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Risks in Investing in Uranium Stocks: Africa

Uranium spot prices continued to rise, surging to $40.50/lb last week, as the 2006 uranium supply shortage takes hold. One uranium mining expert told us there were now more than 450 companies exploration, development and production of uranium. Some have property options and want them explored. Others are trading options. Very few of them are proceeding with serious plans. One that hopes to move towards bankable viability, possibly within a year, is Forsys Metals (TSX: FSY).

On March 2, we published an article titled “A Third Uranium Mine in Namibia.” The subtitle discussed how Forsys Metals hoped to repeat Paladin’s (TSE: PDN) success in Namibia. Four days later, the Namibian, a local newspaper, ran the headline: “Third Uranium Mine Coming.” The report summarized the development: “ANOTHER uranium mine in the Namib Desert is in the pipeline. Gulf Western Trading Pty Ltd, which plans to trade as UraMin Namibia, has announced that it has applied to renew its minerals license in Namibia for deposits in Trekkopje and Klein Trekkopje”.

What the hell? We thought the headline was about Forsys Metals. But it was a competitive mining company.

There are some geographical similarities. UraMin’s Forsys Metals Valencia and Trekkopje uranium deposits are about 35 kilometers from the Rossing uranium mine. The Valencia deposit is about 40 kilometers north of Paladin’s proposed Langer Heinrich uranium mine, while the UraMin deposit is 80 kilometers to the southeast. Registered in the British Virgin Islands last year, Gulf Western Trading Pty Ltd and UraMin have offices in London and South Africa. They do not appear to be publicly traded yet. Forsys Metals has offices in Toronto and is listed on the Toronto Venture Exchange.

Curious about this development, early Friday morning we called into Johannesburg, South Africa, to interview Mr. Graham Greenway, from whose technical report we quoted when writing about the Forsys Metals Valencia uranium deposit. Basically, we wanted to know if there was a race between the two companies. “They’re probably more or less parallel,” Greenway said. “Both are quite mature projects. They have been vetted in the past. They were sub-economic in the past. Both are doing confirmation work.” Greenway repeated his emphasis: “They are on a parallel path.”

So is it possible for Namibia to have four uranium mines before the decade is out? “I wouldn’t be surprised,” Greenway said. “When I look at Rossing, they’re also looking at alternative sources of uranium around the Rossing area.” Before becoming a resource evaluator for Snowden Mining Industry Consultants in Johannesburg, Greenway evaluated resource deposits for the Rossing mine as chief mine geologist. Snowden is a highly respected international mining consultancy with offices in Johannesburg, Perth, Brisbane, London and Vancouver. One of the uranium deposits that Greenway evaluated for Rossing was the Valencia deposit. “They and Rio Tinto have a great deal of information on exploration up to Valencia,” Greenway told StockInterview. “There’s quite a bit of interest in that area.”

Well, will UraMin take over Valencia, or will the Valencia deposit move on schedule and be Namibia’s third mine? Hard to say was Greenway’s enigmatic reply. But the geologist explained some good points to consider about the Forsys Metals uranium deposit. “Valencia is quite small in terms of low-grade uranium deposits,” Greenway explained. “But it’s a hot area. It’s in the right corridor for uranium mineralization, for that style of uranium mineralization in Namibia.”

Is the Forsys deposit in Valencia too small on its own to become a uranium mine? No, think of Greenway. “When I looked at a very rough financial model, it could be an independent operation,” he said. “I think it’s a compact deposit. It can be exploited in the open pit. It’s not a mine that can harm the environment. From that point of view, it won’t have a big environmental impact, it will have a fairly small foot print impact.”

Greenway added: “There is the potential for extraction to a certain extent before it is handed over to someone like Rossing.” Does that mean Forsys would sell its uranium deposit to Rossing? Greenway was quick to reply, “I wouldn’t say ‘sell the deposit to Rossing.’ Talking to the guys at Forsys, they’re very interested in developing a mine.”

Let’s get down to business here. Is Valencia an economic deposit or not? We ask because we would like to know if this could be the third, or possibly the fourth, uranium mine in Namibia. “I think so,” Greenway replied. “Under the right conditions, I think it could be economical based on the current mine plan.” For the record, in his technical report, Greenway wrote: “…the Valencia Project represents an advanced-stage uranium project that has the potential to develop into an economically viable mining operation.” He also wrote in his technical report: “Uranium mineralization has been identified in an area 1,100 meters from north to south by 500 meters from east to west.”

How far is Forsys from pre-feasibility? We asked Sean Felker, corporate communications at Forsys Metals. “We have three rigs on site,” he replied. “We are drilling to the east to extend the mineralization.” He stressed that Forsys was accelerating the project and believed the company was about a year away from making it feasible to fund.

At least Forsys has solved one of the drawbacks of uranium mining in Namibia.

“One of the difficulties, especially within Namibia, will be water. The biggest one will be water,” Greenway stressed. Sean Felker proudly announced, “We don’t have to truck water anymore.” The company had been trucking water some 65 kilometers from the coast. Now they don’t. “We drilled for water and we have water on site,” Felker told us. That’s a hurdle cleared, but it does raise a concern investors should have about better understanding various uranium companies, especially those in Africa.

The uranium bull market has opened the doors of Africa to many uranium exploration and development companies. Most are young Canadians or Australians; some are South African miners financed by Canadians, through the TSX or London’s AIM. Greenway noted that enthusiasm was “pretty widespread.” The countries that he found that there was the most interest in were “The Democratic Republic of the Congo (DRC), Namibia, Angola, Tanzania.”

At this point, it might be important to discuss risk factors.

Risks to uranium stockpiles in Africa

As with investing in any natural resource venture, the most important element to consider is whether there is an economic deposit to tap. Of course, there are many other considerations, which a knowledgeable Registered Investment Advisor could clarify. From his perspective as an experienced geologist, Greenway suggests that investors consider at least the following six elements when looking at uranium companies developing a property in Africa.

1. Political Risk. As with any “exotic” country or continent, such as Mongolia or Central Asia, there is questionable political risk. For example, we asked Greenway if there were any African nations to avoid. “Zimbabwe is very certain of what is happening there at the moment,” he replied. “Niger has political and water problems.” Based on our analysis of the news, Namibia appears to be politically stable.

2. Infrastructure. Unless the repository is world class, if there is no infrastructure, then the repository will stay with Mother Nature a little longer. Infrastructure can mean roads, a pipeline, or whatever transportation system is required to move ore to a processing facility. If the project is large enough, infrastructure will be built to service the reservoir. In the case of Forsys Metals’ Valencia Deposit, it is located near the Rossing mine. Not so close that additional infrastructure is necessary, but not hundreds of miles from a mill either.

3. Water. Many parts of Africa are arid. The largest desert in the world, the Sahara, is part of the African continent. Namibia’s uranium deposits are in a desert. Therefore, water must be readily available to explore and exploit the reservoir. “Niger has had a drought.” (Note: Greenway, however, praised Niger for having developed infrastructure.)

4. Electricity. “Namibia is very reliable in South Africa for its power supply,” Greenway said. “But they are talking about expanding their KUDU gas fields in the south, to build gas-fired power plants.” Other countries may rely on expensive diesel to generate electricity. Ironically, the cost of uranium mining may depend on the price of crude oil, more so in Africa than in a major coal-producing region like Wyoming.

5. Ownership of Property. “Previously, Angola and the Congo had problems with property tenure,” Greenway said. “You would find two companies that own the same piece of land depending on who received more bribes.” Greenway suggests this could still be found in the Democratic Republic of the Congo (DRC). “Land ownership is pretty clear in Namibia,” Greenway said.

6. Mining Code. Basically, this defines how much the government gets from uranium mining. That’s what a mining code is really about: royalties. “South Africa has become a bit of a problem with that,” Greenway said quietly. “Most other countries will allow you to take your money out of the country. Generally, the government will levy a 10 or 20 percent tax on your project and then allow you to take your money out of the country.” He added, speaking of South Africa: “There is code published and there is code that can be translated differently depending on who you talk to.” Greenway concluded: “I don’t think you’ll find the same problem within Namibia.” He added that Burkina Faso had a pretty good mining code (previously known as Upper Volta).

With any project, the maturity of an area strengthens the economic possibility of a worthy uranium project. The number of years it took for Rio Tinto to help develop relationships within Namibia may help pave the way for Paladin, Forsys Metals and UraMin. Again, having a large gatekeeper, such as the Rossing uranium mine, in the country where you want to develop a mine could speed up the mine development process.

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