The world rediscovers nuclear

There’s a buzz about nuclear energy at the moment that hasn’t been felt since the 1970s, and it’s positive.

Increased energy consumption around the world, environmental concerns about greenhouse gas emissions and an unstable Middle East have countries scrambling to find cleaner and more reliable sources of energy. Uranium is becoming a vital piece of the world’s future energy needs.

“We see that countries representing half the world’s population are building new nuclear power plants and a number of countries that historically have not had nuclear energy are in the planning stages to introduce it into their electricity mix,” said Cameco (CCO-T, CCJ-N) president Jerry Grandey during a recent investment presentation to a New York audience. Indonesia, Turkey, Vietnam and Brazil are among those countries contemplating a nuclear future.

“There are growing signs that a large quantity of that electricity as we look out into the future will be generated by nuclear plants,” he said. “It’s our now strongly held belief that we are in the beginning stages of a nuclear renaissance.”

Currently, 32 countries use nuclear energy, accounting for 16% of the world’s electricity generation, just behind hydropower at 19% and considerably behind the use of coal, at 39%. There are 440 commercial nuclear reactors operating in the world, including 103 in the United States, with one more to be brought back on-line in 2007.

Energy legislation passed in the U.S. in August 2005 recognized, for the first time at a national level, the clean air benefits of nuclear energy and provided encouragement to jump-start the construction of a new generation of nuclear plants, according to Cameco’s recent annual report.

Grandey projects that over the next 10 years, the number of plants in operation will grow to 506 despite the decommissioning of 16 smaller units. Most of the new projected growth will come from China, India and othe parts of Asia. Fifty-seven new reactors are scheduled to be built over the next decade, primarily in China and India.

“We expect our industry will play an increasing role in providing sustainable energy supply for the world’s growing population,” says Kim Goheen, Cameco’s senior vice-president.

Uranium demand has far outstripped supply for the past 20 years. The global market uses about 176 million lbs. U3O8 per year, while mine production in 2005 was around 108 million lbs. or 63% of demand. The shortfall has been made up mainly from a depleting inventory sourced from dismantled nuclear weapons, excess inventories and recycled product.

“While there are still inventories, they are considerably reduced and in many cases might be classified as strategic rather than excess and, therefore, are not available to be used or sold,” says Cameco’s 2005 annual report.

Based on a projected 2% annual growth rate, world demand will reach 217 million lbs. in 2015.

“Even under a business-as-usual case, new production is going to be required; new investment is going to be required,” Grandey concluded.

The spot price for uranium has risen from near-historic lows of US$7.10 per lb. at the end of 2000, to the current price, around US$45 per lb.

“We’ve been living on inventory and we know that inventories are finite and because of that relationship we expect that the market will continue to be tight,” Grandey explained. “We will continue to live on inventories even as new mines are brought into production, but like any commodity, at some point in time we’ll find a level where the price begins to respond to oversupply and so you could expect some volatility. Our guess is there will be some volatility but the underlying long-term fundamentals, given the nuclear renaissance, we think are quite positive for this industry.”

Meeting demand

To meet growing demand, several new mines are coming on-stream, including Cameco’s Cigar Lake in Saskatchewan and Inkai in Kazakhstan. Cameco intends to increase its uranium production by 50% over the next four years. However, there has been a historic underinvestment in uranium exploration, which is now about a year and a half into a third wave or cycle of exploration. The first was back in the 1950s, and the second, in the late ’70s and early ’80s. The last exploration cycle resulted in the discovery of the Key Lake and Cigar Lake deposits in Saskatchewan and Jabiluka in Australia.

“For literally two decades or longer, this industry has done almost no exploration,” Grandey noted. There are now well over 100 junior exploration companies searching for uranium worldwide.

“We know that some over the next three to five years will succeed (in exploration).” Grandey said. “Cameco’s strategy here has been to kind of watch and observe and try to pick a few here and there to get close to.”

Cameco recently acquired a 19.5% interest in Unor (UNI-V, UNOFF-O) by subscribing to just under 23 million common shares priced at 40 apiece for $9.2 million in proceeds. UNOR (formerly Hornby Bay Exploration) holds 2,200 sq. km of mineral claims in northwestern Nunavut on the Hornby basin, a geological formation with similar characteristics to the uranium-rich Athabasca basin of northern Saskatchewan.

Cameco also owns a 21.7% stake in UEX (UEX-T, UEXCF-O), a junior exploration company formed in 2002 from a combination of uranium properties previously held by Cameco and Pioneer Metals (PSM-T, PNMTF-O). As long as it maintains at least a 20% interest in UEX, Cameco retains certain uranium marketing rights related to future discoveries. As well, Cameco has the right to mill uranium produced from any of the properties it contributed to UEX at the time of its formation.

“Uranium is an abundant element, some forty times more common than silver,” Grandey noted in the company’s annual report. “We know that significant deposits are out there to meet the expanding needs of the rejuvenated industry. It is just a matter of money, time and talent.”

Cameco is the world’s largest uranium producer and the largest supplier of uranium. According to Grandey, the energy content of the company’s reserve base of 526 million lbs. U3O8 is equal to 15.3 billion barrels of oil or 4.3 billion tonnes of coal.

Surging uranium prices have resulted in renewed interest in the Athabasca basin, a region known for hosting some of the world’s richest and highest-grade uranium mines and deposits. Much of the basin has been re-staked over the past two years, with more than 25,000 sq. km locked up. There are at least 35 companies active in the Athabasca basin, with exploration programs ranging from reconnaissance prospecting to more sophisticated geophysical methods targeting deeply buried deposits, diamond drilling of regional targets and deposit delineation.

“During the low price environment of the past two decades, Cameco invested sufficient funds to retain its large land position in the best hunting ground, Saskatchewan’s Athabasca basin,” said Grandey in the company’s annual report. “Perhaps most prospective in the near-term are areas around our existing mines as exemplified by the resource addition at Rabbit Lake and by the promising drilling results last year adjacent to our McArthur River mine.”

Cameco is spending $32 million on uranium exploration during 2006, up 25% over 2005. The company has expanded its exploration activities by acquiring several new land positions in Nunavut, the Northwest Territories, Quebec, Australia and Gabon, West Africa.

Lasting potential

The discovery in 2000 of the Millennium deposit by the Cree Extension joint venture, led by Cameco, shows the basin’s potential has not been fully exhausted in the almost 40 years that have passed since the first major uranium discovery, Rabbit Lake, was made in 1968.

Host to a resource totalling 57 million lbs. U3O8, the Millennium find represents the culmination of nearly 25 years of exploration in a relatively mature area of the basin. The Millennium deposit was found in the eastern part of the basin, 35 km
north of the former Key Lake mine. Drill indicated resources are estimated at 449,000 tonnes grading 4.63% U3O8, for 45.8 million lbs., while an additional 280,000 tonnes averaging 1.81% U3O8, or 11.2 million lbs., are inferred.

The Cree Extension project is a joint venture held 42% by Cameco, 30% by Japan-Canada Uranium (JCU) and 28% by Cogema Resources, a wholly owned subsidiary of Areva (ARVCF-O). The partners are undertaking a prefeasibility study and some environmental baseline work on Millennium this year.

“Recognize that no development decision has been made, but in today’s price environment one would be likely,” Grandey said, adding that, in the developing world, the permitting and licensing process would still take six to 10 years before commercial production could be achieved.

Saskatchewan’s Industry and Resources Ministry estimates that about $66 million was spent on uranium exploration in 2005, more than double the previous year. Some of the larger exploration programs in the province are being conducted by Cameco, Cogema and UEX.

Saskatchewan produces 100% of Canada’s uranium output from three operations in the Athabasca basin — McArthur River, Eagle Point and McClean Lake, which accounted for 29% of the world uranium output in 2004. These three mines produced a total of 30.2 million lbs. U3O8 in 2005, which is just slightly ahead of the previous year’s 30.1 million lbs.

Cameco’s flagship operation in the Athabasca is the McArthur River underground mine, near Toby Lake in the southeastern portion of the basin, 620 km north of Saskatoon. McArthur River is the highest-grade uranium deposit in the world. Discovered in 1988 by Cameco and put into production 10 years later, proven and probable reserves at the end of 2005 stood at 727,000 tonnes grading an astonishing 24.3% U3O8, equal to 389 million lbs. U3O8. With a direct and indirect participating interest of 69.8%, Cameco’s share of the reserve base is 272 million lbs. Cogema Resources owns the 30.2% remainder.

Additional measured and indicated resources are estimated at 80,700 tonnes of 9.33% U3O8, or 16.6 million lbs., while inferred resources contain a further 585,000 tonnes grading 7.35% U3O8, for 95 million lbs.

Continued exploration drilling at the north end of the McArthur River deposit has returned “significant new results” that have the potential to further expand resources with further confirmation drilling, reports Cameco.

Notwithstanding the richness of Saskatchewan’s uranium deposits (the average grade of uranium orebodies elsewhere in the world — the U.S., Australia and Africa, is in the order of 0.15% to 0.3% U3O8), the prairie province does not have the world’s largest reserves.

The ore mined at McArthur River is initially processed in an underground grinding circuit, then pumped to surface in the form of a slurry into holding tanks and trucked some 80 km southwest to the Key Lake mill for processing under a toll-milling agreement. The Key Lake mill is operated by Cameco, with a 66.7% ownership. The remainder is held by UEM, a company owned equally by Cameco and Cogema.

The mine and mill are licensed to produce 18.7 million lbs. U3O8 per year. Cameco is seeking to increase the annual limit to 21-22 million lbs. It had hoped to receive regulatory approval in 2005, but the process is currently on hold.

Heavy metal buildup

“As we went through the permitting activities for the expansion, we discovered that where we’re discharging the water there has been an accumulation in the sediment of two heavy metals: molybdenum and selenium,” Grandey said. “Even though we’ve met consistently the discharge limitations that are imposed upon us by federal and provincial standards, the fact that we have this accumulation of heavy metals — from Cameco’s perspective — is unacceptable.”

Cameco is now reconfiguring the back end of the mill to further reduce the effluent concentrations, which could delay the proposed expansion by another two years.

Cameco’s 100%-owned Rabbit Lake mine has been operating some 30 years, and almost year-by-year producing 6 million lbs. U3O8. It was expected to be nearly mined out by the end of 2007, but the company has been very successful in replacing ore reserves. Over 75,000 metres of drilling was completed in 2005, contributing to a net increase of 2.8 million lbs. U3O8 in reserves and 7.2 million lbs. in resources after accounting for the 2005 mine production.

“We’ve been quite encouraged in finding additional resources around the existing operation,” Grandey said. “There are a number of smaller deposits in the Rabbit Lake area that, in a US$7 environment, were not developed. In a US$44-market, going back and looking at those opportunities may make a great deal of sense.”

During the first quarter of 2006, 40 surface holes totalling 8,500 metres were completed at Rabbit Lake. Several holes are reported to have intersected encouraging results. One hole returned 1.76% U3O8 across 1.7 metres and 1.87% U3O8 over 3.3 metres at a site collared 100 metres south of the 144 zone at the Eagle Point mine.

In addition, underground exploration drilling at Eagle Point intersected 48.3 metres of 1.13% U3O8 and 17.2 metres of 0.99% U3O8, while testing the plunge of the 02Next zone.

At the end of 2005, proven and probable underground reserves were estimated at 383,100 tonnes grading 1.3% U3O8, or 11 million lbs. An additional 7.5 million lbs. is contained in 456,300 tonnes of indicated resources grading 0.74%, while inferred resources host a further 104,700 tonnes averaging 1.6%, for 3.7 million lbs.

Ultimately, the Rabbit Lake mill will be used to process ore from Cigar Lake.

High grade

Cigar Lake is another rich, high-grade orebody, second in the world only to McArthur River. In December 2004, based on proven and probable reserves of 551,000 tonnes grading 19.06% U3O8, for 231 million lbs., the Cigar Lake joint venture approved the project’s $450-million development after the Canadian Nuclear Safety Commission approved the construction licence. An operating licence still needs to be approved.

Cigar Lake is 40 km inside the eastern edge of the Athabasca basin, 660 km north of Saskatoon. Cameco is the operator of the joint venture, with an ownership of slightly more than 50%. The other partners include Cogema, with a 31.7% stake, Idemitsu Uranium Exploration Canada at 7.8% and Tepco Resources, holding 5%.

Cameco is building surface and underground facilities to support an operation that is expected to produce 18 million lbs. U3O8 for at least 15 years during the first phase of operation. Based on additional inferred resources of 317,000 tonnes averaging 16.9% U3O8, or 118 million lbs., a second phase of production will extract the remaining portion of the deposit for another 15 to 25 years at a reduced operating rate.

Initially, the Cigar Lake uranium will be processed at Cogema’s McClean Lake operation, 70 km northeast. As Cigar Lake ramps up to full production, just over half of final uranium processing will take place at Cameco’s Rabbit Lake mill.

Official construction began at the start of 2005. By the end of the year, the development of the underground workings was about 55% complete but in early April, construction of a 6-metre-wide, concrete-lined ventilation shaft was halted due to a water leak at the bottom of the shaft, some 392 metres below surface. The water inflow began after the mechanical failure of a valve used to prevent water from coming up a hole that had been drilled in a highly fractured and saturated environment. The drilling was being done ahead of the shaft development in order to test for the presence of ground water and to grout and seal off any inflow of water.

The company now plans to freeze the shaft area to allow for its completion, meaning about a 6- to 7-month delay in getting the ventilation shaft connected to the underground workings. Like McArthur River, Cameco is freezing the Cigar Lake orebody so that it can be mined safely. A room has
already been established in the underground workings under the shadow of the second shaft and freeze holes are being drilled up into the affected area.

Capital costs at Cigar Lake have shot up to $660 million from the previous revised estimate of $520 million. There may be added unforeseen costs — to the tune of $50 million — in completing the ventilation shaft, but the project has experienced cost overruns that are being blamed on increased energy costs and a shortage of contractors and trades people due to competition with the oilsands. The increase in capital spending also includes modifications at the Rabbit Lake and McClean Lake mills.

Construction of Cigar Lake was originally scheduled to take 27 months. Cameco now expects Cigar Lake won’t be ready to begin production until the end of 2007.

In related exploration news, Cameco is targeting the Collins Creek zone, part of the Dawn Lake joint venture, with an aggressive infill program of 25 holes to produce an initial resource estimate. Recent exploration at Collins Creek, about 15 to 20 km northwest of the Rabbit Lake mill, has outlined mineralization over a strike length of 650 metres and at depths of about 200 metres. The best hole of last year’s campaign intercepted 5.62% U3O8 across 7.8 metres. Five of the first eight holes of the 2006 program have intersected uranium mineralization, with the best intercept grading 1.96% U3O8 over 21.6 metres.

The Dawn Lake joint venture is held 57.4% by Cameco, 23.1% by Cogema and 19.4% by JCU. A recently completed prefeasibility study on the small Dawn Lake deposit itself concluded development to be uneconomic at this time. Dawn Lake hosts an indicated resource of 347,000 tonnes grading 1.69% U3O8, for 12.9 million lbs.

Coming soon: Rob Robertson’s report on the uranium juniors active in the Athabasca basin.