ESO Uranium to Angle Drill near a Promising 1970’s Hole

“I look at about 100 different projects a year, most of which go into the round filing cabinet on my floor,” said Tony Harvey, the senior technical advisor to ESO Uranium (TSX: ESO), and formerly a senior manager of Wright Engineers-Fluor Daniels, which was involved with the design and construction of 14 mines worldwide. Harvey quickly ticked off what is necessary to attract his eye, “I need to see history. I need to see signposts before I give it any credence.” So why is he advising little-known ESO Uranium, after a long, prolific career? Harvey helped found Amex-listed Azco Mining, and more recently was a director of Mexican mining firm, Cobre del Mayo, which sold two of its last three mines, which he helped discover, to Phelps Dodge (NYSE: PD).

“I believe this one has a huge amount of history,” Harvey argued. “Not only have you got the Cluff Lake mine, which already confirms the presence of uranium, but you have got the Shea Creek drilling intercepts which validate it. We have the conductors streaming onto our property. We have the boulders, which is also another sign post.” The boulders, of which Tony Harvey refers, are the six uranium-mineralized boulders near the ESO Uranium project on the company’s Cluff property. Near those boulders, a promising drill hole from the 1970s indicated 0.85% U3O8 over 2.3 meters. It was all but forgotten until the recent explosion of exploration activity in Saskatchewan’s Athabasca Basin, an area which has helped Cameco (NYSE: CCJ) grow into a company with a market capitalization of nearly $12 billion.

What ESO Uranium’s geological team will be looking for at the company’s Cluff property are Cluff Lake style uranium deposits in basement rocks with the Carswell structure close to the unconformity with sandstones of the Athabasca group.

Drilling in the Meteor’s Wake

“The value of the ore extracted at the Cluff mine, in today’s terms, would be equivalent to $2.6 billion,” explained Harvey. “That’s how much was extracted at the Cluff mine.” The company’s vice president of exploration, Benjamin Ainsworth, who is both a senior geologist and a mining engineer, helped explain the Cluff structure. “A meteorite probably impacted at this location and with sufficient force to break right through the layers of Athabasca sandstone on the surface. On rebound, basement rocks got lifted back up. In bouncing back out, it also lifted up the surrounding Athabasca rocks and tipped them up, if you can imagine, like an opening flower.” As a result, the basement got lifted up to the surface and made it easier to find and mine the uranium at Cluff. Ainsworth added, “The significance of that for me and our group is that shows very high grade uranium deposits in the western side of Athabasca.”

Drilling a property helps the geological team better understand the area. Since the Cluff property was mined out, two decades ago, additional scientific study has opened up new doors. At the 67th Annual Meteoritical Society Meeting, University of Quebec Earth Science professors presented a paper entitled, “A Re-Evaluation of the Size of the Carswell Astrobleme.” The Montreal scientists concluded in the 2004 annual conference held in Brazil, “The Carswell impact structure is therefore older and larger than previously estimated… the central uplift considered to be under the annular dolomitic unit would suggest a crater size in the basement of 118 to 125 kilometers wide.” While some believe the meteor hit about 478 million years ago, recent evidence suggests it may have been closer to 1.8 billion years ago.

Angle Drilling This Time

ESO Uranium plans a six-hole drill program to learn more about their Cluff property. The first hole hopes to confirm what was found earlier, “We’re going to drill right up against the CAR-425 hole drilled originally in the 1970s, which indicated uranium of about 0.85 percent U3O8 over 2.3 meters.” They will drill adjacent to the uranium-mineralized boulders. Ainsworth explained how the company’s strategy is different from previous drilling, “We’re drilling angle holes to give us a better opportunity to find more of the structures that can be carrying mineralization in that sort of system.” In the 1970s, holes were vertically drilled. Harvey added, “We’re going to be stepping out to the southeast, which bring us then closer to the original Cluff mine.” The company plans 150 to 200-meter holes. Ainsworth noted, “The CAR-425 drill hole, which we’re coming up close to, is 146.5 meters deep.”

Robert Beckett, ESO Uranium’s exploration manager, agrees about the 55 degree angle holes the company will be drilling at the Cluff property, “They were drilling vertical holes, and we’d like to go back and check it with an angle hole on the theory, which we interpret as some kind of subvertical system.” Beckett talked about additional drilling to the south, after the property had been explored, revealed “the structure extends from the edge of the basin all the way through Shea Creek.” He added, “We believe it extends onto our property to the north at 11 o’clock, just to the north. We see the extension of those conductors coming up through Shea Creek – conductors and by extension, structures, extending up onto our property. And the structures are the key thing – the destruction of the upper fold and the unconformity in the bedrock, it gives you the right kind of conditions for the deposition of uranium.” Before Beckett joined ESO Uranium, he had been district geologist for Esso Minerals and for the Saskatchewan Mining Development Corporation, which later merged with El Dorado Nuclear to become Cameco Corp. He was the exploration manager at Midwest Lake and the project manager of the Port Radium mine.
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Cameco Corp (NYSE: CCJ) is the 800-pound gorilla of the uranium sector. Cameco is to uranium what Wal-Mart is to retailing, and what Saudi Aramco is to petroleum. On a percentage basis, Cameco dominates its sector more so than either of the two. Cameco probably has more clout in turning off the electricity now powering your computer than any other company in the world.

This week, the spot price of uranium rose to $40/pound, for the first time since Ronald Reagan was president. That should help grow the uranium business in Wyoming by leaps and bounds. In Part 5, we look at the largest U.S. uranium producer, Cameco-owned Power Resources.

Understanding ‘In Situ Leach’ Uranium Extraction

“It took $284 million Canadian to build, and it operated with 546 people,” said Patrick Drummond, Plant Superintendent for Cameco subsidiary Power Resources’ Smith Ranch facility. He was pointing to Kerr McGee’s Smith Ranch underground mine on the wall across from desk, which was later converted into an ISL operation, first run by Rio Algom. “This operation cost US$44 million to build and 80 people to start.” Drummond was referring to the In Situ Leaching (ISL) uranium extraction facility, known as Smith Ranch. “That should give you the scale of the ISL versus an underground mine,” he explained.

The aging, but sprightly, Drummond knows his uranium. He’s worked in underground mines, open pit mines, and uranium mills since 1980. From 1996 to the present day, he’s worked in Wyoming for Power Resources at the company’s ISL uranium extraction facility. “I started off in the coal mines in Scotland,” boasted Drummond, who claims he can spot a coal miner in a bar, just by looking at the veins in his hands. “I worked up in Elliot Lake and the massive underground mines up there.” Clasping his hands and looking down, he seemed to apologize, “It’s also a massive environmental problem to clean up, a major undertaking. Quirk Lake was one of the bigger mines up there. It cost a lot of money to clean it up.”

The New Face of Wyoming’s Uranium Mining is the ISL uranium extraction method, also known as solution mining. The differences between mining uranium underground and an ISL operation are both minor and vast. Both methods mine uranium beneath the surface. So both methods are underground mining. However, that is where the similarities end. “With underground, you bring up the ore, grate it, crush it, and extract the uranium from the ore,” Drummond explained the basics of underground uranium mining. “That ore becomes waste, which is known as tailings. You then have to service these big tailings and then decommission.”

ISL is the new breed of mining. “With ISL, we don’t do that,” continued Drummond in his day-long lecture to our editorial team during a VIP tour of the Smith Ranch facility. “To mine underground with ISL, you drill the holes where the uranium is and extract the uranium from the underground ore,” he said. “Then, you process that into yellowcake.”

It’s not all wine and roses for Drummond, though. He pines away for his underground mines, “From a mining perspective, it’s not mining so it is not as exciting. Drummond laughs, “ISL is like a water treatment plant. We take water out and remove some ions.” He makes it sound so simple, “We remove the water from the underground and remove the ions, being the uranium ion. Then, we put the water back under the ground.” All of the water goes back into the ground? Actually no. Drummond explained, “We take our water out and we put 99 percent back in. The one percent we call ‘bleed.’ It’s a control function.”

Drummond cites more comparables, “To start an underground mine, it would take a year to do the shaft before you could start mining. Then, there’s the development cost of the mill complex. You have all that outlay of cost before you can get any benefit. It’s expensive to do underground — $200 million plus – because of the upfront development costs.” From his perspective, the miner in Drummond has come to like solution mining. “ISL is easier. It is a lot cheaper: less expensive capital costs and less operating expenditures. It is less labor intensive.” Asked about the deadly radon emissions, often cited as a danger in underground mining, Drummond shot back, “This is a zero emission facility.”

Analyzing the two methods, he said, “You can start producing faster with an ISL operation. You start your first header house, and you can start producing and make money.” He added, “So you get a return on your investment faster.” What’s the downside? “We also recover less uranium with ISL,” Drummond admitted. “Some of Cameco’s mines in Saskatchewan are running around 5, 10, 15, and 27 percent uranium. In this area, or in an ISL, it runs less than one or two percent. It’s very low.” Plus the uranium ore body must be found below the water table. He added, “You can only do ISL in rock that’s porous and has water in it in the first place.”

To put it in the simplest terms, billions of years ago, the uranium found its way into the underground aquifers of Wyoming’s sandstones. “We add oxygen and get the uranium back into solution,” Drummond remarked. “We complex it with CO2 to keep it in solution, and then bring it to the surface. We extract it with an ion exchange base.” According to Drummond, extracting uranium works on the same principle as a water softener. “We add salts to the resin to get the uranium to back off from the resin. Then, we take that uranium and make it into a final product called yellow cake.”

And why it is called yellowcake? “Some of it is yellow; some of it is green or dark green. Some of it is black,” Drummond patiently explained. “The color is a function of how we dry it, not how we process it. There is a very definite correlation between drying temperatures of yellow cake and color.” It all depends on what chemicals you use while processing uranium. At Smith Ranch, we make uranium peroxide. It is very clean and yellow. We complex uranium with hydrogen peroxide to make our product. You can make different types of yellowcake. You can make a uranium diuranate, a complex made with ammonia.” Yellowcake can be made with other chemicals.

How is Wyoming’s ISL uranium dried? “We dry the uranium with vacuum dryers,” said Drummond. “The benefit of vacuum dryers is first of all, it’s a vacuum so everything is sucked inside the canister so nothing escapes into the environment. There are no gases that escape.”
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A recent report published by the Cohen Independent Research Group, called Wall Street’s #1 Independent Research Firm, rated Pacific Asia China Energy (TSX: PCE: Other OTC: PCEEF) a Buy. The 68-page research report set three wide-ranging valuation levels as price targets for PCE shares for the company’s coalbed methane concessions in China. Considerations such as the wide range of the Guizhou’s abundant gas reserves, expected prices of natural gas during the research firm’s forecast period, and discounting factors, such as the stock price’s high volatility, were included in their price targets.

PCE shares, which closed at C$1.16/share on nearly 131,000 shares trading hands on June 19th, were given long-term fair market pricing of C$1.96/share by Cohen Research. This pricing was under the most pessimistic scenario. The low-case scenario included a natural gas price as low as $275 per 1000 cubic meters, and included a discount rate of 25 percent on the stock price. Cohen also reported, in the report, that at the current market price, PCE is “grossly undervalued.”

Cohen Research wrote, “As per our Base Case scenario estimates, the NAV of PACE’s resources falls in the range of C$5.31 – 7.83 per share (with a discounting factor of 20 percent).” Under the most optimistic pricing, assuming natural gas at $375 per 1000 cubic meters, Cohen targeted PCE shares at C$11.56/share. Cohen Research used the Net Asset Value (NAV) based method, which is one of the most accepted methods to value mining companies.

PACE, the acronym for Pacific Asia China Energy and not the stock’s ticker symbol (which is PCE, trading on the Toronto Venture Exchange, or TSX), is fortunate that one of its concessions is in the Guizhou province of China. Estimates describe this Chinese province as hosting more than 20 percent of China’s coalbed methane (CBM) reserves. The country’s total CBM reserves have been independently estimated to exceed 31 trillion cubic feet.

PACE was the first Canadian publicly traded company to participate in China’s granting of CBM concessions. PACE is participating in the Baotian-Qingshan CBM project through its wholly owned subsidiary Asia Canada Energy (ACE). China’s state-owned CBM company, China United Coalbed Methane (CUCBM), granted the 970-square kilometer CBM concession in September 2005 to ACE. The Baotian-Qingshan concession is located in the CBM-rich Guizhou province.

The Cohen Research NAV levels confirm what we anticipated. Earlier this year, we had reported on the assessment by Sproule International on the Baotian-Qingshan property. On March 1st, PACE had released three scenarios presented in the technical report filed by Sproule. The worst-case scenario on the property showed 504 billion cubic feet for three coal seams. The high case volume scenario for seven coal seams reached as high as 11.2 trillion cubic feet. Sproule’s assessment, called the “Most Likely Case volume” estimated 5.2 trillion cubic feet. Some analysts have valued each trillion cubic feet of gas at C$1 billion market capitalization.
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Investors who bought during the top of the frothy commodities rally are now panicking or kicking themselves. Neither activity helps an investor or trader think straight. Below are a few tips in dealing with the current market shakeout.

1. If you believe you invested in the right stock(s), then turn off your computer and do something enjoyable. Exercise is a great stress reliever. The market has already begun its shakeout. If you didn’t get stopped out, or failed to place earlier stops, your best opportunity lays ahead in picking up additional shares at a much lower price. Most of the experts we’ve interviewed tell us the next rally should start sometime between late July and Labor Day. In an attempt to interview the uranium guru James Dines in late May, we were told, “Call back in a couple of months.” That was a helpful clue that the markets were less than exciting. Mr. Dines is often eager to be interviewed, but recently he was not.

2. Do you believe the fundamentals which engendered the commodities boom have changed? If they haven’t, then the bullishness is only taking a breather. We don’t see any fundamental change in the markets. Russia still wants nuclear power, and its oil production may be peaking. China hasn’t announced the end of its nuclear expansion program. India wants to spend $40 billion on new nuclear reactors. If you are invested in uranium stocks, spot uranium jumped another dollar to $45/pound this past week. Hardly the end of the bull market.

3. If you worry about your investment in one stock or another, then stop watching the ticker and focus on the company fundamentals. Is the story still true or has it changed? See #7 A, B and C below.
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