Uranerz set to benefit from uranium upswing

VANCOUVER — Uranium juniors have had a tough time over the past two years, but Wyoming-focused developer Uranerz Energy (URZ-T, URZ-X) looks poised to capitalize on a recent uptick in the nuclear market, with an enviable land position in the Powder River basin that includes three deposits primed for near-term, in-situ uranium production.

Uranerz planned to have its Nichols Ranch deposit — which holds 1.2 million indicated tonnes grading 0.114% eU3O8 for 2.95 million contained lb. at 0.03% eU3O8 cut-off — in production by the end of 2012, but a delay in permitting pushed start-up back roughly six months.

The company received the final piece to its puzzle in the form of its deep-disposal well permits in late October. The underground-injection control permits will allow Uranerz to sink two disposal wells at a depth of 2,700 metres, which is a licensing requirement in Wyoming.

“That is the last major capital expenditure we have left prior to production,” executive chairman Dennis Higgs says during an interview at the company’s Vancouver offices. “We slowed down our development early last year with the knowledge that this permit would likely be a hold-up for us. We just finished building the pads out there, and we’re ready to drill them, but we won’t commit to drill them until we have our financing completed. We’re working on this Wyoming-state financing, which we applied for last September.”

On Nov. 6, the Wyoming Business Council recommended the approval of the company’s application for a US$20-million loan under the Industrial Development Bond financing program. The loan would be repayable over seven years at an interest rate of 4.25%. Higgs says the loan has reached the third-party review stage, and that Uranerz has explored interim-financing options so that the company is not dependent on its approval.

Drilling the deep-disposal wells is set to cost Uranerz around US$6 million — with capital costs to date at Nichols Ranch pegged at around US$30 million. The company had planned to build a full-scale, in-situ processing plant at the site, but an agreement signed with neighbour Cameco (CCO-T, CCJ-N) allowed Uranerz to cut costs and downsize its build-out.

“We had planned our processing facility and poured the foundation,” Higgs says, noting that it would only take another US$3 million to US$4 million for the company to complete its processing circuit. “So what we’re really using now is just the ion-exchange portion, where you collect uranium on the resin. Previously we would have had the full circuit with precipitation and drying, but what we’re going to do is have trucks coming through to pick up the resin and take it down to Cameco’s Smith Ranch Highland facility. We have a minimum we must supply to them because they are providing us with a circuit, and there is a maximum, but that range works very well for us.”

Despite the permitting delay, construction at Nichols Ranch is proceeding on schedule, and the company has drilled 260 in-situ wells at the site. Higgs says that the well field is almost finished, with technicians completing the final hookups to the header houses that will transport uranium-rich fluids to the company’s plant. Assuming Uranerz hits its mid-year production target, the company could produce up to 250,000 lb. U3O8 this year before ramping-up to between 500,000 and 600,000 lb. over a full year of production in 2014. After-tax cash costs are pegged at roughly US$35 per lb.

Uranerz has locked down two five-year offtake agreements it hopes to begin fulfilling later this year. One is with industry leader Exelon (EXC-N), while the other is with a major utilities company that wants to remain anonymous.

Higgs says that assuming Uranerz produces in the targeted range of 250,000 lb. U3O8 this year, the majority of the output would be sold under the two agreements. If the company expands production to its planned 600,000 lb. range by 2014, a little under half would be sold under offtakes, while the remainder would go to market.

“So we do have a lot of room for spot sales, and that gives us a good balance where we have sensitivity to a rise in uranium prices, but also maintain the contract sales on some of our product. In terms of other agreements, we’re keeping our ear to the ground — it is a varied process because some utility companies put out formal bids, whereas others prefer to buy on market,” Higgs says, adding that the offtake agreements were signed back in 2009 when spot prices sat around US$65 per lb. uranium oxide.

And operational flexibility seems to be a real strength for Uranerz. The company’s existing permits allow it to produce as much as 2 million lb. uranium oxide annually at its processing facility, though current production levels are capped at around 800,000 lb. per year.

Along with Nichols Ranch, Uranerz has full permits for its Hank deposit — adding 823,000 measured-and-indicated tonnes grading 0.123% eU3O8 for 2.24 million contained lb. The company is also permitting its Jane Dough deposit, located south of Nichols Ranch, which tacks on another 2.7 million measured-and-indicated lb. U3O8 an average grade of 0.108%.

“The typical well field runs over two to three years, so by the time you’re developing an additional deposit, you might very well be doing reclamation at your previous site,” Higgs says, reviewing the deposits on a map. “Jane Dough will be an amendment to our Nichols Ranch permit, so hopefully that will come in quickly, because if we get it soon enough we can develop it before we develop Hank.”

Uranerz has plenty of opportunity to expand its resource base. Uranium deposits in Powder River are secondary in nature and occur along reduction-oxidation (redox) boundaries. Uranerz has 450 km of redox trends on its property package, and the company has only explored 15% to 20% of its targets. With reported resources on seven properties, Uranerz has over 30 regional prospects that could lead to a district-scale operation.

“As a general rule we know where to locate those trend lines. There have been several past exploration initiatives out there, and we have those maps,” Higgs says, adding that Uranerz has compiled a database of 12,000 drill holes. “And though it isn’t hot right now, the coal-bed methane stuff was big three or four years ago. The interesting thing about that — and the oil and gas guys, generally — is that when they drill a hole the rules dictate they must gamma-log the hole and put it on a website that is public domain. That information is free, and can confirm where our trends are located.”

Uranerz is likely looking at six to seven years of production out of its Nichols Ranch and Hank deposits, assuming the company produces 800,000 lb. U3O8 annually.

Despite a major downswing in uranium markets, Uranerz has emerged with a healthy balance sheet and a near-term production asset, bolstered by a regional presence that could fuel growth. The company’s stock tracks like the majority of uranium players — down from over $5 per share in 2011 to $1.37 per share at press time — but Uranerz has avoided dilution, with 77 million shares outstanding and US$12 million in cash to end the third quarter. Higgs says the company is looking at financing options, and hopes to achieve a debt-to-equity balance on its road to production.

“I get asked about mergers and acquisitions pretty often, because obviously we have some notable neighbours,” Higgs says. “We would not want to be sellers of our company at this time — and if there was a consolidation happening in the industry, we would rather be the consolidator, quite frankly. There are lots of opportunities, and we’ll look at other uranium jurisdictions amendable to in-situ recovery.”