Cameco’s Cigar doused (April 17, 2006)

Saskatoon, Sask.-based uranium giant Cameco (CCO-T, CCJ-N) has suspended construction of the ventilation shaft at its Cigar Lake uranium project in northern Saskatchewan, owing to a water leak at the bottom of the shaft, some 392 metres below surface.

The water inflow began after a worker tried to tighten a leaking valve. The valve caps a drill hole used to monitor ground water and prevent any inflows. The company says all workers and equipment were safely removed from the area.

At one point, Cameco estimated that the water was coming in at a rate of around 330 cubic metres per hour, but that the rate was decreasing. On the morning of April 7, the water had risen to 100 metres below the surface. The company says it no longer has equipment in the area to measure the inflow or water level.

Cameco spokesman Lyle Krahn says that since the shaft is not being developed in ore, there are minimal radon concerns, and there was no impact on the environment.

The water is being allowed to rise to its natural level as the company weighs its remediation options. Cameco had already been considering freezing the area around the bottom of the shaft to deal with the difficult ground conditions.

Krahn says that while ground conditions in the area are poor, grouting to stop leaks had been working well, aside from a few water issues.

“If the valve had held, it wouldn’t have been an issue,” he adds.

He says if the company does decide to freeze the area, it would take months, as holes would have to be drilled and time allowed for the ground to freeze properly. The project already has a freezing circuit in place.

In any case, once the leak is plugged, the water will be pumped to the surface where it will be run through the operation’s water treatment facility, as is the case with any water encountered during shaft development.

The flood is not expected to damage the 6-metre-wide, concrete-lined shaft, which is not connected to existing underground development. An investigation into the cause of the incident is under way. A preliminary assessment suggests production from the deposit may be delayed by up to 6 months, until late 2007.

The results of an ongoing review of the project’s capital costs, including costs associated with the construction delay, will be included in the company’s first-quarter financial results, scheduled for release on April 28. The current $520-million estimated price tag is expected to grow by up to 20%.

Capital costs at Cigar Lake were previously upped to $450 million from the original estimate of $350 million in 2001, owing to higher-than-anticipated contractor rates, increased energy costs and several unforeseen project enhancements.

Cigar Lake ranks as one of the world’s largest high-grade uranium deposits, with proven and probable reserves totalling 551,000 tonnes grading 19.06% U3O8, for 231 million contained pounds.

Cameco is operator and 50.1% owner of Cigar Lake; the remainder is held by Areva (ARVCF-O) subsidiary Cogema, with a 37.1% stake, Idemitsu Uranium Exploration Canada at 7.8% and Tepco Resources, holding 5%.

Cigar Lake is designed to produce 18 million lbs. U3O8 for at least 15 years during the first phase of production. Initially, ore will be processed at Cogema’s McClean Lake operation, 70 km to the northeast. Once the operation hits full steam (around three years in), more than half of the ore will be shunted to Cameco’s Rabbit Lake mill.

Plans call for a third shaft to access inferred resources of 317,000 tonnes averaging 16.9% U3O8, or 118 million lbs., during a second phase of production.

The leak at Cigar Lake comes three years to the day water infiltration in a development drift swamped the pumping system at the McArthur River mine, 50 km southwest. That flood saw water pour in at a rate of up to 600 cubic metres per hour, causing a 10-metre-long portion of the roof to cave in. The flooding totally submerged a semi-autogenous grinding (SAG) mill on the 640 level.

In all, mining was suspended for around three months, and Cameco lost around $4-5 million per month from its bottom line. The incident prompted Cameco to review the water management procedures at Cigar Lake.

By world standards, Cigar Lake is second only to McArthur River, which contains 436.5 million lbs. U3O8 and averages 24.72% U3O8.

Shares in Cameco were off $1.94, or 4.3%, at $43.34 in mid-afternoon trading in Toronto following the news.