I know this is long but for anyone interested in IUC it's probably worthwhile reading. If not just hit next.
RL
Salman Partners says buy
International Uranium Corp IUC
Shares issued 65,743,051 Mar 9 close $1.20
Tue 10 Mar 98 Research
Kevin Eldridge says why
THE COMPANY
International Uranium Corp was formed in 1996 to purchase the uranium producing assets of Energy Fuels, a company in Chapter 11 bankruptcy in the US. IUC's main assets include the White Mesa mill, and both conventional and in-situ reserves in South Dakota, Wyoming, Colorado, Utah, Arizona and Mongolia. IUC is currently producing ore from the Sunday mine in anticipation of a mill run in mid 1998. By 1999, we expect IUC will be mining from at least three separate deposits, as well as processing uranium bearing residues from uranium conversion plants and other commercial
facilities. Cash costs of production at IUC's mines are expected to be less than US$9.00/lb.
THE BANKRUPTCY
The first question that comes to mind when looking to invest in a company comprised of assets purchased out of bankruptcy is why did the company go bankrupt in the first place? The answer lies in the background of Oren Benton, the previous owner of Energy Fuels. Benton controlled a complicated empire that included interests in such disparate operations as computer memory chip manufacturing (17% of Ramtron International Corp), professional baseball (20% of the Colorado Rockies) and gold mining (24% of Rio Narcea Gold), as well as uranium production (Energy Fuels) and uranium trading
(NUEXCO). A large part of this empire was financed with cash generated from the uranium interests, in particular the money earned from shorting uranium in the early 1990s. When it became necessary to cover these highly lucrative short positions, the money was not forthcoming due to Benton's non-uranium investments and Benton was forced to seek bankruptcy protection in 1995 along with several of the companies he controlled. This represented one of the largest personal bankruptcies in the history of the US. IUC purchased the bulk of the uranium producing assets from Benton's estate for US$20.5 in an open bidding process.
MANAGEMENT
Much of the management team from Energy Fuels remains intact under the IUC banner. Although IUC currently has the market capitalization of a junior, the depth of management's experience in terms of uranium marketing, production and exploration can only be found among the Camecos of the world.
Earl Hoellen, President
Under his management, Nuexco became the largest independent trader of nuclear fuel in the world. Mr Hoellen was also involved in the drafting of the "matched sales" agreement that oversees the sales of uranium from the former Soviet Union into the US.
Harold Roberts, Executive Vice-President
Mr Roberts has been involved with Energy Fuels since 1978, including acting as president from 1994 through 1996. In the late 1980s, Harold participated in the design and engineering of the White Mesa mill. He has also been heavily involved in the compliance and permitting aspects of the uranium production business. IUC also continues to employ most of the key operational personnel from Energy Fuels. This includes the former general managers of both the Colorado Plateau and Arizona Strip operations.
ASSETS
Mesa Mill, Utah
This 2,000 tpd mill was constructed in 1979 and is the only conventional mill in the US to have run consistently in the last decade. It also includes a vanadium circuit which can be of great economic advantage when processing ore from mines in the Colorado Strip. This is truly a strategic asset since the cost and permitting difficulties associated with a new facility would be prohibitive. It is IUC's intention to "turn down" the
mill to a reduced capacity of approximately 1,200 tpd for the foreseeable future, thereby allowing longer mill runs and smaller work-in-process inventories.
The mill is in good operating condition having completed its last significant conventional ore run in 1996. Since that time, several alternate feed campaigns have also been completed. Approximately $1.5 million has been budgeted for the necessary improvements, which include the relining of a tailings pond, the relining of a SAG mill, and the refurbishment of the vanadium circuit.
The Colorado Plateau IUC has a significant land position on the Colorado Plateau, one of the historical hot beds of uranium mining. The area's mining history dates back to 1898, from which it grew to be one of the world's largest producers of vanadium and uranium by the middle part of the century when hundreds of mines were in operation. In total, there have been over 47 million pounds of uranium and 278 million pounds of vanadium mined from this area by IUC's predecessor companies.
IUC's main resources on the Plateau occur in two areas, the Sunday complex and the Deer Creek complex, both of which have developed and permitted mines with production histories. The local rocks are predominantly sedimentary, with most of the important deposits occurring in the Salt Wash Member of the Jurassic Morrison formation. The chief uranium mineral is a fine grained uraninite, while the dominant vanadium mineral is montrosite.
The ratio of vanadium to uranium varies substantially from roughly 5:1 to 10:1, with an average of 6.7:1. The currently delineated reserves in the Sunday complex are shown below. It is important to point out that extensive reserve delineation has never been the focus due to the vein like nature of the deposits in this region. Traditionally, reserve replacement during any given year has been roughly equal to the amount of mining that has taken
place. This is a cycle that repeated itself for over 40 years until low prices forced mining to cease. The closures were not in any way due to the depletion of reserves.
The Sunday mine was the first to be put back into production. The operation was originally developed as a number of stand alone mines, which have since been joined through a series of underground drifts. Mining in this area has used random room and pillar methods. Access to the operation is via a number of declines running from surface. Mining at the West Sunday mine is currently under way, with full production of 75,000 tons per year expected to be achieved in the first quarter of 1998. Mining costs at this operation have been estimated by independent consultants to total roughly US$57 per
ton while milling costs have been estimated at US$67 per ton.
IUC's assets also include a number of known deposits in the area referred to as the Arizona Strip, 200 air miles from the Colorado Plateau. Energy Fuels, IUC's predecessor company, was the pioneer in mining these deposits, having mined over 19 million pounds of uranium from this region since 1981.
IUC currently owns four permitted mines two of which (Canyon and Arizona 1) could be brought into production relatively quickly.
By US standards, the Arizona Strip deposits, which run up to 1% U3O8, are considered high grade. These small, but rich breccia deposits, typically occur from 1,000 to 1,800 feet below surface where the uranium ore is hosted by the breccia in a sand, silt, and clay matrix with pitchblend being the principal uranium mineral.
Because of the irregular shape of many of the Arizona strip orebodies, a combination of mining methods have historically been used. For larger ore zones, blasthole or slot mining has been used, while smaller pods have typically been mined with room and pillar, shrinkage and open sloping methods.
We expect that the Arizona 1 and Canyon mines will begin production in
1999. When development work at Arizona 1 was halted in 1992 due to low
uranium prices, the shaft had been sunk to a depth of 1,254 feet, roughly
400 feet from plan depth. It is estimated that an additional US$1.8 million
in capital expenditures will be needed to put Arizona 1 into production.
Mining costs are expected to average US$40.10 per ton, with milling costs adding an additional US$40.60 per ton.
The Canyon mine will need roughly US$9 million in pre-production capital costs, the majority of which will be spent on completing the remainder of the 1,500 foot shaft that was previously collared at a depth of 53 feet. Mining and milling costs at Canyon are expected to average US$39 and US$42 per ton respectively.
IUC is also involved in properties where in-situ solution mining (ISL) appears to be feasible. In-situ mining involves pumping water fortified with solubilizing agents directly into the orebody, causing the uranium to dissolve in place. The enriched solution is then pumped to the surface and processed into uranium concentrate. This mining method is attractive in
that its lower cost structure typically allows for the economic mining of lower grade deposits. The most advanced of IUC's ISL projects is on the
Reno Creek property in the Powder River Basin of western Wyoming. A pilot plant study in the 1980s was successful in demonstrating that this deposit
could be mined using the ISL process. The permit applications for Reno Creek are complete and are expected to be issued in 1998 allowing for initial production in late 1999. Drilling performed by Energy Fuels has delineated a reserve of 5.1 million pounds U3O8.
IUC holds large exploration holdings in all three of these regions which are well known for their historic uranium production. The prolific history
of the Sunday Mine complex was noted earlier while the exploration potential of the Arizona Strip is highlighted by the number of advanced targets that remain from Energy Fuels' exploration program of the 1980s.
IUC currently holds 32 drill-tested, mineralized breccia pipes awaiting further exploration work. Also noteworthy is the fact that a number of attractive targets previously owned by others have been dropped in recent years due to low commodity prices and the uncertainty concerning the White Mesa mill through the bankruptcy proceedings of Oren Benton. These now represent potential acquisition possibilities for IUC.
IUC owns 70% of a joint venture company formed to explore and develop four concessions (24,290 sq km) in central eastern Mongolia. Most of the work to date has been focused on the Choir Depression where over 25,000 meters of drilling was completed in 1996. Initial calculations by independent consultants have estimated the geologic reserve to be in excess of 11 million pounds although 70% of this total lies above the water table which
makes ISL operations more difficult IUC has a 19,000 metre drill program in
place for 1998.
Potentially more important was the 33,000 metre program conducted on the
Hairhan Depression to follow up encouraging results from the 1996 program.
It appears the mineralization in this area rests completely beneath the water table. Although substantial work remains to be done on the feasibility of using ISL technology in this area, the potential is nevertheless immense. Recent results have shown consistently strong GTs over a 1,200 metre strike length (GTs are a measure of an ISL deposit's richness which incorporates the thickness of the intersection as well as the grade). Pilot plant testing, expected to begin next year, should shed light on the viability of economic mining in this area. Total expenditures
on the Mongolian properties are budgeted at US$3.5 million for 1998.
PRODUCTION
The beginning of 1998 will be spent starting the mines and stockpiling ore at the White Mesa mill. Initial production is expected to come from the Canyon, Arizona 1 and Sunday Complex mines, although continuing strength in vanadium prices could lead management to open another mine on the Colorado Plateau in advance of Canyon. This production will be complemented by ore
purchased and tolled from local miners that own deposits in the surrounding area. These latter aspects highlight the strategic benefits of owning the
only uranium mill in the area. It is interesting to note that when the
White Mesa mill was constructed, Energy Fuels did not own any operating mines. It procured roughly 1.8 million tons of ore obtained from 122 local
miners, equivalent to a two year mill-feed inventory. Going forward, we
expect the availability of purchased and tolled ore to be dependent on the
level of uranium prices.
The production leverage associated with the White Mesa mill is worth
highlighting. As mentioned earlier, IUC intends to decrease the mill's
capacity to 1,200 tpd from the current 2,000 tpd level. However, should
uranium prices and the availability of ore from the local miners increase
substantially, IUC will be capable of raising the operating rate to produce
at the original design capacity. This would mean that IUC's production
leverage actually increases with a rise in the commodity price, an effect
which is in direct contrast to companies like Cameco that are hindered by
royalty structures that counter the leverage effects of uranium price
changes.
ALTERNATIVE REVENUE SOURCES
Substantial growth possibilities also exist in such non-core businesses as
alternate feed processing or low level radioactive waste disposal. In fact,
both these areas provide revenue potential that makes it difficult to call
them "non-core" sectors.
IUC recently announced the signing of a fourth alternate feed contract. In
many cases, these alternate feeds represent residues from uranium
conversion plants and other commercial facilities that contain uranium as
well as other economically recoverable minerals. Although the quantity of
alternative feedstock available to be processed is difficult to quantify
because of its numerous sources and heterogeneous nature, it appears that
this profitable niche is virtually untapped. It is estimated that these
agreements will provide operating profits in excess of $11 million to the
company in 1998 despite the low prices currently seen in the uranium
market. These profits come from the sale of uranium and other by-product
materials, as well as from processing fees.
Similarly, the low level waste disposal business has the potential to
eclipse the revenue potential of uranium mining. This market has come to
the fore in recent months as allegations of extortion and kickbacks have
surfaced surrounding Envirocare, the largest low level waste disposal
company, and a Utah state government official. In 1996, Envirocare
processed about 350,000 cubic yards of waste at an average price in excess
of $200 per yard. At the very least, we expect this controversy to result
in a level playing field for potential entrants like IUC into this
lucrative market. For the most part, this low level radiation waste is less
radioactive than the tailings that IUC already places in its disposal
ponds. With its current tailings capacity and expansion capabilities, IUC
is an obvious candidate for this sort of business. Nevertheless, the
process is likely to be bureaucratic and slow, and as such, we have not
included them in our forecasts.
METAL MARKET OVERVIEW
Uranium
The uranium market's history can be divided into two distinct phases that
are directly related to the main end use in each period. Phase I began with
the Manhattan project in the early 1940s when the strategic value of
uranium was first highlighted. Under the guidance of the Atomic Energy
Commission, the US became the world leader in uranium production,
predominantly for use in nuclear weapons. The boom in western world uranium
production began to wane in the late 1950s, when it became obvious that
enough uranium had been stockpiled to satiate military needs for years to
come. This drove uranium oxide prices down to below US$6/lb by the late
1960s.
A second boom began in the mid-1970s, as high oil prices combined with the
height of the cold war to fuel expectations of substantial increases in the
demand for uranium as nuclear fuel. In the 1970s and early 1980s, the use
of commercial nuclear power plants expanded rapidly in numerous parts of
the world. Nuclear electric power, as a percentage of total electricity
consumption, increased from 3% in 1970 to 25% in 1985. This created
concerns of a forthcoming shortfall in the supply of uranium which drove
prices as high as US$43.40/lb in May 1978.
The optimism surrounding the prospects of uranium usage was severely
tarnished with the 1979 near disaster at the Three Mile Island reactor near
Harrisburg, Pennsylvania. This had a dramatic effect on the number of
nuclear facilities in the construction and permitting pipeline, although
the cancellations had actually begun several years earlier as new
legislation increased the financial risks associated with operating nuclear
facilities. Utilities, having entered into long term contracts to purchase
uranium, were forced to accumulate large excess inventories even as they
were canceling orders for new reactors.
The resulting slide in uranium prices led to a dramatic slowdown in world
uranium production, and a virtual halt to exploration through much of the
late 1980s and early 1990s. During this period, utilities, the only
consumers of uranium in the last decade, have met the majority of their
needs through the drawdown of inventories that were held by producers,
governments and the utilities themselves. Although the US experience is an
extreme one, it highlights the trend in production around the world in the
last decade. In 1980, there were 17 licenced, conventional milling
operations in the US. Today, there are three. Annual production over this
period fell from in excess of 40 million lb in 1980, to a low of about one
million lb in 1992.
This has created an environment where uranium demand has outstripped
primary production for a number of years, with the difference being covered
by the draw down of commercial and government inventories. In this time
period, commercial inventories in the western world declined to roughly 450
million lb U3O8, equivalent to three years of supply. Although this seems
like a large figure when compared to most other metals, the relative
insignificance of the cost of uranium when balanced against the costs, both
monetary and in terms of safety, of an unplanned reactor shutdown make
seemingly large inventory levels necessary. We believe that 1.5 years of
requirements is considered a "normal level" for most utilities, while 0.75
year of requirements is an important level for primary producers. This
latter figure has become more important in recent years as many utilities
have successfully demanded quantity flexibility in their purchase contracts
thereby increasing the importance of producer inventory to meet these
obligations. We expect these inventory drawdowns to continue albeit at
slower rates than seen in the past. Two factors underlie this belief; new
primary production as well as the increasing importance of reprocessed
uranium from nuclear weapons.
Production increases are expected to come predominantly from Canada,
Australia and the US. Canadian production should increase with the
commissioning of McArthur River and Cigar Lake, although some variability
is likely over the next five years as their predecessors, Rabbit and Key
Lake, go offline. In Australia, the recission of legislation which has
limited uranium mining to the Ranger III and Olympic Dam deposits for the
last decade should allow operations such as Jabiluka and Kintyre to
proceed, although we expect that higher uranium prices are required before
the latter operation is upgraded from its current "care and maintenance"
status. Similarly, we expect production to increase substantially in the
US, although again, much of this is contingent on higher commodity prices.
This analysis highlights that, despite flat demand expectations, a
considerable increase in HEU sales, and a 30% rise in primary production,
the supply gap is maintained through the beginning of the next decade. This
will continue to reduce inventory stockpiles, taking them to the critical
2.25 years of total requirements by 2000. Under this scenario, we would
expect prices to gradually rise, breaking $15.00 by the end of the decade.
Any significant permitting problems at the larger operations, such as Cigar
Lake, could accelerate the rate of inventory drawdowns. Similarly,
disruptions in the flow of HEU from Russia, or conversely, the need for the
eastern block countries to consume the uranium internally, will also
increase the supply gap in the western world. Either of these scenarios
could cause uranium prices to spike well beyond our forecast levels.
Vanadium
Because of the importance of vanadium prices to IUC, it is worth spending a
moment on the vanadium market as well. Vanadium is used heavily as a
strengthening agent in the steel industry, a market that uses approximately
87% of current production. Of the remainder, 8% is used in
titanium-vanadium-aluminum alloys for the aerospace industry, while 5% is
used in the chemical industry. Intensity of usage in the steel industry has
been rising over the last ten years, from a low of 35 tonnes of vanadium
per million tonnes of steel production, to current levels of roughly 45
tonnes per million tonnes. This has reduced some of the cyclical movement
in vanadium demand, although its usage remains linked to the overall rate
of economic growth.
As with most other metals, government stockpiles negatively affected
vanadium pentoxide (V2O5) prices in the early 1990s, pushing prices below
US$2/lb for a number of months. Since 1995, the diminished effect of
Russian, Chinese and US government sales have allowed vanadium prices to
rebound. The recent inability of producers to access any significant
quantities of vanadium, thought to be due to production difficulties in
South Korea, China and South Africa, has driven prices of V2O5 through
US$6/lb, levels not seen in nearly a decade. Although, with expected demand
in 1997 running at roughly 87% of overall capacity it is unlikely that we
will see significant oversupply in the near future, we also feel it overly
aggressive to assume the current market tightness will continue. Our
forecasts assume US$4.25 in 1998, falling to US$3.75 in the subsequent
year.
FINANCIAL POSITION
Approximately $26 million of the March 1997 $50 million financing was
earmarked for the acquisition of the Energy Fuels assets from the estate of
Oren Benton. The remainder will be used to refurbish the mill and to
develop the company's mines. IUC was also able to generate US$5 million
upon the transfer of the existing environmental bond. We expect these
funds, combined with profits generated through existing uranium sales
contracts, will be sufficient to support the company until the first mill
run in 1998.
EARNINGS FORECAST
Obviously, IUC's earnings are going to be dependent on the output
assumptions outlined above. Similarly, they will depend on the price of
vanadium, an important by-product of the Colorado Plateau ore.
It is noteworthy to highlight that these forecasts are based on a gradual
rise in the price of uranium to US$15.25/lb by the year 2000.
We continue to be of the opinion that the aggressive forecasts for uranium
to rise above US$20/lb are misguided. For those more bullish on uranium
prices, the IUC story is only made better since the company's financial
performance increases sharply with higher uranium prices, in large part due
to the leverage associated with the White Mesa mill.
RECOMMENDATION
Outside of Cameco, there is a dearth of liquid vehicles in which to play
moves in the price of uranium. Although the renewed interest in uranium in
the last year has created a market for junior exploration companies, the
long time line between exploration success and actual production makes them
inferior vehicles to companies with near term production. That being said,
IUC obviously sits on a different part of the risk/return curve than an
established low cost producer like Cameco. Nonetheless, we feel the
potential returns more than compensate for these risks. On an earnings
basis, IUC is trading at 4.5X our 1999 forecast. This is less than a third
of the average multiples being afforded to the major uranium producers.
Given our earnings forecasts and a significant discount to the multiples
being afforded other uranium producers, a share price in excess of $2.60 is
justifiable within the coming 18 months given a 12 multiple on our 1999
earnings forecasts.
(c) Copyright 1998 Canjex Publishing Ltd. canada-stockwatch.com |
