Over the weekend Cameco (CCJ) announced that it has reached an agreement with BHP Billiton (BHP) to acquire Yeelirrie uranium project in Western Australia for $430 million. The agreement follows BHP's earlier decision to delay the development of this deposit and comes on the heals of announcement not to move forward with another major uranium project, Olympic Dam Expansion.
What is Cameco buying? Yeelirrie is one of Australia's largest undeveloped uranium deposits with 139 million pounds U3O8 in JORC resource and a sizable addition to Cameco's already substantial resource base. The project is still in its early, pre-feasibility stage and unlikely to add to Cameco's near-term production. Yet over the longer term it has a potential to become a significant contributor with 3-4% share of global annual uranium production.
Summary of Historic Estimate for the Yeelirrie Project
Note: Cut-off grade = 0.05% U3O8
Why is BHP selling? The official company response is that the project is too small. Yet timing of the decision indicates that there is more to it than the size of the project. BHP Billiton inherited the Yeelirrie project in 2005, as part of the acquisition of WMC. But the project came to light only in 2008 after Western Australia overturned its ban on uranium mining. Back then BHP listed it as an "outstanding long-term opportunity" with a potential start up date of 2014. But after additional studies the excitement cooled off and the project was put back on a back burner. Today BHP continues to be a significant uranium producer contributing close 5% of global uranium supply annually. But the decision not to move forward with two of its largest uranium growth projects may be a vote of "no-confidence" in the mid-term industry outlook.
What is in the price? A $430 million acquisition price tag, or $3.09 per pound of uranium, is well below most of recent precedents in the uranium mining space. Last year Rio Tinto (RIO) paid in excess of $10 per pound for it acquisition of Hathor and Russian nuclear holding, ARMZ, paid $9 for the ownership of Tanzania based Mkuju Project. The acquisition price is on the lower end among recent precedents even after adjusting for potential reclassification of the resource base and adding $22 million tax now owed to the state government. Such adjustment would raise the total price closer to $6 per pound.
What is next? It is early to tell whether Cameco is better fit to develop the deposit than the world's largest mining conglomerate. But here are a few things investors should watch for as the project moves along:
- Confirmation of the resource base: Cameco's next step should be making the resource base compliant with 43-101 guidelines. Cameco now believes that the historic estimates may overestimate the resource base by about 10%. In addition, 50 million pounds U3O8 would have to be moved to a lower confidence category.
- Economic viability assessment: Investors are yet to see the details on the timing of the project and assessment of its economic viability. BHP was initially planning to launch the operation in 2014, but the timing has been delayed. With Cameco involvement and need to re-confirm the resource base, we are unlikely to see further delays. Therefore the project is unlikely to be an important contributor to Cameco's "Double U" strategy.
- Public policy environment: Investors should also keep an eye on political landscape in Western Australia. While uranium mining ban in WA was overturned in 2008, the next state elections are scheduled for March 2013 and return of the Labor party (which still opposes uranium mining) could considerably increase political risk for both Kyntire and Yeelirrie projects.