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Safest Ways To Invest In Uranium Companies
By: James Finch
Summary: Because of soaring uranium prices, hundreds of companies have formed to
capitalize upon the latest craze. How do you avoid being fooled? Look to ISL
uranium companies. About 21 percent of the world’s nuclear reactors are now
fueled by uranium mined using this method. How do you evaluate the many uranium
companies now developing their ISL operations?
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.
About the Author:
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 jfinch@stockinterview.com |
