To produce 89% lessJANGLED STORY
Uranium One – a cautionary tale for the uranium investor
Uranium One’s Dominion mine is now set to produce 89% less, in 2008, than originally projected.
Author: Barry Sergeant
Posted: Thursday , 14 Aug 2008
JOHANNESBURG -
Investor appetite - a marvelous cocktail of greed and fear - is constantly tested by all kinds of characters in all corners of the world. Despite, however, the incredible richness of such a canvas, there are always stories that stand out like stinging jellyfish on a calm and tranquil tropical beach.
Going back a year or so, it had been for more than two years that Neal Froneman, erstwhile CEO of Uranium One, had almost on a daily basis advised shareholders and new investors and anyone else who would listen that Uranium One's cash cost for uranium oxide at Dominion, not too far from Johannesburg, would be around USD 18.00/lb.
This was a very sexy prospect. First, uranium oxide prices had been rising for some years, from less than USD 10/lb, and would peak out at USD 138/lb in June 2007. Second, the first estimate of production for 2008 at Dominion was a gigantic 2.8m lbs, suggesting cash flow profits of about USD 200m for the year.
This was excessively sexy because both projected production and margins were high, giving Dominion the profile of a captive and mindless one arm bandit. The Uranium One stock price had peaked at CAD 35 a share in April 2007, and started drifting down. In October 2007, Uranium One cut Dominion's projected 2008 output to 1.7m lbs and again in February this year to 0.55m lbs.
Froneman stepped down as CEO at that stage, to be replaced on an interim basis by Jean Nortier, who was confirmed this week as CEO, just as Dominion's "pre-commercial" uranium oxide output projection for this year was again cut, this time to 0.32m lbs, some 89% less than Froneman's original projection of 2.8m lbs.
Investors who bought into this jangled story would remember that Uranium One used its "flagship" Dominion project to entice investors to back two big mergers. Well, that was the luck, given that the only entity making any money in the Uranium One stable emanated from one of those deals, in the form of the Akdala mine, in Kazakhstan. This is apparent from the voluminous financial results published this week by Uranium One; results which, at the same time, remain immeasurably murky over what's really going on at Dominion.
Nortier, Froneman's erstwhile right hand man, has persistently refused to discuss Dominion in any kind of detail. Crunching the latest numbers from Uranium One suggests that the mine (now apparently downgraded to a development project) continues to burn cash. Investors may start asking questions over the 138 page "independent technical report" signed by SRK Consulting on 26 October 2006.
The available evidence points to a Dominion that is not performing vaguely close to that projected by SRK Consulting, as endorsed by Uranium One's board of directors. Dominion's woeful performance has come as no surprise, however, to mining experts familiar with the findings of an evaluation of Dominion, published on 13 September 1996, by the-then Gold and Uranium Division Geology Department of Anglo American Corporation of South Africa.
SRK Consulting found for an underground grade of 970 grams per ton of uranium oxide at Dominion; Anglo American found for 550 grams a ton. This week, Uranium One stated that "the average blasted grade" increased from 361 grams a ton in the first quarter of this year to 536 grams a ton in the second quarter.
Regulators - Uranium One is also listed in Johannesburg - clearly don't worry about bizarre and tangled stories like this. Investors have voted with clay feet. Uranium One's stock price has been down to nearly CAD 3 a share, but has traded more recently around CAD 3.70, down nearly 90% from the 2007 high.
| Selected uranium stocks | | |
| Producers | Stock | From | From | Value |
| | price | high* | low* | USD bn |
| Cameco | CAD 33.27 | -33.8% | 6.0% | 12.18 |
| ERA | AUD 19.52 | -21.8% | 37.5% | 3.25 |
| Paladin | AUD 5.35 | -42.8% | 40.8% | 2.86 |
| Uranium One | CAD 3.70 | -72.3% | 21.7% | 1.84 |
| Denison | CAD 5.89 | -56.8% | 12.6% | 1.19 |
| Producer averages/total | | -45.5% | 23.7% | 21.32 |
| Weighted averages | | -42.3% | 15.5% |