Strateco appears out of luck at Matoush

Any chance that Strateco Resources (TSX: RSC; US-OTC: SRSIF) had in advancing its Matoush uranium project in northern Quebec’s Otish Mountains after the provincial government temporarily banned uranium development in late March has been diminished with the tentative refusal of an underground exploration permit in late June.

The two blows — delivered by Yves-François Blanchet, Quebec’s minister of Sustainable Development, Environment, Wildlife and Parks — has left the Boucherville, Que.-based junior gasping for air, with its share price declining nearly 68% since the start of the year.

Strateco has invested more than $123 million over six years to secure 22 permits for its flagship Matoush project, including the Canadian Nuclear Safety Commission (CNSC) operating licence, which it received last October. Now it’s relying on the Quebec Superior Court to rule in favour of several motions to ease its mounting financial concerns and secure the underground exploration permit, without Blanchet’s input.

The junior started its legal battle in January after waiting nearly two years for the government to decide whether it would authorize underground exploration at Matoush. On Jan. 17, the company filed a motion for mandamus asking the court to order Quebec’s environment minister to make a decision.

On March 28, Blanchet instead imposed a moratorium on issuing certificates of authorization for uranium projects until Quebec’s environmental assessment agency, BAPE, tabled an impact study on uranium exploration and mining in the province. The study could take 18 months to complete.

Strateco called the moratorium an “illegal” and “abusive” move to delay Matoush, and some investors saw it as a hurdle too big to overcome, pushing Strateco’s shares down 68% from 14¢ on March 27 to 4.5¢ on April 1.

Given the uncertainty, Strateco took an impairment charge of $87.2 million at the end of the first quarter. The junior’s president and CEO Guy Hébert also trimmed his staff and reduced his own salary by 60%, while putting Matoush on care and maintenance after the ban was imposed.

Losing patience, as well as the confidence of its investors, Strateco’s management filed new motions in April. It sent a formal notice for damages to Blanchet and his ministry, seeking an initial $16 million to cover the loss in market capitalization. The firm also said that if Matoush was unjustly delayed it would seek more compensation to recover the $120 million invested to date, as well as damages for the loss of opportunity.

It then amended its motion for mandamus requesting the court rather than the minister to issue the underground exploration permit for the Matoush project. And to retain the project until the court ruled on the permit, Strateco requested a safeguard order declaring the government to pay between $420,000 and $800,000 each month, starting in May, until at least September.

In a June 13 and 14 court hearing, Strateco asked the government to pay a $2.3-million safeguard so it could sustain Matoush.  Hébert says it costs about $450,000 a month to maintain its operating licence at Matoush and his management, adding he has already let go 14 employees. (There are three employees left at the camp, located 275 km north of Chibougamau.)

While a decision stemming from the June hearing is due by the end of July, any hope Strateco had at developing project was further dampened in late June.

On June 25, Blanchet said he intends to “refuse to issue the permit for the Matoush underground exploration project” because of “a lack of sufficient social acceptability.” He added that he wouldn’t wait for the BAPE report on the Quebec uranium industry to make his decision, giving Strateco 60 days to comment.

Hébert calls the latest announcement “utterly incredible,” adding in a June 27 interview that “what we are saying is we did all our studies, we did all our public hearings, and we have strong support from the population.” However, he acknowledges that the Cree community in the area has opposed Matoush’s development.

“From August 2006 to August 2010, we had good relations with the band,” he says, adding the general attitude towards the project shifted from “neutral” to “negative” after a new chief was elected in 2010.

But Hébert argues the project is on public lands and deemed safe by the Canadian nuclear regulator, CNSC, and says that the tentative move to deny the Matoush permit is mostly political. 

Laurentian Bank Securities analyst Eric Lemieux, who doesn’t cover Strateco, agrees. The minister “is making a political decision based on no science at all, but a partisan, leftist ecological agenda,” Lemieux writes in an email. 

“In the name of ‘social acceptability,’ he has blocked a project that remains in development phase and has satisfied the requirements of the CNSC,” he says, adding that the project is more than 100 km from the nearest community of Mistassini.

“[Blanchet] made that move because he was afraid I think to have to pay $2.3 million . . . our chance was pretty good that we would win [the safeguard],” Hébert says. “Lawyers of the minister had the same conclusion, because he was not supposed to make any decision until at least eighteen months . . . with the BAPE study on mining uranium in Quebec.”

Dundee Capital Markets analyst Dave Talbot says that “Strateco doesn’t yet know how this will impact the project or the lawsuit seeking compensation. And while this sounds negative, management believes it may be a better alternative to waiting eighteen months for an impact study, and allows the lawsuit to be fast-tracked.”

While a court date is scheduled in the third quarter to push for a permit approval, Talbot says he doesn’t know of a “precedent to suggest this is a likely outcome.”

Meanwhile, if the judge decides not to grant the safeguard, Hébert says he would have to lay off his remaining staff and liquidate the camp at Matoush. “After that I would have no choice. I would have to shut down the camp: and that means removing all the equipment and everything at the camp.”

The next step for Strateco would be to push for compensation, he says. “We have a motion saying the government would be responsible for damages. And at the moment we evaluate it at $16 million, but we reserve the right to go to $300 million to $400 million, depending on if it’s really a ‘no’ [from Blanchet].

“I think we have a good chance to win on these damages because we received twenty-two approvals from the same department since 2006 . . . every year because of the permits we were raising $20 million on average a year. And our investors were pretty confident that we would get all the permits, and we got the toughest one, which was from the CNSC.”

Talbot adds that “we expect Matoush is going nowhere during this government, and while we aren’t lawyers, we are skeptical about ever seeing compensation.”

While Hébert appears optimistic about collecting damages, he shares Talbot’s belief that Matoush will stay in limbo under the Parti Québécois government, which came into power last September. 

“Someday the government will be bright enough to say we need uranium and to develop Matoush to create jobs and to
bring in money . . . so I have no doubt that on a certain day this project will go into production. But during the time this government is there and if they say no, we will try to get our money back.”

But if Strateco wins, it could take years until it recovers some of its investment. Junior uranium explorer Boss Power (TSXV: BPU; US-OTC: BPUZF) in B.C. waited three years until the provincial government agreed to pay a $30-million settlement after abruptly banning uranium exploration and mining in 2008. The ban came shortly after the company filed for permits on its Blizzard properties east of Kelowna. Boss is still working with the B.C. government to conclude the settlement.

Talbot says that if Strateco halves its burn rate to $200,000 per month and defers the repayment on the $2.8-million Sentient bridge loan, it might survive another 20 months. He adds that a foreign company may be interested in buying the project to add to its pipeline, until better days for uranium mining arrive in Quebec.