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Wednesday, October 25, 2006

Cigar Lake Mine Flood

Cameco announced on Monday Oct 23 that they experienced a flood in the developing Cigar Lake mine.
Cameco Corporation reported today that Cigar Lake mine construction is expected to be delayed by at least a year after the mine experienced a significant water inflow following a rock fall and a portion of the underground development was allowed to fill with water. Production startup was previously planned for early 2008.
This mine was projected to ramp up to 18 million pounds of uranium oxide per year, which would make it either the largest or 2nd largest uranium producing mine in the world. That amount of uranium would have been around 12% of the total world production (some are claiming 17%).

Later on, Cameco announced that they could not contain the water, which will now flood the entire mine.
Efforts to protect the main shaft and key underground infrastructure by closing bulkhead doors were not successful. Everyone was safely evacuated by 11:30 a.m. today. There were no injuries and no impact on the environment.
The flood is the reason why Strathmore Minerals and other uranium stocks have gone up so much this week. Supply was already very limited going forward and it now looks like the Cigar Lake mine uranium will be pushed out by perhaps 3 years.

TheStreet.com has a guest column here by Sean Brodrick, an editor at Weiss Research about the flood which covers a lot of the various aspects of the industry.

Nigel Wilson at The Australian says:
The accident has led market analysts to suggest that the spot price, which was $US56 a pound this week, could top $US100 a pound as consumers attempt to find replacement supplies for post-2008 consumption.

The Globe and Mail has an article with some quotes from Sprott Asset Management:

Kevin Bambrough, market strategist at Sprott Asset Management Inc. of Toronto, said yesterday that he now thinks there is a "good chance we'll see $75 by year end and be testing the $100 level next year."

Mr. Bambrough said mining executives he talked to are estimating Cigar Lake's start-up could be delayed three years or more because of the flooding and that it may not be able to extract the amount of uranium it had anticipated.

And the other side of the argument is this:

By contrast, John Redstone at Desjardins Securities in Montreal has a decidedly bearish view on prices for the metal.

He said in a note to clients following Cameco's announcement Monday that "any production shortfall from Cigar Lake can be easily met by the 20,000-25,000 tonnes of inventory that the World Nuclear Association estimates the industry has on hand."

As a result, he said, he expects the spot price to stay in a range of $55 to $65 a pound and, with other new production set to come on stream, fall to $45 in 2008 and $35 in 2009.

If that's the case, why is the spot price so high right now when investors were only responsible for 8 million of the 23 million pounds of yellowcake (in 85 transactions) so far this year on the spot market? Yes, that's a lot but the price has been truly soaring these last two years from $15.

I believe that higher prices will definitely pull a lot of supply into the market, but the imbalance between supply and demand is huge and it just got worse.

Mining MX has an article on the flood here. They talk about Uranium One (which I covered here). Uranium One is not able to speed up their processes because they're already going as fast as possible. And I found this to be very interesting:
The contracts are generally setting the received price as that of the spot price on the day of delivery because of the very tight conditions in the uranium market, he [CFO Jean Nortier] said.

Nortier estimated the shortfall in the market of between 60m and 80m pounds.

“The market has been operating under the “everything has to go right” scenario and now things aren’t going right,” he said. “There are quite a number of healthy assumptions being made by the market on the supply side. We believe it continues to operate on that scenario and there might be more of these shocks coming.”

Workers have gone on a wage strike at Rio Tinto’s Rossing uranium mine in Namibia, which is the source of nearly eight percent of the world’s nuclear fuel, Bloomberg reported on Tuesday.
I found this at InvestorIdeas.com. Kevin Bambrough of Sprott Asset Management has some quotes in there.

U.S. utilities should panic. Less than one month ago, we challenged Rajiv Kundalkar, Vice President of Nuclear Engineering for Florida Power and Light, about Cigar Lake and other significant uranium supply sources at a Platts-sponsored nuclear fuel conference. We asked him if he was aware of the risks at Cigar Lake and else where. Calmly, he answered that he was.

Obviously, Mr. Kundalkar was not.... Those who neglected to lock up uranium inventory for their reactors through 2011 are now the butt of jokes at the Nuclear Energy Institute's (NEI) annual uranium conference presently in session in Quebec City, Canada [probably at the Chateau Frontenac]. Many fuel brokers and utility industry consultants emailed or phoned us, over the past six months, announcing they were convinced the uranium price was "too high." Each one sincerely believed Cigar Lake, Kazakhstan and/or Olympic Dam would bring the uranium price back down to earth.

"I still say the uranium price is going to test and exceed the inflation-adjustment highs of the prior peak," Bambrough told us. "I think the (peak of) $110 to $120 will get taken out in this market." Is this the super spike we've been waiting for, and will it sustain at higher levels? "We'll have to see how high the spike goes," Bambrough pondered. "I still think some companies are going to be able to sign long-term deals around $100/pound. I don't think that will be a problem for some to have that opportunity."

Bambrough mentions that Cigar Lake will be a huge problem because Cameco will need to deal with water permits to handle the increased flow rate.
"Right now, they're only permitted to process about 500 cubic meters of water an hour," he pointed out. Cameco Chief Executive Jerry Grandey told analysts on Monday the water was flowing at 1500 cubic meters an hour. "Basically, they've got to go and apply for permitting to get processing in place to handle that extra water flow," Bambrough said. "We don't know what the flow rate is ultimately going to be. They don't even know how contaminated the water is going to be and what processing needs to be done. They've got a big water problem to deal with."
Then there's Kazakhstan where Russia has locked up the uranium there "a couple of weeks ago" for their own facilities. As far as an Olympic Dam expansion goes, apparently it needs a desalination plant since they already use up all the local water, which requires a power plant.

Read the whole article, it's very interesting. More here.

The Star Phoenix has a good article on the flood.
Some Cameco mine officials have likened mining Cigar Lake and the similar geology surrounding the McArthur River uranium deposits as akin to poking holes in a submarine while submerged. The analogy is apt, since the water in the sandstone geology -- at a depth of 500 or 600 metres -- is under the same pressure as ocean water at the same depth.
It's worth noting that Strathmore Minerals has been working hard to get properties that are amenable to in situ leaching, which is cheap, easy, and environmentally friendly.

As far as Cameco's contractual obligations go, they have the provision for a force majeur.
A ‘force majeure’ is a clause in a commercial contract covering natural disasters, such as a flood, excusing the party from performing its obligations under the contract. “A lot of the forces majeures are probably going to the U.S,” he said. “The utilities were confident in the 18 million pounds to be coming out of Cigar Lake. They aren’t going to get this uranium. The question is: ‘Where are they going to get it?’”
It wouldn't surprise me if the uranium spot price went up even faster than it has in the past (but it won't show up for at least a week since the price is delayed). And the issues about things going wrong makes a lot of sense. Companies are going flat-out right now in trying to bring uranium to the market. Utilities would be silly to try to discourage speculation in the prices by investors because the price is what sends the signals to the producers to increase production. Driving the price up quickly before there's a crisis is the best way to prevent a crisis. The cost of uranium is a small part of the cost of running a reactor. Higher prices won't affect them that much, but it will affect producers. At $100 per pound, you'd see some serious motivation and resources put into it.
OT video of the day

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