URANIUM: THE REVIVAL OF ENERGY'S "OTHER WHITE MEAT"

UNCLAS SECTION 01 OF 03 CALGARY 000643

SIPDIS

STATE FOR WHA/CAN, EB/ESC/ISC, EB/PPD

USDOE FOR IA (DEVITO, PUMPHREY, DEUTSCH)

E.O. 12958: N/A
TAGS: EMIN ENRG ETRD PARM CH CA
SUBJECT: URANIUM: THE REVIVAL OF ENERGY'S "OTHER WHITE MEAT"

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SUMMARY
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1. The international media buzz generated by Alberta's booming
oil and gas industries has overshadowed a revival of interest in
western Canada's uranium resources. Seemingly destined to be
the "other white meat" of Canada's energy industry, uranium's
fortunes had been in decline for a quarter-century before spot
prices surged earlier this decade. From an all-time low of US$7
per pound in 2001, uranium nearly quadrupled in value over the
next two years, before reaching its current 15-year high of
US$33. Canada, with the second largest uranium reserves on the
planet, is responsible for nearly a third of world output; this
proportion is expected to climb to half by 2015. The province of
Saskatchewan is home to all of Canada's mines, as well as the
world's largest uranium producer, Saskatoon-based Cameco
Corporation (uranium produced in Saskatchewan generates
electricity for 1 in 9 American households). With reserves of
almost 450 million pounds, McArthur River is the world's largest
mine producing nearly 18 million pounds of uranium yearly. The
future looks bright for the western province governed by a
socialist New Democratic Party that has struggled over the years
with the social implications associated with developing a sector
that continues to garner a strong "not in my backyard" response.
With uranium revenues (C$40-50 million is earned by the
Government of Saskatchewan yearly from uranium royalties and
industry taxes),and therefore royalties, the provincial coffer
is almost guaranteed to climb as emerging nations develop
peaceful nuclear power capabilities. Cameco has also been
dismantling nuclear warheads in the former Soviet Union since

1999. End summary.

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RADIOACTIVE, AND PROUD OF IT
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2. Saskatchewan has long been a world leader in uranium
production. Mining in the Athabasca region of northern
Saskatchewan has been around almost as long as the uranium
industry itself, and has been an important component of the
West's nuclear power program from the Manhattan Project on. The
province currently produces about 32% of the world's total, and
numerous development projects are underway to increase this
proportion to over half by 2015. At current rates of
consumption, Saskatchewan has enough economically viable
reserves to last 25 years, and with US$30 million in ongoing
exploration projects, the province has the potential to continue
as the uranium capital of the world for much of the century.
Saskatchewan has derived many benefits from hosting the uranium
industry, not the least of which is the C$256 million in goods
and services those companies purchase every year. Uranium mining
has been a godsend to northern Saskatchewan, where it is the
largest private sector employer.

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THE RISE OF THE YELLOW BLACK GOLD
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3. While the rationality of market swings in volatile
commodities is difficult to determine, several factors seem to
have contributed to the rapid rise in the price of uranium after

2001. Perhaps most prominent was the Russian warning early that
year that they might discontinue exports of the highly enriched
uranium (HEU) they acquired after the dismantling of their
nuclear warheads. Nuclear power facilities, accustomed to
relying on such secondary production sources for their fuel
needs, were forced to take a hard look at the lack of primary
production around the world. The program continued, but damage
had already been done.


4. Further aggravating the production deficit, Saskatchewan's
McArthur River mine, responsible for one-fifth of the world's
production, was faced with a water inflow problem that
effectively shut it down for several months. With prices falling
and several mines worldwide announcing plans to decrease
production, former Cameco CEO Bernard Michel predicted that
world production of uranium would meet only 40% of world demand
by 2010, down from 60% in 2001. A smaller factor, but emblematic
of the downward trend of the uranium industry, was the news that
British Nuclear Fuels, an important player in the uranium
hexafluoride (UF6) manufacturing and shipping industry, was
phasing out its Springfield, England plant.


5. While these factors had a negligible impact on production for
an industry that defines "short-term projects" as lasting more
than ten years, they inserted a new logic into the uranium
market. Previously, uranium consumers knew they could rely on
commercial stockpiles to make up the difference between
consumption and production. However, with the continued decline
in primary production and a 19-year drain in stockpiles, nuclear
power facilities worldwide clamored to buy up available
supplies. The resulting price increase has fueled a 21st century
uranium rush in Saskatchewan, the western province traditionally
known for its wheat, open prairies, and unspellable name.

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HOMEGROWN COMPANY MAKES IT BIG
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6. If Saskatchewan is the uranium capital of the world, then
Cameco Corporation is its king. The company is the largest
uranium producer in the world, accounting for one-fifth of
existing production, and more than two-thirds of identified
future capacity. Cameco has a controlling interest in two of
Saskatchewan's five mines, plus a 50% stake in the lucrative
Cigar Lake development, which is expected to be operational by

2007. Cameco and AREVA (a subsidiary of Government of
France-owned COGEMA),together produce over 90% of
Saskatchewan's uranium. The world's most productive mine,
McArthur Lake, is 69% Cameco-owned. With an ore grade 100 times
that of the world average for uranium mines, McArthur has been
the company's cash cow since it opened in 1999. It is the
world's largest high-grade uranium mine with reserves of almost
450 million pounds. It allows Cameco to produce almost 18
million pounds of uranium yearly. Uranium is considered
economical to mine if the concentration is in excess of 0.1%;
McArthur Lake has an average concentration of 24.7% U3O8
(uranium oxide, commonly known as yellowcake). Cameco is also
the world's sole commercial supplier of UO2, the fuel used in
Canadian-designed CANDU reactors. Uranium produced by Cameco
generates electricity for 1 in 9 American households.
Altogether, Canada exports 5 million kilograms of uranium to the
United States every year, supplying 6.5% of American electricity
consumption.


7. Cameco has weathered a succession of threats to its viability
in recent years, starting with the catastrophic drop in
uranium's spot price during the late 1990s. At the time, Cameco
was also faced with a PR nightmare, after a chemical spill at
its facilities in Kyrgyzstan prompted a public outcry and
government inquiry. More recently, the company's failure to
acquire a stake in an enrichment facility in southern Texas
disappointed investors. Cameco has made several attempts to
provide enrichment services; the Bruce Power reactors in Port
Hope, Ontario are scheduled to soon begin using slightly
enriched uranium (SEU),which Cameco hopes to supply. Cameco had
planned to develop enrichment facilities in Port Hope itself as
recently as September, until public concerns and technical
issues put the project on hold indefinitely. Cameco has since
made public its bid to acquire Zircatec Precision Industries
(also located in Port Hope),a reactor fuel fabrication company.
If the proposal comes to fruition, Cameco will buy SEU from one
of three undisclosed US sources, which Zircatec can convert into
a useable form for the Bruce reactors.

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HUNGRY DRAGON DISCOVERS "THE WHEAT PROVINCE"
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8. Uranium is increasingly an important revenue source for
Saskatchewan. The C$40-C$50 million sent to Regina every year
from uranium royalties and industry taxes may comprise less than
one percent of total government revenues, but it has enabled
significant debt reduction in a province that was on the verge
of bankruptcy just 12 years ago. Royalties are expected to
increase substantially over the next five years, as industry
leaders such as Cameco develop new long-term contracts based on
higher spot prices. In the meantime, the provincial government
is aggressively courting uranium mining interests. Chinese
nuclear power facilities in particular have expressed interest
in acquiring a stake in Saskatchewan uranium. Premier Calvert
recently returned from high-level talks with China National
Petroleum Corporation, attracting attention to the increasingly
close relationship between Chinese business and the provincial
government. Business-to-business ties have also increased;
several Chinese investors have visited Cameco's headquarters in
Saskatoon, where they indicated a preference for Saskatchewan's
high-yield mines over less rich facilities in Australia.

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THE AGE OF THE ATOM, AGAIN?
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9. After a 30 year hiatus, nuclear power appears to be making a
comeback, as evidenced by new reactors planned in Asia and even
polls in the U.S. showing 60% of Americans support an increase
in the use of nuclear power. While the NIMBY (not in my
backyard) effect is as strong as ever, Saskatchewan provincial
officials, along with Cameco, have set their sights on
accommodating President Bush's support in his 2005 New Energy
Policy Act to build new nuclear power plants by the end of the
decade. However, Saskatchewan and Cameco have had their efforts
to receive similar recognition from Ottawa fail, partly because
of a strong anti-nuclear lobby. Former Saskatchewan NDP deputy
premier Dwain Lingenfelter, now an executive of Calgary-based
Nexen Inc., has spearheaded support for new nuclear power
facilities, campaigning to convince Saskatchewanians that a
plant in the northwestern part of the province would be a huge
economic opportunity. The construction rush on the Alberta
oilsands has raised speculation that nuclear power could fuel
new bitumen processing; nearly one third of the energy reaped
from mining the oilsands must be used merely to pump it out of
the ground. Initially, nuclear's proponents believed the Kyoto
Protocol, which commits Canada to reducing its greenhouse
emissions by 6%, would help their cause; however, Ottawa's plan
for fulfilling the agreement has no mention of nuclear power,
instead focusing on "clean fuels" such as natural gas, solar,
and wind power. The uranium industry would like to see the
reduction in greenhouse emissions resulting from use of
Saskatchewan's U3O8 counted into Canada's total. Use of Canadian
uranium in the United States alone avoids an estimated 230
million tons of greenhouse gas emissions, over a third of
Canada's total.

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COMMENTS
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10. While uranium mining will never be the boon for Saskatchewan
that oil and gas have been for Alberta, the province is likely
to be increasingly identified with the industry. With companies
like Cameco and COGEMA expanding in Athabasca, Saskatchewan has
the opportunity to shed its anti-business reputation, stemming
the tide of money and skilled workers to neighboring provinces.
Numerous challenges face Saskatchewan's uranium mines, such as
competition with the booming diamond industry for experienced
drillers and geophysicists, and the prospect of a downturn in
new nuclear power construction worldwide. However, with spot
prices high, and headed higher, Saskatchewan companies like
Cameco have a rare opportunity to promote their product in a way
once impossible for the cash-strapped industry. Saskatchewan's
uranium fields continue to benefit the United States by
providing a stable supply of an unstable resource.


11. During a July visit to Calgary, Treasury Secretary Snow was
briefed on Saskatchewan's uranium by Cameco President Jerry
Grandey. Grandey also hosted former Ambassador Cellucci and the
CG for a tour of the McArthur River mine in September 2004 (see
2004 Calgary 536). In partnership with Russia and the USG,
Cameco has been dismantling nuclear warheads in the former
Soviet Union since 1999. The target is to dismantle 22,000
weapons. By October 2004 when we visited the mine, almost 8,500
had actually been dismantled.


12. This cable was drafted by our fall intern, David Dill.




AHMED