Price jump sparks uranium mining boom

An explosion in demand for nuclear energy in the face of chronically short supplies is sending long-time mining companies and a growing cadre of new players scurrying across North America in search of new uranium hot spots.

Annual demand for uranium, used primarily for nuclear power generation, has climbed to more than 160 million pounds.

Saskatchewan-based Cameco Corp., the world's largest uranium miner, estimates that even without the potential for higher demand due to rising oil and natural gas prices, global uranium demand will average 194 million pounds per year from 2003 to 2012, with the United States using 40 million pounds of that amount from 2006 onwards.

Uranium supplies, on the other hand, are running at about 135 million pounds per year, with mines contributing only 79.2 million pounds per year, according to analyst Doug Casey, editor of the Financial Speculator. The remainder comes from secondary supply such as the drawdown of excess inventory still left over from the 1970s, dismantling of Russian nuclear warheads, re-enrichment of spent reactor fuels and, more recently, the enrichment of uranium tailings.

Most of the secondary supply, with the exception of weapons-grade uranium being procured from Russia, is not expected to last for much longer than a few more years.

Growing appetite for nuclear power

Currently, some 438 nuclear power reactors operate in 31 countries and provide 16 percent of the world's electricity. In several Asian and European countries the percentage of electricity generated from nuclear power exceeds 35 percent, with France leading the way by deriving 80 percent of its power from nuclear energy. U.S. consumers derive 22 percent of their electricity needs from uranium-powered nuclear reactors.

In recent years, many existing nuclear power plants have increased capacity. China, for example, intends to quadruple its nuclear power generation by 2020.

Some industry analysts say the world's strong and growing appetite for nuclear power will spur demand for uranium, also called the other yellow metal, by 66 percent to 300 million pounds yearly by 2020.

"The other metal you should be paying attention to is uranium," analyst Paul van Eeden told investors in a recent newsletter. "The big expense in a nuclear power plant is the capital cost to actually build the plant. Because the price of uranium accounts for a small portion of the cost of generating electricity, the utilities cannot afford to run out of fuel: they have to keep operating. So they are likely to start hoarding uranium at the first sign of a potential supply shortage - it won't be the first time."

Van Eeden recounted uranium's price history, which peaked at $43 per pound in 1979 on fears of supply shortages before plummeting to less than $8 a pound by 1992. Uranium prices have seesawed since, between $16.50 in 1996 and $7.10 in 2000, as nuclear power plants have hoarded uranium. In 2003, supply concerns again sparked a sustained run-up in prices to nearly $20.50 in mid-December, up nearly 75 percent from $11.75 nearly 18 months ago.

Why uranium?

Analysts say economics is one key to uranium's growing popularity. One pound of uranium at $20 is equal in power generation capability to 40 barrels of oil at about $1,600.

Moreover, uranium is more abundant than tin and 10 times more abundant than silver. Yet a chronic supply/demand imbalance persists in yellowcake, as U3O8 - the marketable form of the mineral - is known. The best evidence: The industry has been living on inventory since 1985, analysts say.

They predict that 100 nuclear power plants will be built in the next 10 years, with 40 of them in Asia. By year 2050, the world will need 900 more plants.

Lastly, nuclear power is the only Kyoto-compliant solution to large-scale electrical power generation, as environmentalists are beginning to recognize.

New exploration in early stages

In Canada and Australia, the big dogs in uranium, few new mines have come on stream, Casey said. About half of global uranium production comes from Canada and Australia, with the North American country accounting for 30 percent. Uranium production in Canada totaled 10,455 tons in 2003 and producer shipments amounted to 9,906 tons.

The number of companies with major exploration programs in Canada is increasing as the uranium price rises, though most spending is focused on advanced projects. Last year, for example, only $13 million of some $36 million went to basic "grassroots" uranium exploration in Saskatchewan. The top three operators, accounting for the majority of the $36 million were: Cameco, Cogema Resources Inc. and UEX Corp.

In the United States, Wyoming, Nebraska and Texas are the only states with current production, though New Mexico, Arizona, Florida and Utah also boast known uranium resources, said Greg Barnes, a mining analyst for Canaccord Capital in Toronto.

As one would expect the recent jump in uranium prices sparked new activity in the industry, said Steve Bonnyman, a mining analyst for CIBC World Markets in Toronto. "There has been a lot more exploration and a lot more announcement this year from the juniors. But with any commodity this kind of thing happens," he added.

If prices continue to rise, that could change as prospectors redouble their efforts to find new deposits. Still, it typically takes up to 10 years from discovery to production for a well-sized mine, Casey observed.

Handful of major companies have production

Uranium production is concentrated in a handful of major companies, including Cogema Resources and Cameco.

Cameco has four operating mines in Canada and the United States. It controls the world's largest high-grade reserves and low-cost operations in northern Saskatchewan, with ore grades 100 times the world average. It also has two new mines being developed in Canada and Central Asia and 550 million pounds of proven and probable reserves.

In 2004, Cameco's uranium sales volumes, for example, are expected to total about 32 million pounds.

Cogema produced 8.9 million pounds of uranium concentrate last year, down nearly 37 percent from about 14.1 million pounds in 2002. The decrease was primarily due to ceasing operations at Canada's Cluff Lake mine and lower production from its McArthur River mine.

A number of major and junior mining companies have launched exploration programs in recent years, most notably in the Athabasca basin of northern Saskatchewan, Labrador, Wyoming and New Mexico.

"It's very early days yet," Barnes said. "But a few companies have had encouraging results."

UEX, a Canadian uranium exploration company formed under agreement between Cameco and Pioneer Metals Corp., is one such company. UEX began trading on the Toronto Stock Exchange in July 2002. It is an active explorer in the Athabasca basin, which is about 100,000 square kilometers and host to the largest and highest-grade uranium deposits in the world.

UEX has a total of 13 projects either 100 percent-owned, joint ventured or under option, totaling about 613,000 acres in the eastern, western and northern perimeters of the Athabasca basin.

In October, UEX announced a discovery of uranium at the Black Lake Uranium Project in the northeast section of the Athabasca. Black Lake is a 70/30 joint venture between UEX and Cogema and UEX is the operator.

UEX staked more acreage surrounding Black Lake on behalf of the joint venture and it will continue exploration at Black Lake this winter.

Others exploring in Canada, Wyoming

At a recent mining conference in New Orleans, analysts drew attention to Western Prospector Group, International Uranium Corp. and Strathmore Minerals Corp., all Canadian public companies with international exposure to uranium and holding interests in actual uranium deposits.

JNR Resources Inc. and International Uranium jointly announced Dec. 9 the completion of their summer diamond drilling program for the Moore Lake uranium project, in the Athabasca basin. The summer program was completed in late October and consisted of 33 holes (ML-47 to ML-71 and ML-501 to ML-508), totaling 12,437 meters.

Pleased with these results, the companies have approved an extensive exploration program for the winter of 2004-05.

"JNR and IUC's work at Moore Lake looks really interesting," Barnes observed.

Strathmore Minerals Corp. is another exploration company that began to acquire properties in the Athabasca region in late 2003. The company's landholdings total more than 800,000 acres within three separate areas: Waterbury Lake, Patterson Lake and Maybelle River.

Strathmore also announced last month acquisition of the PT Claims in the Powder River basin of Wyoming, some 600 acres. Wyoming has produced more than 80,000 tons, or 200-plus million pounds, of U308. The Powder River basin is home to two operating uranium mines and other known uranium resources.

Bonnyman of CIBC said Strathmore's work had come to his attention though he normally follows the majors.

Production possible at current prices

Some uranium industry experts say few new deposits discovered in current exploration will be economic to produce at $20 a pound, but Barnes disagrees. "It depends on what they find, where they find it and how much they find," he said.

A number of companies have found new deposits this year that may prove economic to produce at current prices, particularly in the United States, he said. In addition to the Powder River basin in northern Wyoming, he said New Mexico appears to be a hot area that mining companies are exploring.

"I believe Altius Minerals is also looking in Labrador and found interesting trace minerals on the surface and is trying to track down where it's coming from," he added.

One junior mining company that is high on uranium's prospects is CanAlaska Ventures Ltd., which has rapidly acquired more than 444,000 acres in the Athabasca basin this year.

"Our objective is simply to control one of the largest uranium exploration portfolios in the Athabasca basin," said CanAlaska Chairman Harry Barr in the October/November 2004 issue of The Bull & Bear newsletter.

In January 2004, following the sharp upturn in the price of uranium, CanAlaska began a serious evaluation of uranium prospects, and by March, the company started assessing projects and prospects in the Athabasca basin just ahead of the market's confirmation of a new boom in uranium, he added.