The Casey Files

What's That Uranium Worth?

August 26, 2005

In order to make the big returns offered by resource stocks, it is only logical that you should have some understanding of the underlying resource, whether that resource is gold, silver, oil or, as discussed here, uranium.

This article by Phil O'Neill, a senior editor of our new Casey Energy Speculator newsletter, provides a quick primer on uranium grades. For reasons Phil explains, when it comes to uranium, grade is often a factor that the latecomer uranium juniors would rather not discuss.

If you are at all interested in uranium stocks, and - selectively -- you should be, read on. That Phil is worth paying attention to is evidenced by the fact that, strictly by virtue of making well-researched investments in junior uranium companies, he has turned $20,000 into a personal fortune.

Doug Casey

[Editors Note: If you're interested in early-stage energy companies with extreme profit potential, take a minute to learn more about the Casey Energy Speculator. During this charter subscription period, you can subscribe for just $99 a year, a 33% savings. Plus, all subscriptions come with a 100% money-back guarantee for six months…meaning you can try it out for half a year with no risk! Learn more now.]

The uranium sector has been on a wild ride since the summer of 2003. With the price for yellowcake soaring, the market has witnessed the birth of well over 100 new uranium companies. That's an astounding number, but what's more impressive - and concerning - is the more than 1 billion pounds of uranium these new juniors purport to hold within all of their various mineral claims.

If this sounds like a lot of uranium, it is. Uranium is in fact the fourth most common element in the Earth's crust. It's everywhere - even in your backyard. So, why do mining analysts keep talking about a current shortage of yellowcake?

The key is that, of the billion pounds of U3O8 claimed by mining companies, it's more than likely that only a fraction will ever come out of the ground. There are many reasons that is the case, politics and environmentalists being two that leap to mind.

But ultimately, grade may be the most important factor of all. Or, put another way: are concentrations of the metal in rock high enough that the material can be mined at a cost lower than it can be sold for? At the right grade, almost any mining obstacle can be overcome. Conversely, if a deposit is too low grade, then if the "pounds in the ground" are found deep in the earth, or are bound in hard rock, then the odds of those pounds seeing the light of day are slim to none… and slim just caught a train out of town.

Many junior uranium companies would rather you didn't know this. That's why they spend most of the time waving their arms about the number of pounds they have, while mumbling under their breath when it comes time to discuss grade. But a quick calculation - using the current uranium spot price of $30.20 a pound, with a comparison to the gold grades that most resource investors are familiar with -- shows how grade affects the economics of a deposit:

  • 0.03% U3O8 = $20 a tonne/rock (equivalent to 0.045 oz/tonne gold)
  • 0.3% U3O8 = $200 a tonne/rock (0.45 oz/tonne gold)
  • 3% U3O8 = $2000 a tonne rock (4.5 oz/tonne gold)
  • 30% U3O8 = $20,000 a tonne/rock (45 oz/tonne gold!)

As just mentioned, the position of the decimal is critical in determining the viability of a junior uranium company's longer-term prospects… which is to say, its ability to generate enough interest within an increasingly discerning investor base to move your shares higher.

A company can have all the pounds in the world, but if the market comes to understand that its flagship properties can't be economically mined, your investment will be like a burning match, waiting only for the promotional hype to die down before flaming out.

In the way of providing some comparables, start with Cameco's McArthur River deposit in Saskatchewan's Athabasca Basin. Costs to mine here are considerable: the deposit is deep, at 550 meters, and involves underground mining. Furthermore, the mine has to be frozen to stop water from flowing into the drifts, and the ore has to be mined by remote control because of the radiation associated with the high-grade ore. But these expenses are more than made up for by the extreme value of McArthur's unusually high-grade uranium; with 436.5 million pounds at an average grade of 24.7% U3O8, the deposit has an in-situ value of roughly US$10 billion.

Still in the economic spectrum are low-grade, sandstone-hosted uranium deposits in places such as the western United States. Although these ores grade in the neighborhood of 0.05%, many are amenable to in-situ leaching (ISL) - a low-cost extraction technique. And, in Kazakhstan, Cameco is currently developing an ISL operation at its Inkai project that will produce ores grading 0.06%. That said, ISL is not a simple procedure - a company has to have considerable expertise to execute such projects. Done improperly, ISL can contaminate nearby drinking water sources, exposing a mining company to expensive litigation. Even so, the fact is that a low-grade deposit can turn a nice profit... but the conditions need to be right.

The best approach is to look for companies whose projects are reasonably high grade, and also carry attractive production characteristics. Two that we follow at the Casey Energy Speculator are Western Prospector (V.WNP) and JNR Resources (V.JNN). WNP, for example, is currently drilling ores of up to 1% U3O8 at its Saddle Hills uranium basin property in mining-friendly Mongolia. JNR holds some very attractive property in the Athabasca Basin, including Moore Lake, which partner IUC is hard at work on as you read this.

The moral of the story is simple: As the next leg of the uranium bull market gears up, it will no longer be enough for a company to simply tout the multi-million pounds of U3O8 they're sitting on. Investors, especially the major institutions, have moved up the uranium learning curve considerably over the past two years. Increasingly, such buyers will be asking not only, "How much have you got?" but also, "How good is it?" If the answer is that a deposit is low grade and deeply buried in hard rock, it's time to head for the nearest exit.

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Goldschläger and Goldwasser are liqueurs containing pure gold flakes.

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