Cameco Fights Floods, Skepticism as Stockpiles Shrink

Cameco CEO Jerry Grandey
Gerald "Jerry" Grandey, chief executive officer of Cameco Corp. Photographer: Geoff Howe/Bloomberg

Cameco Corp. plans to begin output at the world’s largest untapped uranium deposit in 2013, just in time to make up for a shortfall in global supplies. The project’s critics say it won’t happen.

The Canadian company, the world’s second-largest uranium producer, is developing the Cigar Lake mine in Saskatchewan beneath almost a half-kilometer (1,641 feet) of water-soaked sandstone. The mine, six years behind schedule because of floods, could meet 10 percent of current global needs.

Uranium use will exceed supply through at least 2015, according to the Royal Bank of Canada. China is building 25 nuclear reactors, almost double the number in operation, while Russia ends a program to extract uranium from atomic warheads.

“The world needs Cigar,” said Thomas L. Neff, a physicist at the Massachusetts Institute of Technology, who in the 1990s devised the so-called HEU, or highly enriched uranium, program to decommission the warheads.

Cameco said Nov. 8 it will proceed with an oil-industry technology to freeze the ground at the deposit to prevent more floods. Preventing further delay is crucial to Chief Executive Officer Jerry Grandey’s goal of doubling the Saskatoon, Saskatchewan-based company’s output to 40 million pounds by 2018.

“Since the HEU deal increasingly looks like it will come to a full stop by the end of 2013, it’s important from a global supply perspective that Cigar be there about the same time,” Grandey said in a Nov. 12 interview.

Warhead Supplies

Uranium from the HEU program is responsible for almost 10 percent of U.S. electricity generation, Neff said.

Some analysts and investors who track Cameco say it will miss its deadline. Duncan McKeen, a Montreal-based analyst at Macquarie Capital Markets, expects Cigar Lake won’t begin output until 2014. John Redstone, a Montreal-based analyst at Desjardins Securities Inc. who visited the project in September, predicts a 2015 startup.

“When someone has disappointed in the past, you have to discount the guidance they give,” said John Wong, a portfolio manager at New City Investment Managers in London who helps manage $450 million, including 175,000 Cameco shares. “Startup could be six months to a year later than projected.”

Cameco rose $1.09, or 3 percent, to $37.36 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have fallen 4.7 percent since the first flood. In that period, BHP Billiton Ltd., the world’s largest mining company, more than doubled in London while France’s Areva SA, the largest uranium producer, declined 41 percent in Paris.

Chinese Expansion

At the current uranium spot price of $60.25 a pound, the deposit’s 209 million pounds of the mineral are worth about $12.6 billion. The mine will cost C$2.04 billion ($2 billion), Cameco said in a technical report on its website.

Cameco owns 50 percent of the project, Areva 37 percent, Japan’s Idemitsu Kosan Co. 7.9 percent, and Tepco Resources, a unit of Tokyo Electric Power Co., 5 percent. Cameco said Nov. 23 it agreed to supply 29 million pounds of uranium through 2025 to China Guangdong Nuclear Power Holding Co., an operator of three nuclear power stations.

Cigar Lake was discovered in May 1981 and lies under northern jack-pine forests amid water-logged Athabasca sandstone and less-porous rock formations.

‘Big Sponge’

“Underground you’ve got like a big sponge filled with water with little walnuts, which are the mineral-bearing rock, and you’re navigating around there without having this water rushing in,” said John Stephenson, who helps manage C$2 billion at First Asset Investment Management Inc. in Toronto.

Water flooded a shaft at the mine in April 2006 via a failed valve assembly. Following a second inundation in October 2006, blamed by investigators on a lack of pumping capacity, the price of uranium climbed, reaching a record $138 a pound in June 2007. A third flood in August 2008 occurred as Cameco sought to drain the facility.

A company-commissioned investigation in May 2007 found Cameco’s “deficient” development plans led to the second flood. During a December 2006 hearing before the Canadian Nuclear Safety Commission, then-member Christopher Barnes said he was concerned Cameco was building the mine “without adequate geologic, geotechnical, hydrogeologic knowledge.”

Cameco took analysts, fund managers and reporters on tours of Cigar Lake in September to show how the sources of the floods have been blocked and pumping capacity increased.

‘Took a Hit’

“There’s no question our reputation took a hit,” Grandey said in September. “I do think our performance over the last couple of years has gone a long way to restoring that.”

The mine visit helped convince Mark Iong, an analyst at Manning & Napier Advisors Inc., that production will start on schedule.

“There’s always concern during mine development that anything can go wrong,” Fairport, New York-based Iong said in an interview. “Our confidence level is higher.”

Cameco is also gaining the trust of regulators, said Kevin Scissons, Saskatoon-based director of the Canadian Nuclear Safety Commission’s uranium mills and mines division.

“The degree of risk mitigation that we’ve implemented, the design and planning, gives us confidence,” Grandey said. “Twenty-thirteen is still a good estimate.”

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