I have always said that the best way to play the uranium boom is by buying producers and not explorers. Why take on the risk of an assetless investment when the producers will be bringing home the gravy? It’s a no brainer.

I am getting more and more entrenched in this view. You should not expect many of the current crop of uranium explorers coming to market at the moment to be around in five years time. I think less than one in ten will survive; probably much, much less.

I believe some of these flotations will never find uranium – in many cases the management does not have the experience and there are fewer and fewer expert geologists to go around. In fact, I suspect that, deep down, a number of board members of some of these companies actually suspect that they will never become a producer as well - they are just along for the ride.

Just five years ago, the uranium exploration industry was insignificant. Now there are many, many companies searching for uranium on scraps of scrub and desert the world over. This requires a lot of uranium geology experts. You can’t just find any old Tom, Dick or Harry to do this. It’s a skilled job.

Stop waving your wand about

These experts do not appear from nowhere overnight. There’s no magic wand to rustle up a geologist, a mining technician – or even the equipment required to undertake a survey. It takes training, field experience and lots of graft to become a true professional in this industry. The laws of supply and demand dictate that these skilled workers won’t come cheap.

So, I believe there aren’t enough boffins to go around. If the management of these companies don’t understand this issue then they do not understand the industry.

This means that progress will be slow and expensive for many of the pure explorers as people and equipment are scarce. With valuations on some of these companies discounting Nirvana, that can only mean there is one way for these share prices to move – and that’s down.

So, if my analysis is correct - and I reckon it is - the management of these uranium explorers will then hop on the next bandwagon, whatever that may be. Of course, they would have pocketed a hefty salary for two or three years; which is nice for them. They won’t be out of pocket – their shareholders will. That’s another reason why I believe you have to be careful.

I have always been very cautious about the way some players in the small-cap game operate. I am cautious through experience. I have seen things that are not illegal by any means, but which I believe border on the dishonest.

For obvious reason I cannot go into specific details here, but I’d like to proffer one word of advice when it comes to smaller companies that may have a management with a colourful background – read the annual report. Don’t put a penny in until you have.

Here’s why

The information that you really need to know to form a view of the management will not be found in an RNS statement. You need to know how much they are paid – and the information is not clear in the RNS. I have been burned this way before, by a company operating in an altogether different sector early on in my career.

At first, this nameless company seemed like a good investment to me – its ideas were exciting and its business model seemed sound. I even wrote about the shares. But then I read the annual report and was horrified. The management were creaming it in; big time.

In an RNS, the salaries of the management are found in the income statement under “administrative expenses”. This figure covers all staffing costs, paperclip purchases and the like. You can hide a multitude of sins in there – and that’s what this company did.

The chief executive was drawing an annual salary of £2m (for doing very little) and the finance director was actually drawing a salary of £1m (for doing not much more). Obviously, this is not the type of business in which you want to invest.

It was being run merely as a vehicle to make the management rich – quite rich. I was appalled – but it taught me a valuable lesson that I have never forgotten to this day. Annual reports are not superfluous PR exercises. They are important sources of information that can preserve your wealth.

So, back to uranium juniors

I expect the flurry of uranium explorer IPOs to continue. Obviously, many (most) of these newly-listed companies are start-ups. They will not have produced an annual report. For a private investor, this makes it difficult to discover how much the management is being paid.

However, its easier for an industry professional like myself. I use my contacts to get hold of the pathfinder document for any company that is planning to list. The information on salaries is found in there.

Pathfinder documents are very detailed and are prepared in conjunction with professional advisors prior to listing. These rarely make their way into the hands of private investors, which puts you at a disadvantage. So, you have to be careful with IPOs and make sure you get information from a credible source.

Don’t get me wrong, I am not accusing all directors of small mining companies of being dishonest; that is patently absurd. I am just suggesting that there are a few rotten apples in any barrel – and you need to watch out for them.

I think you’d be bonkers to put a significant amount of cash into a new uranium mining junior. Sure, the price of uranium is rising, but that will only benefit people that are digging it out of the ground.

Even now, because of the long-term nature of uranium contracts, it will take time for the rises in the spot price to make it down to a producer’s bottom line. For explorers, profits are a long way off.

The sector is undoubtedly very exciting – I just want to make sure you don’t get too carried away… P.S. If you enjoyed this article then sign up for Smart Commodities UK. It’s dedicated to searching out the investment trends that could provide our biggest profit opportunities for the next decade…

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