CNSC greenlights McClean Lake mill expansion

Areva, Denison Mines and OURD Co.’s McClean Lake uranium mill in northern Saskatchewan.  Credit: Denison Mines.Areva, Denison Mines and OURD Co.’s McClean Lake uranium mill in northern Saskatchewan. Credit: Denison Mines.

The Canadian Nuclear Safety Commission (CNSC) has approved the expansion of the McClean Lake mill — operated by Areva Resources in northern Saskatchewan — allowing Cameco (TSX: CCO; NYSE: CCJ) to ramp up production at its low-cost Cigar Lake uranium mine.

On May 31, CNSC signed off on an application from the mill’s 70%-owner Areva and minority partners Denison Mines (TSX: DML; NYSE-MKT: DNN) and OURD (Canada) Co. to boost McClean Lake’s annual production capacity from 13 million lb. uranium oxide (U3O8) to 24 million lb.

The mill — held 22.5% by Denison and 7.5% by OURD — toll-treats all of the ore from Cameco’s Cigar Lake mine, some 70 km away.


A truck ships ore from the Cigar Lake mine to Areva's McClean Lake mill. Credit: Cameco

A truck ships ore from the Cigar Lake mine to Areva’s McClean Lake mill. Credit: Cameco

With the CNSC approval, Cameco can meet its 2016 production forecast at Cigar Lake of 16 million lb. U3O8, where the miner’s 50% share will total 8 million lb. U3O8.

It also paves the way for the mine to reach its production design rate of 18 million lb. U3O8 in 2017, where Cameco’s share would be 9 million lb. (Areva, Idemitsu Canada Resources and Tepco Resources hold the rest of Cigar Lake.)

Cantor Fitzgerald analyst Rob Chang notes McClean Lake is the “world’s most technologically advanced mill,” and can process Cigar Lake’s “ultra” high-grade ore without dilution.

The mill has undergone expansion since 2013, ahead of the CNSC approval. While the approval was expected, Chang says the news also helped Denison, which benefits from the mill’s higher processing and revenues.

Edward Sterck, a BMO Capital Market analyst, estimates that Denison will collect $6.5 million annually from its interest in the mill from processing Cigar Lake’s ore, once the mine reaches full production in 2017.

Sterck, who also covers Cameco, says the expanded mill will have excess capacity of 6 million lb., assuming it does not process ore from other sources. “Should Cigar Lake continue to exceed expectations there could be the potential for the mine’s output to be upscaled, subject to regulatory approval,” he writes.

However, an expansion may be far down the road, as Cameco recently reduced its 2016 consolidated production guidance, due to weakness in the uranium market.

Its annual guidance is now 25.7 million lb. U3O8, down from 30 million lb. earlier. The reduction incorporates Cameco’s production suspension at the costly Rabbit Lake mine in Saskatchewan and deferred wellfield development at its U.S. in-situ recovery operations, as well as reduced output at its 70%-held McArthur River operation in Saskatchewan.

As part of Cameco’s strategy to build its low-cost production base, it recently signed an agreement with Kazatomprom to restructure the Inkai joint venture in Kazakhstan.

The joint venture is a partnership between Cameco and Kazatomprom, where Cameco holds a 57.5% interest.

The agreement allows the doubling of production at Inkai to 10.4 million lb. a year, over three years after required approvals, as well as an extension of the production leases. The agreement, which may take up to two years to approve, will lower Cameco’s share in the joint venture to 40%, while boosting Kazatomprom’s ownership to 60%.

It is not a “tremendously good deal for Cameco, but neither does it look terribly bad, either,” BMO’s Sterck comments. Although Cameco’s annual production from the full Inkai expansion will drop to 4.2 million lb. from 5.2 million lb., its “financial exposure presumably will be less.”

The joint-venture partners also intend to complete a feasibility study on building a uranium refinery in Kazakhstan with a capacity of 6,000 tonnes a year of uranium trioxide. If built, Cameco’s interest in the joint venture will increase based on certain conditions.

For the first quarter of 2016, Cameco recorded an adjusted net loss of $7 million, or 2¢ per share, compared to last year’s adjusted profit of $69 million, or 18¢ per share. The loss resulted largely from lower gross profit from its uranium and Nukem segments.

Sterck has a $20 target and an “outperform” rating on the stock, while Cantor’s Chang has an $18.15 target and a “buy” rating.


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