Spec Value Hunter Comment - February 3, 2012: Recommendation Strategy for Uravan Minerals Inc
Uravan Minerals Inc was recommended a Good Relative Spec Value Buy at $0.07 on December 30, 2011 with a $0.10 limit based on the junior's innovative geochemical approach to assessing the Athabasca Basin for the potential discovery of high grade unconformity associated uranium deposits. The $0.10 limit is arbitrary and should not deter Spec Value Hunters from accumulating a position under $0.30 with the goal of holding it for a world class discovery during the next three years. Based on the $500 million to $1 billion valuation a high grade uranium deposit in the Athabasca Basin with a resource in excess of 50 million lbs of U3O8 can command, as demonstrated by the recent $654 million buyout of Hathor's Roughrider deposit by Rio Tinto, and the theoretical expansion of Uravan's current 46.1 million fully diluted capitalization to 100 million, or alternatively, a reduction of its 100% ownership stake to 40% via farmouts, a $5-$10 price range would be the reward for Uravan shareholders if the junior's grassroots exploration strategy proves successful. Although Uravan is a uranium junior, ownership of the stock does not require any macro assumptions about the outlook for uranium prices other than the assumption that despite the Fukushima accident and the knee-jerk antics of Germany nuclear energy will be part of the world's electricity grid for many decades yet to come, and the assumption that current yellowcake spot prices of about $50/lb represent a floor. Neither of these assumptions carries much risk. Despite a review pause in the wake of Fukushima, nuclear power plants remain on the drawing board, with future generations to be built and operated in compliance with long established standards in a new context of zero tolerance for back-sliding of the sort engaged in by the Japanese utilities. A drop in yellowcake prices below $50/lb is unlikely because utilities are happy to write long term contracts in the $50-$60 range, below which the cost of production ensures no future supply. This price level may be uncomfortable for low grade roll-front style uranium deposits, but it works just fine for unconformity style deposits running 5% to 30% U3O8 grades which represent a rock value range of $5,000 to $30,000 per tonne. But to be very clear, Uravan is an exploration uranium junior, not one trying to permit or delineate an existing deposit. The risk is that Uravan will never make a meaningful discovery, but in my view that risk is offset by the success criteria the company has marshalled which could lead to discovery linked price gains of 10-20 times current levels as early as late summer if the junior is able to raise the $2.5 million it needs for the drilling proposed for the Halliday Lake and Outer Ring prospects. Uravan has a management team very experienced in uranium exploration, it has persisted in developing its strategy for more than a decade without blowing up the stock's capital structure, at 30% insiders have a very meaningful equity stake that aligns their interests with those of minority shareholders, with more than $2 million working capital the company is in no danger of diluting in order to keep the overhead lights burning, the company has refined its radiogenic lead isotope based geochemical exploration tool in recent years through both academic and practical studies using Cigar Lake as a case study, it conducted a drilling campaign in 2011 on its Outer Ring and Math projects which yielded projected positive and negative results that support the methodology, and it hopes to prove the concept this summer by drilling Halliday Lake. The stock price is still suffering the fallout from last year's market downtrend, as are most exploration juniors lacking projects at the discovery-development stage. The anxiety about a global economic recession will take at least a year to mitigate, if indeed we are to avoid such a downturn, which implies that speculative appetite for exploration plays will remain muted during 2012. However, 2012 will be a very good year for early stage exploration juniors such as Uravan, and another one of my favorites Nevada Exploration Inc, which have a special hook with regard to homing in on big discoveries in elephant country settings that defy conventional exploration strategies. In generic terms Uravan Minerals Inc is a Good Relative Spec Value Buy which should be trading in the $0.30-$0.50 range where its 100% owned projects would have an implied project value in the $15-$20 million range rather than the abysmally low $5 million that prevailed at the start of 2012. In specific terms Uravan is recommended as a Good Relative Spec Value Buy because the junior represents the highest probability of a new uranium discovery in the Athabasca Basin arising not from brute force drilling of geophysical targets, a task that becomes excessively expensive as explorers follow the unconformity ever deeper into the basin, but arising from the systematic application of a new geochemical tool, in effect a remote sensing tool, that prioritizes the traditional geophysics based targets in the Athabasca Basin.
Uravan, which has been listed since 1999 after a capital pool acquired a portfolio of uranium and nickel-PGM prospects from a group headed by Larry Lahusen, has only 46.1 million shares fully diluted, of which the insider group owns at least 30%. Uravan's management is very technically oriented, producing detailed exploration results along with elaborate graphics for its exploration models and targets, but challenged when it comes to promoting its story beyond a tight circle of academics and geologists. During the uranium boom of the past decade it did attract some financial muscle through broker Bob Disbrow, who managed to accumulate enough stock at an average $0.55 price to become a 10% insider, which he has since dropped below as a result of private placements in recent years. However, Disbrow's presence as a shareholder is of little help until Uravan delivers a uranium discovery, for high-powered brokers are as impotent as anybody else when it comes to grassroots exploration stories. In this regard Uravan bears a close resemblance to another favorite of mine, Nevada Exploration Inc, which has spent the past decade refining and applying a groundwater geochemistry tool to the basins of Nevada in search of blind gold deposits in the bedrock beneath the gravel. Both the Uravan and NGE teams rely on traditional exploration tools and sophisticated geological modeling to generate drill targets, but what sets them apart from traditional exploration is that they use an additional data layer to focus their conventional efforts. Both have yet to prove their concept by delivering a major discovery with a hole on a target nobody would ever have generated without the help of their geochemical tool, and consequently neither gets much respect from the market, just periodic investments by patient people who recognize the brilliance of the strategy and acknowledge while it is only a matter of time before success is delivered, that time could take a long time to arrive. On the plus side, stories such as this only get stronger as the exploration failures along this journey build the knowledge base from which the team applies its tool. The biggest risks are that the geological team falls apart and the holistic understanding of how the method works dissipates, or the failure to develop a higher market profile results in continual dilution at rock-bottom prices to fund the junior until its capital structure is so bloated a rollback is required before additional funding is possible. Uravan is not currently in danger of these risks becoming reality, though last year it did see its exploration VP poached away by Rio Tinto, a development Larry Lahusen says did not result in transfer of proprietary knowledge.
In the case of Uravan Larry Lahusen's team relies on measuring the presence of the lead isotope formed by the decay of uranium deposits, which in the Athabasca Basin sit at or near the contact between the basin sediments and the crystalline basement rock, usually within structural splays off major northeast-southwest structures that rip through the basin. As groundwater circulates through the basin along these structural conduits it will encounter graphite deposits that accumulate along the fault planes. When the uranium bearing solutions hit the graphite a chemical reaction precipitates the uranium, forming very high grade deposits running up to 20%-30% U3O8, which at $50/lb U3O8 represents a rock value range of $22,000 to $33,000 per tonne. By their nature unconformity associated uranium deposits are small with complex geometries, but not much tonnage is needed to produce world class deposits such as Cigar Lake and MacArthur River. Because these deposits are associated with graphite, which is very conductive but mainly present near the unconformity and thus geologically blind, geophysical surveys are the primary tool used to generate targets. Unfortunately, there are numerous graphite padded structures within the Athabasca Basin, but only very few where the uranium piled up in 100,000 tonne plus concentrations. In other words the properties that blanket the Athabasca Basin are chock full of tantalizing EM anomalies that suck up drill dollars, not just because exploration is testing the unconformity as deep as 1,000 metres, but because the small, complex geometry makes it so easy to miss them entirely, or worse, just nick an edge of a deposit. The latter poses an exploration nightmare because the basin is also full of high grade uranium blebs of the sort that Cameco and Intl Enexco Inc have been nipping at Mann Lake since the seventies. When you hit 0.5 metres of 6% U3O8 at a 450 metre depth you have no choice but to drill small but still expensive stepouts without any guarantee of there being a bigger zone to find. During the uranium boom when U3O8 was bumping at $140/lb there was some speculative market interest in grassroots uranium exploration, but today there is no interest at all in grassroots exploration, particularly in the wake of Fukushima which has temporarily muted enthusiasm for nuclear power. When you consider that the Roughrider deposit of Hathor Exploration Ltd, which Rio Tinto bought out at $4.70 for $654 million, boasted a resource of only 60 million lbs U3O8, of which half resided in the East Zone consisting of 118,000 tonnes of 11.58% U3O8, it is easy to understand why making a high grade uranium discovery in the Athabasca Basin is so difficult.
In an effort to prioritize conductors as drill targets Uravan has developed a three-pronged geochemical survey strategy which collects samples from clay, vegetation (tree needles) and tree cores which undergo multi-element analysis that includes the two isotopes of lead (207 and 206) which are the respective decay products of the uranium 238 and 235 isotopes. Lead has four natural isotopes of which lead 207 and lead 206 have a relative abundance of 22.1% and 24.1% while lead 208 and lead 204 are 52.4% and 1.4%. If you go into your backyard and measure the lead content of the soil, the lead measurement can be broken down into its 4 isotopes, with the ratio of 207 to 206 always working out to about 0.92:1. Uranium's two natural isotopes have relative abundances of 99.3% for U238 and 0.7% for U235. Because the much more abundant U238 decays into Pb206 while the much less abundant U235 decays into Pb207, and because these lead isotopes are stable, any area starting with the natural lead isotope distribution that is inundated by radiogenic lead isotopes arising from uranium decay will see a preferential buildup of Pb206 over Pb207. Although the half life for U238 is 4.47 billion years compared to 704 million years for U235, the overall relative abundance ratio of 142:1 more than offsets the 6.3 times greater frequency with which U235 turns into Pb207 than U238 turns into Pb206. Uravan has established that when the Pb207/Pb206 ratio drops below 0.65:1, meaning a lot more Pb206 than Pb207 has built up than is the case with crustral lead, a uranium deposit must be nearby.
When uranium decays into one of the daughter lead isotopes the atom has not moved, so an obvious question is why should samples taken from the surface hundreds of metres above the uranium deposit's location at the unconformity tell us anything about the presence of a uranium deposit. It turns out that microbes are present at the unconformity beneath the basin sediments and have an affinity for uranium mineralization to which they secure access courtesy of the fracture system within the basin sandstone that emanates from basement to surface. These fractures propagated during the Proterozoic when the parallel set of regional northeast-southwest faults that cut the Athabasca Basin were reactivated, a tectonic event that also coincides with the formation of the basin's uranium deposits. This fracture system serves as the conduit for circulating groundwater as well as gases. Microbial activity on the uranium deposit surface liberates the lead isotopes which work there way to the surface dissolved in groundwater or as gaseous compounds. At the surface they either get trapped in the clay soil or, if dissolved in groundwater, get absorbed by vegetation. Obviously the farther these solutions and gases migrate from the uranium source, the more diluted their payload becomes. When the radiogenic lead isotope ratios in each geochemical surface sample are plotted the result should be a 2-dimensional gradient that theoretically maps to the buried uranium deposit, with possible offsets depending on the orientation of the fracture system. (For a good overview I recommend Uravan's Corporate Presentation.)
If you think this story sounds just like the golden haystack anomalies of NGE's gold in groundwater measurements, you are correct. Instead of generating golden haystacks that are plumes emanating through Nevada basin gravels from golden needles in the buried bedrock, Uravan is generating leaden haystacks with a radiogenic lead isotope based signature that is unique to uranium, which are plumes emanating from uranium deposits buried at the unconformity. The only difference is that in the Nevada basins the sediments are not consolidated, whereas in the Athabasca Basin the sediments have been cemented into sandstone. Whereas NGE does multi-element analysis on groundwater samples, Uravan analyzes the cores from trees which soaked up the radiogenic lead isotope spiked water and retained the lead payload. Both companies are using a geochemical exploration tool to mark a map: "here there be monsters".
Geochemical surveys are well known as a regional prospecting tool, and were put to extraordinary use during the past 20 years to establish Canada's diamond potential. But conventional geochemical surveys rely on the past surface exposure of mineralization which erosion has dispersed. The geochemical tools deployed by Uravan and NGE target mineralization that has never seen the light of day, and the elements they measure are being generated today from blind sources. They were not liberated from the source tens of thousand years ago by glaciers or weathering. Uravan's tool is a new development which has not been systematically applied beyond the geochemical surveys Uravan initiated during the summer of 2010. I first heard about the concept in 2008 when Uravan was still formulating the theory based on observations that arose from the company's history of analyzing vegetation samples as a remote sensing tool.
Uravan's focus from late 2004 until 2008 had become the Thelon Basin which straddles Nunavut and the Northwest Territories where management had past experience during earlier uranium booms. The Thelon Basin is similar to the Athabasca Basin, and although no major uranium deposit has been found in it, very high grade uranium boulders have been found. When Uravan merged with the capital pool predecessor Uranco Minerals Inc on June 18, 1999 the property portfolio included the Garry Lake claim at the northeastern end of the basin and the Boomerang Lake claim at the southwestern end. Starting in late 2004 as it became apparent that a new uranium boom was underway Uravan staked large land positions exceeding 300,000 hectares surrounding the Garry Lake and Boomerang Lake claims, of which Cameco optioned the Boomerang project. The prospect of a major discovery in the Thelon Basin drove Uravan to peaks of $2 in 2005 and 2007 (see the above chart clipped from an older Uravan presentation), but when Uravan applied for land use permits in 2008 for expanded exploration programs, both the Nunavut and NWT regulators succumbed to anti-nuclear lobbyists by insisting respectively that Uravan first conduct an EIS and EA on the Garry Lake and Boomerang projects. Uravan retained SRK to estimate the cost of the required EIS, which came in at $5 million and 3 years with no guarantee that land use permits would be granted, in effect a de facto moratorium on future uranium exploration in the Thelon Basin as far as the juniors were concerned. Uravan was able to secure a waiver from filing assessment work on Garry Lake which expires in May 2012 while it negotiated with NIRB for a policy change, but Cameco, which had vested for 51% in Boomerang after spending $6 million but declined to proceed to 60% because of the land use blockade, decided as operator to play the MVEIRB's game. Unlike Cameco Uravan did not have time and capital on its side, so in December 2010 a deal was reached whereby Uravan would swap its 49% Boomerang stake to Cameco in exchange for 4 Athabasca Basin properties in which Cameco had effectively given up. As a result Uravan ended up with 4 Cameco reject properties in the Athabasca Basin plus the Outer Ring project it staked in 2009 and Johannsen Lake staked in 2010.
The focus shift from the Thelon Basin to the heavily staked Athabasca Basin fit with Uravan's ambition to develop the radiogenic lead isotope strategy in a setting known to host world class uncomformity style uranium deposits and which had a history of cooperation with the First Nations and Saskatchewan government stakeholders. The Cameco reject properties were ideal because they had already been explored with conventional exploration tools. I made Uravan a medium priority bottom-fish buy in the $0.10-$0.19 range on December 24, 2008 as part of my Bottom-Fish 2009 Edition based not on optimism that exploration would resume in the Thelon Basin, but because I was intrigued by the remote sensing tool Larry Lahusen had described to me. Because of the progress Uravan has made since then I adopted Uravan as a Spec Value recommendation on Decembwer 30, 2011 when I closed out the Bottom-Fish 2009 Edition. During 2009 Uravan formalized a funding agreement with the Queen's Facility for Isotope Research (QFIR) at Queen's University under the direction of Dr Kurt Kyser to develop protocols using samples provided by Uravan. In a major research coup Uravan and QFIR were able to persuade Cameco and Areva to allow the research team to conduct a geochemical survey over the western portion of the Cigar Lake deposit and study the historical Cigar Lake core. This work confirmed that the geochemical survey conducted by Uravan was capable of establishing a radiogenic lead isotope based anomaly correlated with a major uranium deposit at the unconformity beneath 450 metres of sandstone cover. This evidence is very similar to what the NGE team did when it collected groundwater samples in the vicinity of known Nevada gold deposits covered by gravel. It is not, however, the same level of concept proof as delivered when you start with the anomaly and then find the world class deposit.
Uravan's first real test of its remote sensing tool took place during the summer of 2011 when it drilled 5 holes on the Outer Ring project in July and 2 holes in October on the adjacent Math project it had optioned 100% from ESO Uranium Corp for $25,000 and 1 million shares in stages. The Math property was the focus of several geophysical surveys in 2006-2009 which home in on the NE-SW trending Pasfeld conductor interpreted to be graphite near the unconformity. This conductor projects onto the Outer Ring claims to the southwest where Uravan had established through a 2010 geochemical survey a robust radiogenic lead isotope signature. Considerably less robust data points described as "encouraging" were established on the Math property. The July drill program on the Outer Ring target encountered elevated radioactivity within bleached, altered and fractured rock near the unconformity at a depth of 700-800 m which Uravan deemed as a setting prospective for high grade uranium mineralization. Uravan did not have much to say about the subsequent Math holes, which Larry Lahusen confirmed to me were duds. But what he also implied was that this was indeed good news, because the radiogenic lead isotope signature associated with what were otherwise excellent geophysical targets was weak compared to the Outer Ring targets. It would have been good news for shareholders if the Math holes hit high grade mineralization, but bad news for the usefulness of the remote sensing tool Uravan hopes to apply extensively throughout the Athabasca Basin.
The next big test will be the Halliday Lake property located 18 km northwest of McArthur River where the unconformity is 800-900 metres deep. Cameco drilled 6 holes for 5,176 m with an average 850 m depth that tested 3 east-west trending EM conductors. Although the holes confirmed the presence of a graphite structural zone with alteration and anomalous uranium, and were drilled several kilometres apart from each other, Cameco decided against further work and gave the property to Uravan as part of the Boomerang swap. Uravan conducted a geochemical survey in 2011 which yielded strong clay and tree-core anomalies which led management to believe that a major uranium deposit is present Cameco would have found if it had persisted. Should the 5 hole 2012 program proposed by Uravan intersect high grade uranium that is more than a bleb, it would go a long way towards qualifying as a proof of concept. Lahusen estimates the program would cost about $1,750,000 which includes $250,000 for a geophysical survey; he has until summer to raise the capital through either an equity financing if the stock price is higher or a farmout. Although initially skeptical about Uravan's remote sensing tool, Cameco and Rio Tinto have in the wake of the past year's work become more receptive to the possibility that a radiogenic lead isotope signature may be the key to revisiting the Athabasca Basin, especially as the unconformity deepens.
Although Uravan has minimal land exposure on the eastern margin of the Athabasca Basin where the juniors with existing claims appear to be in no hurry to let them lapse, it does have very strategic ground acquired from Cameco covering a major new corridor which hosts the Centennial discovery made by Cameco. On the souther flank of the basin this corridor is called the Virgin River corridor, and on the northern flank its continuation is called the Black Lake corridor. Uravan acquired the Stewardson Lake property covering the Virgin River corridor from Cameco and conducted a geochemical survey during 2011 whose results are still being analyzed. The Johannsen Lake property was staked by Uravan in 2010 during which it conducted a geochemical survey that outlined some anomalies. Both projects are ready for drilling if the Halliday Lake program delivers proof of concept during 2012.