By Elliot Blair Smith and Christopher Donville
April 20 (Bloomberg) -- Cameco Corp. announced at 2:11 a.m. on Oct. 23 that its Cigar Lake uranium mine in northwest Canada had flooded after a ``rock fall,'' jeopardizing the world's richest undeveloped source of nuclear fuel.
In the six months since, Cameco has said little about the circumstances behind a disaster that will delay production at its $25.5 billion claim for up to three years.
The accident removed 10 percent of anticipated supply from an already overstretched global uranium market, helping drive the ore to $113 a pound today, double the October price.
Canadian government records and interviews with authorities reveal that blasting by Cameco workers may have triggered the flood at Cigar Lake and that the company couldn't control the water because it didn't fulfill repeated pledges to regulators to install more underground pumps there. Those promises came after a similar accident at another of its Saskatchewan mines three years earlier.
``We didn't have it installed quickly enough,'' Cameco Chief Executive Officer Jerry Grandey says.
That statement -- made during an interview at the company's Saskatoon, Saskatchewan headquarters -- is the first acknowledgment by Cameco that it might bear some responsibility for a disaster that has jolted the global nuclear fuels market.
``We'll find, I'm sure, that there was a combination of geologic factors and human error,'' Grandey, 60, says. ``It's that type of combination where you learn your lessons.''
For investors, the Cigar Lake accident means Cameco won't fully profit from one of uranium's greatest bonanzas since the beginning of the Atomic Age. The company could have sold ore from that mine for prices closer to the current spot market. Most of the uranium Cameco now sells is covered by older contracts with lower prices and terms of up to 10 years.
Cameco said in a March 30 securities filing that it would disclose in the third quarter the results of a company- commissioned investigation. Its press releases, securities filings and conference calls with analysts and reporters haven't gone beyond saying the flood was caused by a ``rock fall'' of indeterminate origin.
The company's Nov. 10 accident report to its primary regulator, the Canadian Nuclear Safety Commission in Ottawa, doesn't mention Oct. 11 blasting by its workers as a potential trigger for the leak. That possibility was raised by Cameco's vice president of safety, health and environment, John Jarrell, during a Dec. 13 commission hearing.
``The first sign of instability occurred in a wedge failure which resulted from the Oct. 11 blast sequence,'' Jarrell said.
Regulators haven't issued an official report and say their investigation is continuing.
In April 2003, blasting contributed to a flood that exceeded Cameco's pumping capacity and almost cost the company its flagship McArthur River mine, 50 kilometers (31 miles) southwest of Cigar Lake, according to a company report filed with the nuclear safety commission.
Another flood at Cigar Lake in April 2006 knocked out a secondary shaft that remains underwater. A company report on the accident that was due in February hasn't been filed with regulators yet.
The setbacks are prompting Canadian regulators to question Cameco's ability to master the daunting geology of northern Saskatchewan's uranium-rich, water-laden Athabasca Basin.
``This is the third flooding event in this Athabasca sandstone for Cameco,'' says Kevin Scissons, director of the Canadian Nuclear Safety Commission's uranium mills and mines division in Saskatchewan. ``It just requires closer scrutiny, period.''
Scissons, who visited the site, said in an interview at his Saskatoon office that blasting by miners is ``directly linked'' to the latest Cigar Lake flood.
Ernest Becker, director of the Saskatchewan Labour ministry's Radiation and Mines Safety Unit, which also is investigating, agrees that the blasting and flooding are related.
``A blast always shakes up things, but the real issue is the ground control failed,'' Becker says, referring to work typically done before blasting to stabilize the earth. ``I want reassurance that whatever they do for ground control in the future will maintain the integrity of the mine.''
The accident also exposes the fragility of uranium's global supply chain. In 2006, worldwide production of uranium oxide, or yellowcake, fell 4.6 percent to 103 million pounds from 108 million the year before, says Jeff Combs, president of Roswell, Georgia-based Ux Consulting Co., which closely tracks uranium production and prices.
The world's 435 existing nuclear reactors require 173 million pounds of the mineral a year, the industry's World Nuclear Association in London says.
That means only 60 percent of the uranium needed by reactors is extracted from the ground. The balance is culled from dismantled weapons in Russia and the utilities' own dwindling inventories, built up during 20 years of oversupply when nuclear power was out of favor.
No new production anywhere near the amount Cameco has under water at Cigar Lake will enter the market for years, mining forecasts show. That could limit the nuclear power industry's plans to develop 168 new nuclear plants worldwide by 2020. Another 198 million pounds of ore is needed to start up those plants, Cameco Vice President Scott Melbye told the association at its September conference in London.
Cameco said immediately after the Cigar Lake accident that it is ``adequately positioned to meet its contractual obligations.'' It is delaying deliveries from Cigar Lake for five to seven years, as allowed under those contracts.
The issues of ground control and pumping capacity at the mine are being investigated by regulators and the company, and in hearings before the Canadian Nuclear Safety Commission.
Nestled in a jack pine forest 660 kilometers north of Saskatoon, Cigar Lake contains about 226 million pounds of ore, the energy equivalent of 1.86 billion tons of coal. That is the world's second-largest deposit of high-grade uranium after the McArthur River mine, which contains an estimated 367 million pounds of uranium and produces 18.7 million pounds a year.
The deposits are considered high-grade because they are far richer in uranium than most such deposits around the world. Radiation levels at these mines also are far more concentrated than in lower-grade deposits, so miners work remotely or in protective clothing and equipment.
The Cigar Lake deposit was discovered in 1981 as the final test hole of a winter exploration. The rugged terrain of woods, lakes and sandstone belies its vulnerability to rock falls and flooding caused by groundwater pressure in earth fractured by glaciers.
Cameco owns 50 percent of the project. Its partners are Areva Resources, a subsidiary of Areva SA in Paris, which owns 37 percent; Idemitsu Uranium Exploration Canada Ltd., a unit of Idemitsu Kosan Co. in Tokyo, which owns 8 percent; and Tepco Resources Inc., a unit of Tokyo Electric Power Co., which owns 5 percent.
The ore lay untapped for two decades as Cameco weighed uranium's then-depressed price against the high cost -- and risk -- of developing new technology to extract it.
By January 2005, when work at Cigar Lake began, Cameco had proven its ability to stabilize the sponge-like rock with a novel ground-freezing technology in use at the McArthur River mine. It also developed high-pressure water jets to carve out the radioactive ore, like a dentist would a cavity, so miners could keep a safe distance.
As recently as April 2006, Cameco said the Cigar Lake mine would be open this year, with uranium production increasing to 18 million pounds a year by 2010. That is enough to meet the annual fuel requirements of 34 nuclear reactors.
The miners blasting at Cigar Lake on Oct. 11 didn't expect a groundwater hazard where they were working, so they didn't take the precaution of freezing the ground there, according to interviews with Cameco officials and executives' testimony before the Canadian Nuclear Safety Commission in December.
``We believed we were developing a geologic area at Cigar that was dry and competent,'' Grandey says in his office. ``Well, that turned out to be an erroneous assumption.''
The danger at Cigar Lake emerged slowly, 11 days after the blasting. The initial leak in the tunnel's ceiling of 340 cubic meters (89,820 gallons) an hour was within the mine's pumping capacity of 500 cubic meters an hour, the company said in its accident report and in testimony to regulators.
Three hours later, the situation was much worse. Groundwater was gushing into the mine at the rate of almost 1,500 cubic meters an hour -- three times the pumps' capacity -- filling the shaft, the company report states.
Grandey says he was on his way to a Nuclear Energy Institute conference in Quebec City when he learned that the mine was in imminent danger of being lost.
``Your stomach immediately does somersaults,'' he says.
Grandey canceled his trip and chartered a plane to fly seven executives to the remote site. Fifteen minutes before the charter landed, mine workers radioed the pilot to say they couldn't control the rising water, the company's report says.
The workers asked for permission to stop pouring concrete for an underground plug so they could prepare to close two water-tight doors 480 meters (1,575 feet) below the surface that might contain the flow.
Cigar Lake General Manager Barry Schmitke, who was aboard the plane, told the miners to salvage what they could and prepare to close the doors, according to the report and interviews with company officials.
The miners closed the first of two steel bulkhead doors on Oct. 23 at 1 a.m., according to a transcript of the nuclear commission's December hearing.
Between 5:40 a.m. and 11:09 a.m., miners tried -- and failed -- three times to close the second door as icy water sloshed above their knee-high boots, according to the company report and hearing transcripts.
The second door got stuck in the mud and failed to seal when a gasket fell off, the report says. The insurmountable gap was one-eighth of an inch (3.2 millimeters).
The surging water brought rising radiation, requiring Cameco to alert federal and provincial regulators three times. Workers wore respirators and there were no injuries, the accident report says.
Just before 11:30 a.m., Schmitke ordered the shaft evacuated. Workers climbed a ladder out of rapidly flowing water -- Schmitke put its temperature at 7 degrees Celsius (45 degrees Fahrenheit) -- into a cage with guide ropes that hovered just above the floor.
``The final evacuation could be described as intense and stressful, as the shaft station did have water accumulation and the groundwater was cold,'' Jarrell told the commission.
Regulators' concerns about the accident have a precedent in the company's own findings that blasting and inadequate pumping capacity contributed to the April 2003 flood at the McArthur River mine.
The Saskatchewan Labour ministry's investigation of that flood, completed two months later, attributed the inundation to workers blasting without adequate ``ground support'' -- that is, earth-stabilizing materials such as bolts, steel reinforcing rods and a form of sprayed concrete known as shotcreting.
An analysis for Cameco by Knoxville, Tennessee, consulting firm System Improvements Inc. also concluded: ``If effective ground support had been in place on April 6, 2003, the ground would not have failed and the water inflow could not have occurred,'' according to a copy filed with federal regulators.
The consultants' report also said the chief geologist at McArthur River had warned as early as January 2001 about the company's ``lack of readiness to fight serious water inflow.'' The mine superintendent and contract workers continued expressing warnings and misgivings to superiors about water hazards almost up to the time of the accident, the report says.
Cameco shut down production at McArthur River for three months after that accident. It then told the federal nuclear commission several times that it had reviewed its mine-safety procedures and would increase pumping capacity at the McArthur River and Cigar Lake mines, Nuclear Safety Commission records show.
Schmitke pledged to the commission in June 2003 and June 2004 that the pumping capacity at Cigar Lake would be increased to 1,500 cubic meters, according to hearing transcripts. That capacity would have been equal to the peak inflow during the October accident.
``We have essentially tripled the underground pumping capacity that was originally planned for Cigar Lake,'' Cameco Senior Vice President Terry Rogers told the same regulators in July 2004.
Scissons told the commission last December that Cameco had started adding water-pumping capacity at Cigar Lake just before the accident. Regulators had asked the company to begin the work after the April 2006 flood there, he said.
``They made a decision they would put it in after their major development work was done and before they went into operation,'' Scissons says now. ``That was the choice they made and they were very clear.''
Grandey confirms this. He won't discuss whether the company's judgment may have been faulty.
``It was all about where should I put my development priorities when you're trying to develop an underground mine,'' Grandey says in his office. ``You can't snap your fingers and do it all at once.''
Cameco disclosed April 9 in a Canadian securities filing that Grandey won't receive a bonus for 2006 because of the two accidents at Cigar Lake. He was paid a C$600,000 ($528,961) bonus in 2005.
The October flood at Cigar Lake and declining production in Australia -- the world's second-largest producer after Canada -- were just two of the factors pushing uranium prices higher. The market price was rising even before the flood as hedge funds speculated on the market and U.S. utilities tried to restock their dwindling supplies.
On Oct. 16, the week before the accident, uranium sold for $56 a pound. By Oct. 30, the week after the accident, the price had risen 7 percent to $60 a pound, according to Ux Consulting. In December, it was $72.
Uranium doesn't trade on a commodities exchange. Its prices are based on private contracts and occasional public auctions.
Cameco's potential profits will be hurt by a long-term contracting strategy predating the recent price surge. Last year, the company sold its ore for an average $20.62 a pound, compared with the $49.60 average spot price, Cameco says.
That price difference amounts to $605.7 million in unrealized revenues for Cameco, based on the 20.9 million pounds it sold last year.
``They were continually proven wrong as the price of uranium went higher and higher,'' says Kevin Bambrough, market strategist at Sprott Asset Management Inc. in Toronto. ``They underestimated the full extent of where things are going, and they didn't anticipate the problems at Cigar Lake.''
Still, company shares have bounced back higher than before the accident, rising 39 percent to an all-time high of C$54.06 ($47.34) on April 9, before easing back to C$52.63 a share.
Cameco's largest shareholder, Wellington Management Co. of Boston, with a 14 percent stake, declined to comment.
Lower Production Goal
Stephen Jarislowsky, head of Montreal-based Jarislowsky Fraser Ltd., which owns 2.1 percent -- worth C$395.9 million -- after disclosing in March that it sold 434,000 shares, says, ``Cameco is a very fine company but I think it's getting too high. It's been overheated for a long time.''
In a March 19 conference call with securities analysts and reporters, Cameco said it won't be able to launch production at Cigar Lake until at least 2010. In an accompanying press release, it lowered its first-year production goal to 3 million pounds from the 7 million pounds it forecast previously.
Cameco also disclosed that it probably won't be able to plug the underground leak until late in the third quarter. It said the estimated cost to complete the mine is now C$1 billion, more than twice the C$450 million it forecast in December 2004.
Without elaborating, the company also said it plans to increase the mine's pumping capacity to 2,300 cubic meters an hour, up from its pre-flood capacity of about 500 cubic meters an hour.
Money manager Robert Mitchell of Lake Oswego, Oregon-based Adit Capital Management LLC, which formerly owned Cameco shares, says he isn't convinced the company can deliver on its promises.
``By no means have the regulatory and remediation hurdles been jumped,'' he says.
During the regulators' December hearing, nuclear commission member Christopher Barnes, a geologist, admonished Cameco officials for the Cigar Lake accident.
``My concern is that you're developing a mine here without adequate geologic, geotechnical, hydrogeologic knowledge; and when events like this one -- or the one at McArthur River -- take place, they put workers in considerable jeopardy,'' he said.
Barnes also criticized company officials three years earlier during a hearing on the McArthur River accident.
``When you put the pieces together, they build a story of really fundamental issues about the competence of the company,'' he said in April 2003.
Barnes declined to comment for this story.
Grandey disagrees with the criticism, saying ``management's about taking risks -- calculated risks.''
``We thought we were on the safe side of that calculation,'' he says. ``And we were wrong.''
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