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:
When in doubt, costs quoted are in USD. Caution- many links are >10 MB.
This is the last of a five-part series looking at some of the key transactions that occurred during the last uranium price boom in the mid to late 2000’s. In parts 2, 3 and 4 respectively, I have reviewed the fates of Energy Metals, Uranium One and Areva. In this part I comment on a number of other transactions that occurred during and following the peak in uranium prices.
The table below lists many of the key transactions that occurred that I have not discussed previously. Only Husab was advanced to production. The key point to emphasize is that all deposits are not created equal. The tendency is to look upon the amount of uranium present at a property and then calculate a transaction value based upon this. Do analysts do this with copper deposits? Of course not.
This approach led to many bad investments and write downs. Every deposit needs to stand on its own merits. For instance, a very high-grade underground deposit in Saskatchewan that has severe groundwater, geotechnical and radiation issues to resolve before production can commence can ultimately be much more expensive to mine than a low-grade open pit deposit in Namibia when unit capital and operating costs are tallied. High royalty rates in Saskatchewan don’t help matters either.
Below the table I ramble on about each of these acquisitions until I run out of ambition.
I was always a bit dumbfounded that Rossing was not aware of the Husab deposit that borders, and indeed crosses onto, their property about 7 km from the Rossing mill. Husab was located under sand cover by Extract Resources in 2007, over 40 years after Rossing’s commencement of production.
Exploration on the property continued to progressively expand resources until the results of a feasibility study were released in April 2011. This study defined an in-pit reserve of 205 MT grading 0.0497% U3O8 for 224.8 Mlb. of contained U3O8 in two adjacent open pits. The waste:ore strip ratio is high at 7:1. The in-pit reserve was subsequently increased to 315.9 Mlb. U3O8 four months later.
The 2011 feasibility study determined a capital cost of $1,659,000,000 with operating costs of $32/lb at an annual production rate of 15 Mlb. The project NPV at 8% was a relatively low $822M utilizing $65/lb. U3O8. Utilizing a $50/lb. long term forecast price, and including the acquisition cost for Extract Resources ($2.4 B ultimately), this project had an NPV at 8% in the minus $3B range so would be of no interest to Cameco (I left Cameco for PotashCorp in early 2008, so I am assuming such).
However, due to the potential size and long life of this project it would be attractive to an entity with long term uranium security of supply concerns, namely China Guangdong Nuclear Power Corporation (CGN). On March 1, 2012 Extract Resources agreed to a $2.4 B takeover.
Despite the poor economics, I am perfectly fine with what CGN did here since I think any nation with planned large nuclear capacity should have some control of its destiny with respect to securing uranium. China is not well endowed with uranium. However, the Chinese are well aware that the cost of a pound of uranium is somewhat immaterial when converted into the dollars in revenue it generates in a reactor as kilowatt-hours. And learning how to take uranium from the ground right through to the fuel bundle is certainly in their long-term national interest. Some nations have not been actively involved in the supply chain, so at times must pay steep prices in lieu (while having to deal with all the primadonna’s this industry possesses). Looking out over a generation, I think this acquisition will pay off in the end.
Husab NI43-101 2012 (Note The Critical Investor: link no longer works and is removed)
We Now Pause For A Ramble/Rant.
CGN et. al. brings up a dilemma for Cameco and other publicly listed uranium suppliers. How do you find economic projects to turn into mines, or even re-start idled mines, when you are competing against state entities that could not care less if they are “losing” money everyday based on current commercial market uranium prices? Toss in the low-cost Kazakhs, who have not got to the chapter on oligopolies in their Economics 101 course yet, and you have a real problem. Praying for protection (ie. Section 232) is not the answer. Selling your company or project to the Chinese may be though as Extract did post-Fukushima. I give them full marks. They not only found it, they scoped out a technically viable scenario/vision and then sold it along to an entity more concerned with supply than cost. Extract Resources is likely the best role model I have come across for NexGen Energy which has a very similar story to tell but at reduced capital and operating costs and higher output. Is anyone listening?
Another key issue is that when you look at the industry cost-curve you see only a small handful of significant miners that are not state owned or private. Cameco, Paladin and BHP. (Uranium One is now a Russian state entity, Rio Tinto has divested of Rossing and are closing ERA, GA/Heathgate are private and make their money building Predator drones to shoot camels in the ass in Afghanistan. U is a nostalgic side show for General Atomics, though I do like the Beverley mine in South Australia.)
BHP, ultimately likely cares little about what they sell their uranium for since it is a by-product of copper mining. They won’t tell you this mind you. Paladin’s mines are closed and all but two of Cameco’s are. What sort of commercial industry is this? Trying to be profitable feeding just the front end of the supply chain may be going the way of the dodo bird, or the OSB’s CCAA. Ah, that feels better.
I liked the Michelin Project in Labrador, Canada. Good hard rock underground mining in a safe jurisdiction. However, due to low ore grade (~0.1% U3O8) and poor logistics, we figured we would need greater than $100/lb. to get a decent return on this one. We sliced and diced it up a few times, at about 4,000 tpd, and came to essentially the same answer each time.
Mark O’Dea and crew did a good job putting lipstick on this one but ultimately it was rolled into the related Fronteer Development Group who then vended the project to Paladin Resources on December 17, 2010 for 52.1 million Paladin shares valued at $C260.87M at the time. Bolt on optionality essentially for Paladin.
The last NI 43-101, dated August 1 2009, is linked below. It was put out after my time in the industry. It utilizes a $75/lb. U3O8 and a 10,000 tpd production rate with plenty of inferred resources in the production schedule in order to come up with a financial model that barely holds together. Both the commodity price and daily tonnage rate are too aggressive in my opinion.
The project has advanced very little in recent years. The carrying value of the project was written down to $US28M in 2017.
Michelin Project NI 43-101 2009 (Note The Critical Investor: link no longer works and is removed)
Valhalla is a uranium property located just a few kilometres north of the George Fisher zinc mine, where I worked in the late 80’s/early 90’s. There is excellent infrastructure in the area. The deposit is literally right beside a paved road. Water and power are readily available. Skal is a few kilometres away.
Uranium was discovered in 1954 but no mining had occurred despite another uranium mine, Mary Kathleen, in the area being discovered and mined out by Rio Tinto. The question we had to answer was why. A 2015 resource statement is below.
Mining was not the issue here. A sizeable open pit at Valhalla could be followed up by blasthole stoping with decline haulage to surface. Mineralization at Valhalla extended 600 m on strike, at least 450 m down dip and was up to 60 m in width. With a subvertical dip. And it comes right to surface. What is there not to like about that? Apart from low grades.
There were two issues that precluded any serious look at these deposits from an economic perspective in the 2005-07 timeframe:
So we were rather bewildered to watch Paladin and Areva get into a bit of a takeover spat here. Perhaps they knew of a way of tackling the milling issue that we did not. Perhaps they were not even aware of the milling issue (even though I mentioned it publicly in 2005 on page 145 here). Perhaps they thought they could get sulphuric acid on the cheap from the copper smelter literally 50 km down the road. Who knows?
On February 27, 2007 Paladin announced a takeover bid of Summit Resources using stock valued at $A1,011 M. Summit rejected the bid and the pissing contest was on. Summit brought Areva into the fray in April with a share issuance but days later recommended accepting Paladin’s revised bid. (Probably after getting to know the French better. ) Paladin ultimately acquired 81.8% of Summit at an approximate price of $US817.2 M with Areva picking up the remainder, I assume with cash.
Paladin reported in 2017 that they still have not resolved the milling issues at Valhalla/Skal. The ban on uranium mining in Queensland was lifted for a few years but then re-imposed and currently remains in place.
Paladin ended up in bankruptcy administration largely due to the knock-on effects of Fukushima. The carrying value of this asset was written down to $US 40M in 2017.
Resources were greatly expanded after this NI 43-101 came out but it was the only one I could locate:
Valhalla NI 43 101 2006 (Note The Critical Investor: link no longer works and is removed)
Similar to Queensland, there was a ban on uranium mining in Western Australia during the period I was working with the project development team. This ban however was lifted in 2008 shortly after my departure. Rio Tinto quickly put the Kintyre project up for sale. Cameco (70%) announced the acquisition of the Kintyre project from Rio Tinto for $US495M (100%) on July 9,2008 in a joint venture with Mitsubishi (30%).
“Based upon Cameco’s due diligence, it is estimated that the Kintyre project may host potential mineral deposits ranging from 62 to 80 million pounds U3O8 in total, with an average grade between 0.3% and 0.4% U3O8. These estimates are conceptual in nature. The basis for these conceptual estimates includes 355 historical diamond drill holes totalling 70,279 metres. There has been insufficient exploration, however, to define a resource at the Kintyre project in compliance with Canadian mineral resource reporting standards. Although Cameco will be undertaking an exploration program with the objective of estimating a resource for the deposits, it is uncertain if further exploration will result in the target being delineated as a mineral resource”
I am not sure who was calling the shots here and whether Cameco was treating this as a hugely expensive advanced exploration property or had enough information provided from Rio Tinto to do a proper economic assessment with positive outcome. I assume the former based on the statement above and the fact that Cameco did not declare any resources here for over three years.
Cameco completed a few drill campaigns and a prefeasibility study in 2012.
“We completed the prefeasibility study, and found that given the measured and indicated mineral resource estimate of about 55 million pounds (100% basis) at an average grade of 0.58%, current uranium prices and continued cost escalation in Western Australia, the economics of the project are challenging. The study was based on an open pit mine with an estimated mine life of about seven years, estimated total production of about 40 million pounds of packaged uranium at an average production rate of about 6 million pounds per year. To break even, the prefeasibility study indicates the project would require an average realized price of about $67 (US) or greater total production at uranium prices similar to today’s spot price.”
“During the fourth quarter of 2012, we recorded a $168 million write-down of the carrying value of our interest in Kintyre. Due to the recent weakening of the uranium market, no increase in mineral resources in 2012 and the decision not to proceed to a feasibility study, we concluded it was appropriate to recognize an impairment charge for this asset. Kintyre remains an important asset in our portfolio. However, given the current state of the market, it was necessary to reduce its carrying value at this time.” No NI 43-101 was issued.
It just goes to show you that virtually everyone let their guard down at one point or another in the last uranium price cycle. (I was quite thankful that none of those write downs had my name attached to them!)
There were a handful of other acquisitions made, that I don’t discuss in detail, most notably:
What was the motivation behind all the acquisitions discussed in Parts 2 through 5?
Clearly, early in the boom the motivation was for many smaller entities to acquire and enhance the attractiveness of known deposits with the aim of share price appreciation, while paying themselves a handsome salary from readily available public financing. In most instances, there was little to no intent to mine these deposits. Instead, finding an attractive exit strategy while benefiting from the paycheck and capital gains in the meantime was the aim. They were essentially leveraged trading vehicles with a limited shelf life. Those that did not find an exit strategy withered on the vine. These comments do not apply to the pure explorers who I have all the time in the world for since the industry would not exist without them.
The motivation for Areva (France), CNG (China) and ARMZ (Russia) was clearly to supply the front end of a domestic supply chain. All three state run entities are from nations with no, or very small, high cost uranium mines. ARMZ’s acquisition of Uranium One (for their Kazakh assets) went a long way to solving Russia’s problem of a lack of uranium to feed the front end of a very extensive Cold War era uranium processing industry. In all three cases, the ramifications for potentially overpaying for assets were minimal. A few heads could roll, the entity may get a name change, but at the end of the day, costs would be passed along to their fellow countrymen.
Paladin’s motivation was likely due to a belief that very high uranium prices were here to stay and as long as acquisitions were made with shares, they were OK. They would not be diluting shareholder earnings since, quite frankly, there were none to dilute. It was ultimately the debt taken on to largely build their two mines that sunk them post-Fukushima. I still give these guys full marks though. They were a victim of Fukushima but knew how to build a mine whereas most other pretended to.
Much of the pressure we felt at Cameco to do deals during the boom originated at the small brokerages. As mentioned in Part 1, there were hundreds of entities created out of thin air during the boom mostly seeking to find uranium or to enhance the beauty of known deposits. Many of these entities were backed by small brokerages. When it became apparent that there were few entities actually willing to acquire assets with historic resources, you could sense the growing frustration that eventually turned into hostility. Hence, Cameco’s label as “Sleepy Hollow”.
But Cameco was not interested in diluting existing shareholder earnings by acquiring over priced assets with stock that would eventually lead to large write downs. This is what the brokerages never understood. Cameco’s marketing group had perhaps the best view in the world to where the long-term uranium market was heading (and at what prices they were currently locked into) which is why we were punching $50/lb. into our spreadsheets.
However, as reserves run out at McArthur River and Cigar Lake, Cameco may not have the luxury in the future of avoiding (eventually accretive) shareholder dilution with acquisitions.
I suspect Cameco acquired the two assets in Australia with cash due to a limited window of opportunity to do so (auctions with deadlines) and also finally realizing it was not such a bad idea to spread their bets a bit if Cigar Lake never performed as planned. “Optionality” essentially. But ultimately this was $C1 B in cash spent that I am sure they wished they had on the balance sheet today.
The outcome for many entities would likely have been very different if the Fukushima accident never occurred. This led to demand destruction of over 30 M lb U3O8 a year when the knock-on effects (German reactor shutdowns etc.) are included. Prior to Fukushima, the market was finely balanced and prices were trending upwards.
So, I guess we can all scoff at some of the decisions in retrospect but who could have predicted Fukushima?
I wanted to do this look at the past uranium boom for a number of reasons:
I literally hit every continent (OK, not Antarctica) looking at uranium assets and prospects in the mid-2000’s and have only discussed the highlights. It was one heck of an experience. But you do get tired of mutton and rice for three meals a day after awhile in Mongolia and camp life in places like McArthur River and Rabbit Lake. Mining potash 50 km from my front door was not so bad after that. I am also pleased to pass along that many of the Cameco people laid off recently have landed at places like Nutrien, BHP’s Jansen and some of the other larger firms in Saskatchewan. Cameco may have a tough time getting McArthur River back on line in a few years time.
Doug Beattie, February 28, 2019
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