This is an article written by Doug Beattie. He was so generous to let me republish his articles, under the condition that I would make several things clear for readers before they continue with the article:
Biography of Doug Beattie
Doug Beattie is a retired Chief Mine Engineer of Cameco, one of the largest uranium producers in the world, and is knowledgeable on uranium mines and mining. He also spent approximately eight of his 30+ years in the mining business working as an engineer at zinc mines including Noranda’s Geco copper/zinc/silver mine in northern Ontario, and Glencore’s George Fisher and McArthur River zinc/lead/silver mines in northern Australia. Doug Beattie graduated in mining engineering at Queen’s University.
After working as a mining engineer in Saskatchewan, Ontario and Australia, he joined Cameco Corporation in 1993 as Senior Mining Engineer at the McArthur River exploration project. He later became Engineering Superintendent during the construction phase, and Mine Superintendent during the ramp-up to full production. In 2002 he became the Corporate Chief Mine Engineer at Cameco’s head office where he was largely involved in uranium project assessments and studies. He then consulted on a number of projects in Canada and Europe before full retirement in 2015.
This sums up the biography of Doug, his article is next, enjoy:
For those aspiring mining entrepreneurs out there, that want to see a text book example of how to run a junior mine development company that ultimately found a lucrative exit strategy then you would want to review the history of Energy Metals during the last uranium boom.
But first, a ramble. Although I have mentioned the Cold War and its impact on uranium mining, I have not mentioned much in the past about the uranium boom that occurred in the late 1970’s when nuclear power was in a major growth phase. Uranium prices spiked in the late 1970’s for a number of reasons including the projected growth in reactor requirements and US government policy related to enrichment scheduling. The growth in perceived uranium requirements was a key reason why mines such as Ranger, Rabbit Lake, Key Lake and Rossing were developed. It was also the key reason why many high cost mines in places such as Elliot Lake Ontario (where I worked) got a new lease on life after the Cold War
Industry perception changed however, on March 28,1979 when the Three Mile Island nuclear accident occurred in Pennsylvania. This resulted in the cancellation of a multitude of planned reactors worldwide. Suddenly the industry realized that uranium requirements going forward would be much less than envisioned and that the massive surpluses built up during the 1960’s and 1970’s would be available in one form or another to fulfill the gap between mine supply and demand as clearly any grade schooler could figure out in hindsight from the figure below. Uranium prices crashed and along with it, so did mine production.
As a very pertinent aside (a ramble within a ramble I guess) this is very similar to todays situation. You can clearly see in the two figures above that mine production did not collapse until the late 1980’s despite spot prices collapsing in the early 1980’s. The reason for this is due to the nature of long term contracting between miner and utility. Floor pricing would keep many miners viable until those contracts expired.
In some cases, such as the mines in Elliot Lake, contracts were “cost-plus”. In other words, the utility paid the miners operating costs, including depreciation etc., and then paid a profit on top of this ($4/lb. seems to come to mind but I am looking back over 35 years).
The point is, we have witnessed the exact same supply/demand phenomena in the past few years post-Fukushima. Spot price collapsed but producers hid behind their long-term contracts while willfully ignoring the 30-40 million pound a year of surpluses this created hoping someone else would blink first.
The net result is utilities sitting on uranium they will not need for a few years and a supply chain clogged with excess uranium in one form or another (U3O8, UF6, EUP) also. I will leave it to you to calculate the number of years it took for the spot price to rise again post-1980’s collapse. It also reveals the desperation utilities were in back then to lock in future uranium deliveries. Why else would they sign cost-plus contracts and assume all the miners financial and technical risks? I don’t sense any utility desperation these days. Instead, I see Kazakhstan frustrated that they can’t find a buyer for even more of their production.
This is what I wrote about the situation in the US in my 2005 IAEA work:
So now back to Energy Metals. Why this legacy is important for the Energy Metals story was the fact that there was a very large number of uranium properties available post the 1980’s bust that had been well defined including many that had been partially mined. It would be relatively easy, therefore, to acquire many of these properties while uranium prices were depressed. Many could be simply re-staked while others could be acquired on the cheap from largely private, long suffering, landowners or bag holders.
So a company called Clan Resources was rebadged as Energy Metals and a group of properties acquired in the past by William Sherriff were folded into Energy Metals. Energy Metals then went on an acquisition spree utilizing their stock as the currency.
These guys were good. Energy Metals went about ticking all the right boxes:
I was of course, sitting back in Saskatoon watching all of this from the comfort of my desk at Cameco. The problem was, the long list of properties they had acquired were to a large extent crap. I was going to run you through a quarterly blow by blow here (acquisitions, market capitalization, working capital etc.) but I would probably lose your, and my, interest in the process. I will cut to the chase scene, therefore, and just show you the long list of properties they were illustrating to shareholders in their last quarterly report in May of 2007.
A key takeaway from Part 2:
I have never witnessed this type of approach being used in other commodities. I guess the response they were looking for was for investors to do a sum of all the total resources listed in the table and then multiply it by some sort of $/lb. factor to come up with a reasonable market capitalization for the company at current uranium spot prices. There were a number of analysts egging on this type of approach at the time. And I see some of these twits are up to old tricks again today.
But summing the pounds in the ground at one crappy property with another crappy property two hundred miles away just gives you nothing more than two crappy properties. Tallying up over 30 crappy properties should elicit the response, “who gives a shit” but this is not how euphoric markets operate. Not one property in that list had even reached the Preliminary Economic Assessment stage yet. So, when you see the next round of uranium promoters taking the same approach, call bullshit and keep your distance.
Again, most of the mania here was related to the hedge fund induced uranium spot price. Living in our $50/lb. long term contracting world at Cameco, the list above illustrated perhaps 2 or 3 mildly interesting assets that could be mined by ISL methods. Energy Metals star asset, La Palangana, was in fact a well known previous technical and commercial failure operated by Union Carbide. But it had a mill within driving distance at Hobson, so it led to the impression of quick production potential to then further the impression that Energy Metals would be a near term producer. But this was really alarm bell number one for us industry veterans. If this is the best they got, they got nothing.
Moore Ranch and a couple others were possibilities but Cameco at that time had plenty of similar undeveloped assets on their books (Gas Hills etc.). Not only must an acquirer contend with the capital and operating costs associated with building out one of these assets, they must add on the acquisition cost of the company in the first place. So no serious uranium mining company was going to touch Energy Metals.
You really truly had to believe that long term contract uranium prices north of $100/lb. were here to stay forever. And there were some believers.
One such believer (in public at least), which I will discuss in Part 3, was Uranium One.
The last quarterly report put out by Energy Metals on May 11, 2007 illustrates the following:
Shares outstanding: 81.18 M
Exercisable options and warrants outstanding: 5.03 M + 3.05 M
Working capital: $C97.9 M
Share price close May 11,2007: $C 15.50 (TSX) / $US 13.95 (NYSE)
Market capitalization (undiluted): $C1,258,290,000 / $US 1,132,461,000
Energy Metals Q3 2007 Management Discussion
Energy Metals Q3 2007 Financial Statements
The links above also provides a list of the wheeling and dealing that went on at Energy Metals since inception. (Note Critical Investor: links no longer work so are left out)
In late 2005 these figures were:
Shares outstanding: 31.21 M
Options and warrants outstanding: 4.00 M + 1.17 M
Working capital: $C31.1 M
Share price*: $2.41
Market capitalization (undiluted): $C75,200,000
*Since I could not find a TSX share price graph dating back 13 years for this now defunct company, I had to base this off of the dollar value of transactions done utilizing shares. Specifically, the issuance of 1,350,000 common shares valued at $3,575,000 in late 2015.
So despite 160% shareholder dilution in 15 months, the stock price rose over 600% and the market capitalization rose 1,600%. A good gig if you can get it.
On June 4, 2007 Energy Metals announced that Uranium One had made an offer for the company whereby Uranium One will exchange 1.15 of their shares for each share of Energy Metals. A roll up company being rolled up themselves. This valued Energy Metals stock at C$19.12 per share, a theoretical 28% premium to the 20-day volume weighted average trading prices of Energy Metals and Uranium One. Energy Metals quickly accepted the offer. Santa came to town.
The insiders and early shareholders at Energy Metals made off like bandits, providing they remembered to sell their shares of course.
On August 10,2007, the acquisition of Energy Metals by Uranium One was reported. It was accounted for in US dollars as:
But you know what comes after a boom. The bust.
On February 21,2008 the CEO of Uranium One resigned.
On November 14,2008, 14 months after closing the acquisition of Energy Metals, Uranium One reported the following $2.8 Billion in impairments for numerous assets including those acquired by Energy Metals:
Hobson and La Palangana was written down to a fair value of just $6.2 M. The “United States conventional mining projects” referred to a separate purchase of the Shootaring Canyon Mill from U.S Energy. Another stranded legacy asset from bygone days that made absolutely no sense to us even at $100/lb. Energy Metals’ list of exploration projects presented previously was largely written off.
Uranium One’s share price dropped 80% from its peak. So it was the shareholders of Uranium One that got the shaft for the Energy Metals acquisition and other theatrics (Part 3). Hence, those that did not sell the stock they received in the takeover would have also been dealt this blow. It was only the prior astute acquisition of UrAsia’s Kazakh assets that saved Uranium One from bankruptcy and delisting in my mind.
Shortly after the write-down, Uranium One gave up on trying to commission La Palangana.
Uranium One continued on with the development of Moore Ranch including the acquisition of Orano’s nearby processing plant at Christensen Ranch/Irigaray for $35M.
In late 2009, they sold Hobson and La Palangana to UEC for shares. UEC subsequently failed to put this property into commercial production. No surprise there.
Moore Ranch received its operating licence in late 2010 and produced 214,800 lb. in 2011 (480,600 lb. in 2012 and 940,000 lb. in 2013) after being rebadged as Willow Creek. Well field development ceased in 2013 due to low uranium prices resulting from the Fukushima accident. Although they reported $24/lb. operating costs in Q3, 2013 for instance, you need to understand that well field development costs are capitalized at ISL’s so this likely pushed all in costs (AISC) above $45/lb. In a $100/lb. world this property would have been a great success though.
The Russians were after Uranium One’s Kazakh assets so eventually did a full takeover of Uranium One and subsequently shut down Willow Creek. (Ramble alert- I therefore get a kick out of this Clinton/Uranium One conspiracy theory since, trust me, the Russian’s could not give a hoot about the US assets they acquired.)
So once again, the properties in the long list above have returned to scrubland. Albeit, some now have a bit more metal sticking out of the ground. And somewhere in that process, a billion or so dollars got transferred out of someone’s pocket into someone else’s.
So more takeaways from Part 2-
If you want to dabble in what are essentially tracking stocks for a given commodity, fine, that is your business. You would have been handsomely rewarded with Energy Metals if you got your timing right. Just remember that most of these stocks will eventually fade away to obscurity once the story does not pan out and the treasury is empty. Remember to sell them when the underlying thesis, in this case a rising uranium price, is no longer valid. Let someone else be the final bag holder.
Most of what you will hear from analysts, particularly those from the smaller brokerages, is nonsense. Most of them have no idea how to value a uranium property so will grasp at crazy metrics such as pounds in the ground times $ Fill In The Blank /lb. in order to come up with a reasonable share price. Even some of the larger brokerages like BMO issue a lot of crap from time to time particularly if they have a role in the underwritings. So, get multiple viewpoints before you pull the trigger. Don’t just listen to the Rob Chang’s of this world. They are not on your payroll. But rest assured they are on someone’s. And there is a very good possibility this someone does not have your best long-term wellbeing in mind.
Only speculate with money you are willing to lose. Under no circumstances should you consider these types of plays to be investments. Buy a good pair of running shoes and pay attention for the first few flames signalling the house is about to burn down.
Finally, I got a kick out of trying (unsuccessfully) to track down a graph of the Energy Metals share price rise during all this time. Only to find out that Energy Metals former trading symbol EMC.V has now been commandeered by a marijuana company. I thought, how appropriate.
Doug Beattie, February 1, 2019.
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