Cameco investment sees Western Uranium on course

SITE VISIT

Orovada, Nev. — Uranium giant Cameco (CCO-T, CCJ-N) must like what it sees in Western Uranium (WUC-V, WURNF-O), and its flagship Kings Valley property.

The major recently invested $21.2 million in the junior under a financing deal that saw it buy almost 5.6 million Western Uranium units (each consisting of a share and half-warrant) at $3.80 apiece with the warrants exercisable at $4.25 for one year. Cameco’s investment gives it a 10% interest and formalizes a strategic alliance agreement between the companies.

Despite a drop in Western Uranium’s share price that has seen it lose nearly half its value — from $3.60 to $1.85 — since the financing was negotiated in May, Cameco honoured its agreement without looking to reset the subscription price. Viewed as a strong endorsement of Western Uranium, the junior’s share price saw a lift to around $3 before recently settling in the $2.50 per share range.

The impetus for Cameco’s investment is Western Uranium’s Kings Valley project, in northwestern Nevada, where exploration indicates several high-potential uranium mineralized targets in the McDermitt volcanic caldera complex, along with some historic deposits.

Not a new discovery, Kings Valley was explored by Chevron Minerals and Anaconda in the late 1970s, resulting in a historic resource estimate of about 17.1 million contained pounds U3O8 in 7.8 million tonnes at 0.1-0.15% U3O8 within a few pods.

Western Uranium gained control of Kings Valley in 2005 through a lease option agreement and by staking some 3,900 claims. Company president and CEO Pamela Klessig admits the company literally beat Cameco to the ground by about three days.

The McDermitt caldera is an 18-km collapsed volcanic feature with similarities to the Streltsovka caldera in eastern Russia’s Transbaikkalia region, near the Chinese-Mongolian border.

Streltsovka hosts the world’s largest uranium deposits associated with a volcanic setting and is Russia’s largest resource of the energy metal. Over 600 million lbs. of U3O8 were produced in the past and current resources within 20 deposits are estimated to average about 0.2% U3O8. Uranium mineralization occurs primarily in strongly altered rhyolites as sub-vertical veins and stockworks, but also stratigraphically in receptive sandstones, conglomerates and tuffs.

That model and the sheer scale of the uranium inventory at Streltsovka have grabbed Cameco’s attention.

While the deal with Cameco has brought on a strong strategic partner and boosted Western Uranium’s treasury to around $50 million, there has been some market perception the junior may have given away some of its upside potential. In response Klessig counters: “We’ve got a great partner and a great deal.”

Cameco liked the volume and quality of work the junior has conducted, she says, as well as the credentials of the technical personnel.

The partnership gives Cameco rights to acquire a 70% stake in each economically viable standalone deposit developed within any of the current projects in Nevada, New Mexico, Nunavut and the Northwest Territories, once 15 million contained pounds U3O8 are defined. On either the Kings Valley project in Nevada or the Treeline property in New Mexico, the 15 million lbs. U3O8 must be in addition to current historical resources, and must be classified as an indicated resource or higher.

To earn in on a deposit and form a joint venture, Cameco must pay Western Uranium at least US$5 per lb. U3O8 for each pound of its 70% share of any resource or reserve outlined in a mine plan. The major will also pay an additional premium related to the fluctuations in the Ux Consulting Co. spot prices for each pound of its 70% interest of the resource or reserve.

Once a joint venture is started, Cameco will carry Western Uranium through to the feasibility stage.

Past work

Most of the exploration focus has been on the western rim of the caldera. At the Moonlight mine, operated by Anaconda from about 1975-80, underground workings were developed with an indeterminate volume of material extracted. The historic deposit holds roughly 5.5 million contained pounds U3O8 based on about 40 Anaconda drill holes.

There are also reports of local prospectors mining and shipping a “couple of cars” of higher-grade ore from Moonlight estimated to average about 0.25% U3O8.

North and adjacent along the range front from Moonlight are the Kings Valley South and North mineralized pods, worked by Chevron in the past. Over 200 holes were drilled into the pods, which hold most of the historic resource at Kings Valley — about 11 million contained pounds U3O8.

Luckily, Western Uranium has most of Chevron’s database, including all probe data, chemical assay information, geologic maps, reports, cross-sections and predevelopment studies. The junior is working to bring Chevron’s historical resource into compliance with National Instrument 43-101, with an estimate expected before year-end.

Uranium mineralization is primarily associated with structural breccias along lithologic contacts and as disseminated grains in late-stage felsic dykes. Significant gold, silver and molybdenum values have also been encountered. Hole 19, collared along strike between Moonlight and the South zone, cut 15.2 metres of 0.28% U3O8, 1.5 grams gold per tonne and 34 grams silver, plus molybdenum.

During The Northern Miner’s recent visit, Western Uranium chief geologist Vic Calloway explains, “there’s more than just a traditional ring fracture being mineralized on the caldera.”

He says that company geologists are working to correlate the different interpretations generated by Anaconda and Chevron with their own observations and models.

Calloway also describes a significant northeast-southwest-trending corridor through the caldera that has caught the company’s attention and which struck Cameco as having considerable tonnage potential. The structure contains several resurgent domes related to the volcanism that would act as heat engines — driving hydrothermal solutions and remobilizing minerals.

Western Uranium recently expanded its landholdings to cover this prospective structure.

Within the caldera

It is inside the caldera where much of Western Uranium’s upside could develop. At Horse Canyon, Old Man Springs and Bull Basin, squealing scintillometers helped identify windows of uranium mineralization at surface.

With an extensive sediment cover over most of the intra-caldera area, the company got permission from its neighbour to the north, Energy Metals — now part of Uranium One (UUU-T, SXRZF-O) — to conduct orientation surveys over its Aurora deposit (16 million tonnes of 0.05% U3O8 equivalent) just across the border in southeastern Oregon. Testing indicated ground magnetometer and track-etch (radon gas detection) surveys work well in identifying mineralization.

Subsequently, Western Uranium conducted ground mag and track-etch programs, finding strong anomalies in the Old Man Springs and Bull Basin areas. Additionally, the company employed soil gas hydrocarbon (SGH) testing at Bull Basin to find very strong anomalies — including essentially a “drill here” recommendation from the lab, which noted it was one of the strongest anomalies identified in its studies and could only represent decay from a buried uranium source.

SGH testing measures specific compounds released from decaying bacteria within the soil that have interacted with minerals. The process can produce a signature over buried or “blind” mineral deposits.

“Every step we’ve taken has given us positive results,” Calloway says. “The next step is to punch some holes in it.”

Lithium spinoff

Separate from the project’s uranium potential, the McDermitt caldera is also host to significant lithium deposits. In an attempt to unlock some of its value, Western Uranium intends to spin out the lithium assets into a new company.

In the early 1980s, Chevron drilled off a large lithium resource. More than 40 billion con
tained pounds of lithium carbonate (not compliant with National Instrument 43-101 standards) were identified in five deposits or lenses.

Lithium mineralization is primarily hosted in hectorite, a clay horizon, which is essentially a bentonite, where the lithium replaces magnesium in the chemical structure.

The company is in the midst of calculating a resource estimate on the most southern lithium lens, PCD, where it is twinning three Chevron holes for confirmation purposes. Lithium grades in the hectorite averaged 0.28%.

Western Uranium notes lithium carbonate prices have rallied over the past year, rising to $3.66 per lb. from about $2.37, driven by growing demand from the hybrid car battery sector. Demand is expected to grow to an estimated 100,000 short tons per year in 2008 from 80,000 tons in 2005, a 25% boost.

Lithium-rich clays are also used in ceramics, paint products, desiccants-absorbents, and drilling fluid applications that require stability under high temperatures.

Current world supply comes predominantly from salar, or evaporitic deposits in Chile and Argentina.

The company projects its PCD lens alone could supply 10,000 short tons of lithium carbonate annually for several decades.

Part of Chevron’s work on the project involved development of a proprietary extraction process that avoided the standard roasting method, and could be much more cost effective. The patent has now expired for the process, which uses an acid-leach method that recovers about 85% of the lithium at an estimated cost of about $1 per lb. lithium.

“Since we’ve announced the project, we have received calls from groups and funds wanting to buy the resource outright,” says Lithium project manager Ed Benson.

As some of the lithium deposits in the caldera are close to its uranium areas, Western Uranium intends to structure the spin out of Western Lithium so that uranium will always have priority. Shares of the new company will be distributed to current shareholders on a yet-to-be-determined basis, along with a planned $10-million financing. The transaction is anticipated to close by the end of the year.