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A little Gem... er, call that a BIG Gem

Bob Moriarty
June 25, 2007

I've heard it said that the best place to find a new mine is in the shadow of an old headframe. That makes a lot of sense. Many mines are shut down, not because they run out of ore, but because the price of the commodity won't support mining at that given price.

So it is with uranium and I've just returned from visiting a wonderful energy company in Canada with giant potential. This is my favorite uranium stock.

click on images to enlarge photos

The company is Pele Mountain and the symbol cannot be forgotten. It's GEM and goes back to when they wanted to focus on diamonds.

Pele Mountain has a commanding land position in Elliot Lake, once called the "uranium capital of the world" during the time Canada was the leading exporter of uranium. Uranium was discovered in Elliot Lake in 1953 and the area soon became home to a number of uranium mines, eventually producing over 270 million pounds of U3O8.

Since that first discovery, the region has gone through a number of boom and bust cycles. The first, driven by demand for uranium for nuclear weapons, took place from 1956 to 1966. In 1960 the area provided a home for 11 mines and 25,000 miners.

In late 1959 the US Atomic Energy Commission made a ruling that the US would only purchase uranium produced in the US. Employment in the Elliot Lake uranium mines plummeted 80% by 1964.

The second boom and bust took place between 1967 and 1996 as demand for the expansion and development of nuclear power caused prices to rise then crash. In 1978 international uranium prices rose to over $43 a pound before dropping in the early 1990s after the incident at TMI caused the nuclear power industry to crash for years. The last producing mine at Elliot Lake and Ontario closed in 1996.

The uranium deposit at Elliot Lake has a characteristic, which makes investing in GEM as close to a slam-dunk as you will ever get with a uranium company. Pele describes the nature of the deposit as Elliot Lake as "stratigraphically-bound deposits that demonstrate remarkable consistency over extensive area." That term stratigraphically-bound is very important.

I don't want to get any flak from geos on this so cool your jets. There may be more technically accurate ways of describing deposit types but in general most mineral deposits are structurally controlled. There will be a fault or faults in the earth, which provide a lower pressure region for mineral laden fluids to seep up and deposit their associated minerals where the temperature or pressure or chemicals change. So in general when you are looking at a mineral deposit, which is structurally controlled, you want to know where the faults are.

U3O8 or yellow cake has an important tendency. Almost anything dissolves it. Instead of leaching with cyanide or acid as is the case with gold or copper, often something as benign as hydrogen peroxide will leech uranium. Literally water. So these deposits are exceptionally mobile, they can and often have moved around. Most uranium is found in ancient rocks, often in sedimentary rocks where the uranium has moved around until it settles in a bed of sandstone. A flood plain.

The uranium found at Elliot Lake is nothing more than a sedimentary bed found in different layers. That's called stratigraphically-bound and is vital to understand why I love Pele Mountain right now.

When I go on a property visit, I want to see the potential. I am not looking for drill grades: I don't give a damn about the type of rock. I want to see what the blue sky potential is. And executives of mining companies hate talk about blue-sky. After Bre-X, blue-sky is a four-letter word. But to invest in a company, any intelligent investor will want to have some clue as to what the potential is.

So I really like it when I can see and measure distance between holes and can see consistency. I want something that can be measured by a reasonable person. Namely me.

Remember the term "stratigraphically-bound. . . over extensive area?" Elliot Lake is one giant deposit. There may have been 11 mines there before but it's all one ancient giant flood plain with similar mineralization and grade over the entire deposit.

Here's what that means. Pele Mountain has a 33 million pound inferred 43-101 resource. Very few of the 450 or so "uranium" companies out there have any 43-101 resource. Many of them are no more than area plays bragging about the fact they are WITHIN 265,000 km of Cigar Lake in the Athabasca region. Or worse. There are perhaps 15 companies with a resource.

I'd guess based on comparisons with other companies with a real resource, the market should be valuing 33,000 million pounds for $10 a pound. Which would make Pele worth more like $5 a share. That was true when uranium was $65 a pound and now it's $136. Could be worth $20 a pound but in any case GEM is not getting much for what they already have.

When I was there on site and being briefed by company President Al Shefsky, he indicated their objective was to develop a world-class uranium mine at the project. Since the deposit is slightly angled and comes right to the surface along a 6 km horizon, numerous faces can be mined at the same time so pretty much they can produce as much per year as makes economic sense.

With a 33 million pound resource, it simply isn't necessary to define much more than they already have outlined but if you want to think about how many millions of pounds of uranium they have, you can figure out the square acres which make up the 43-101 resource and divide it into the much larger area where historic drilling has shown the deposit continuing for kilometers beyond where the 43-101 resource has been outlined. Since it's pretty much useless information for now, I can tell you they aren't going to run out of ore anytime soon. We flew over the entire area and saw where the other mines and mills had been. Pele controls a lot of uranium.

Many of the other 450 "uranium" companies in the market place don't discuss processing plants. You can leach your ore but you must have a secure processing plant nearby which is capable of doing the final processing into yellowcake. Naturally security is a prime consideration in uranium mining. No government is going to allow for the possibility of a terrorist group getting their hands on a shipment of uranium. So it's vital to ask just where and how the final processing will be done before investing in any uranium company. If the company can't answer, don't invest.

Cameco has a uranium refinery only 60 km from Elliot Lake at Blind River. Pele is as well positioned from a security point of view of any company I have looked at. And since everyone else is closed at Elliot Lake, Pele has hired some of the best and most experienced mining people and geologists from the area. There will be no learning curve in bringing the professionals up to speed. They have all been there, done that.

I am a big believer in Peak Oil. To me it looks real obvious that peak oil actually has passed. Cantarell in Mexico, their biggest oilfield, has dropped production by 41% and Saudi Arabia with Ghawar as its biggest producer is an accident waiting to happen. China and India are coming on line, they watch TV, too, and they want to live the good life. That requires a lot of energy and we simply cannot produce the oil and natural gas necessary. We must turn to nuclear power in a big way.

I've liked Pele for years. Actually they have some nice gold and diamond properties with good JV partners that I am going to ignore. Think of them as being nothing but an energy company. They have a real resource, they are accelerating development at Elliot Lake and I think they will be in production as fast as is possible. Al has put together an incredibly talented and experienced team with the skills needed to develop this project into one of Canada's leading uranium producers. These prices and the even higher prices for U3O8 which we know are coming, are going to suck the metal out of the ground. Those few real uranium companies that have positioned themselves to take advantage of the boom are going to make a lot of money for themselves and their shareholders.

I really like Pele. It is my top uranium pick. It's absurdly underpriced today and there will be a scoping study completed by the end of September. The market will soon wake up and the share price will more closely resemble their real value.

We own shares and they are an advertiser. Naturally I am biased but I think in any comparison with any other "uranium" company, it will be easy for any investor to see the real value. They are cheap now but that situation isn't likely to last for long.

Pele Mountain Resources
GEM-V $.92 Canadian (June 22, 2007)
71.6 million shares
Pele Mountain website

Bob Moriarty
President: 321gold

321gold Ltd