Expensive Cigar to Be Lit Up in 2010

The Cigar Lake uranium project will go over $1 billion thanks to delays and changes to the project design, but remains economic, says operator Cameco (CCO-T, CCJ-N).

The mine is now scheduled to go into production in 2010, rather than the 2008 starting date that had been in the plans when a rock fall and groundwater inflow made the deposit inaccessible in October 2006. Cameco and its partners — Areva (ARVCF-O), with 37%, Idemitsu Uranium Exploration Canada, with 8%, and the Tokyo Electric Power Co., with 5% — incurred $10 million in remediation costs in 2006 and are budgeting for $74 million in 2007 and another $18 million in 2008; Cameco’s share is half of that sum.

A report on the revised development costs, which Cameco expects to make public late in the month, puts the capital cost of the project at just over $1 billion. To date, the partners have spent $468 million on construction, not counting the remedial work to deal with the flooding. Cameco is also carrying $378 million in previous expenditures on its books.

The increase takes in the costs of a larger dewatering program and of freezing more of the rock surrounding the workings to prevent water inflows. In addition, contracting costs in Western Canada have increased drastically, thanks to increased demand in the broader resource industry.

The first phase of the remediation program — drilling 14 holes to allow concrete to be pumped into the flooded workings and seal off the flooded area — is nearly done. Concrete plugs are expected to be complete in the third quarter of the year.

The next phase in the remedial plan — dewatering the workings, installing a freezing system to prevent further infiltration, rehabilitating any damaged workings, and reinstalling mine infrastructure — will require approvals from the Canadian Nuclear Safety Commission and the Saskatchewan ministries of the environment and labour. Cameco says it hopes to wrap that work up by summer 2008.

After the drilling and concreting is finished, Cameco plans to pump the mine out and verify acceptable water inflow rates, work that should be complete by the end of September. The third phase of work will consist of any necessary remediation identified in the second phase, but its timetable depends entirely on what is found when the mine is dewatered; Cameco is predicting year-end to complete that work.

In the fourth phase, Cameco will re-establish ventilation and pumping works and start the ground-freezing program. If that work is finished by the summer of 2008, Cigar Lake will be on track to produce uranium in 2010.

Even with the increased capital cost, the project is expected to remain economically robust thanks to very high grades. The proven reserve at Cigar is 497,000 tonnes grading 20.67% U3O8, and a minor probable reserve — 61,000 tonnes at 4.9% — has been moved back into indicated resources, as the cutoff grade has been increased to 5.9% U3O8.

The reserves have been calculated at U3O8 prices of US$32.30 and US$38.50 per lb., without significant changes in that price range. They include 10% dilution, plus 0.5 metre of wall rock above and below the ore, and assume 90% of the resource will be recovered in mining.

Cigar is scheduled to produce 3 million lbs. (1,360 tonnes) U3O8 in 2010, rising to 9 million lbs. (4,100 tonnes) in 2011 and reaching steady-state full production in 2012. It should then produce about 18 million lbs. (8,200 tonnes) annually, with Cameco’s share 9 million lbs.

Without Cigar Lake, Cameco is slated to produce between 21.6 million lbs. (9,800 tonnes) and 23.1 million lbs. (10,500 tonnes) U3O8 annually between 2007 and 2011. Cameco management said the additional capital cost of the Cigar project would not affect programs at other projects, and that the additional production from Cigar in the last two years of that period could simply be added to those projections.

Cameco executives told a conference call that the company has no plans to declare force majeure on any of its sales contracts, and that it would not need to find additional financing to meet the revised Cigar Lake budget.