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Meridian's Energy Insights: Uranium is the Attention Getter

Malcolm Bucholtz
May 25, 2007

At the recent New York Hard Assets Conference (May 14-15, 2007), there were a number of companies giving presentations as well as a number of noted newsletter writers giving talks. I can tell you that at any presentation where the topic of presentation was Uranium - there was standing room only and you could have heard a pin drop in the room. Attendees were literally hanging onto every word spoken by the presenters.

The one idea that was common to all was the notion that Uranium spot prices are headed higher, driven so by a glaring supply-demand imbalance. The question, though, that has been nagging at me is how high is too high? At what price inflection point does Uranium as an energy source no longer make sense? This week I finally found my answer thanks to the Canadian Nuclear Safety Association (CNA).

It turns out the cost breakdown of operating a nuclear reactor is 5% related to Uranium and 95% related to things like labor, management salaries, maintenance etc…So with this being the case, we could easily see Uranium prices carry on with their upward trajectory. In fact CNA spokeswoman Claudia Lemieux quoted in the Globe and Mail on Friday May 18th says Uranium prices could go to $1000 per pound and not have a deleterious effect on the operating costs of a reactor. Similar comments by Ux Consulting LLC of Georgia claim that $500 Uranium is not out of the question.

However, investing in Uranium stocks is not a slam dunk, easy-money proposition. Getting at the Uranium mineralization is a challenging issue and remains so. This has been aptly illustrated by the trials and tribulations of Cameco at its Cigar Lake Project in Saskatchewan, Canada. Consider also the plans by UEX Corp. to spend a reported $100 million just to sink an exploratory shaft on their property. The other issue is that of grade. Investors instinctively always seem to ask what is the grade? But we are not talking Gold mining here. As I will explain in a moment, grade is of secondary importance when exploring for Uranium.

Of primary importance to investors is the Uranium geological setting. You see, in North America, Uranium mineralization occurs in 2 basic formats - Pegmatite style mineralization and Unconformity style mineralization. Pegmatite formations were created 1.5 billion years ago by hot, molten, igneous volcanic matter coming to surface and re-crystallizing. Certain areas of Canada are ripe with such pegmatite formations that lay just beneath surface. Unconformity style mineralization occurs in those areas where a layer of metamorphosed sedimentary sandstone overlays a layer of older rocks. Around 1.5 billion years ago as compressive forces in the earths crust gave way to tensile forces, massive fault zones opened up and hot hydrothermal liquids rich in base metals, precious metals and Uranium rushed to surface. Where these hot liquids intersected the sandstone layer, the mineralization in the liquids precipitated out of solution. This zone of intersection is called the unconformity.

In places like the Athabasca Basin made famous by the mining activities of Cameco, up to 1200 feet of sandstone may overlay the unconformity zone. Getting at this mineralization entails sinking a shaft through the sandstone. Sandstone, if you have ever seen it or handled it, is brittle. As shaft sinking progresses, the chances of having the sandstone crack apart increase proportionately. And this is exactly what happened at Cigar Lake. The sandstone cracked, water seeped in and a series of untimely management decisions resulted in the entire underground operation flooding.

Investors who have studied the Thelon Basin may or may not be aware that a similar issue exists. The Thelon Basin is structurally similar to the Athabasca Basin in that the Uranium mineralization is unconformity style. Depths of sandstone are apparently up to 600 feet. There is one other area of North America that deserves attention and that is Wyoming. Here the mineralization is also unconformity style but the unique geology to the area means the mineralization can be recovered by a technique called in-situ leaching in which a sodium bicarbonate solution is injected at pressure down a well that has been drilled into the unconformity. A series of recovery wells strategically placed in the surrounding area are then used to recover the Uranium-rich slurry.

Newsletter writer Doug Casey is well aware of geological setting issues. He recently made a comment in the Bull and Bear newspaper to the effect that investors now should be starting to focus on those companies that are exploring in areas away from these Basins. And I trust you can see why he would say this. The cost of drilling through the thick layer of sandstone is far from cheap. Any eventual mining or bulk sampling will entail having to sink a shaft which will be prone to a Cigar Lake type of flooding incident. Mr. Casey goes on to argue that investors should now be looking at companies exploring in lower grade areas absent the thick sandstone cover. With rising Uranium prices, the economics of lower grade deposits are starting to really make sense.

This week I introduce two Uranium exploration companies. Two are active in the Wyoming area and will use in-situ leaching. Three are active in areas of Canada with pegmatite style mineralization and one is active on the fringes of the Athabasca Basin where thanks to a geological anomaly, the area is largely absent the thick covering of sandstone thus making exploration easy and future mining cost effective.

Uracan Resources (TSXv:URC):

Uracan's efforts to date have all been focused on its North Shore Property in Quebec (on the north shore of the St. Lawrence River). This 900 sq. km property has a documented history of exploration from the late 1960s and late 1970s by Denison, Imperial Oil and Uranerz. These companies found mineralization in the basement rocks (ie pegmatite) of grades up to 0.5 pounds per ton. There is a non 43-101 compliant resource of 55M lbs of 0.025% (.55 lbs per tonne) on the Wee Gee property which lies SE about 25Km's from where they have been drilling.

Uracan has just released its drill data on 46 of 58 holes drilled over the past several months. The majority of the assay's had uranium mineralization from surface. However, two holes in particular SS-22 and SS-23 should start creating a buzz in the industry.

Hole SS-23 returned 124M of .55 lbs per tonne with the first 40 metres from surface running .88 lbs per tonne. I don't know what your math says but to me it spells 124 metres of $65 rock that would probably only cost $20 per tonne to mine (back of the napkin). Find 200 million tonnes of this ore grade and not only do you have one of the largest uranium discoveries in Canada, but one very profitable, long life mine. You do the math.

Additionally, Uracan is also well positioned in Saskatchewan outside the Athabasca Basin in an area where the mineralization is at surface/near surface. Historical grades on its Pipewrench Property located 130 km's NW of La Ronge indicate grades several lbs per tonne over widths up to 60 feet.

With Uranium prices set to rise even further, the economics of a lower grade deposit such as this start to come into clearer focus. Keep a close eye on this company as it marches forward with determination. Uranium City Resources (TSXv: UCR): Here is a trivia question: Where was Uranium first mined in Canada? Answer: Uranium City, Saskatchewan. Uranium City is located on the fringe of the Athabasca Basin and from 1950 to 1982 a total of 65 million pounds of lower grade Uranium was mined from open pit operations in the area. Falling Uranium prices in 1982 saw the area shut down. Today, Uranium City Resources has over 70,000 acres of exploration property in the area. Mineralization is at or near surface thanks to the lack of thick sandstone cover. So far, the company has focused on what it calls its East Target and a 43-101 compliant resource calculation is expected out soon from engineering firm Griffis Watts McOuat. Meanwhile, drilling is ongoing at a couple of its other properties. Given the issues with the thick cover of sandstone discussed above, I say this is a company to follow, especially given that it is in an area with a documented history of open pit mining.

Malcolm Bucholtz
May 25, 2007
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