Cameco turns eye to Western Australia

VANCOUVER — It appears Canada’s major uranium power Cameco is viewing a downswing in uranium markets as an opportunity to diversify its project portfolio and acquire a foothold in Australia.

VANCOUVER — It appears Canada’s major uranium power Cameco is viewing a downswing in uranium markets as an opportunity to diversify its project portfolio and acquire a foothold in Australia.

Cameco announced on Aug. 26 that it had agreed to buy the Yeelirrie uranium deposit in Western Australia from BHP Billiton for US$430 million. The sale is expected to close by the end of the year, at which point an additional US$22 million in taxes would be payable to the Australian government thereby bringing the total acquisition value to US$452 million.

The deal marked the second acquisition by Cameco this year. The company acquired nuclear fuel trading house NUKEM Energy for US$136 million in mid-May, while also absorbing roughly US$164 million in net debt. Cameco acquired a “portfolio of purchase and sales contracts, including approximately 4.5 million lb of uranium” in the deal.

Yeelirrie carries 16.6 million measured tonnes grading 0.16% U3O8, and an additional 31 million indicated tonnes averaging 0.12% U3O8. The historic resource is non-compliant with National Instrument 43-101 standards and is based on 10,250 surface holes, including 4,000 diamond drill holes. Cameco reports indicate the estimate may be overstated by roughly 10%. With a 0.05% U3O8 cut-off grade being applied too liberally across the deposit.

According to reports, the purchase price equates to roughly US$3.13 per lb of uranium oxide, or 6.6% of the uranium oxide spot price at the time of purchase. Uranium oxide prices have been in the US$50 per lb range recently after hitting a high of US$74 per lb during the first quarter.

Cameco currently operates 22 exploration projects in Australia. Cameco is aiming to increase annual companywide uranium oxide production to 40 million lb by 2018 (the company’s 2012 guidance sits at 21.7 million lb) and a key producing asset in Australia would go a long way in realizing that goal.

During the second quarter a prefeasibility study on Cameco's advanced stage Kintyre uranium project in Western Australia’s Sandy Desert failed to provide competitive returns.

The company reported that it would require a US$67 per lb uranium oxide price or roughly 62 million lb total packaged production at current spot rates for Kintyre to break even. The study is based on an open pit mine scenario that would produce about 6 million lb. U3O8 annually — or 40 million lb. total — over a seven year mine life. Kintyre holds 55 million measured and indicated tonnes averaging 0.58% U3O8.

“I want to emphasize that this is not a production decision but rather the next step in our 'stage gate' process,” said president and CEO Tim Gitzel during Cameco’s second quarter conference call, after announcing the company would not be going ahead with project development under current economic conditions. “We are not going to develop Kintyre at any cost. As you’ve seen throughout our history, we are a financially disciplined company and the project must make sense economically for us to go forward with it.”

BHP has gone back and forth on the Yeelirrie deposit since Western Australia's Premier Colin Barnett lifted a ban on uranium mining in the state in 2008. The major also shelved plans for a US$30 billion expansion at its Olympic Dam copper-uranium-gold-silver mine in South Australia in early September, and looks to be moving away from growing in the uranium sector.

According to reports, Barnett had been pressuring BHP to move forward with development plans at Yeelirrie after the miner halted activities at the site late last year. The company had started up an environmental approval process on the project under a speculative mine plan that would have produced 7.7 million lb U3O8 per year.

"The state is keen to see the Yeelirrie uranium deposit developed and if BHP does not wish to progress this project, we'd urge them to sell the asset to someone who does want to develop it," Barnett told a reporter from The Australian on Aug. 27.

BHP says that pure uranium developments are simply too "small scale" for the company to pursue, and cites a collapse in uranium prices following the Fukushima nuclear incident last year as reasons behind its shift away from the sector.

BMO Capital Markets analyst Ed Sterck maintains an "outperform" rating on Cameco with a $29 target price. Sterck notes that the price per pound of uranium oxide in the deal is significantly less than other recent acquisitions in the uranium space,

“Given the amount of work conducted to date by BHP, BMO Research believes it is possible for Cameco to fast track development and achieve first production within four to five years,” Sterck comments in an Aug. 27 research note.

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