The atom may be the future -- again CEO Jerry Grandey and his colleagues at Cameco Corp. told investors and anyone else who would listen that the price of uranium was going to climb, but it stubbornly refused to comply. That has changed, JOHN PARTRIDGE reports JOHN PARTRIDGE
SASKATOON -- The way Jerry Grandey tells it, there was a time not so long ago when running the world's largest uranium company required one thing more than any other: faith.
No matter how often he and his colleagues at Cameco Corp. told investors and anyone else who would listen that the price of the raw material for nuclear fuel was going to climb, it stubbornly refused to comply.
"All through the nineties -- and I was as guilty as anybody -- we were preaching that [uranium] inventories were finite and that at some point in time, when inventories were strained . . . a price response would begin," Mr. Grandey, Cameco's chief executive officer since 2003, said during an interview at the company's head office in Saskatoon.
"We thought an equilibrium price of uranium would be between $15 and $20 [a pound] but every time we made that prediction, the price . . . would go down.
"We even began to doubt whether we were still sane," Mr. Grandey, an affable expatriate Californian, added later with a chuckle.
No wonder.
For much of that decade and into the new century, prices for uranium oxide or "yellowcake" remained in a deep freeze that had set in when the Western world went cold on fission after the notorious partial meltdown of the No. 2 reactor at the Three Mile Island nuclear power plant near Harrisburg, Pa., in 1979. Smacked hard again by the vastly more serious Chernobyl disaster in the Ukraine in 1986, the price had plunged to less than $9 (U.S.) a pound by early 1990 from its 1979 high of $43, as the United States and other nations abandoned plans to expand their fleets of atomic power plants, driven off by multibillion-dollar price tags and public opposition, leaving too much mining capacity in operation for too few customers.
Compounding Western uranium miners' woes, the collapse of the Soviet Union put large quantities of cheap uranium into the market, and the landmark 1993 START II agreement in which Russia and the United States agreed to dismantle thousands of nuclear missile warheads and convert the fissile metal they contained into power plant fuel threatened to damage prices still further.
Mr. Grandey and his colleagues are, however, no longer questioning their sanity.
Since bottoming out at just over $7 a pound in December, 2001, uranium has redeemed itself and them by rocketing skyward, recently hitting $37.50 on the spot market.
The rise has been fuelled by a variety of developments, including a growing interest in atomic power in electricity-starved China and India, both of which are planning to double their reactor fleets over the next 15 years, and by a renewed interest in the West, where, in the age of global warming, there is a growing push to reduce fossil fuel emissions. In all, the International Atomic Energy Agency is now forecasting 60 additional plants will be added by 2020 to the approximately 440 currently producing power in 31 countries around the world.
All of this, proponents such as Mr. Grandey say, adds up to a "nuclear renaissance."
The icing on the yellowcake has been the entry of hedge funds and other speculators into the spot market, buying up millions of pounds of uranium, betting the value will continue to rise.
The new speculative interest has had a significant impact in an industry that currently mines only about 108 million pounds of uranium a year, but where demand is running at 180 million pounds.
Cameco, whose rich mines in northern Saskatchewan's famed Athabasca Basin and elsewhere have given it control of a startling 20 per cent of world uranium production -- and a nickname as the Saudi Arabia of the business -- is, of course, a key beneficiary.
In 1993, the year Mr. Grandey joined the company as senior vice-president of marketing and corporate development, its key product was fetching about $10 a pound, and Cameco turned in a profit of $73-million (Canadian) on revenue of $305.8-million. Just last week, it reported a profit for 2005 of $218-million on revenue of $1.3-billion. The shares have risen sixfold since 2002 when uranium began its run, taking Cameco's stock market capitalization to more than $14-billion, nearly double the figure a year ago.
Jerry Grandey was almost genetically predisposed to end up connected with the nuclear business in one way or another. In the waning days of the Second World War, his parents moved to Los Alamos, N.M., where his father had been posted by the U.S. Army Signal Corps to help with the Manhattan Project, the ultrasecret program to build the world's first atomic bomb.
"I was conceived at Los Alamos -- at least that's what I'm told," Mr. Grandey, 59, said with a laugh. However, his parents moved to Long Beach, Calif., where he was born in 1946.
At the other end of the scale, Cameco's CEO was also an anti-nuclear activist for a time. After graduating from the Colorado School of Mines in 1968 and two years of military service, Mr. Grandey enrolled in law school in Chicago. While there, he worked part time for a public interest law firm. "Like any young person I was interested in saving the Earth," he recalled.
Once Mr. Grandey received his law degree in 1973, he moved to Colorado, where he joined a firm and specialized in mining, mineral financing and litigation and environmental law.
He completed his transformation from anti- to pro-nuke by signing on with Robert Adams, a U.S. uranium pioneer, whose Energy Fuels Ltd. subsequently became the metal's largest producer in the United States, with Mr. Grandey as its president.
One of the key benefits Mr. Grandey brought to Cameco when he joined it at the beginning of 1993 was a network of high-level contacts in the atomic establishment in Russia that he had developed while at Energy Fuels. He put it to use almost immediately.
When START II was announced, it became clear that the 500 tons of uranium covered by the 20-year agreement between the U.S. and Russia would crush the already depressed prices if it was allowed to flood the civilian market.
"So I immediately bought a ticket and flew to Moscow and met with the Minister of Atomic Energy and tried to then educate him," he recalled. "And we did the same thing with the Canadian government and the U.S. government."
Eventually a quota system was instituted that regulated the amount of weapons-derived uranium from Russia that could be sold into the marketplace. "In that way, the industry could adjust to it," Mr. Grandey said.
Back at head office in Saskatoon, meanwhile, Cameco was being run by just its second CEO, Bernard Michel. Mr. Michel, an expatriate French mining executive, had signed on in 1988, the year the company was created as Canadian Mining & Energy Corp. through the merger of two Crown corporations, federally owned Eldorado Nuclear Inc. and Saskatchewan's Saskatchewan Mining Development Corp.
Faithful to its own sales pitch that uranium prices would eventually recover, Cameco pursued a number of avenues during the 1990s and early 2000s to further its strategy of becoming the world's "dominant nuclear energy company," as Mr. Grandey puts it. This included well over $600-million in mining acquisitions, as the firm picked off the assets of other players, which, blessed with less faith, decided to exit.
The largest of these was its $483-million purchase in 1998 of German-owned Uranerz Exploration & Mining Ltd., a deal that solidified Cameco's control over what was to become its massive flagship mine at McArthur River in the Athabasca Basin. That mine, 70 per cent of which is held by Cameco, sits on the largest body of high-grade uranium yet discovered anywhere. It now accounts for about 18 per cent of world production all on its own.
Cameco solidified its hold on another key property in northern Saskatchewan, Cigar Lake, which is scheduled to go into production next year, and continued to invest in uranium refining and conversion plants it maintained in Ontario.
Abroad, the company accumulated a large land position in Australia for exploration and acquired a number of U.S. properties. And it landed a deal in 2004 to build a large mine at Inkai in Kazakhstan, also set to start commercial production next year.
Then, in 2001, in a key step in a strategy of vertical integration, Cameco moved into electricity generation by picking up a 15-per-cent interest in Ontario's massive Bruce nuclear plant, bumping it up to 31.6 per cent the next year, and taking its bargain-basement investment to just $311-million.
"It was just positioning the company . . . making sure we had a very broad production base, and making sure we were the low-cost provider of uranium conversion and refining and [electricity] generation," Mr. Grandey said. "Then when nuclear was rediscovered and uranium prices began to go up . . . Cameco was well positioned to receive the attention of the investment community."
For all the kudos and stock market gains Cameco has won, the company's strategy has not been an unalloyed triumph.
In 2003, for instance, it backed away from joining a partnership to build a $1.1-billion uranium enrichment operation in the United States. Mr. Grandey said the firm is staying clear of this part of the business because it has not yet figured out a way to make money at it.
As well, its plan to expand in the power generation business appears to be stymied, at least for the time being. In Ontario, for instance, then-premier Ernie Eves' 2002 decision to re-regulate half of the province's electricity market has made further major investments in the Bruce operations unattractive. Increasingly aggressive competition from electric utilities for nuclear plants on the market in the U.S. have hurt its efforts to grow there.
Mr. Grandey insisted, however, that Cameco has not abandoned the idea of expanding in the electricity market.
"We're watching, because at some point, having access to uranium and conversion may be valued enough by a utility to allow us to meet our financial goals and have the utility meet its [goals]."
If electricity generation is a dead end for now, Mr. Grandey sees plenty of potential in the new wave of uranium exploration sparked by the soaring prices, because Cameco has acquired the skills and experience to deal with all the technical and regulatory hurdles in going from discovery to functioning mill. "We ought to be, then, a partner of choice: joint venture partner, acquisition partner, merger partner," he said.
Cameco already has taken a 21.8-per-cent stake in one junior, UEX Corp. of Vancouver, whose share price has soared over the past two years on strong drilling results in the Athabasca Basin.
By contrast, the company also has taken the first steps toward exiting the gold mining business, where it also has extensive interests. It spun out its holdings there as a separate company, Centerra Inc., in 2004, and has retained a 53-per-cent stake in the business.
More vertical integration is also on Cameco's menu. Early last week, the company filled another gap in its arsenal by closing a previously announced $108-million deal to buy Zircatec Precision Industries Inc. of Port Hope, Ont., which fabricates nuclear fuel bundles for use in Candu reactors.
As for the future, Mr. Grandey said he still tends to think of Cameco as "a small entrepreneurial company trying to grow."
And now the nuclear industry finally seems to be living up to the hopes of a decade ago, he's in no hurry to depart.
"Knowing how difficult it was to keep the faith through the lean years . . . now that it's coming back and once again people are talking about nuclear energy, I just want to be a part of it," he said.
WHAT IS IT?
With a density 18.7 times greater than water, uranium (U) is the heaviest naturally occurring element, and while the metal is usually thought of only in a nuclear context, its weight also makes it ideal for such non-nuclear applications as keels for sailboats and counterweights for aircraft rudder and elevator controls. It is mined underground or in open pits but can also be extracted by a method known as in-situ leaching, which uses a system of wells to inject and then recover a solution that strips uranium from the host rock. It can be more dangerous than other mining processes because its ores often emit radon gas and contain radioactive products.
HOW DO WE USE IT?
The first step in making uranium fuel for power plants is to produce yellowcake or uranium oxide (U{-3}O{-8}) by treating crushed uranium ore with sulphuric acid. The yellowcake is converted into a gas, uranium hexafluoride (UF{-6}), a necessary prelude to "enriching" the material so that the proportion of the uranium-235 isotope is boosted to 3.5 per cent from the natural level of 0.7 per cent. The gas is then converted to uranium dioxide (UO{-2}), which is made into fuel pellets that are inserted in metal tubes. The tubes are bundled together and inserted into the reactor's core. International Atomic Energy Agency safeguards are employed to keep uranium from being used for weapons.
SUPPLY AND DEMAND
About 17 per cent of global electricity is generated from uranium in nuclear reactors, which number about 440 in 31 different countries. Another 31 are under construction and an estimated 60 to 70 are on the drawing board. Demand is outpacing supply coming out of the ground, and the gap has been made up by recycled uranium from nuclear weapons, especially from Russia. But when that imbalance is removed, analysts are anticipating new mine production will still fall short of demand by about 22 million pounds in 2010. The current production shortfall is 25 million pounds.
WHO'S SHIPPING IT?
Canada is the largest producer in the world, producing 11 million to 12 million tonnes of uranium oxide a year. The McArthur River mine in Saskatchewan's Athabasca Basin sits in the largest high-grade deposit in the world, with its uranium grading at 23 per cent, about 100 times higher than the world average.
POLITICAL FACTORS
Iran has the West up in arms because it is insisting on the right to enrich uranium within its borders. The issue is that enrichment is a key step in the process of converting yellowcake to the basic material for nuclear weapons as well as fuel, although for this use it must be enriched to 90 per cent U-235.
WASTE STORAGE
Spent fuel from nuclear reactors poses a major health and security risk because it remains highly toxic and radioactive for thousands of years. In Europe it is mostly reprocessed back into fuel, but in the United States and Canada it is considered waste. It is currently stored in canisters at reactor sites but both countries are looking for possible centralized storage sites, deep underground.
WHAT ABOUT PRICE?
Analyst John Redstone at Desjardins Securities, a uranium bear, sees new supply creating a surplus by 2009. As a result, he said in a recent report that he expects prices to be capped at about $35 (U.S.) a pound. That is one of the reasons he also figures that Cameco's shares are overpriced and poised to finish the year about 25 per cent below today's price. By contrast, Greg Coules, managing director and head of research for Metropolitan Capital Advisors Inc., a New York-based hedge fund that has invested in the sector, is betting that $50 (U.S.) uranium is "very likely" over the next 12 to 18 months and that it has the potential to climb to the $70 range "over the next couple of years."
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