TORONTO (ResourceInvestor.com) -- Uranium's run-up to 23-year highs has attracted a slew of juniors to stake new ground and revive old projects.
Though stock performance has been generally positive, investors and speculators should have a grasp of the basic geology of uranium deposits so as to keep profiting as the cycle matures - and to separate the companies with promising projects from those with dubious claims.
The targets of most juniors fall into one of four main deposit types:
- Quartz-pebble conglomerate or paleoplacer deposits;
- Sandstone-hosted deposits;
- Olympic Dam.
For brevity, this article does not include descriptions of other, smaller deposit types such as surficial, volcanic, intrusive, vein or metasomatic.
These are the deposits that are found in and around the Athabasca Basin in northern Saskatchewan. Eighteen deposits have been discovered in the area since 1968, giving Canada claim as the world's largest producer of uranium. In 2004, 13,676 tonnes of uranium oxide concentrate were produced, accounting for about 30% of total world production.
The prime producer is Cameco [NYSE:CCJ; TSX:CCO], the world's largest publicly traded uranium company, whose stock has climbed from C$10 to C$60 since 2000 on the Toronto Stock Exchange. The company operates the McArthur River and Rabbit Lake (Eagle Point) mines, and hopes to start production at Cigar Lake in 2007. Cogema Resources, a subsidiary of France's Areva Group, operates the McClean Lake mine.
The 100,000 km2 Athabasca Basin is an oval-shaped deposit of sandstone, elongated east-west, which sits atop older basement rocks. From a depth of over 1,000 metres at its centre, the sandstone tapers to less than 100 metres thickness at the edges.
The term 'unconformity' refers to two rock groups of different ages in direct contact with each other. In this case, the Athabasca Basin is approximately 1.3 billion years old whereas the basement rocks are around 1.8 billion years in age.
The uranium deposits occur below, across and immediately above the unconformity, averaging 70 to 100 metres on either side. The highest-grade deposits found so far are situated at or just above the unconformity. As a result, historical exploration has focused on the edges of the Basin where the sandstone is relatively thin, makes it easier to examine the unconformity.
Mineralisation occurs as veins, breccias and open-space fillings grading from less than 1% to over 20% U3O8. The source of the uranium is still unknown and could be derived either from 'heavy' minerals in the sandstone or graphitic-pelitic gneiss in the basement.
Almost all of the major uranium deposits have been found along the eastern edge of the Basin. This is believed to be due to the presence of northeast-southwest trending faults and related shear zones in the basement rocks of this area, which acted as a conduit for uranium-rich fluids.
Speculators examining a junior's property in the centre of the Athabasca Basin should ask how thick the sandstone is on the play since the junior would most likely have to conduct geophysical surveys to try and locate a sharer zone, and such a property would require extra cash to finance drilling through the thicker sandstone as opposed to a play near the Basin's edge.
Quartz-pebble conglomerate (paleoplacer) deposits
The best-known examples of these deposits are Blind River-Elliot Lake in northern Ontario, and South Africa's Witwatersrand Basin, where it is a by-product of gold mining.
Uranium occurs in paystreaks, thin sheets of quartz pebble conglomerate interlayered with thicker beds of sedimentary rocks. In the Witwatersrand, paystreaks are generally less than three metres thick but can extend for up to 10 kilometres in length. The rocks are interpreted as representing a delta environment where rivers flowed from mountainous regions into alluvial plains and the ocean.
Where it is recovered as a by-product of gold mining, uranium grades may be as low as 0.01% U3O8. In deposits mined exclusively for uranium, average grades range as high as 0.15% U3O8. Individual deposits vary in size from a few thousand tonnes to monsters well over 100,000 tonnes of U3O8.
Uranium placer deposits are only found in rocks 2.5 billion years in age and older. This was prior to the Earth's atmosphere having appreciable levels of oxygen. In such an environment, uranium could travel as grains of uraninite (UO2) in streams and rivers without dissolving in surface waters rich in oxygen. It is believed that the uranium was derived from granitic rocks in the sediment source area.
Sandstone-hosted uranium deposits are found scattered across the globe, notably in the western US, Niger, Kazakhstan, Uzbekistan, Gabon and South Africa.
The two main types of sandstone deposits are:
- Rollfront deposits - arcuate bodies that crosscut sandstone bedding;
- Tabular deposits - irregular, elongate lenticular bodies parallel to sandstone bedding.
The sandstones are medium to coarse-grained and are often bound by impermeable shale and mudstone units
The deposits form from oxidized groundwater that leaches uranium and flows down into aquifers. Upon coming into contact with a reducing agent, such as carbonaceous material, sulphides or hydrocarbons, uraninite is precipitated out of the water forming a deposit.
Deposits commonly grade 0.05% to 0.4% U3O8, with individual orebodies ranging up to 50,000 tonnes of U3O8 in size. Though relatively small, sandstone-hosted uranium deposits may be mined in-situ using various leaching methods.
Olympic Dam (IOCG)
According to the World Nuclear Association, Canada's current reserves total 509,000 tonnes of U3O8, or 12% of the world's total. In comparison, Australia's reserves are around double the size.
This is predominantly due to Olympic Dam, Australia's largest underground mine and the world's largest uranium deposit. Located in the south-central part of the country, the ores contain 370,000 tonnes U3O8, 12 million tonnes of copper and significant amounts of gold and silver.
The deposit was discovered in 1975 beneath over 300 metres of sedimentary cover. In operation since 1988, owner WMC [ASX:WMR] estimates a current reserve life of 50 years.
The deposit was, and still remains, a geological enigma, spanning a new class of mineral deposit - IOCG (e.g., iron ore, copper, gold) deposit.
The complex itself consists of a hematite-quartz breccia flanked by zones of intermingled hematite-rich breccias and granitic breccias approximately one kilometre wide and up to five kilometres in length.
Virtually all of the mineralisation is hosted in the hematite-rich breccias and contains copper, uranium, gold, silver, iron, rare earth elements (e.g., lanthanum, cerium) and fluorine.
Uranium grades average 0.05% U3O8. Copper grades average 2.7% for proved reserves, 2.0% for probable reserves, and 1.1% for indicated resources. Gold grades vary from 0.3 to 1.0 gram per tonne.
Olympic Dam's incredible wealth has led to a worldwide search for similar deposits. Though a few have been found, none are near the original's size, nor contain economic quantities of uranium.
This lack of exploration success is partly because geologists still don't really know how Olympic Dam was formed. Both hydraulic and tectonic fracturing appears to have created the breccia units, most likely in a near surface environment, and the source of the metals could be a granite intrusion, but the processes and still poorly understood.
Price history - how did we get here?
Demand for uranium, initially directed at nuclear weapons programs, started to take off following the 1973 'oil shock', when orders for new nuclear reactors jumped and existing reactors stockpiled the metal. As a result, prices steadily increased, peaking close to $45 per pound in 1979.
Yet the expansion of nuclear power was less rapid than had been predicted by many, partly a result from the accidents at Three Mile Island and Chernobyl that led to a moratorium on new nuclear power plants in the United States and a slowdown in reactor construction worldwide. Large uranium inventories accumulated and a major bear market in uranium ensued, dropping the price to $7 by 2000, and shutting the flow of exploration funds.
Though as prices decreased, uranium production fell below reactor requirements, and by 2000 had dropped to only half the annual usage, according to the World Nuclear Association. For example, last year 102 million pounds were mined whereas the world's 440 nuclear power reactors consumed 173 million pounds.
The gap has been partly filled from re-enrichment of spent reactor fuels, as well as utility and government stockpiles that include material from dismantled Russian nuclear weapons. Nevertheless, 10 million pounds from aboveground inventories are being reduced by each year.
In addition to falling inventories, a number of factors converged that were bullish for prices:
- A lack of new deposits.
- Burgeoning nuclear programs in emerging markets such as China, India and Turkey.
- Rising crude oil prices, that led many governments to consider alternative sources of energy.
As a result, uranium spot prices have surged to $30 a pound according to the Ux Consulting Company.
One of the outcomes of this bull market was the creation in May of Uranium Participation Corp. [TSX:U], a security that lets investors and speculators bet on the price of the metal. As at June 30, 2005, the fund's portfolio held 1.05 million pounds of U3O8 (referred to as 'pitchblende,' in its natural state, and yellowcake in its refined state, so-called because if its colour after the ore is milled and bathed in sulphuric acid to remove impurities).
Outlook for uranium prices
Current demand relative to capacity apparently points to a continuation of strong uranium prices. In addition, nuclear power appears to be making a revival, partly the result of high oil prices, partly about America's desire to lessen its dependence on Middle Eastern oil, and partly because of nuclear power's ability to help countries meet emission targets set out in the Kyoto Protocol.
Yet according to the summary of uranium resources published jointly by the OECD's Nuclear Energy Agency and the UN's International Atomic Energy Agency, known reserves of uranium from conventional sources are slightly more than three million tonnes. This translates into about a 50-year supply if no more reactors are built or shut down. In addition, unproven resources are estimated to be of the order of 10 million tonnes, or about three times the known reserves.
Reprocessing of spent fuel for use in new reactor fuel is already being undertaken in a number of countries at a rate of about 2,000 tonnes each year, according to the World Nuclear Association. However, the potential for recycling is considerably greater than this. So if prices remain high, there will be a strong financial incentive for utilities to increase their recycling rate.
Also, improvements in reactor design, changes in reactor operation and prototype breeder reactors all point to more efficient reactors in the future.
Therefore, investors may want to consider the following quote from the World Nuclear Association's web site before blindly believing the uranium prices have nowhere to go but up:
"...it is clear that any concerns regarding the availability of uranium to fuel increased deployment of nuclear reactors are unfounded. Even a significant increase in the use of nuclear power will not cause a shortage of nuclear fuel for several hundred years."