China’s energy appetite is insatiable

By Marin Katusa

Mining is a risky business and accidents happen. But when your mine is the world’s largest uranium deposit, fourth largest copper deposit, and fifth largest gold deposit, an accident can cost a little bit more than the average. Something BHP Billiton found out after the shaft accident at its flagship Olympic Dam mine located 560 kilometres north of Adelaide, South Australia.

In October of last year, a breakdown of one of two haulage systems saw a loaded iron skip plummeting to the bottom of the 800-metre-deep main shaft. It caused enough damage to the inside of the shaft, and to the gears and the wheels that bring the ore to the surface, that it took nine months to repair.

So how much does it actually cost when production is halted at a mine that’s clearly won the geological lottery? BHP Billiton revealed on July 21 that annual copper production was down 11% in 2010, uranium production off by 43%, and gold production was 19% below the normal. The amount of material mined in fiscal 2010 was 5.3 million tonnes, down 9.8 million tonnes from last year.

The mine has, according to the company, returned to full production now. There is however, the small problem of contracts. One of BHP’s largest clients is China, the country whose energy appetite just can’t get enough. The country that will be buying up to 5,000 metric tonnes of uranium this year.

The Olympic Dam mine produces 7% of the world’s uranium, production that was affected by the shutdown. While production is getting back on track today, the feeling in the BHP boardroom is one of unease. The reason: The rise in the number of new nuclear power stations coming online in the next few years, along with all the contracts that need to be fulfilled. Expansion plans are in the works already. BHP is looking to massively increase the size of the mine and has handed in a 4,000-page environmental impact statement draft to the Australian government.

The sticking point is, they’re going to have to go deeper, and it’s going to get a lot more expensive. The Australian government isn’t going to turn away from the opportunity to tax this goldmine either. And if the problems of additional cost aren’t enough, the rail system in Australia can’t handle moving that much ore at all times, so tack on some more delays.

Unsurprisingly, BHP is out scouting the market for some good deals on uranium. Top on their list is Saskatchewan, Canada.

The uranium deposits in Saskatchewan aren’t just significantly large; they’re also the highest-quality uranium known on the planet. The ore mined at MacArthur River has an average ore grade of 21% (average ore grades are given as a percentage of uranium oxide in the ore).

Just to compare, the uranium found in the United States is usually around 0.4% to 0.5%. That makes the Athabasca Basin uranium 45 times higher grade.

The uranium deposit at MacArthur River can be visualized as a few school buses parked within a school football field. It might sound small, but in uranium-speak, that deposit is big! It’s big because the grades are incredible in the Athabasca Basin. And that makes it huge financially.

Canada also ensures that the uranium it sells is used solely for electricity generation at nuclear power plants. The end use is very strictly enforced through an assortment of international non-proliferation treaties and Canadian export restrictions. In fact, uranium on a per-tonne basis is worth more than gold if you’re in the Athabasca Basin. Given current uranium spot prices, it can fetch a staggering US$13,500 per tonne.

That’s unheard of!

After meeting with many uranium executives, one can’t help but notice the large BHP building off 3rd Avenue while walking around Saskatoon. It’s not just the potash and diamonds that BHP cares about in Saskatchewan. The quantity of uranium underneath the Athabasca Basin is almost beyond reckoning. It can provide substantial wealth to the right company and the right investor.

If BHP decides to enter the uranium sector in Saskatchewan, which companies are on their short list?

That’s exactly what I was finding out while wandering the Prairies.

Financial Post
Marin Katusa is an analyst with Casey’s Energy Report.