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February 21, 2008

Careful about Moving to Nevada
by David Petch

This article was originally posted for the benefit of subscribers on February 13th, 2008.

I have one thread that basically sums up the title for the introduction so please read before continuing further into the article: http://www.physorg.com/news122050436.html. Access to water is essential for mining and nuclear power plants and if Lake Mead continues to decline in volume, the Hoover dam will become a modern day Pyramid...a derelict of the past that had a purpose only to be viewed as a monument of the technical savvy of those that went before them. This event could affect millions of people, so as an aside, avoid purchasing real estate in Vegas because it likely is entering a long-term bear market.

Denison (DML.TO) has 4 operational mines at present alongside their White Mesa Mill in Nevada, along with most of their major operations and exploration properties around the globe. At present, production in Nevada has been hampered by ventilation shaft permitting and a lack of experienced miners (seems to be the main problem everywhere these days). Three new mines are expected to come into operation in 2008, giving a total of 7 mines in operation within Nevada. I suspect that beyond 5 years, there is going to be a squeeze on Uranium production in Nevada, with this one article from 3 years past hinting at such an event: http://www.iht.com/articles/2005/12/30/news/gold.php. For our investment purposes, 3 years from now is about the point in time when we should begin to cash in the chips.

The mining techniques for Denison in the Nevada area are physical mining based, not ground source leaching, which would pose numerous problems, especially when the aquifers are being drained. The following article sums up the problem: http://coloradoconfidential.com/showDiary.do. The white Mesa Mill processes all of the ore from the surrounding mines, so contamination of groundwater is restricted.

Denison has a very broad portfolio of Uranium mines and properties, with plans to produce 5 million pounds/year by 2011. Personally, I think this number is a little on the high side as stated in the latest corporate presentation: http://www.denisonmines.com/files/objects/Dec_18_07_WEB.pdf. US production is expected to be between 2.3-2.8 million pounds/year by 2011, but I suspect it will be more like 1.5-2 million pounds/year, just because of problems associated with available water. There are no nuclear power plants in the State of Nevada. Internal sources of electricity are the Hoover dam (faces declining electrical production from Lake Mead retreating), coal plants, natural gas plants, geothermal plants, small solar plants and imported electricity.

I have used Denison as a model company in Nevada because they have an established footprint there and provide a critical energy source needed to power the US. It is funny to note that a byproduct of gold mining in Nevada the past few decades has been water as per the second thread of the article in order to keep the mine dry. The future for gold mining will be restricted by the availability of water. Energy is more important than gold when it comes down to hard choices, so watch for Nevada politicians to grant future mine developments to Uranium companies instead of gold miners as water supplies continue to dry up.

Declining fresh water supplies around the globe are going to have implications on mining output, which will likely result in lower amounts of Uranium available for market. One of the longer-term projects for Nevada and California will be the installation of desalinization plants, pending available funding. There are plans to try and prevent a water crisis in Los Vegas by spending some 200 million dollars on drilling wells around the region and pumping in the water. These wells are slated to go down some 1600-1800 feet and it would literally take hundreds of years for the water table to recover. I would hope the EPA would have common sense to prevent this from occurring, given the potential for habitat destruction and accelerated losses to riverbed volumes and Lake Mead.

The take home point to this essay is to add water supply to the list of items essential for determining whether a mine (gold mine, oil sands, Uranium mine) will go into production or not.

A major portion of the work I do is technically oriented, but I am starting to write 2-3 editorials per week, such as the above. For further viewing of prior work, simply click on the Archive section of this site. I update the AMEX Gold BUGS Index, AMEX Oil Index, US Dollar Index, 10-Year US Treasury Index, S&P 500 Index as well as commentary on market-related issues and new technical analysis findings. We follow some 60 stocks, with a focus on core positions and stocks that actually make up our personal portfolio. As well, the keeper of the site, Captain Hook writes 3-4 articles per week discussing macro issues, ratio analysis of various markets and an in-depth study of put/call ratios and shorting candidates.

Have a good day.

David Petch
TreasureChests.info

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