The Industry

The following summary of the uranium industry has been based in its entirety upon various publicly available reports and sources, including, without limitation, the EIA’s International Energy Outlook 2006, the OECD’s Uranium 2005: Resources, Production and Demand (the ‘‘OECD Red Book’’), various reports and publications by the WNA and pricing information published by Ux Consulting. All opinions, expectations and estimates contained in the following industry summary, which are not specifically attributed to management of the Company, are solely those of the authors of the aforementioned reports and sources. See ‘‘Cautionary Statements Regarding Forward-Looking Information’’ and ‘‘Risk Factors’’.

Overview

The most common commercial use for uranium is as a fuel for nuclear power plants. Through the process of nuclear fission, the uranium isotope U-235 can undergo a nuclear reaction whereby its nucleus is split into smaller particles. As the nucleus is split, a significant amount of heat energy is released, which is used as the basis of power generation in nuclear power plants.

The first practical use of nuclear power occurred in 1951, when an experimental nuclear reactor at a United States research centre in Idaho Falls lit four ordinary light bulbs. In the late 1950s, the first full-scale nuclear power plants went into service in the U.S., the United Kingdom, Russia and France. The nuclear industries of these countries and several others grew rapidly during the 1960s and 1970s. The first export orders for nuclear power reactors were awarded in 1958 and were followed by the spread of nuclear electricity generation to many other countries, including Canada, Germany, Switzerland, Spain, Belgium, Finland and Japan. Reactor technology was also exported by Russia to several Eastern European countries, including the former East Germany, Czechoslovakia, Bulgaria and Hungary. Many of these countries developed their own nuclear expertise, leading to the development of today’s international nuclear industry.

Nuclear Fuel Cycle

A key to understanding the uranium industry is to first review the nuclear fuel cycle. The nuclear fuel cycle essentially involves the conversion of uranium ore to electricity by processing uranium through various forms and increasing its concentration.

Uranium found in nature consists largely of two isotopes, U235 and U238. The production of energy in nuclear reactors is from the fission or splitting of the U235 atoms, a process which releases energy in the form of heat. Natural uranium contains 0.7% of the U235 isotope. The remaining 99.3% is primarily the U238 isotope that doesn’t contribute directly to the fission process. U235 and U238 are chemically identical but differ in their mass. U238 has three additional neutrons. This difference in mass is significant because it allows the U235 and U238 isotopes to be separated and makes it possible to increase or enrich the percentage of U235.

The major stages in the production of nuclear fuel are uranium exploration, mining and milling, refining and conversion, enrichment and fuel fabrication. The diagram below depicts the nuclear fuel cycle.

According to the WNA, the proportion of the cost of nuclear fuel breaks down by stage of the nuclear fuel cycle as follows: (i) mining — 46%, (ii) conversion — 5%, (iii) enrichment — 36%, (iv) fuel fabrication — 13%. While uranium accounts for approximately 46% of the total cost of the fuel for nuclear generators, it accounts for approximately only 6.5% of the total cost of electricity charged to electricity consumers.

Mining

Before uranium can be turned into a useable fuel source, uranium ore must be mined in one of a variety of ways depending on the characteristics of the deposit. Uranium deposits close to the surface can be recovered using an open pit mining method. Higher-grade, deeper deposits can be mined using conventional underground mining methods. If ground conditions are appropriate, the ore can be mined via in situ leaching, whereby oxidizing agents dissolve the uranium contained within the ore body, and the resulting solution is pumped to the surface for uranium recovery. Historically, the price of uranium has been too low to justify its recovery from mineral processing wastes known as tailings. However, with the increased price of uranium in recent years, it has become economically feasible to process the contents of surface tailings dumps to recover any contained uranium. These dams can be mined with high-pressure water cannons, creating a slurry which is pumped to the processing plant for uranium recovery.

Once the uranium ore or solution has been extracted via one of the above mining methods, it is transferred to a mill for primary refining. Mined ore is ground up and leaching is used to extract the uranium. The uranium is then removed from the leach solution and precipitated, producing concentrates containing 80-90% uranium oxide (U3O8). Uranium oxide (which is also known as yellowcake) is the most commonly priced and sold form of uranium. One tonne of uranium contains 2,600 lbs of U3O8.

Conversion

U3O8 is typically shipped from the mine site in drums to a conversion facility for refining into uranium trioxide (UO3). The UO3 can then be processed for use in either light water nuclear reactors (LWRs) or in heavy water nuclear reactors (HWRs). In both cases, the uranium must be converted but no enrichment is necessary for the HWRs. Since most of the world’s nuclear reactors are currently LWRs and approximately 94% of mined uranium is used in LWRs, the remaining discussion will focus on the fuel cycle for LWRs. The UO3 is further purified and converted into a gaseous uranium hexafluoride commonly referred to as UF6 or ‘‘hex’’. Conversion plants are operating commercially in the United States, Canada, France, the United Kingdom and Russia.

Enrichment

The UF6 is then fed into an enrichment facility which increases the proportion of U235 from 0.7% to approximately 3.5 to 5.0%, depending on the specifications of the nuclear reactor for which the uranium is destined. In the enrichment process approximately 85% of the natural uranium feed is rejected as ‘‘depleted uranium’’ or ‘‘tails’’ (consisting primarily of U238).

As depicted in the table below (based on 2003 OECD and WNA estimates), large commercial enrichment plants are in operation in France, Germany, Netherlands, the United Kingdom, the United States and Russia, with smaller plants elsewhere. The enrichment market is an oligopoly, with four principal companies — Techsnabexport/Rosatom (38%), USEC Inc. (22%), Eurodif/Areva SA (21%) and Urenco Group (14%) — controlling approximately 95% of the global uranium enrichment capacity.

Location of Enrichment Facility	Enrichment Process	Capacity (1000kg SWU/annum)
Russia	Centrifuge	20,000
France	Diffusion	10,800
United States	Diffusion	8,000
Germany-Netherlands-UK	Centrifuge	5,850
China	Mostly Centrifuge	1,300
Japan	Centrifuge	900

The capacity of enrichment plants is measured in terms of ‘‘separate work units’’ or SWUs. The SWU is a complex unit which is a function of the amount of uranium processed and the degree to which it is enriched and the level of depletion of the remainder. Enrichment accounts for approximately 36% of the cost of nuclear fuel and approximately 5% of the total cost of the electricity generated by a nuclear reactor. Enrichment services are sold in SWUs. Where the price of uranium is relatively low, a customer (such as a utility company) may request that the enrichment facility use more uranium and less SWUs in order to enrich the UF6. Conversely, as the price of uranium rises, SWUs become relatively cheaper and the customer may specify that more SWUs be used and less uranium.

Two main enrichment processes are used on a commercial scale, the gaseous diffusion process and the centrifuge process. At present, the gaseous diffusion process accounts for about 40% of the global uranium enrichment capacity. The diffusion process involves forcing UF6 under pressure through a series of porous membranes or diaphragms. As U235 molecules are lighter than the U238 molecules, they move faster and have a slightly better chance of passing through the pores in the membrane. The UF6 that diffuses through the membrane is thus slightly enriched, while the gas which did not pass through is depleted in U235. This process is repeated many times in a series of diffusion stages called a cascade. The gas must be processed through approximately 1,400 stages in order to obtain a product with a concentration of 3-4% U235.

The centrifuge process is economic at a smaller scale as compared to the diffusion process. It involves the feeding of UF6 gas into a series of vacuum tubes each containing a rotor one to two metres in length and 15-20 cm in diameter. When the rotors are spun rapidly, at 50,0000 to 70,000 rpm, the heavier molecules with U238 increase in concentration towards the cylinder’s outer edge. There is a corresponding increase in the concentration of U235 molecules near the centre. These concentration changes are enhanced by inducing gas to circulate axially within the cylinder. The enriched gas forms part of the feed for the next stages while the depleted UF6 gas goes back to the previous stage. Eventually enriched and depleted uranium are drawn from the cascade at the desired assays.

Although the capacity of a single centrifuge is much smaller than that of a single diffusion stage, its capability to separate isotopes is much greater. Centrifuge stages normally consist of a large number of centrifuges in parallel. Such stages are then arranged in cascade similarly to those for diffusion. In the centrifuge process however, the number of stages may be only 10 to 20 instead of a thousand or more for diffusion.

The trend in the enrichment industry is to retire obsolete diffusion plants. As set out in the September 2006 Nuclear Issues Briefing Paper 33 prepared by the Uranium Information Centre, it is estimated that centrifuge enrichment plants will account for approximately 65% of uranium enrichment in 2007 and 96% by 2017.

After Enrichment

The enriched uranium is finally converted by a fabricator and made into fuel pellets (ultimately a sintered ceramic), which are encased in metal tubes to form fuel rods, typically up to four metres in length. A number of fuel rods compose a fuel assembly that is loaded into the nuclear reactor.

The complete cycle from exploration for uranium to production of electricity is referred to as the front-end of the nuclear fuel cycle.

Electricity Demand

The demand for uranium is directly proportional to the level of electricity generated by nuclear power plants, which in turn is driven by the future growth in global consumption of electricity. According to the EIA’s International Energy Outlook 2006 (base case), world net energy consumption will more than double before 2030, from 14,781 billion kilowatt hours in 2003, to 21,699 billion kilowatt hours in 2015, and 30,116 billion kilowatt hours in 2030. Most of the growth in electricity demand occurs in the non-OECD nations, where electricity use is expected to increase on average by 3.9 percent per year from 2003 to 2030, as compared with 1.5 percent per year in the OECD nations. This represents a combined growth rate in net energy consumption of 2.7 percent over the same period. According to the EIA, for all the non-OECD regions combined, economic activity, as measured by gross domestic product (GDP) in purchasing power parity terms, is anticipated to expand by 5.0 percent per year on average, as compared with an average of 2.6 percent per year for the OECD economies. Billion Kilowatt Hours .

Source: Energy Information Administration - International Energy Outlook 2006

Uranium Demand

With power generation as the most common commercial use of uranium, nuclear power plants are predominantly responsible for the world demand of uranium resources. According to the WNA, as of September 2006, there were a total of 442 operable commercial nuclear power plants globally with an aggregate installed generating capacity of 370,721 megawatts of electricity per year. As reported by the WNA, these commercial nuclear plants currently supply approximately 16% of the world’s electricity production. Another 28 commercial nuclear power plants (representing 22,510 Megawatts of electricity) are under construction, with a further 62 (68,021 Megawatts) planned and 160 (118,825 Megawatts) proposed. New construction is presently centered in Asia, principally in China and India. Planned and proposed plants are centered primarily in China, India, Russia, South Africa, and the United States. More than 65,000 tonnes of uranium is required to satisfy this capacity. The WNA (base case) projects that reactor-related demand will increase by more than 65% by 2030, up to 110,776 tonnes of required uranium.

Source: World Nuclear Association - The Global Nuclear Fuel Market, 2005.

Apart from the increased consumption of electricity, demand for uranium power may also be escalated by the inherent nature of the fuel in comparison to other sources. For example, the abundance of naturally occurring uranium offers security of supply in comparison to energy sources such as oil and gas, which can be vulnerable to interruption of deliveries. There has been growing concern in the last few decades about the increasing concentration in the atmosphere of greenhouse gases such as carbon dioxide, which, it is believed, has resulted in a heating of the earth’s atmosphere. The WNA estimates that without nuclear power today, carbon dioxide emissions from the energy sector would be 20% higher. In addition, countries like the United States, through its recent National Energy Bill, and the United Kingdom have begun to acknowledge that nuclear energy may become a growing source of each country’s energy supply in the future, constituting a significant change in policy from prior years.

Demand for uranium power will also be affected by the economics of production in comparison to other fuel sources. The costs of electricity production are usually broken down into three major categories: investment, operation and maintenance, and fuel. Fuel costs include costs related to the fuel cycle, including purchasing, converting, and enriching uranium, fabrication, reprocessing, disposal of spent fuel, and transport. According to the OECD Nuclear Energy Agency, fuel costs make up only about 20% of the costs of nuclear-generated electricity, making it relatively insensitive to fuel price fluctuations in contrast to the cost structure of fossil fuel-generated electricity. In addition, in comparison to wind, gas, combined heat power, and coal, nuclear power generation is, on average, the least expensive method of electricity production.

Note: Represents average costs for Capital, O&M, and Fuel in Canada, France, USA, Germany, Korea, Japan, Denmark, and the Netherlands

Source: OECD Projected Electricity Costs, 2005

Uranium Supply

To satisfy increasing demand, uranium is supplied from both primary production (the mining of uranium ores) and secondary sources such as the drawdown of excess inventories, and uranium made available from the decommissioning of nuclear weapons, re-enriched depleted uranium tails, and used reactor fuel that has been reprocessed. According to the WNA, after a decade of falling mine production ending in 1993, primary production has been on the rise and now comprises 60% of the supply made available for nuclear power generation.

According to the WNA, the uranium primary production industry is projected to undergo a significant expansion during the next 10 years as existing production projects are expanded and new production centres are brought online. Later, closure of existing mines due to resource depletion is expected to result in a leveling and downward trend in production capability. The WNA projects that global primary production will peak in 2015 at 71,512 tonnes of uranium per year, before declining to 70,474 tonnes per year by 2019.

Source: World Nuclear Association - The Global Nuclear Fuel Market

Supply Versus Demand

Since 1990, global uranium demand has exceeded global uranium supply provided by primary production (mining). The deficit between demand and supply has typically been filled by the supply of uranium from secondary sources. However, as this finite stockpile becomes used up, there is increasing pressure on primary production to meet total demand. According to the OECD, secondary sources of uranium are expected to fall short of meeting the deficit requirement by 2016.

Source: World Nuclear Association - The Global Nuclear Fuel Market

According to the WNA, in 2005, primary production of uranium from all reported existing and committed production centres satisfied only 64% of demand. Based on WNA base case forecasts, production supply in 2030 will still satisfy only 64% of demand. However, as discussed in the OECD Red Book, the decline in secondary supply will mean that a substantial global uranium deficit will result beginning in 2016, which must be met either by expanding existing production centres or opening and developing new projects.

Source: World Nuclear Association - The Global Nuclear Fuel Market

Uranium Prices and Contracts

According to pricing information published by Ux Consulting, from relative highs of more than US$40.00/lb in the late 1970s, U3O8 spot prices dipped dramatically reaching a low of US$7.10/lb at the end of 2000. Since then, price levels have more than recovered, surpassing the previous historical high to reach US$60.00/lb by October 30, 2006. This represents increases of 80%, 196%, and 745% over prices one, two, and three years prior, and 661% over the recent low at the end of 2000. The spot price for U3O8 was US$62.50/lb as at November 14, 2006. Current high prices indicate a turn-around in the market for sellers following two decades of uranium prices that were depressed by recycling and previously accumulated stockpile selling.

Source: The Ux Consulting Company, LLC

There is currently no exchange-traded commodity market underwritten by metals dealers and market makers for the various components of nuclear fuel. Utilities typically purchase uranium pursuant to contracts with producers on either a medium (less than five years) or long-term (greater than five years) basis, with delivery of the uranium generally commencing two to three years after the date of the contract. Pricing formulas are complicated and generally remain confidential and undisclosed to the public. However, contracts may specify a base price, such as the uranium spot price, and rules for escalation. In base-escalated contracts, the buyer and seller agree on a base price that escalates over time on the basis of an agreed-upon formula, which may take economic indices, such as GDP or inflation factors, into consideration. Uranium purchase contracts will also set out the specifications applicable to the product subject to the contract.

Utilities may also purchase uranium through spot and near-term purchases from traders as well as producers. Spot market buying usually calls for delivery within one year rather than multiple year delivery dates. In this regard, traders generally purchase uranium through organizations, such as utilities, that hold excess inventory. According to Ux Consulting, demand in the spot market in 2005 was for delivery of approximately 27 million lbs of uranium oxide (U3O8) according to published reports.

It is important to understand the way in which utilities with nuclear power plants buy their fuel. Instead of buying fuel bundles from the fabricator, the usual approach is for utilities to enter into contracts with various suppliers at each stage of the uranium processing stages. Utilities may purchase a combination of U3O8, UF6, enriched uranium and fabricated fuel pellets. Sellers consist of suppliers at each of the four stages of uranium processing as well as brokers and traders. Depending on the stage at which the uranium product is purchased, the purchasing utility will be responsible for any remaining processing of the uranium required in order to generate the appropriate fuel for its nuclear plant. Although uranium prices have increased considerably during the last few years, many uranium producers are still parties to legacy contracts with purchasers at lower historical prices.

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