Safest Ways to Invest in Uranium Companies

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 (and possibly your money) 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 the 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, one of the safest investment strategies is to speculate on those companies, whose properties were drilled during the previous uranium bull market (1974-1980). Many of those properties had uranium deposits delineated by major oil and uranium companies, who did not blush at spending tens of millions of dollars to find uranium. Some of these companies acquired the drilling databases and the properties, which were abandoned over the past twenty-year uranium depression. Some of those companies have been actively moving their projects forward to production, using a more environmentally friendly mining method than the conventional mining of an open pit or underground mine. It is called In Situ Leach (ISL) mining, or solution mining. An ISL uranium operation is much like a water treatment plant, where oxidized, or carbonated, water is pumped into a uranium orebody and uranium is flushed into a uranium-treatment plant. These are relatively inexpensive to install, possibly for as little as $10 million, and can be economically operated during the current uranium boom. 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. Bigger is always better in most cases, but recovering uranium through an ISL operation, like any other mining operation, has its problems. Once you can sift through the companies with very real prospects from those who are cheerleading their "pounds in the ground," you will have narrowed down your list of potential investment vehicles. These are the four key questions that 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, once you believe there may be a uranium-mineralized orebody on the company's property, 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. Uranium Energy Corporation Chief Operating Officer 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 Chief Executive 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. However, the Darcy is a widely accepted measuring unit in the industry. With low permeability in a tight formation, you may need to space more wells in a typical well field pattern. How much does each well cost? That depends upon the depth of the roll front deposit. 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 are crazy. They'd be out of business before they started." Catchpole was more reserved in responding, "It probably wouldn't have an economic recovery." Strathmore's David Miller offered a more technical analysis, "Frankly, 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. "It depends upon the deposit," Miller added. Uranium grades can impact the cost of operating an ISL plant. Anthony gave an example of an ISL plant operating at 5000 gallons per minute. Running 24 hours daily, the plant would process 7.2 million gallons of water. That's more than 2.6 billion gallons of water processed every year. 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. Using a 5,000 gallon per minute 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, Strathmore's David Miller can determine the economic viability of the ground. "The keys to what is recoverable are: (a) how many pounds are recoverable per pattern? And (b) what does it cost 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. Add your operating cost, capital amortization and restoration cost, and you would have a total cost."

Finally, 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," remarked Terrence Osier, senior geologist for Strathmore Minerals. "That means more injection wells and more production wells." Depth of the wells influences its installation cost, as mentioned previously, and impacts its daily operating cost. "When uranium costs were very low, a few years ago, a company needed 70,000 pounds per pattern," Harry 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 Chief Executive 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 the criteria we've provided, you can avoid the hysteria by speculating with the odds stacked more in your favor.