed. There is no justice in Mongolia. When the Government exerts pressure on national producers by imposing 68 percent tax, the foreign investors still enjoy all possibilities under the stability. Corruption, bribes and illegal activities have covered the civil society. We will continue our struggle on Sukhbaatar Square on July 11. How will the poor and weakened people celebrate the national holiday? We will continue our struggle until the Parliament is dissolved.”

In regards to the loan and credit savings cooperatives, the Government has set up a working group as well as an investigation. How effective they will be will only be determined over time.

Magnai also comments on the windfall profits tax and the fact that mining companies with stability agreements will not have to pay this tax. However, there are only four companies with stability agreements and not all of them are copper or gold companies. While a few companies will not be subject to the new tax, hundreds of Mongolian and foreign companies will pay the tax in this coming year.

With the influx of foreign tourists already becoming visible in Ulaanbaatar, some Government officials may view the protests as a black eye on Mongolia’s 800th anniversary celebrations. As was witnessed in May with the arrival of the South Korean President, law enforcement could potentially be involved in making Ulaanbaatar more “presentable.”


Sept-Oct ’06 scoping study
Discovery of additional resources
Mining agreement
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