A Chance To Find The World’s Best Uranium Deposit… Again

There's something very special about Australia's Olympic Dam uranium mine.
Olympic Dam is the largest uranium ore body in the world, with a towing 57-year reserve life.

Production here is also world-leading. Owner BHP Billiton (ASX: BHP) mined and processed nearly 8.6 million pounds of uranium oxide from the mine in fiscal 2012.

To put that figure in perspective, consider the output from some of Australia's other significant uranium mines. The famous Rum Jungle operation produced about 7.8 million pounds of uranium oxide over 17 years. Considerably less than Olympic Dam puts out in 12 months.

The incredible thing is that Olympic Dam's big production numbers come at very low ore grades. In fact, the mine is one of the lowest-grade yellowcake producers on the planet-at only 0.054% U3O8.

By comparison, the world's largest uranium mining company Cameco (TSX: CCO) holds reserves at its McArthur River and Cigar Lake deposits in Canada that grade over 20% U3O8. That's more than 350 times richer than Olympic Dam. Even Cameco's most low-grade project-Inkai in Kazakhstan-is nearly 50% higher in grade than Olympic Dam, at 0.08% U308.

But here's the amazing secret of Olympic Dam-despite being one of the lowest-grade mines in production globally, it is one of the lowest-cost uranium producers found anywhere. Just look at the cost curve below for the worldwide uranium industry.

Producing a pound of uranium at Olympic Dam is-pardon the pun-dirt cheap. There are only a few other mines that can make yellowcake at the same ultra-low costs. And most of those are extremely high-grade ores in Canada's Athabasca Basin.

There's one reason that BHP enjoys such low costs at Olympic Dam-a factor that makes the mine incredibly unique. So much so that some geologists doubt whether another deposit like it exists on Earth (or any other planet, for that matter).

The thing that makes Olympic Dam so special is other metals.

Unlike most uranium mines, Olympic Dam produces a lot more than just uranium. It's also one of the world's largest copper mines-producing over 150,000 tonnes of high-value copper cathode over the last year. In the most recent quarter, Olympic Dam accounted for nearly 20% of BHP's total copper output.

That's not all. The mine also produces gold-over 100,000 ounces during the last year. Along with about a thousand ounces of silver.

The revenues from selling all of those by-products subsidize the cost of producing uranium here. Leading to the incredibly low costs we saw in the chart above. Olympic Dam's unusual combination of copper, gold and uranium-within a deposit type that exploration geologists call Iron Oxide-Copper-Gold, or IOCG-is what unlocks the economics for one of the world's largest and most profitable suppliers of yellowcake.

Is The World Getting A Chance At Olympic Dam II?

I mentioned above that some geologists believe another Olympic Dam will never be found.

It's true the rocks here do have some very unique features. The scale and intensity of the mineralizing system that created this giant probably didn't happen everywhere.

But there's a movement of ore geologists that believe they know exactly where another Olympic Dam might be found. Not far away from the mine-in northern Australia.

That's because of some intriguing discoveries in this region.

At least two deposits have been found in Australia's northeastern state of Queensland that appear to be the same type of IOCG mineralization seen at Olympic Dam.

These discoveries show some very attractive numbers. Glencore Xstrata (LON: GLEN) has been producing copper and gold from its Ernest Henry mine here since 1998. With an initial resource that graded over 1% copper and more than 0.5 g/t gold. Not quite the 1.86% copper that Olympic Dam produced in its most recent quarter, but very good by global standards.

More recently, Inova Resources (ASX: IVA, formerly Ivanhoe Australia) has discovered a cluster of IOCG copper-gold deposits just south of the Ernest Henry mine. Grades are somewhat lower on the whole, but range up to 1.4% copper and 1.1 g/t gold.  

I know, you're probably wondering-why are we talking about copper and gold in an energy letter?

Because these metals might be the key to discovering the world's next big uranium mine-perhaps even one with the same massive scale and spectacular economics as Olympic Dam.

All because of some critical changes happening right now in Australia's mining industry. Changes that might set the stage for a new exploration model-that could revolutionize the uranium industry, and make discovery-driven profits for early-in mining companies.

An Opportunity 20 Years in the Making

You'll notice neither of the deposits I mentioned above in Queensland come with uranium alongside their copper and gold ores.

Exploration in this area has in fact purposely focused on targets without uranium. Because of a political quirk that dates back over two decades.

In Australia, individual states have the ability to determine many of their own mining policies. In the past, that's meant several parts of Australia took an anti-uranium stance-banning mining of the metal completely.

That's been the case in Queensland. The last uranium mine in the state-Mary Kathleen-shut down in 1982. Soon afterward in 1989 the state government imposed a complete moratorium on new uranium mining.

The result was that for the next two decades, no one wanted anything to do with uranium in Queensland. If you found a copper deposit with associated uranium, it would likely mean a denied mining permit. So exploration focused on deposits like Ernest Henry-IOCG deposits without any uranium.

But a number of geologists believe that uranium-bearing IOCGs like Olympic Dam may be waiting for discovery in Queensland.

A geological study in 1998, for example, looked at all of the host rocks for IOCG mineralization around Australia. And found that a band of rocks called the "Mount Isa fold belt" in western Queensland appears most similar to the host rocks at Olympic Dam. Intriguingly, this is the same chunk of geology where the Ernest Henry deposit is found.  

The similarities between Olympic Dam and the under-explored terrain in Queensland go on. Geologists studying Ernest Henry in the late 1990s noticed something unusual about its ores-the presence of a distinct suite of minerals including carbonate, fluorite and barite. This mélange jogged these workers' memories-they'd seen the exact same group of minerals in the Olympic Dam workings.    

All of these encouraging findings however, came at a time when no one wanted to find an Olympic Dam in Queensland. Rather than being a company-maker, such a deposit in this state would have been an un-mineable money pit.

But here's where the opportunity comes in: Queensland's anti-uranium outlook has now changed.

Late last year, the state got the ball rolling on policy changes that would once again allow uranium mining within its borders-for the first time in over 20 years. We've now passed the one-year anniversary of that shift, with none of the last-minute reversals politicians are famous for.

Signaling that Queensland is open for uranium business.

The combination of a place with tantalizing indications of world-class uranium ores, along with the first modern exploration in over two decades, is a recipe for major discoveries.

Who's Positioned To Profit?

The Queensland uranium opportunity is a breaking development. But the winner here won't come in a staking rush.

That's because much of the prospective ground has already been taken up.

With copper and gold also in the area, the exploration sector has long been active here. Meaning that much of the choice land in the western Queensland's "Mount Isa-Cloncurry" district has been taken up-as shown in the claim map below from the Queensland Department of Natural Resources and Mines (you can see the map location, in the northwest of the state, at the top left).

This means that early-in explorers will be best positioned to run with the hunt for another Olympic Dam.

Companies like Inova Resources. This firm holds a massive 5,700 square kilometer land package in the heart of the district.

As mentioned, Inova's exploration here has already yielded significant finds of other metals. But the potential for uranium is also big.

In fact, back in the uranium exploration boom of the mid-2000s, the company-then Ivanhoe Mines-said itself that the yellowcake potential here was high. A press release from the firm in January 2007 noted that it had "completed a comprehensive review of the previous 30 years of exploration data that have highlighted the potential for significant uranium mineralization."

The release even noted that airborne radiometric surveys had pin-pointed "numerous" uranium anomalies in the area.

But this news came just as the uranium price tumbled to $40 per pound. Talk of uranium exploration died off, and little has been said since.

But the lifting of the Queensland uranium ban could change that. Even at today's uninspiring uranium prices, another deposit like Olympic Dam would be a moneymaker. The benefit of being one of the lowest-cost producers in the sector.

Another spin on this play is through Inova's joint venture partner-Exco Resources (ASX: EXS). The firm owns 20% of 541 square kilometres in the heart of this play, held with Inova.

Exco is a better play on Queensland's uranium upside for investors averse to exploration risk. That's because the company is actually a producer-through its White Dam gold project in South Australia.

In an interesting full-circle twist, Exco also holds an IOCG exploration venture near White Dam in South Australia. Not far to the east of the original IOCG itself, Olympic Dam-the mine that put this deposit type on the map, and provides the template for the next generation of big uranium discoveries in places like Queensland.