INSIGHTS ABOUT THE URANIUM
PRICE AND CIGAR LAKE


What Went Wrong at Cigar Lake?

Cameco acknowledges Cigar Lake will be difficult to mine. A geologist intimately familiar with the Cigar Lake uranium orebody warned that the basement rock lacked the stability and strength to safely build the development and production shafts necessary to mine the orebody. A mining engineer, who wished to also remain anonymous, told us, “It’s like mining in quicksand.” This could place the uranium market supply balance in a deficit for several years.

Two sources for uranium price forecasts and industry insights, from whom StockInterview had previously drawn upon, were worth visiting with again. Both Sprott Asset Management Market Strategist Kevin Bambrough and Strathmore Minerals President David Miller have been extremely bullish in forecasting the spot price of uranium.

Kevin Bambrough told us during an email and telephone interview, “Uranium mining is difficult and risky.” We talked about the recent mine flood. “The Cigar Lake mine is very unique in the world,” he pointed out. “So far the uranium market hasn't priced in the risk to the viability of Cigar Lake nearly enough.”

“Unlike most mines, they are forced to go below the orebody, which is hosted in unstable water-saturated sandstone in order to find solid dry basement rock,” Bambrough explained. “They go below the orebody so they can build stable safe shafts under the entire orebody for the purpose of extracting the ore from below using a jet-boring method. They are also forced to freeze the orebody in order to prevent excessive water flow into the production shafts.” Bambrough added, “It's clear that encountering flowing water in what is supposed to be dry basement rock was a shock, especially because the flow rate was so high.”

Bambrough has numerous questions for Cameco on the company’s scheduled earnings conference call this Wednesday. He told us, “We need to ask Cameco these questions:

If the water wasn’t coming from the orebody above, where was it coming from? Was the water flow coming from above at all? Is it possible there are faults in the basement rock in which large volumes of water are flowing? If so, what will have to be done in terms of re-engineering the mine in order to deal with this possibility? How much harder is it to freeze basement rock to prevent water flow than freezing water-saturated sandstone? And how effective is this? How will you build shafts, through what may be faulted rock almost 3000 feet below the surface, while water is attempting to flow into your working area at 1500 cubic meters per hour? Will you be increasing your pumping capacity to avoid another unforeseen problem? What confidence level should we have even if they plug the leak, drain the orebody and give us a new production schedule that it will be achieved? Will the mine development continue to be plagued by difficulty and delays for years?"

From his research and interviews with mining executives and other sources, Bambrough believes at least two events are likely to take place. “It’s likely that in the coming days, weeks or maybe even months, Cameco will revise their expectations of the delay being ‘at least a year’ to possibly a few years or more.” He added that utilities “will have extreme difficulty in trying to replace what was likely low-cost uranium expected from Cigar Lake .” He thinks the bill in terms of higher uranium prices collectively could cost utilities more than one-half billion dollars per year. “They may have to pay more than double than what they would have paid under their Cigar Lake contracts,” Bambrough concluded.

Those who sold uranium production before the Cigar Lake flood could later regret it, he told us. And Bambrough warned, “I expect the spot market in uranium could become fairly illiquid over the next while as traders try to assess the timeline for the Cigar supply.”