It appears that Cameco(CCO-T, CCJ-N), Canada’s major uranium power, is viewing a downswing in uranium markets as an opportunity to diversify its project portfolio, and acquire another foothold in Australia.
Cameco announced on Aug. 26 that it had agreed to buy the Yeelirrie uranium deposit in Western Australia from BHP Billiton (BHP-N, BLT-L) for US$430 million in cash.
The sale is expected to close by year-end, at which time 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 Cameco’s second significant acquisition this year. In May, the company bought nuclear fuel-trading house Nukem Energy for US$136 million while also absorbing US$164 million in net debt. Cameco acquired a portfolio of purchase and sales contracts in the deal, including 4.5 million lb. uranium oxide.
Yeelirrie carries 16.6 million measured tonnes grading 0.16% uranium oxide (U3O8), and 31 million indicated tonnes averaging 0.12% U3O8. The historic resource is non-compliant with National Instrument 43-101 reporting standards, and is based on 10,250 surface holes, including 4,000 diamond drill holes. Cameco reports indicate the estimate may be overstated by 10%, with a 0.05% U3O8 cut-off grade being applied too liberally across the deposit.
According to reports, the purchase price equates to US$3.13 per lb. 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 after hitting a high of US$74 per lb. during the first quarter.
Lower uranium prices have impacted Cameco’s entrance into Australia, where the Canadian company operates 22 exploration projects. Cameco is aiming to increase annual 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 towards realizing that goal.
Cameco hit a snag during the second quarter when a prefeasibility study on its 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 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 6 million lb. U3O8 annually, or 40 million lb. in 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," president and CEO Gitzel said during Cameco’s second-quarter conference call, after announcing the company would not go 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."
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 plan at its Olympic Dam copper-uranium-gold-silver mine in South Australia in early September, and looks to be lessening its emphasis on 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," The Australian quoted Barnett as saying on Aug. 27.
BHP commented that pure uranium developments are too small-scale for the company to pursue, and cited a collapse in uranium prices following the Fukushima nuclear disaster last year as reasons behind its shift from the sector.
BMO Capital Markets analyst Edward Sterck maintains an "outperform" rating on Cameco, with a $29 target price. Sterck notes that the acquisition price per lb. U3O8 in the Yeelirrie deal is significantly less than other recent acquisitions in the uranium space, and that "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."
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