Southern Cross postpones Honeymoon (November 01, 2004)

Shares in Southern Cross Resources (SXR-T) plummeted as much as 25, or 30%, to a 52-week low of 58 in early trading in Toronto on Nov. 1, after the company said increased capital costs would force it to delay development of the Honeymoon uranium project in southern Australia.

The company attributes most of the increase to a weakening U.S. dollar, but also cites higher costs for construction, concrete, structural steel, and labour. Additionally, operating costs have climbed on higher power costs.

Still, the company is betting that uranium prices will continue to rise and make the project more economic in the short run. “As time progresses, the uranium price is forecast to increase and Honeymoon can be brought on stream relatively quickly and in the context of the large regional exploration opportunity that is currently being explored,” the company said in a prepared statement.

At the end of October, the spot price for uranium was US$20.25 per lb., up from US$14.50 at the end of 2003.

At last count, the Honeymoon project was home to an indicated resource totalling 2.8 million tonnes grading 0.12% U₃O₈, for a total of 7.3 million lbs. U₃O₈ at an average grade thickness of 0.84 metre per cent U₃O₈.

“The 400-tonne-per-year plant is the maximum size of plant that can be considered at Honeymoon given the resources available on the mining lease, and higher uranium prices are needed to make this option attractive to shareholders,” said Southern Cross’ chief executive Mark Wheatley.

The latest review pegged the cost of a 400-tonne-per-year plant at A$44.1 million, with cash operating costs projected at A$17.70 per lb.; such an operation would have a mine life of 6 to 8 years.

Earlier this year, after a 49-hole drilling campaign failed to boost resources at Honeymoon, the company said it would consider building a smaller and longer-lasting plant than the originally planned 750-tonne-per-year operation.

In the meantime, Southern Cross intends to focus its efforts on exploration at Goulds Dam and the surrounding region, about 80 km to the northwest. Resources there currently total around 13.4 million lbs. of U₃O₈, with an average grade thickness of 0.29 metre per cent U₃O₈.

Based on positive exploration results, the company may consider building a 750-tonne-per-year plant at Honeymoon. In 2002, a cost and engineering study by fellow Aussie Ausenco pegged capital costs for such a plant at A$48 million, with cash costs estimated at A$11.80 per lb.; the latest review boosts those figures to A$56 million and A$15 per lb.