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Tommy Humphreys

Tommy Humphreys

Tommy Humphreys is the editor of CEO.CA, a blog focused on identifying talent and opportunities in natural resources investing. Humphreys' analysis and commentary can be…

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Uranium In 2016: Time To Watch The Athabasca Basin

The best way to make money as a mining investor is by owning a company that has exploration success, or being on the right side of commodity price moves.

Last year, NexGen Energy (NXE-TSXV) delivered us 95 percent share price increases thanks to their Athabasca Basin uranium discovery, Arrow. But we're holding out for a bigger move. We believe Arrow will get larger through exploration, and that the uranium sector is staged for a substantial recovery.

The sector has struggled since the Fukushima nuclear catastrophe of 2011, but change is finally in the air. Japan is restarting some of its reactors and global nuclear power generation is expected to eclipse pre-Fukushima highs within the next two years, according to Forbes.

The climate change deal reached in Paris late last year will only accelerate the move to clean energy, and nuclear power is among the cleanest, most efficient, and most reliable energy sources. Unlike solar or wind, nuclear power supplies consistent base-load power. And unlike coal, oil or natural gas, nuclear energy is carbon-free.

Demand for nuclear is growing, and it’s coming from both established nations — including the United States and Japan — and emerging economies like China and India, which have opted for nuclear power as a key component of base-load electricity needs.

There are currently 438 nuclear reactors generating electricity globally and another 67 new plants under construction in 15 countries, according to the Nuclear Energy Institute.

China is leading the way as it builds out its nuclear power industry at a dizzying pace, its polluting coal-fired power plants in the crosshairs. There are 30 nuclear reactors operating in China and another 24 under construction, according to the World Nuclear Association. Almost 100 more are planned by 2030.

Importantly, the nuclear reactors now being built are much larger than existing nuclear power plants, requiring even more uranium.

On the supply side, a JP Morgan analysis from March 2015 estimates the average price required to spur meaningful new supply is US$80-85/lb — compared to a current spot price of US$34.50/lb.

Canada’s Athabasca Basin has become the go-to destination for high-grade uranium, with grades in excess of 100x global averages.

It’s home to the world’s richest uranium mine — Cameco’s Cigar Lake, which achieved commercial production on May 1 and has average grades of 17.8% uranium. Cameco holds a 50% stake in Cigar Lake, with the balance held by French nuclear giant AREVA (37%), Idemitsu Canada (8%) and TEPCO Resources (5%). Other producing mines in the eastern Basin include McArthur River and Rabbit Lake.

The prolific uranium-producing region — sometimes described as the “Persian Gulf of uranium” — is also home to dozens of exploration plays and a handful of more advanced projects.

These range in size from tiny exploration plays to mid-tier development companies with multiple assets.

Investors are now researching how they can profit from the resurgence of nuclear. On the production side, Cameco, one of the world’s largest uranium producers, AREVA and Kazakhstan state-owned Kazatomprom are the main players. On the exploration and development side, the most active companies in the basin are Denison Mines, Fission Uranium and NexGen Energy.

Denison Mines (DML-T)

Denison’s executive chairman, Lukas Lundin, is no stranger to mining investors. And just as The Lundin Group’s empire spans the globe, his uranium company has diverse properties reaching across the eastern Athabasca Basin.

Denison recently closed the sale of Mongolian projects to focus on the Athabasca Basin, where its assets include a 60% stake in Wheeler River, a minority interest in the McClean Lake mill, and interests in several exploration and development projects.

The 60% owned Wheeler River project, a joint venture with Cameco (30%) and Japanese consortium JCU (10%), consists of the high-grade Phoenix and basement-hosted Gryphon deposits in the southeastern Athabasca Basin. Phoenix hosts an Indicated 70.2 million pounds of uranium at average grades of 19%, while Gryphon’s maiden resource estimate — announced Nov. 3 — is 43 million pounds Inferred at 2.3% uranium. Related: War Between Saudi Arabia And Iran Could Send Oil Prices To $250

Phoenix and Gryphon are about three kilometres apart, so could potentially be developed together. They are also near established infrastructure, located between McArthur River and the Key Lake mill complex. A preliminary economic assessment on the two deposits is in progress and expected to be released in the first half of 2016.

Also nearby is the McClean Lake mill, which is 22.5% owned by Denison (70% AREVA, 7.5% OURD Canada). An expansion at the mill will increase processing capacity from 13 million pounds to 24 million pounds annually, more than enough to process the ore from Cigar Lake. The spare capacity gives Denison potential processing options, and toll milling revenue provides the company with cash flow to finance its other Basin projects, which include minority interests in the Midwest, McClean Lake North deposits, and earlier-stage exploration projects at Mann Lake and Murphy Lake.

Fission Uranium (FCU-T)

Fission Uranium was formed out of the 2013 merger between 50% joint venture partners Fission Energy and Alpha Minerals, whose 2012 Patterson Lake South discovery established the overlooked western Basin as a bona fide uranium powerhouse.

In the fall of 2012, Fission and Alpha, under the guidance of Ben and Garrett Ainsworth (who won AMEBC's Colin Spence Award for the discovery) began hitting high-grade uranium in the area, which had been all but abandoned by other players. Fission’s Triple R deposit at Patterson Lake South is now the single largest undeveloped uranium deposit in the Basin among projects that have a resource estimate.

Fission’s maiden resource for Triple R — announced Jan. 9, 2015 — contains an estimated 79.6 million lbs uranium, Indicated, at average grades of 1.58% uranium, as well as 25.9 million lbs Inferred at 1.3%.

One of the company’s main challenges is Triple R’s location underneath a substantial lake, a feature critics have said could complicate mine construction, engineering and permitting.

On Monday, Fission announced the finalizing of a subscription agreement that sees China's CGN Mining Corp. take a 19.9% equity stake in Fission through an $82 million private-placement financing. The deal, first announced Dec. 21, also includes a 20% offtake agreement for uranium production that can go as high as 35%. The agreement is clear validation of the future fundamentals of uranium, with China initiating its first direct entry into Canadian uranium.

A preliminary economic assessment released Sept. 3 showed initial capex of $1.1 billion for the hybrid open-pit/underground mine, average operating costs of US$14.02/lb, and a post-tax net present value of $1.1 billion at a 10% discount rate. The PEA was done at US$65/lb uranium (currently US$34.50) and an 85-cent Canadian dollar (currently US $0.71). Some market watchers are questioning these inputs, notably the operating costs as well as moving Patterson Lake to access the ore.

Denison and Fission attempted to merge in the fall, but Fission’s retail investors revolted and the agreement failed to get two-thirds support. The foray into M&A hit the share prices of both companies but each stock rallied at the end of 2015, mitigating some of the damage to shareholders.

NexGen Energy (NXE-V)

If Fission was first out of the gate in the southwestern Basin, NexGen Energy is the powerful upstart that is rapidly becoming the Basin’s preeminent play. Related: There Might Be More Oil Under The North Sea Than Previously Thought

NexGen’s Arrow deposit has grown at an astonishing pace. They’ve done it through aggressive angled step-out drill holes — with 95% plus hit rates — that have been targeted to hit all four parallel shear zones. NexGen's drilling philosophy is to discover and develop high-grade uranium projects as cost-efficiently and quickly as possible. That is the key to delivering the highest possible returns to shareholders. Incorporate this philosophy and discipline with the technical guidance of VP Exploration Garrett Ainsworth, who was key to the PLS discovery while working for Alpha Minerals, and NexGen is fast becoming an exploration & development leader in the global mining sector.

The shear zones that host the high-grade uranium run 820 metres vertically, starting 100 metres from surface. An even higher grade sub-zone within the A2 shear alone runs more than 200 metres in strike, has an average true width of 27.5 metres, hosts grades averaging more than 10% U3O8, and is open in all directions.

On the strength of that high-grade sub-zone and rapidly expanding mineralized zones in other shears, several analysts who cover the Basin forecast that Arrow’s maiden resource estimate will leapfrog Fission’s Patterson Lake South deposit. According to some estimates, Arrow’s higher-grade A2 sub-zone alone may put Fission’s deposit in its shadow.

The latest assays, released Monday, point to the growth potential of the A3 shear zone. The six angled drill holes included intervals of 10.5 metres at 8.52% uranium and 37 metres at 6.3% (including 15 metres at 10.10%) in AR-15-61c2. NexGen has only one assay remaining from the summer 2015 drill program, hole -62. It could prove to be the best yet, as the drill intercepted 35 metres of off-scale radioactivity. Both A3 and the higher-grade A2 sub-zone are top priorities of NexGen's 30,000-metre winter drill program, which kicked off on Jan. 7.

Arrow’s first resource estimate is expected to be published in H1 2016 and the average expectation of Bay Street analysts is approximately 125 million pounds. However, some have higher expectations, including one of the company’s largest institutional shareholders and Cameco’s former Chief Mine Engineer.

Significantly, Arrow is 100% land-based, which has execution and permitting advantages, and is basement-hosted. Unlike most of the Basin’s uranium deposits, which are typically partially located where the wet Athabasca sandstone meets the crystalline basement rock, requiring freezing to mine, Arrow is basement-hosted. These characteristics increase Arrow’s appeal among potential suitors, including Cameco.

Doug Beattie, Cameco’s former Chief Mine Engineer, has extensive Basin experience, which includes serving as the lead engineer on the design and build of Cameco’s McArthur River uranium mine. The McArthur River/Key Lake mine complex — a complicated operation that uses freezing and raise-boring to extract ore — is the world’s largest uranium producer.

Beattie, who is now retired, described Arrow’s geometry as “excellent” in a recent CEO.ca interview. NexGen is the only uranium stock Beattie has invested in, because deposits like Arrow “only come around once every 20 years,” he says.

“Underground mining engineers pray for vertical ore bodies and this is present at Arrow. … Small stopes similar to Eagle Point (part of the Rabbit Lake mine complex) are likely in order,” said Beattie.


“McArthur River is constrained by the location of water-bearing sandstone but, being so far down in the basement rock at Arrow, this should not be an issue. No ground freezing is used at Eagle Point and I expect that to be the case at Arrow.”

Money flows among Athabasca Basin uranium players during 2015 also tell a story. NexGen shares surged 95% in 2015, outpacing both Fission Uranium (-12%) and Denison Mines (-39%).

Since the end of 2014 — a period that saw NexGen’s stock rise from the mid-.30s to the current .77 — the company has more than tripled its percentage of market capitalization for all Athabasca Basin plays (not including the Fission-CGN deal, which has yet to close).

Hedge fund manager Warren Irwin, CEO of Toronto-based Rosseau Asset Management, has been among the buyers. Irwin visited the Arrow site and undertook extensive studies of NexGen, including a hand-drawn model of all the Arrow drill holes that took several weeks to complete.

From his firm’s research, Irwin concluded that NexGen is dramatically undervalued. Rosseau Asset Management is now a large institutional shareholder, with a high single-digit-percentage stake in NexGen stock.

The hedge fund manager considers NexGen his best idea in the last 5 or 10 years, especially considering the derisking drill data that has been published. Related: China’s Refiners Report Glut In Distillates

“In a healthy market, when a junior makes a big discovery, not only is every pound in the ground fully valued by the marketplace, but there’s also a 30% speculation premium because people know the deposit is going to grow,” Irwin said.

“NexGen at present is extraordinarily inexpensive given what they have, and there’s nothing factored in to their upside potential in terms of market value."

NexGen has been successful at raising money to explore — in December the company closed a $21-million bought-deal financing that saw partial exercise of the over-allotment option. NexGen CEO Leigh Curyer and VP Exploration Garrett Ainsworth both participated in the financing, purchasing 100,000 shares each. In 2015, NexGen led the sector in financing, raising a total of $48.5 million in hard dollars with no warrants or other sweeteners (like flow-through issuances where shareholders get positive tax consequences). Since discovery, NexGen has raised approximately $70 million to advance Arrow. Shareholders include Rosseau, Blackrock, Fidelity, 1832 and CQS.

Despite the flush treasury (approximately $34 million at Jan 5, 2015), NexGen remains prudent with its capital allocation. The company puts $10 into exploration for every dollar of G&A expenses — a higher rate than any of its Basin peers.

Favourable supply and demand characteristics bode well for uranium prices, and the high-grade deposits of the Athabasca Basin make the region a focal point for investors.

Of all the Basin plays, NexGen has the single most important catalyst with the release of its maiden resource estimate for Arrow in late Q1/early Q2, which will only include drill holes to the end of the summer 2015 drill program. When the resource is released, it will effectively already be out of date because the winter 2016 drill program of 30,000 metres will be well advanced.

That said, it’s a data point that will reflect some of the best angled drill holes in the Basin’s history and provide investors with a strong perspective as to the direction Arrow is heading. As it currently stands, the deposit already dwarfs Toronto’s CN Tower and is open in all directions and at depth. With close to a 100% hit rate of holes drilled, it seems NexGen is still just scratching the surface of Arrow.

Author at the time of publishing, the writer held shares in NexGen Energy.

By James Kwantes and Tommy Humphreys

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