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 Tue Sep 28, 2004
Tracker 2004-06: Bitterroot's Michigan uranium play
    Publisher: Kaiser Research Online
    Author: Copyright 2004 John A Kaiser

 Tracker 2004-06

September 28, 2004

Bitterroot Resources Ltd (BTT-V: $0.30)

Bitterroot's Michigan uranium play

I recently revived my readership's awareness of Bitterroot Resources Ltd (BTT-V: $0.30) as an old medium priority bottom-fish buy recommendation in the $0.30-$0.49 range when the stock's market action suggested that the junior's Twin nickel play in central Quebec was starting to pan out. Unfortunately, massive sulphides and oxides in the core turned out to be massive with iron and little else, effectively killing that play. This forced the company to switch its focus to the GK gold-copper play in southern British Columbia where a drill program will commence shortly. But the uranium mania of recent weeks is drawing the market's attention to Bitterroot's uranium play in the Upper Peninsula region of Michigan, much to the chagrin of Bitterroot's Michael Carr. The reason for the chagrin is that Carr is not, for the moment, overly eager to see Bitterroot's uranium play in the limelight. Nor for that matter is Bitterroot's partner, Cameco. The muted enthusiasm for uranium was also evident in a September 24 Gold Mining Stock Report Alert put out by Bob Bishop, a significant shareholder in Bitterroot and a long-time moral supporter of Michael Carr's efforts to produce a winner through brainwork and effort rather than luck. Bishop is a little leery of uranium mania, and given his admitted conflict of interest with regard to Bitterroot, reluctant to exploit what is clearly a bubble. I, however, have no vested interest in Bitterroot other than that I have in the past devoted considerable ink to the quest for unconformity associated uranium deposits in the Athabasca Basin by Pioneer Metals Corp, which spun the story off into UEX Corp through a 1:1 butterfly transaction in 2002. Over a year ago Michael Carr introduced Bitterroot's uranium play to me, and while at the time I was reluctant to enthuse about this conceptual play in advance of its validation, today is an entirely different situation. Most of the uranium juniors offer poor speculative value based on the implied values of their projects and the modest dream target potential of these projects. Their upside is largely a function of market mania, the conditions for which are not going to disappear overnight except in the event of a dirty or nuclear bomb explosion. A meltdown at a nuclear reactor would also deflate uranium mania, but that is not likely to happen. While the main uranium juniors with existing deposits (Strathmore, UEX, Clan, Goodfellow, Southern Cross, Laramide) and new discoveries (JNR, Intl Uranium) trend higher, there will be lots of ambulance chasers picking up uranium "prospects" such as Harry Barr's Canalaska Ventures who will eventually dilute the current short list of uranium plays and force the market's attention back to geological and economic fundamentals. Since I do not know when the music will stop, nor at which point uranium plays will be as ubiquitous as gold plays, my preference is to focus on a uranium exploration play with the potential to deliver a world class discovery through old-fashioned exploration. Saskatchewan's Athabasca Basin is a great place to look, but the highly prospective shallow eastern flank has already had several hard looks. What I'd really like to speculate on is a new Athabasca Basin, and that is why Bitterroot's Jacobsville Basin play intrigues me, especially with Cameco's involvement. Bitterroot's Michigan uranium play is purely conceptual at this stage, but the setting of the Jacobsville Basin is analogous to that of the world class Athabasca Basin whose high grade uranium deposits are worth billions. Should the Jacobsville Basin play move beyond a "science project" Bitterroot's stock price would appreciate sharply. Meanwhile, Bitterroot's flagship play is the GK gold-copper play in British Columbia which will be drilled by late October. At current prices bottom-fishers are paying for the GK drill play and getting the Michigan uranium play and exposure to "uramania" for next to nothing. I am elevating Bitterroot from a Medium Priority Bottom-Fish Buy in the $0.30-$0.49 range to a Top Priority Buy in the same price range.

Low Grade Sandstone hosted ISL candidates or High Grade Unconformity Underground Mining Candidates
The world of significant uranium deposits divides into low grade large tonnage (less than 1%) sandstone hosted type deposits generally found in Australia, the United States, and Kazakhstan, and high grade small tonnage (more than 1%) unconformity style deposits such as found in Saskatchewan's Athabasca Basin. There are others of both high grade (Beaverlodge style pitchblende veins and Colorado style breccia pipes) and low grade potential (pebble conglomerates such as Elliott Lake). There are also IOCG (iron oxide copper gold) deposits such as Olympic Dam which include uranium as a credit. IOCG targets should be disregarded as uranium plays because these breccia intrusive related deposits derive their economics from their copper and gold content. Find a world-class IOCG deposit and it will not matter whether or not there is a uranium credit. Nevertheless, uranium mania will flush promotional touts for all these types out of the woodwork. But the ones that the market and serious juniors will gravitate towards will be either near-surface low grade deposits they hope will become economic courtesy of higher uranium prices and in situ leaching (ISL), or yet-to-be discovered high grade unconformity style Cigar Lake or McArthur look-alikes whose rock value can run in the thousands of dollars per tonne.

Faults, hydrothermal activity and a redox front key to unconformity deposits
Bitterroot's uranium story falls into the category of a conceptual play that hopes to demonstrate that a Proterozoic sedimentary basin in Michigan called the Jacobsville is an analogue of the Athabasca Basin with potential to host high grade unconformity style uranium deposits similar to Cigar Lake (576,926 tonnes at 15.44% U) or McArthur (1,259,842 tonnes at 12.7% U). (Note that grade can be expressed as % uranium or % of U3O8 which is about 85% uranium.) These small deposits form near the unconformity between basement rocks and overlying sediments where a fault structure has served as a conduit for hydrothermal solutions circulating through both the sediments and the basement rock. Critical to the deposition of uranium mineralization is a "reducing" chemical environment that causes uranium to drop out of solution. Graphite serves as a good "redox front" and is commonly associated with faults, particularly where the fault cuts the boundary between different rock types, also known as the "unconformity". These deposits typically occur as a string of small lenses, which to discover requires a lot of "probing" drill holes, and to delineate requires numerous close-spaced drill holes as is now happening with JNR's Moore Lake discovery in the Athabasca Basin.

Three reasons why there is little noise about the Jacobsville Basin play
Why have we not heard a lot more about the Jacobsville Basin play? Michael Carr's reluctance to toot his horn about his Michigan uranium play has three reasons: 1) he does not yet have definitive proof high grade uranium deposits are present, 2) Bitterroot and Cameco do not want any land acquisition competition, and 3) neither is eager for uranium related publicity that will stir up the NIMBY ("not in my backyard") crowd heavily entrenched in Michigan. What appeals to me about this predicament is that bottom-fishers can get exposure to a potentially huge uranium story for the price of a standard gold-copper exploration play. The first issue explains why this play is relatively cheap. The second issue explains why Cameco and Bitterroot are not in a hurry to promote this play. And the third issue is a wildcard to keep in mind if the Jacobsville Basin moves beyond a science project.

Jacobsville Basin play has its origin in a nickel-PGM play
Bitterroot has been involved with the Upper Peninsula region of Michigan since 1996 when Michael Carr developed a Nor'lsk style nickel-PGM play that was inspired by the Voisey's Bay discovery and drew the support of Tony Naldrett. Carr's target was a layered ultramafic intrusive related to the Mid Continent Rift and similar to the Duluth Complex in Minnesota and Missouri. While a deep drill program by Bitterroot in 1997 did confirm that the Echo Lake intrusion contained nickel and platinum metal group mineralization, the grade was too low and the depth too deep to be of economic interest. That coupled with the collapse of metal markets in the aftermath of the Asian Currency crisis in 1997 discouraged Bitterroot from drilling additional holes.

Jacobsville Basin sediments derived from granites to the south
The 1110 Ma Echo Lake intrusion was located in the northern part of Bitterroot's so-called "Voyageur Lands" which covered part of a sandstone filled basin unconformably overlying Proterozoic rocks that in turn lie on top of an Archean basement. The Jacobsville Basin was formed not long after the Echo Lake intrusion during a period of rifting and uplift. The largely feldspathic sediments of the Jacobsville sandstone derived from granites and gneisses to the south. The basin is bounded on the north by the northeast striking Keweenaw fault, to the north of which is a thick formation of basalts and volcanics that are host to the Copper Range native copper deposits from which 5 billion kg of copper have been mined from 1845-1968. The basin reaches a depth of 3 km along its northwestern flank where it abruptly transitions to the basalts and volcanics. The unconformity has a shallower dip at the southern and eastern flanks of the basin where it is cut by a series of deep-seated east-west faults that Bitterroot was able to identify with the help of seismic surveys generated by Texaco during the early eighties when it investigated the basin for its oil potential.

Finding uranium inspiration in the remnants of a failed nickel-platinum play
The geometry of the Jacobsville Basin has been understood for decades, and its mineral potential has been dismissed as inconsequential. While contemplating the endless footage of Jacobsville sandstone Bitterroot had cored to get at the Echo Lake intrusive beneath the unconformity, Michael Carr noticed that the sandstone stratigraphy exhibited considerable evidence of bleaching and alteration related to fluid movement. This piqued his curiosity because the Jacobsville sandstone was perceived as a rather monotonous sequence of unaltered sediments. Although it was known that the Jacobsville sandstone had anomalous background levels of uranium and thorium several times higher than the Athabasca Basin sandstones, which could be attributed to the uplifted granite and gneiss source rocks to the south whose eroded remnants filled the basin, the absence of any evidence indicating hydrothermal activity and fault structures made the Jacobsville Basin a poor analogue for the Athabasca Basin. Partly to blame for this perception is a fairly flat topography covered by bush and loosely consolidated sediments that provided little opportunity to map variations within the Jacobsville sandstone outside a few river valleys. Past uranium exploration activity in the region has focused on the granites to the south while the Jacobsville Basin was ignored. The anomalously high uranium content (3-4 ppm U) of the Jacobsville sandstone (normally sandstone has 2 ppm while granite has about 4 ppm uranium) was meaningless if no structures and hydrothermal systems were present that would have allowed concentration of the uranium into high grade deposits. Bitterroot's sandstone core revealed that there was plenty of hydrothermal activity within the basin, but was this just diffuse fluid movement or was there also a plumbing system?

Jacobsville Basin a smaller scale analogue to the Athabasca Basin
As part of his nickel-PGM play research Michael Carr had obtained seismic surveys shot by Texaco during the eighties when it checked out the basin's potential for oil. No such potential was discovered and Texaco moved on. But the seismic surveys did reveal the presence of structural disruptions at the unconformity that extended into both the sandstones and the basement rocks. These structures had an east-west orientation along the southern flank of the Jacobsville Basin. Here the unconformity slopes gradually to a depth of about 250 metres 10-15 km into the basin before the unconformity steepens sharply. This 50 by 20 km segment of the Jacobsville Basin was similar to the 200 by 50 km eastern flank of the considerably larger Athabasca Basin where the high grade unconformity uranium deposits are associated with north-south structures. Graphite was already known to be present within the Jacobsville sandstone, so the presence of possible redox fronts was not an issue. When Michael Carr presented evidence to Cameco that the Jacobsville Basin was not only cut by faults active since the basin's deposition, but that the basin's sandstones also exhibited alteration evidence that they had been pumped by fluids, Cameco took notice. Here was a virgin Proterozoic sandstone basin in Cameco's backyard that resembled the Athabasca Basin!

A complex deal that could vest Cameco very quickly in key ground
Negotiations with Cameco began in mid 2002 but did not culminate in a deal until February 2003. Uranium prices were still weak and so was the market for junior exploration companies. What emerged was a complex deal skewed in Cameco's favor that now covers an area of interest encompassing 784 sq miles (about 200,000 hectares). Within this area Bitterroot has mineral right title to about 34,000 hectares. The deal is summarized as Cameco having the option to earn 65% of everything within the area of interest by spending $23.6 million over 18 years. But in reality the deal allows Cameco to vest in various land units by spending $1 million to $10 million depending on the land unit. During the first two years Bitterroot is the operator, during which Cameco must spend $600,000 (by December 31, 2004). After that Cameco must spend $500,000 per year, but any amount spent by Cameco on ground where it is already vested for 65% and Bitterroot is contributing its 35% share counts toward that amount. It is thus possible for Cameco to "sterilize" exploration on the entire package by focusing on one claim area where its vesting cost is only $1 million. These low-cost units tend to be state lands within the area of interest to which Bitterroot did not have title when the deal was signed. Not surprisingly, Cameco has been keen to focus exploration on state land for which applications have since been made.

Messy land ownership necessitates stealth exploration
Does this mean Cameco will be able to run roughshod over a junior forced to accept a one-sided deal when the times were tough? Cameco is unlikely to abuse its dominant position in the Jacobsville Basin play because of this region's complex land ownership situation. Michael Carr has spent the past ten years sorting out the land ownership situation. In 1996 Bitterroot acquired a patchwork of claims known as the "Voyageur Lands" from private owners for about $1 million cash. Surface and mineral rights had been granted at the turn of the century to the Voyageur group in exchange for building a road into the region. This resulted in a checkerboard title situation similar to that awarded to the railway builders in the west. The owners eventually sold off the surface rights, but retained the mineral rights which they sold to Bitterroot. Much of the land between the Voyageur lands belongs to the state of Michigan, from which mineral prospecting permits can be obtained through an application process. The entire area falls within the Ottawa National Forest, which is administered by the Bureau of Land Management (BLM). The problem faced by Cameco and any other outsiders eager to move into the Jacobsville Basin is that it is difficult to figure out private land ownership. This requires an exploration strategy where targets are generated first and land is acquired later, unlike in Canada where it is easy to acquire title to large tracts of land through the staking or permit application systems. Exploration for unconformity deposits in a region with little outcrop is largely a geophysics and drilling game, with geophysical surveys the primary target generation tool. Because geophysical anomalies pay no attention to mineral title boundaries, a great deal of secrecy and land acquisition adeptness is mandatory. For this reason Cameco and Bitterroot have been very vague about the Jacobsville Basin play. It is impossible to tell what claims the joint venture already owns, where applications for additional claims have been made, and what exploration work has been done. In fact, in the November 25, 2003 Technical Report by Dave Billard on the Upper Peninsula Projects the word "uranium" is not used once! The Jacobsville Basin's potential to host high grade unconformity style uranium deposits has not yet been proven, but should this happen, Cameco will need Bitterroot's "land" skills to mount an aggressive land acquisition program. And once that happens the market will be beating a path to Bitterroot's door.

Exploration suspended during a Michigan mining law review
Work done by Cameco and Bitterroot during 2003 prompted the partners to apply for mineral leases on state owned land. This application was on the verge of approval when in April 2004 the state of Michigan suspended leasing activity to allow it to review its decades old mining regulations. Although the Keweenaw Peninsula is a historic mining district famous for its high grade native copper deposits, mining had ceased in the late sixties. What prompted the mining law review was a recent nickel-copper-platinum group metals discovery by Kennecott in peridotite dykes outside the basin to the northeast. Bitterroot has been informed that the review should be done by mid-November, at which point processing of Bitterroot's claim applications will resume. Cameco drilled one geological hole earlier this year and suspended further work pending title confirmation for the additional ground. Nothing was reported about this hole, not because of the need for secrecy, but simply because there was nothing to report. Bitterroot does not expect to resume drilling until the new year because deer hunting season starts in November, a time when it is unwise for exploration crews to be beating about in the bush.

Bitterroot's Jacobsville Basin play cheap compared to Athabasca Basin plays
The evidence assembled by Michael Carr supporting a world class dream target in the form of potential high grade uncomformity style uranium deposits is very intriguing, but until drilling intersects high grade uranium mineralization (1% or better) and in doing so proves that hydrothermal activity within the Jacobsville Basin was capable of concentrating the anomalous uranium dispersed throughout the sandstone, this play remains extremely speculative. That, of course, is why it is cheap compared to plays in the proven Athabasca Basin. Based on 36.3 million shares fully diluted, a $0.30 stock price, and a 35% net interest the Jacobsville Basin play is carrying an implied project value of $31 million. This represents fair speculative value only in relation to a $2 billion dream target, which is equivalent to finding another Cigar Lake or McArthur River deposit. The checkerboard distribution of Bitterroot's Voyageur lands provides the joint venture with broad exposure to the shallow southern flank of the Jacobsville Basin. Current exploration is focused on targets in areas where the unconformity is less than 100 metres deep. Although Cameco was slow getting exploration underway last year, during the past six months there has been an acceleration of interest that has been stymied by the Michigan mining law review. Because much of the reconnaissance exploration activity overlaps state land not controlled by the joint venture, Cameco has been reluctant to speed up exploration before the permit granting system is operational again. This roadblock is expected to disappear by the end of November, paving the way for much more aggressive exploration in 2005. It is possible that Cameco may conclude that the Jacobsville is a dead basin after all and walk away, just as it recently dropped its option from Altius Minerals on the Rocky Brook play in northeastern Newfoundland. Offsetting this risk is the GK gold-copper play in British Columbia which Bitterroot plans to drill in late October. Based on a 100% net interest the GK play is carrying an implied project value of only $11 million, which represents fair speculative value for a $2 billion dream target. Bitterroot has not yet provided evidence that the GK has target potential of this scale, so one might quibble that the GK play is expensive. But when you consider that the Jacobsville Basin uranium play is part of the bargain and that speculators are hungry for a good uranium story, the $11 million price tag for the GK play is cheap. The IPV chart reveals that exposure to unconformity style uranium plays among the key uranium juniors is not cheap. The Moore Lake play of JNR Resources Inc (JNN-V: $1.40) and International Uranium Corp (IUC-V: $4.81) is priced at more than $400 million through either junior. The Riou Lake play of UEX Corporation (UEX-T: $2.60) on the north flank of the Athabasca Basin is also expensive with an IPV of $392 million. The Russell Lake play of Northern Continental Resources Inc (NCR-V: $0.86) at $31 million has a price similar to Bitterroot's Jacobsville Basin play, but this is a proximity play to the Moore Lake discovery that is clouded by a title dispute. I must emphasize that if the Jacobsville Basin turns out to be prospective for high grade unconformity uranium deposits, Cameco and Bitterroot are in a strategic position to tie up most of the key land. I am elevating Bitterroot from a Medium Priority Bottom-Fish Buy in the $0.30-$0.49 range to a Top Priority Buy in the same price range.

*JK does not own shares of any securities mentioned herein other than Strathmore

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