To the World Nuclear Association, 2% uranium ore is high grade. At 14%, 16% and even 20% uranium, the grades in the Athabasca Basin are astounding analysts and investors around the world. Derek Hamill, Zimtu Capital Corp.'s new head of research, tells The Energy Report about where the investment dollars are moving in the Athabasca Basin, and what areas and companies are worth watching going forward.
The Energy Report: Derek, thank you for joining us. Why is the Athabasca Basin generally described as the most prolific uranium source in the world?
Derek Hamill: There are a few factors that make the Athabasca Basin region of Saskatchewan and Alberta the best place to look for, and mine, uranium. Grade is the number-one factor. The average grades for a few of the bigger deposits in the Basin are above 15% U3O8, whereas the world average is far below 2% U3O8. The next important factor is that Saskatchewan is a great place to build a mine, and has been since the 1950s. There is all the necessary infrastructure (roads, power, mills) in most of the region. The western region of the Basin, including Fission Uranium Corp.'s (FCU:TSX.V) Patterson Lake South (PLS) project, does not have existing power or operating mills. But given how this deposit and potentially others are developing, it's just a matter of time.
TER: What are the shortcomings of the Athabasca Basin compared to other uranium-producing basins?
DH: Infrastructure is a major factor that influences the economics of a potential mine. In the last few decades, the exploration in the western section of the Athabasca Basin has been markedly quiet compared to the east, where Cigar Lake, McArthur River and other mines and mills are located. The PLS area is relatively remote compared to the eastern section of the Basin. Additional exploration in the region will likely prove up another deposit, so over time the western side will build comparable infrastructure. However, there will need to be material investment to develop the necessary infrastructure in the western areas of the Basin.
Another shortcoming of some deposits in the western region is the depth. The Cigar Lake mine illustrates this point quite well. The deposit is located between 410–450 meters (410–450m) below the surface, far too deep for cheaper open-pit mining, and the entire deposit needs to be frozen in order to prevent flooding. In 2006, a breach of this freezing technology caused significant delays. The project had an original start-up date of 2007, and is now expected to be producing by the end of Q2/14. Keep in mind though that many deposits in the Basin, including the PLS project, are at conventional open-pit mining depths.
TER: I have seen high praise lavished on Fission's PLS deposit. What's the reason for that?
DH: As mentioned, most of the past exploration and all the production in the Basin comes from the eastern side of the Basin. PLS has brought renewed optimism for exploration in the southwestern areas of the Basin that surround the discovery. Additionally, PLS is close to the surface, meaning open-pit mining of fairly high-grade uranium is an option.
TER: Is there another deposit in the basin that comes close to PLS?
DH: Right now in production is McArthur River, and Cigar Lake should start producing this year. Both are operated by Cameco Corp. (CCO:TSX; CCJ:NYSE). Average grades for both are listed as 14–16%. Once Cigar starts, McArthur and Cigar will be the two largest high-grade uranium mines in the world.
Cameco is by far the largest producer in the Basin, followed by AREVA SA (AREVA:EPA). Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT) holds an interest in the McLean Lake mill and in several near-term producing deposits. Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK), which purchased the Roughrider deposit in 2012 from junior Hathor Exploration for $654 million ($654M), appears to be advancing its deposit fairly aggressively. UEX Corp. (UEX:TSX) is also a candidate for near-term production with its Shea Creek and Hidden Bay projects.
TER: How does grade affect price?
DH: The major uranium producers, such as Cameco, AREVA and Denison, generally negotiate the price of uranium on long-term contracts. These companies also process all the ore in the three mills situated in the eastern region of the Athabasca Basin. It is not like other commodities, where the final product is sold on a fluid or open market. The producers generally control the mining and milling of the ore into a product called yellowcake, which is about 70% uranium. At this point, the yellowcake is either further refined in Canada or shipped directly to customers in the U.S. or overseas.
Cameco's estimated cash costs at Cigar Lake could be somewhere around $18/pound ($18/lb) or less. High-grade ore can help control operating costs. Many uranium analysts believe that a long-term price of $60/lb U3O8 is needed to properly incentivize investment and maintain production for close to one-third of the world's high cost production. I believe the fact that Paladin Energy Ltd. (PDN:TSX; PDN:ASX) is placing operations at its Kayelekera mine in Malawi on care and maintenance (after continued operating losses) illustrates the material difference in cost structures that exist for producers outside the Basin.
There are also some external factors. Saskatchewan is a politically friendly, stable environment, with an established regulatory and tax environment. There's technical expertise in the area as well. Grade is only one factor in the mining and milling economics of a deposit. The less material that you have to physically mine, truck and process, the more lucrative your operation.
TER: You have reported the average compound annual growth rate of several forecasts of electricity generating capacity from 2010 to 2025 as 2.6% for nuclear and 6.3% for non-hydro renewables. That's a higher growth rate for renewables than for nuclear. Why is nuclear a better target for investment?
DH: Nuclear is not necessarily better; there's actually tremendous room for both. Nuclear reactors can supply consistent electricity generation, night and day, over a long operating life, 40–60 years. The fuel costs represent 10–15% of the total cost of running a nuclear reactor. Even during the uranium price spike in 2007, operating costs for a nuclear reactor in the U.S. did not increase. That's an attractive property. Of course, nuclear can help reduce CO2 and SO2 emissions, which also makes the technology attractive in places like China, where air quality is an issue.
Energy Consumption: Nuclear Vs. Wind and Solar
Source: BP Statistical Review 2013
The biggest knock against nuclear energy has been the enormous capital costs of building reactors. Westinghouse Electric Co. is designing the AP1000, focused on simplifying the process—passive safety systems, fewer moving parts, etc. Hopefully, this kind of innovation can help control capital costs.
In China, nuclear power is growing at a 10-year compound annual growth of about 14.5%, but it still represents only ~2% of the country's electricity production, so there is tremendous potential for nuclear power as well as renewables.
Nuclear Reactors Worldwide
Source: IAEA|PRIS, WNA
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