Outlook brightens for uranium mining

The startup of Cameco's Cigar Lake uranium mine in Saskatchewan is one more link in a recent chain of events that has observers predicting a significant comeback for the industry in 2014.

Beginning last fall, industry analysts began to forecast rising uranium prices in 2014, citing a number of reasons, from the development of more nuclear reactors to a return to imminent shortages of reactor fuel. They also greeted news of the March 13 startup of the new Athabasca Basin uranium mine with further optimism.

"The long-term outlook on the uranium market remains the same at US$65 per pound U3O8. I think a new reality in the near term has set in. The uranium price has dropped significantly and now appears stable at levels not seen for almost eight years. We believe much of this has to do with the lagging Japanese restarts, cash-strapped sellers impacting the market and probably most important, near-term demand is lacking," David Talbot, vice president and senior mining analyst for Dundee Capital Markets told "The Energy Report" in February.

"We do expect uranium prices to rise, and relatively quickly when they do, but for right now, uranium prices will remain leveraged to the news of the Japanese reactor restarts and a return to term contracting by utilities," Talbot predicted.

Analysts say the supply side looks favorable for higher uranium prices as recent extremely low prices had the side-effect that numerous mine development projects have been delayed, put on hold or outright canceled, tightening supply significantly for many years.

Effect of excess inventory

Between 1950-1990, there was more uranium mine supply than demand, but since then demand has outpaced mine supply, the uranium market is currently facing a dramatic supply risk due to low market prices. The average marginal production costs for global mine supply stands at around $40/pound, yet spot prices trade at $35/pound today.

JPMorgan and others warned that the market must recover to $75-$80/pound to incentivize the development of new uranium projects.

Why are uranium prices so low? And why is a strong rebound on the horizon?

About 20 percent of the world's major large reactors are lost to production. All 55 Japanese reactors have been shut down, six permanently. That left a huge inventory of unused fuel and contractually committed fuel for long-term supply with nowhere to go. Some of it was repackaged and used elsewhere.

The excess inventory caused by Japan, analysts say, remains the number one reason for low uranium prices. Related to that is the chilling effect the March 2011 Fukushima reactor incident had on nuclear reactor development in other countries. Upward pressure on uranium prices, meanwhile, has mounted because of the much higher cost of replacement fuels, of having to build LNG plants, coal-fired power plants and to some limited degree renewable power plants to replace nuclear power sources.

Today, more reactors are under construction, planned and proposed than before the Fukushima incident. China has 28 reactors under construction, including five ready to be connected to the grid in 2014. Japan has submitted applications for 17 reactors to be restarted, and analysts expect at least six to eight reactors to be granted permission for restart in 2014. Both China and Japan are set to add vast amounts of demand back into the uranium market.

Analysts also note that the United States is more dependent on foreign uranium supply than it is on foreign oil, as yearly consumption exceeds 23,000 metric tons of uranium, whereas domestic production accounts for less than 2,300 metric tons.

According to a January 2014 update of the World Nuclear Association, some 500 metric tons of high-enriched uranium, delivered in the form of down-blended low-enriched uranium inside more than 200 vessels crossing the Atlantic, supplied about 10 percent of all U.S. electricity over the past 15 years, representing about 12 percent of world uranium demand in recent years. The 500 metric tons of HEU is the equivalent of roughly 150,000 metric tons of natural uranium (177,000 metric tons U3O8, or 2.5 times annual world demand). This also represents an average of 8,850 metric tons U3O8 per year from global mines over the past 20 years.

In 1993 the United States and Russia signed the "Megatons to Megawatts Program," whereby the nation bought 500 metric tons of Russian surplus high-enriched uranium from nuclear disarmament and military stockpiles over 20 years. The program ended in 2013.

Consuming some 23,000 metric tons U3O8 per year and domestically producing only 2,300 metric tons, the United States now must import at least 20,700 metric tons every year, and no supply source is readily apparent. Analysts say the needed imports are likely higher as the majority of U.S. mine production is owned by the Russian government, and the Russians are within their rights to export it all back to Russia if they so desire.

Forecast of shortages

Another reason uranium prices are so low is the unprecedented low demand by nuclear power generation utilities. Normally, the lion's share of physical uranium is transacted via long-term contracts. For nuclear utilities, the costs of uranium is somewhat negligible as it only makes up around 10 percent of total costs, hence supply security is much more important to them than the question if uranium costs US$35 or US$70 per pound, analyst say.

Energy companies normally buy ahead their uranium requirements for 3-5 years. Nuclear utilities, however, neglected long-term procurement in 2013 and acted sparsely only in the spot-market due to the sudden plethora of uranium available in the market in response to the seeming lack of danger supply security.

As a result, the utilities are expected to be short of 7.2 million pounds of uranium in 2014, and uncovered uranium requirements are estimated to increase substantially in the years ahead as new reactors come online worldwide. The World Nuclear Association forecasts demand growth of 48 percent until 2023.

Producing mines, meanwhile, will lack sufficient capacity to meet future demand at current prices.

In October, Areva, the world's second-largest uranium producer after Cameco) warned its clients not to bet on low prices for much longer but to secure their long-term procurement until latest by 2015 in order to not be forced to compete with utilities from China, Russia, India or South-Korea.

"Supply remains a wild card and probably the most important factor ... Mines are currently being taken offline, deferred or cancelled altogether. But long-term fundamentals underpin our belief that a uranium supply deficit starting in 2016 will likely increase by 2020, at which time we think we'll see a deficit of about 16 million pounds," said Talbot. "So we remain adamant that uranium supply is threatened by current uranium prices, regardless of the difficulties of the mining industry and challenges in permitting."

As the industry moves closer to the supply deficit that he foresees, Talbot anticipates development for some projects to accelerate on the back of stronger uranium prices. "But most of the new supply we see over the next few years is from existing producers, mainly expansion of existing projects, Ranger 3 Deeps, for example, or Cigar Lake. We do model some marginal players coming on-line. But that's a relatively small amount of production and certainly not enough to close the gap," he said.

"I think it all hinges on supply. Demand is relatively consistent. It's predictable, Japan restarts notwithstanding. But I believe it's the strengthening fundamentals based on supply that really drive this. When uranium prices come back, I think they're going to come back quite quickly, not because Japan is going to come back seeking supply but because the other 90 percent of the world hasn't been buying like it should," Talbot added.

Ongoing Nunavut activity

Uranium mining activity, while mainly in the early stages in Nunavut, is advancing at an encouraging pace. The territory boasts vast potential for economic uranium deposits and at least 10 active uranium projects, most of which are located in the south-central Kivalliq region near Baker Lake. The area hosts a number of deposits similar to those found in the Athabasca Basin region of Saskatchewan.

Nunavut's most advanced uranium project, Kiggavik, is inching closer toward potential development within a couple of years. The project, located about 80 kilometers, (50 miles) west of Baker Lake, is owned by Areva Resources Canada, which is currently celebrating a half-century of uranium mining activity in Canada. Today, Areva is one of Canada's largest uranium producers.

Areva Canada has filed a project description with the Nunavut Impact Review Board for an open-pit and underground mine development at Kiggavik aimed at extracting uranium resource totaling 133 million pounds averaging 0.54 percent U3O8.

The Review Board is the regulatory authority that approves mining projects in the territory, for public consultation, environmental assessment and permitting.

The total quantity of recoverable reserves at Kiggavik is currently estimated at 114 million pounds U3O8, or about approximately 44,000 metric tons of uranium ore reserves.

Areva envisions mining activities starting two to three years prior to milling.

Based on anticipated annual production rates of 2,000 to 4,000 metric tons or 7.8 million pounds U3O8 per year of uranium concentrate (yellowcake), mining would last 13 to 25 years, while milling would last 11 to 22 years.

A decision regarding a production certificate for an 8 million-pound-per-year uranium mine is anticipated for the development of Kiggavik after AREVA completes its Final Environmental Assessment Submission, expected in September. The Nunavut government re-affirmed its development-friendly uranium policy in 2013. A mine at Kiggavik project would employ up to 600 people during operations.

Areva Canada submitted its annual report Jan. 31 for the Kiggavik project 2013 field program. The report summarized exploration activities conducted at Kiggavik last year. Undertaken between June 19 and Sept. 1, exploration focused on diamond drilling to further evaluate potential deposits. The Areva team drilled more than 10,500 meters in 39 holes.

The explorer also put in place environmental management plans during the field program to prevent or reduce any potential adverse effects from exploration activities; implemented occupational health, safety and radiation protection programs to ensure worker safety.

Kiggavik is located in the Proterozoic Thelon Sandstone Basin. Uranium mineralization occurs mainly in meta-sediments and meta-volcanics along a 24-kilometer (15 miles) section of a regional northeast-trending structural zone called the "Kiggavik Structural Trend."

Several other companies, including Cameco and Forum Uranium Corp., are focused on deposits and prospects clustered nearby.

After nine years of exploration on the Turqavik-Aberdeen claims, located some 85 kilometers (53 miles) west of Baker Lake, Cameco's current exploration is focused on finding mineralization in the southern portion of the two claims similar to that found within deposits at Areva's Kiggavik and Sissons properties to the east. Cameco has prioritized deep basement targets similar to Areva's End Grid and Andrew Lake at the south end of the Turqavik-Aberdeen claims and plans to test drill targets in the north part of the project claims.

Forum's North Thelon Project covers 50 kilometers of the eastern extension of the trend that hosts the Kiggavik deposits, and potentially host similar-style uranium deposits.

Forum has entered 2014 with five drill-ready projects, C$4 million in working capital, 29 million shares outstanding, and a low market capitalization. It has kept its highly regarded technical team intact during this extremely difficult period in the junior mineral resource industry, and has strengthened its financial capabilities with the appointment of James A. Hutton to its advisory board.

The company said it has benefited from minimal exploration assessment requirements during recent weak uranium prices, and "is positioned to not only maintain its Athabasca (Saskatchewan) and Thelon (Nunavut) property portfolios in 2014, but is now actively seeking property acquisitions to … strengthen its uranium base in these two core regions."

In February, Forum consolidated its North Thelon property interests by entering into a purchase and sales agreement with Agnico Eagle Mines Ltd. to acquire a 100 percent interest in Agnico Eagle's Judge Sissons and Schultz Lake claims. Sufficient work has been done by Forum to keep the claims in good standing with minimal expenditures for three years.

"This acquisition reinforces Forum's strategy of maintaining a strong presence in both the Athabasca and Thelon basins. The Agnico Eagle purchase now gives Forum full control of a strategic landholding in close proximity to Areva's proposed Kiggavik uranium development," said Forum President and CEO Richard Mazur. "Our 100-percent-owned North Thelon project continues to be a long-term core asset that the company plans to revisit as uranium prices improve and as Areva advances Kiggavik towards production."

Exploration on IOL lands

Another junior, Kivalliq Energy Corp., was the first company to explore for uranium on Inuit-owned lands in Nunavut, a move that could pay off handsomely for the company. Five years later, Kivalliq has identified the 340,268-acre Angilak property which is believed to host Canada's highest grade uranium resource outside Saskatchewan's Athabasca Basin. Angilak, located 225 kilometers (140 miles) south of Baker Lake has a 2.8-million-metric ton inferred resource grading 0.69 percent U3O8, totaling 43.3 million pounds.

In January, management told Kivalliq's shareholders that despite sustained weakness in the uranium spot price (20 percent drop since Jan 1, 2013) and mining equity capital markets (27 percent drop in TSX-V index since Jan 1, 2013); the company delivered new discoveries and other encouraging exploration results that continued to demonstrate the district-scale potential of the Angilak property.

"Advancement of Angilak evolved this year to focus on de-risking the project by evaluating potential extraction and processing options for the Lac 50 uranium deposit.

Continued exploration success in the summer, as well as positive results from preliminary metallurgical and beneficiation studies, underscore Angilak's potential as a world-class uranium project," said Kivalliq CEO Jim Paterson.