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Doug Beattie: The Last Uranium Boom; Part 3- Uranium One, The House of Cards

Posted on: Dec 8, 2021

Introduction

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:

  • Readers should be made well aware that Doug Beattie is retired and has not accepted, and will not accept, any compensation for the reports  he has written.  Once compensation comes into the equation, it takes away some of his editorial liberty and would likely cause him to become very cautious with what he has to say.
  • Secondly, with respect to the zinc modules in particular, he has based his assessment on publicly available information only, hence he does not have the "inside angle" that analysts at the brokerages, traders etc. have. Since most of these modules were written over two years ago, many of the links are no longer functional.
  • The uranium work is largely based on recollections since he no longer keeps a library of information, apart from what is publicly available.
  • That Doug cannot be held liable for anything he has written in his articles
  • That these reports are often on the whimsical side and readers should bear this in mind.
  • That Doug has given me permission to republish.

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:

 

The Uranium One story is an interesting one of how a good front man with a story to tell took the uranium world by storm while attempting to teach those poor schmucks at Cameco, with all their production headaches, a thing or two in the process.

Uranium One started out life as sxr Uranium One which was a combination of Southern Cross Resources’ Honeymoon Well mine in South Australia with a company called Aflease listed on the JSE.  Aflease had the  Dominion property in South Africa.  I will only discuss Dominion in this blog.

Dominion Mine

The CEO was sure not shy about promoting Dominion at various dog and pony shows (NEI, WNA meetings etc.).  We were told such things as “the mine would grow to rival BHP Billiton’s mammoth uranium and copper Olympic Dam mine, in Australia.”  The CEO would often tout that their production costs were going to be in the $14.50/lb. U3O8 range.

The Dominion Mine is located near Klerksdorp in South Africa.  I had the privilege of visiting this mine during its construction.  The uranium was contained in gold bearing shallow dipping reefs near surface that had been previously mined by Anglo American amongst others.  The reefs would be mined at a minimum 1 m (3.3 ft.) height and maximum of 1.6 m (5.3 ft.) in height.  The picture below gives you a sense of how cramped it is at the mining face of typical reefs in South Africa.

Gold mining occurred on the property sporadically.  During the Cold War (1956-1961) there was some recorded uranium recovery also on the property.  You can get a sense for this previous near surface mining in the plan view below.   Below this figure is a plan view illustrating the combined Dominion/Rietkuil property where they illustrate the location for four declines to access the ore.  The reefs cover an area of approximately 20 km x 15 km and dip gently but are highly faulted in places.

I had a number of concerns with what Uranium One was up to at Dominion but key amongst them was the way they were calculating resources and reserves.  The concerns I had were somewhat technical so I have pushed off a discussion of these concerns into a footnote at the end of this blog.

Why I tweaked to this issue in the first place was because I would review the diamond drilling results that were issued routinely and the great majority of the holes reported grades far less than the resource grades being reported in the NI 43-101’s.  The law of averages states that this should not occur unless there was a very skewed grade distribution.

Below is the production schedule for the ramp up phase that was provided in the October 26,2006 amended NI 43-101.

The actual mining results were:

1Based on sampling at the mining face.  Mill head grades are routinely 10-20% lower.

2 Includes production from reprocessing tailings

3 Q1-Q3 2008 only.

So the mine that was supposed to produce 1.9 million tonnes of ore in 2008 was actually on trend for about 450,000 tonnes instead.  Mill head grades in 2008 were only about 60% of plan.

The mine was shut permanently in October 2008 and Uranium One reported $1.8B write down on the asset shortly after.   The reasons given for the shutdown were:

The problem with some of this reasoning is that the price of uranium at the time the shutdown was announced was similar than the price assumed in their studies.  The spot price was approximately $46/lb and remained at or above this for the next five years.  The financial model used $48.5/lb for 2008.  The real reasons for the closure were:

  • The grades to the mill were overstated in the studies;
  • The capital cost of building the mine to full production were greatly understated;
  • The sustaining capital costs to ramp up the mine were greatly understated;
  • The operating cost per pound, that was promoted extensively by the CEO ($14.50/lb.), was bogus.

The Dominion mine was a sham from the get go.  The Dominion asset was touted to be the “flagship asset” that was then leveraged into a number of large acquisitions using Uranium One stock as the currency for these acquisitions.  If the market knew that Dominion was actually a bust before these acquisitions, they would not have had the necessary share price and market liquidity to do these acquisitions.   And for this I blame the analysts at the brokerages for not being very inquisitive early on.  (There was one journalist at mineweb.com, now moneyweb.com, who was crying bullshit here but he was obviously drowned out.) Uranium One was truly an empire built on a house of cards called Dominion.

After the acquisitions occurred, the analysts went for a site tour at Dominion.  I have no idea what transpired on this tour but some of the analysts apparently came back with some skepticism.  I received a call from one of them a few days later where I described the concerns that I had, for probably close to a year now, along the lines of what I present in the footnote at the end of this report.  I guess I confirmed their suspicions.  Within a week or so, negative reports started to emerge from the brokerages and the game was finally up.  It was only a few weeks later when the CEO resigned (I have no idea what the precise reasons were for this sudden resignation).

Some takeaways from Part 3:

  • Time is both the friend and enemy of junior mine development companies.  It is possible to say and write generally whatever you like with respect to what your future mine will produce and what it will cost while it is still a generally barren field.  NI 43-101 was supposed to clean this mess up but it has not in the least bit.  (Most companies have merely circumvented the NI 43-101 process by issuing PEA’s instead for instance).  But eventually, it comes time to deliver the goods via mine construction and operation.  This is when time becomes their enemy.   The time between these two events is the honeymoon where the stock can act as a currency in order to complete numerous alternate deals and acquisitions.  And insiders can have a field day exercising options etc.   This is the period where time is their friend.  (Ramble alert- An example of a company where their honeymoon is coming to an end quickly is New Century Zinc.  We shall see soon enough if in fact they will be a top ten zinc producer.)  So be cognizant of where the company is in their story line and be cognizant to rumours that it may not be true;
  •  It is important to understand who has derived the key metrics of a given project.  In other words:

- Was the resource determined by an independent geologist or was it generated by the company and then signed off for NI 43-101 purposes by an independent geologist?  For the later case, the potential for coercion or bias can exist.  In other words, it is much easier for an independent geologist to go with the company flow then call bullshit in the 5% of the cases, such as Dominion, where it should be called;
- Who did the operating and capital cost estimate?

  •  If it was an EPCM firm (such as Wood, Fluor, Bechtel etc.), this gets full marks.
  • If it was a hired group of independent consultants, such as RPA, SRK etc. this gets only half marks since many of these firms have limited to no experience with recent project engineering, procurement and construction management hence do not have the background, nor up to date cost databases, necessary to properly estimate costs.  And they are usually on a very tight study budget.  Indirect costs are usually woefully underestimated for instance.
  • If the junior mine development company itself did the operating and capital cost estimate, this gets no marks, since it is usually their jobs on the line if the financial model does not hold up.   They are intrinsically biased to report low figures.  And they routinely do, knowing it will probably be two years or so before anyone figures this out.

I scratched my head a bit about the size of the write down Uranium One took for the Dominion mine since the amount spent to build the mine was only a small fraction of the write down taken. I was surprised at what I discovered.  The write down for Dominion was in fact largely a write down of the UrAsia Energy acquisition.

The problem you have when one over priced company takes over another over priced company with stock is that the dollar equivalence of that transaction then comes on the books of an acquirer as an asset equivalent to the purchase price.  But that asset value may be many times more than what the underlying assets will ultimately generate in free cash flow going forward.  Hence the accountants require you to do a write down in asset value.  In this case the asset value of the UrAsia acquisition was $1,837,322,000 and was accounted for as:

However, months later the segmented asset values presented were:

The assets of UrAsia included:

Wtf?  The $1.8 B “spent” acquiring UrAsia with Uranium One stock now shows up on the books with an asset value of roughly $0.8 B with the other $1B or so charged to the Dominion mine which had nothing to do with this transaction.  Things that make you go hmmm.  Did Uranium One know a year beforehand that they were going to eventually write off Dominion?

The $1.8 B Dominion write off was therefore largely a write off of the goodwill associated with the UrAsia acquisition.

In Part 2, I discussed the Energy Metals acquisition and the large write down subsequently took there.  The Shootaring Canyon Mill was also written off as was the Honeymoon Uranium Project as illustrated below.  At the end of the day, the only performing assets Uranium One possessed were the ISL assets in Kazakhstan.

To me, what Uranium One represented was a convenient place for other uranium stock promoters to dump their company in order to acquire stock of Uranium One that they could then liquidate onto the TSX and NYSE retail markets.   Ultimately, retail investors once again got left holding the bag.

Cameco never got involved in acquiring over priced assets largely because they do not do non-accretive acquisitions with stock.  They use cash.   Making acquisitions at this time meant the taking on of considerable goodwill onto the balance sheet that would then have to be written off.

FOOTNOTE

The flaw I found in the resource/ reserve calculations at Dominion was the use of “post-processing” in order to artificially raise the grade of their deposit.  The language as provided in one of a number of NI 43-101 reports is cut and pasted below.

I literally had to read that about five times to understand what these guys were up to.  I then ran it by a couple company geologists to confirm my interpretation was correct.

The geologists reading here will probably follow along nicely but don’t worry if you don’t. For the rest of us, I will try to summarize this geobabble as:

  • Diamond drilling occurred on roughly 200 m centres from surface;
  • The reef was subdivided into 240m x 240 m blocks which meant that there was usually only one drill hole per block;
  • This 240m x 240m block was then subdivided into 30m x 30m blocks for 64 blocks in total;
  • Grades were assigned to these 30m x 30m blocks using geostatistical probabilities;
  • Based on the geostatistical grades assigned, those blocks that were below a grade of 30 cmkg/t were removed from the resource.  The remaining blocks constituted the indicated and inferred resource;
  • The indicated resource was then converted to probable reserves by applying a number of recovery and dilution factors.

The key fundamental problem with the above approach is the fact that although geostatistics may be able to approximate what number of 30m x 30m blocks are expected to be above the cut-off grade in a 240m x 240m block, it cannot tell you where they are located.

So if you had a diamond drill hole grading 0.5 kg/t U3O8 over 100 cm (50kgcm/t), using the logic above, you could convert this into a block of ore grading perhaps 0.7 kg/t albeit with fewer tonnes in that block due to the removal of the theoretical low grade blocks.  I never witnessed this sort of nonsense from geologists underground during my career.

This must have made for some interesting planning meetings that could go like this:

Mining Engineer:  Good morning Peiter, we need to lay out block E43 so we can start mining.  What can you tell us about it?

Geostatistics guru: Morning Neal.  Our model tells us that there are 43 30m x 30m blocks in that 240 m x 240 m block that are above cut off grade.  We expect the tonnage to be 108,000 t grading 0.7 kg/t.

ME:  Great, can I get a plan view of where those 43 blocks are so I can layout the access tunnels?

Geo:  I’m sorry, that is not how geostatistics works Neal.  It’s all based on probabilities don’t you know?  There are probably 43 blocks above cut off grade but we are not sure where.

ME: So how am I going to extract the stuff in the reserves and not the low grade stuff beside it that is not?

Geo:  That is your problem, not mine.

Even the auditors (SRK) of the resources admit to this problem when they state: “Large blocks can be represented as a set of smaller blocks, selective mining units that are contained within the larger block or panel and could somehow be selected for extraction on the basis of some future sampling programme, executed at or prior to the time of mining.” (Emphasis mine.)

In other words, the company has not told us (SRK) how they are going to go about finding the higher grade bits, but we will sign off on their resources anyways.

We were then presented with the proposed mining plan illustrated below.

Uranium One clearly had no intention of running around trying to figure out what 30m x 30m blocks were and were not above cut off grade.  They were going to take it all as illustrated.

I therefore had the suspicion that the “post-processing” approach was used by Uranium One to counter some bad press that the mine was too low grade.  I recall a rather public pissing match between the CEO of Paladin Resources and the CEO of Uranium One at the time on this topic. It looked to me like some geologists had been coerced into presenting a theoretical case but not a practical case.

(Ramble alert- if much of the above sounds like Pretium’s Brucejack mine, you would not be wrong.  This is another case where probabilities have been used to determine grades but there is a question mark as to where the more attractive ore is spatially located sending the mine geologists and engineers on a wild goose chase underground daily.)

The tables and figures used in this blog are all from public filings for Uranium One and UrAsia Energy at www.sedar.com.

Doug Beattie, February 10,2009

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