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PESSIMISTIC ANALYSES

More delays at Cigar Lake will put pressure on uranium price

Some uranium analysts and traders expect further slippage in dewatering Cameco's big ultra high grade Cigar Lake uranium mine.

Author: Cameron French
Posted: Wednesday , 12 Dec 2007

TORONTO (Reuters) -

Cameco jumped a hurdle last week when it got a two-year permit extension for overhaul of its flooded Cigar Lake uranium mine in Canada, but analysts say the miner's forecasts of output by 2011 are too optimistic.

With the mine expected one day to supply over 10 percent of the world's mined uranium, any further delays starting production would put upward pressure on uranium spot prices that have already hit a record high earlier this year.

"I don't know anybody that's betting 2011. I think a lot of people are expecting at least another year or two slip there," said one uranium trader. "I would say 2012 or 2013. Nobody thinks they can get it done in the time Cameco has outlined."

The two-year extension from the Canadian Nuclear Safety Commission (CNSC), Canada's nuclear regulator, means Cameco can continue to prepare to pump water out of the half-km deep mine, which flooded in 2006 after a rock fall.

Cameco is the world's top uranium producer.

Buried beneath the uranium-rich but waterlogged sandstone of the Athabasca region of northern Saskatchewan, Cigar Lake is the world's richest undeveloped deposit, containing about 226 million pounds of uranium.

It is 50 percent owned by Cameco and 37 percent owned by a unit of France's Areva.

Delays to reconstruction have come as Cameco has also run into trouble elsewhere, including the discovery of contaminated soil at its Port Hope, Ontario, nuclear fuel plant, and a water inflow at its Rabbit Lake operation, also in the Athabasca.

In addition, a sulphuric acid shortage in Kazakhstan could crimp production at its Inkai mine.

TEASPOONS

But Cigar Lake has been the major overhang, helping depress Cameco's stock 16 percent so far this year, despite a 29 percent rise uranium spot prices in the same period.

Raymond Goldie, an analyst at Salman Partners, said the stock's level indicated investors were unwilling to ascribe much value to the Cigar Lake deposit. He calculates the company's net asset value at C$57 per share. Cameco closed at C$39.60 on the Toronto Stock Exchange on Monday.

"Stocks that represent pure plays on commodities in Canada usually trade at a premium to their net asset value, so that suggests ... the market is not expecting Cigar Lake to come on."

But analysts say the richness of the deposit -- its average grade of 21 percent is about 100 times the industry average -- means it will be exploited somehow as demand outstrips supply.

"Two percent of the world's electricity is going to come out of this mine, but it's so high grade you could mine it with teaspoons and still make money," Goldie said.

He says Cigar Lake could come on line by 2011, but likely about six months later than the company's predictions.

Others are more pessimistic.

Blackmont analyst George Topping said in a recent note he expected Cigar Lake to be delayed until the second half of 2012.

Cameco has said its 2011 forecast is subject to several conditions, and Chief Operating Officer Tim Gitzel has said the company isn't "fixed to any time" in its repairs. Cameco will provide its next update on the overhaul on December 19.

Spokesman Lyle Krahn would not comment on how the CNSC's decision affects the repair timeline, but said the decision -- which will see additional oversight on the upcoming repairs -- was what the company had expected.

($1=$1.01 Canadian)

( Editing by Chris Johnson)

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