Safest Ways to Invest in Uranium Companies
by James Finch
Published on this site: April 27th, 2006 - See
more articles from this month
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
assessment.
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.
James Finch contributes to StockInterview.com and other
publications. The above article can be read in its entirety
with full graphics and additional data at http://www.stockinterview.com.
Feedback to James Finch is welcome and encouraged. Please
contact him at: [email protected]
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