Jean Nortier, Uranium One CEO
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Meltdown at Uranium One
Brendan Ryan
Posted: Fri, 07 Mar 2008

[miningmx.com] -- NEAL Froneman's abrupt decision to quit as CEO of Uranium One looks like the action of a pilot ejecting from his crippled aircraft.

Froneman might even privately acknowledge the comparison – he’s a pilot and owns aircraft – but claims, astoundingly, that the grim situation now being revealed at Uranium One played no role in his decision to quit.

However, for a CEO to bale out with immediate effect from a company clearly under such stress indicates only one thing – and that’s huge trouble.
higher than expected dilution
Froneman refused to comment on what’s happening at Uranium One. He referred queries to interim CEO Jean Nortier.

Nortier didn’t return calls placed to him, both directly or through Uranium One’s investor relations department.

Froneman will survive. He made a profit of around R32m cashing in options in November 2006 and has sold more since then. He says he can’t remember precisely how much and defends the sales as “part of my remuneration package”. But the troubled Dominion mine may not make it, and the outlook for Uranium One shareholders is poor.

An informed mining industry source says the Dominion mine looks in a far worse state than the picture painted in its updated guidance to shareholders provided by Nortier. Concern about the situation at Dominion has been growing over the past year.

Previous queries with regard to problems at its treatment plant and the underground mine were played down by Froneman and vice-president Robert van Niekerk, who’s directly responsible for the project.

Yet the latest developments bear out predictions made in some quarters last year that the grade at Dominion had been overstated and its operating costs understated.

In July 2007, Froneman acknowledged some delays involving construction at the plant, but still claimed: “I believe we can still deliver on our stated target of producing 500 000lb of U308 by end-December.” That was revised to 200 000lb at end-October.

At the Mining Indaba in Cape Town in early February, Froneman delivered an upbeat presentation that gave no indication of further production problems.

Nortier said on 21 February – when Froneman quit – that Dominion produced only 171 000lb of U308 last year and forecast production for this year at 590 000lb. That’s against a previous forecast for 2008 of 2m lb.

Nortier said Uranium One’s total production – it also owns an operating mine in Kazakhstan – would be 32% down this year at 3,15m lb and it would be 15% down in 2009 from the previously published estimate of 6,8m lb.

Addressing the BMO Nesbitt Burns conference in Miami on 25 February, Nortier stated the design of the Dominion mine and plant was “still appropriate” to reach designed production but he extended the ramp-up period to reach full output of 3,5m lb/year to 2011.

According to the informed source, Dominion is falling well short of budget on three key metrics: underground production volumes, the grade delivered to the treatment plant and the recovery efficiency of the treatment plant itself, where the high-pressure “autoclaves” aren’t operating efficiently.

The overall result is that Dominion is estimated to be losing money heavily – perhaps as much as R60m/month. If correct, that situation isn’t sustainable and hence speculation the mine may have to be closed or sold.

Uranium One doesn’t provide detailed financial and operating statistics for the mine. Latest available numbers (for the September 2007 quarter) report a loss of $150,000 for the quarter but a profit of $247,000 for the nine months to end-September.

Let’s start with grade. The Uranium One feasibility study on Dominion gave a U308 grade of 0,32kg/t for its “inferred mineral resource”. That’s in line with an estimate of 0,34kg/t made by Anglo American’s gold and uranium division, which operated this mine in the late Seventies but subsequently shut it down.

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But Uranium One boosted that inferred grade dramatically to 0,81kg/t in calculating its “indicated mineral resources” – which Anglo American’s geologists didn’t do.

In July last year, Van Niekerk said the reason for the difference lay in additional exploration that had identified higher-grade payshoots and had upgraded those to the indicated category.

Nortier has now revised the indicated mineral resources grade estimate for Dominion down from 0,81kg/t to 0,63kg/t. He said that resulted from a decision to “consider both higher grade ore shoots as well as lower grade inter-channel areas”.

What it actually means is that Dominion has been unable to mine the deposit selectively at the forecast higher grades.

While the new calculation boosts the total amount of contained uranium in the deposit, it’s the grade that’s crucial to Dominion’s success. Nortier doesn’t provide underground production volumes, but commented: “Recent mining history indicates that previously planned rates couldn’t be achieved.”

He cited power shortages, equipment unavailability and “higher than expected dilution” as the reasons.

Dominion was forecast to produce at 220,000t/month from underground. Mining operations started early last year but are believed to be running at just 70,000t/month due to its operational difficulties.

That lower volume is being delivered to the high-pressure autoclaves in the treatment plant at a lower grade than they were designed to treat. The result is that Dominion isn’t achieving the higher recovery efficiencies in the treatment process that management was counting on.

Anglo American reported a “recovered” grade of 0,51kg/t from its operations because it didn’t use pressure leaching. Instead, it used “low tech” atmospheric leaching, giving recoveries of between 55% and 65%.

Uranium One was looking for a much higher recovery number – estimated at around 87% – from the pressure leaching process, which uses equipment called “autoclaves”.

But its pressure leaching plant is falling way short of its design parameters, as material is being put into it at an average grade of 0,22kg/t instead of the 0,53kg/t it’s supposed to receive.

Nortier said that’s because low-grade surface tailings material is being put through the plant. He added recoveries will improve when that’s replaced by higher-grade underground ore.

Point is, its autoclaves shouldn’t be treating such low-grade material in the first place. Nortier says both autoclaves have been commissioned but only one is in operation, due to the “slower-than-expected rate of underground development”.

The industry source says there are severe operating problems on certain sections of the plant, with the result that there are constant breakdowns. But Nortier said at the BMO Nesbitt Burns conference: “Most start-up issues have been addressed during commissioning.”

Nortier doesn’t provide operating numbers. Dominion was looking to operate at a cost per ton milled of around R260/t of ore or around US$18/lb of uranium produced. Those cost estimates looked optimistic a year ago, given Chamber of Mines statistics reporting an average cost for the gold mining industry of R366/t for 2006. Mining costs have surged since then.

Dominion’s costs are believed to be running as high as R520/t, while revenues have collapsed to below R200/t due to low uranium recoveries. Revenues had been forecast at around R440/t.

Froneman now intends running junior mining company Aflease Gold, which is controlled by Uranium One and where this whole saga started. He took over the former Aflease when he ousted founder and former CEO Peter Skeat, who had run the company profitably for several years.

Froneman was forced to close the gold mine within a year as grades collapsed and costs rocketed. He blamed Skeat for non-disclosure of essential mine plan and resources information. Skeat rejected that and blamed Froneman for not knowing how to run an opencast mining operation.

Froneman’s background is in underground mining – mainly at Harmony, where he was the “Mr Fixit” deployed by former CEO Bernard Swanepoel to turn around the marginal operations that Harmony acquired, such as Evander.

Froneman got to Aflease via a stint at JCI with Brett Kebble. He subsequently fell out with Kebble but that didn’t stop him borrowing money from Kebble to buy an aircraft, despite their differences.

Froneman and Skeat ended up in a corporate and legal brawl that eventually led to an out-of-court settlement.

Aflease looked headed for bankruptcy until Froneman decided to diversify into uranium. Give him his due, he did it well at the corporate level, making strategic acquisitions in the United States, Kazakhstan and Australia. But operating realities caught up with him at Dominion – as they did before at Aflease, and before that the Kalgold opencast operation he tried to buy at one stage from Harmony.

Froneman’s resignation immediately knocked the share down by 20% to R40 and it’s now hovering between there and the mid-thirties. Uranium One stock had already taken a pummelling over the previous year, falling from a high of R114.