December 16 2006 – ERIC REGULY
Forget the oil sands. If you want to find the real action, go to Saskatchewan’s extreme north, where about two dozen junior mining companies are staking land and poking holes in the ground looking for uranium. You can bet the nuke-happy leaders of North Korea and Iran can find the region on a map.
Known as the Athabasca Basin (not to be confused with the Athabasca tar sands), the area has some of the richest uranium ore grades on the planet. Australia’s famous Olympic Dam uranium mine, owned by BHP Billiton, has a 0.4-per-cent grade. In Athabasca, grades of 20 per cent or more are not uncommon. Saskatchewan’s Cameco, the world’s largest pure uranium play, with a market value of $16.2-billion, operates the industry’s largest high-grade uranium mine at McArthur River; the grade is 21.2 per cent. Cameco’s Cigar Lake project, the largest undeveloped uranium reserve, is almost as rich. A recent flood at the project will ensure that it remains in limbo for several years.
You can see why the juniors are tripping over themselves to find the next McArthur River or Cigar Lake. They have plenty of encouragement from investors, who throw money at the companies with alacrity and watch the investments soar like nuclear-tipped missiles. Purepoint Uranium, to pick but one name from the clutter, was a 30-cent stock in September. It traded yesterday at 94 cents. Even the biggies are on the move. Cameco is up 25 per cent over the past year, in spite (or perhaps because) of the Cigar Lake disaster. With the development on hold, already tight uranium supplies will get even tighter.
Uranium prices explain the dot-com-like performance of some of the uranium shares. Uranium spot prices collapsed in the 1980s, after the disasters at the Three Mile Island and Chernobyl nuclear plants. The end of the Cold War didn’t help. With no pressing need to obliterate the Soviet Union, the U.S. government sold millions of pounds of uranium to commercial generators. At one point, the price went as low as $7 (U.S.) a pound. While the government intends to unload more inventory, demand has climbed so much that the price has moved up relentlessly since about 2003. The latest spot price was about $65. Add in production shortfalls – Canada and Australia, the countries that dominate the market, will produce less this year than in 2005 – and you can find forecasts for $100 uranium.
Driving the price is the nuclear revival. For the first time in decades, dozens of nuclear plants are under construction, most in Asia, and many more are contemplated. Ontario wants to build one or two new plants. Alberta is considering a nuke to provide heat and energy to the oil sands. Reactors take a long time to build and operate for decades. There is no sense getting started on the multibillion-dollar projects unless there is security of fuel supply. Uranium isn’t exactly scarce. But the lead times on mine development can be horrendous, for environmental, safety, regulatory and technical reasons. The easy-access open-pit mines are being replaced by deep mines; Cigar Lake’s main reserve is 430 metres below the surface.
For investors, there is no shortage of choice. Merrill Lynch alone keeps tabs on about 70 uranium companies, most of which are Canadian and Australian, with some representation from Russia, the United States, South Africa and the former Soviet republics.
Evaluating the companies can be hard. The analysts tend to favour the ratio that divides enterprise value by reserves. Net present value – the present value of the future cash flows, minus the initial investment – is probably the better measure. That’s because of the projects’ potentially long delays and enormous production costs. What’s buried in the ground isn’t the only thing that matters.
Geography is a big factor. In Saskatchewan, investors are pretty much assured that a monster deposit will turn into a mine. The question is when. The regulatory hurdles can delay production for years.
Companies that discover uranium in other parts of the world, such as Southern Africa, might be able to start production far sooner because of lax environmental regulations. But dealing with the local government can be a long, dreary voyage into the unknown.
Take Khan Resources, which hit the TSX in August with an offering price at $1.50 (Canadian) a share and now trades at more than double that price. It owns 58 per cent of an existing, though inactive, uranium mine in northeastern Mongolia. It has no exploration risk even though analysts classify it as an “exploration” company. It wants 100 per cent but isn’t exactly sure how it will get it or what stake the Mongolian government might insist on taking.
For investors thinking of playing the uranium market, the bad news is that the easy gains have been made. The good news is that the nuclear revival is just getting started and uranium prices show no sign of going back to their old levels. There are still plenty of opportunities to make a buck on a commodity that spent almost 20 years in the dead zone.
ereguly@globeandmail.com
