May 6, 2010

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There was a mysterious disappearance of uranium in South Australia last week.

Uranium mining hopeful PepinNini Minerals reported a new resource estimate on its Crocker Well project. And something was missing.

In 2005, a resource estimate on the Crocker Well project identified 12.65 million tons of uranium oxide, using a 300 ppm cutoff.

Last week's updated resource however, showed just 4.75 million tons using the 300 ppm cutoff.

Based on the findings, PepinNini and partner Sinosteel have decided to put the project on hold. This after the resource consultants said that the deposit is "small, with the currently definable resource not likely to support a mining operation at the current time."

What caused the resource downgrade? Management attributed the drop to new deposit modeling, taking into account only the part of the deposit that could be feasibly incorporated into the a mine plan.

This kind of disappointment on uranium projects is becoming more common. This week Aussie developer Toro Energy announced it will abandon a deal to acquire the 13.2 million-pound Napperby uranium project in the Northern Territory.

Toro's management said the numbers on Napperby just don't pass muster. The company will instead focus on exploration for higher-grade uranium deposits with more robust economics.

Grade is indeed the challenge with both Crocker Well and Napperby. These deposits run 283 and 359 ppm uranium oxide, respectively.

A little perspective. 300 ppm is 0.03%. Now consider the world's largest uranium mine, McArthur River in Saskatchewan. McArthur's proven reserves run 13%. Over 400 times higher-grade. Other projects in Saskatchewan like Cigar Lake are similar.

This is one of the major challenges in uranium. Global deposits have a "bi-modal" grade distribution.

As the cost curve below (from a BHP presentation on the Olympic Dam uranium mine) shows, there is a good deal of uranium production that can be had at relatively low production cost. At lot around $15/lb.

But look what happens when you push the curve to its limits. If the world needs supply greater than about 75,000 tonnes (165 million pounds) uranium oxide yearly, the cost goes up quickly.

That's because supply above 75,000 tonnes per year has to come from lower-quality, lower-grade deposits like those mentioned above. We only have so many high-grade deposits on Earth.

(It should be noted that some of the "low-cost" uranium producing mines are so by virtue of by-product metals. Olympic Dam is very low-grade. But it produces a lot of copper, silver and gold along with the uranium. After selling these other metals, the effective cash cost for uranium production is less.)

Four years ago when uranium prices topped $100/lb, the mining community assumed we needed the high end of the cost curve. Projects like Crocker Well and Napperby were brought into the mix.

Now with uranium languishing in the $40/lb range, we're not so sure. In 2009, the world produced 59,640 tonnes of uranium oxide. We're not yet at that "tipping point" where high-cost deposits are needed.

But we're close. If significant new demand does emerge, the low-grade deposits may once again be called into service.

In the meantime, there's a pretty good niche for anyone who can discover higher-grade uranium deposits. 0.1% is not bad. 1% would be terrific.

Unfortunately, there aren't many districts known on the planet with this kind of potential. Niger isn't bad. Northern Australia might do. Northern Canada also has some deposits that might get there.

But the uranium market is ripe for new ideas. Otherwise, a very imbalanced cost curve is going to persist. Potentially making for volatile prices if demand ramps up.

Here's to blowing the curve,

Dave Forest