Now that the spot uranium price has sustained above $40/pound,
after a 20-year drought and a bottom of $6.40/pound at the end
of December 2000, hundreds of junior exploration companies have
thrown their hat into the ring. Both Canadian and Australian
junior uranium companies hope to raise the big money required to
bring a uranium property into production. A perceived uranium
supply crunch has added to this frenzy. As occurred with previous
uranium cycles, only the strong will survive.
While numerous Canadian junior exploration companies hope to find
a new discovery in various uranium-prospective regions through
Canada, a safer investment strategy is to speculate on companies,
whose properties were previously drilled during the uranium bull
market of 1974-1980). Some of those properties had uranium
deposits delineated by major oil and uranium companies, who did
not blush at spending tens of millions of dollars in exploration.
Some of the newly arrived uranium companies acquired those
drilling databases and their properties, which were abandoned
by the previous owners. Some companies have been actively
moving their projects forward to production, using a more
environmentally friendly mining method than an open pit or
underground mine. It is called In Situ Leach (ISL) uranium
mining, and the operation is much like a water treatment plan.
Oxidized, or carbonated, water is pumped into an orebody, and
uranium is flushed into a processing plant. These are relatively
inexpensive to install, possibly for as little as $10 million.
There are pitfalls when investing in those companies which plan
to establish ISL operations. During the initial phase of this
bull market, a common myth, circulated among investors, had been
"pounds in the ground." How many pounds of uranium oxide, or U3O8
for short, does a company have in the ground? The more pounds a
company claimed, the higher its market capitalization ran. Once
you sift through the companies with very real prospects from
those who are cheerleading their "pounds in the ground," you
should have a realistic short list.
These are the four key questions which must be answered if you
wish to minimize your risk when investing in uranium stocks:
* How permeable are the ore bodies you plan to mine?
* What is your average grade?
* Over what area does your rollfront extend?
* What is the depth of your ore body?
One of the most important factors to consider is the permeability
of the sandstone, from which the uranium will be mined.
Permeability is the flow rate of the liquids through the porous
sandstone. Knowing what the permeability of the orebody will
let you know how much water you can get through the sandstone
formation. Harry Anthony, an internationally recognized ISL
expert, noted, "You need higher grade ore for tight formations.
With high permeability, you can space your wells further apart."
The make-break point for a formation's permeability is its Darcy
rating. How high is the Darcy? A typical Darcy can range from
minus 1000 to plus 3. The higher the Darcy, the more permeable
the formation. This helps determine how economic the orebody is.
An acceptable range would be one-half to one Darcy. What is
a Darcy? Uranerz Energy CEO Glenn Catchpole, who is also a
hydrologist, said, "It is gallons per day over feet squared."
He added a pure hydrologist would calculate the feet per day
or centimeters per second to get a more accurate permeability
With low permeability in a tight formation, you may need to space
more wells in a typical well field pattern. While explaining that
costs are fixed and variable, Anthony computed the cost of a
production well for a 500 foot deposit at $15,000. An injection
well could cost $11,000 to install. By comparison, in New Mexico,
where the deposits are wider and of higher grade, a 2000-foot
production well might cost $27,000 and the injection well could
cost $18,000, and it would still be economic. Obviously, the
deeper the deposit, the more it will cost to extract the uranium.
Not only will the capital costs increase, but operating costs
will be greater.
Uranium grades can be a contentious point. "Grade is the driving
force," Harry Anthony shot back. We asked him about companies
which said they could run an economic ISL operation with grades
as low, or lower than 0.02. Anthony laughed, "They'd be out of
business before they started." Strathmore Minerals' president
David Miller offered a more technical analysis, "That will not
likely have enough recoverable pounds. The operating grade
feeding the plant will be too low." What is the best grade?
Miller wanted to see properties with deposits that average on
the order 0.5, 0.10, or 0.15.
Uranium grades can impact the cost of operating an ISL plant.
An ISL plant may operate at 5000 gallons per minute. Running
24 hours daily, the plant would process 7.2 million gallons of
water. Operating costs are based upon cost per thousand gallons
of water. "This includes electricity, reagents and labor," said
Anthony. On a daily basis, it would cost more than $21,000 to
run an ISL plant, based upon Anthony's calculations of $3.03 per
thousand gallons of water. Under this scenario, a plant might
produce 2360 pounds of U3O8 every day or 80,000 pounds monthly.
The cost to produce each pound would be $8.18. Using that math,
the uranium grades would be about 44 parts per million (ppm) or
0.08. Anthony said, "I like to see 70ppm or higher." That comes
to a uranium grade of 0.13.
Another way to evaluate a company's uranium property is looking
at each part of its development costs. In a well field pattern,
David Miller can determine the economic viability of the ground.
"The keys to what is recoverable include how many pounds are
recoverable per pattern and what it costs to install a pattern,"
Miller explained. "If you have 10,000 pounds in place and can
recover 8000 pounds, your well field development cost can be
$8/pound, if it costs you $80,000 to install that pattern.
The cost to install a pattern also depends over how much
territory your uranium deposits run. "Ten million pounds over
an area of one-half mile will cost less than those same pounds
over an area of two to four miles," explained Terrence Osier,
Strathmore Minerals senior geologist. "That means more injection
wells and more production wells." Depth of the wells influences
installation cost and impacts its daily operating cost. "When
uranium costs were very low, a company needed 70,000 pounds per
pattern," Anthony commented. "Now a company might only need
20,000 pounds per pattern to make it economic."
There are many variables within the above advices provided by
these experts. However, the important point to realize is the
time of hyperbole and hoopla over "pounds in the ground" has
passed. As more uranium development companies move closer to
establishing an ISL operation, the go/no-go consideration, as
UR-Energy CEO William Boberg aptly described it, will come down
to permeability. After that, the economics of a project will
either make it viable or not. Using these criteria, you can
avoid the hysteria by speculating with the odds stacked more
in your favor.