URANIUM LEASES, AGREEMENTS AND OTHER DELIGHTS

• Jurisdiction: United States

Uranium Exploration and Development
(Apr 2006)
CHAPTER 9A
URANIUM LEASES, AGREEMENTS AND OTHER DELIGHTS
Mark T. Nesbitt
Law Office of Mark T. Nesbitt
Denver, Colorado

MARK T. NESBITT

Mark T. Nesbitt is a private practitioner in the Law Office of Mark T. Nesbitt in Denver, Colorado. He specializes in Business Law; Mining; Contracts; and Corporations. Mark was admitted to the Colorado Bar in 1978. He earned his J.D. from Gonzaga University in 1975, and his B.S. in Geology from Washington State University. He is a Member of: Denver, Colorado (Mineral Law Section), American (Business Law Section) and International (Energy and National Resources Law) Bar Associations; Rocky Mountain Mineral Law Foundation (Trustee, 1987-93; 2003-present; International Mining Professionals Society (Treasurer, 2000-present); Colorado Mining Association (Director, 19-1994); and the Northwest Mining Association. He is the author of "Area of Interest Provisions," 35th Rocky Mountain Mineral Law Institute; "Hard Minerals Due Diligence," 39th Rocky Mountain Mineral Law Institute. He was an Adjunct Professor at the Denver University School of Law, 2000 and 2002. Mark served in the U.S. Army, 1969-71 and U.S. Army Reserve, 1971-92, Lt. Col.

Introduction

The near-accident at Three Mile Island resulted in nuclear power not only falling out of favor but from even being considered as a viable alternative energy source, and this in turn caused the collapse of the uranium mining industry. And then the Soviet Union collapsed leaving a threatening number of unneeded nuclear warheads. The collapse of the nuclear power industry and the Soviet Union combined to provide a huge inventory of uranium from industry reserves and the re-processing of nuclear warheads, but in 2002 everyone realized the inventory would soon be gone, the price of uranium began its steady increase and the industry was reborn. Another accelerant to recent industry growth has been the recent upswing in the price of oil and gas and growing concern for global warming caused at least in part by carbon dioxide emissions from the use of fossil fuels. The result of all this is a growing recognition that nuclear power as the only viable alternative to the world's increasing appetite for energy.

So what is the status of the uranium mining industry and how is it responding to the world's demand for an old but stigmatized fuel source? The first thing that happened was existing mines and mills increased their production to full capacity. Then all known old properties were acquired and the exploration boom began. The problem, however, is that it appears that the production from all existing mines and mills cannot meet either the current or expected future demand. And this already stressed situation is further aggravated by a world-wide construction boom of 60 new nuclear power plants by 2020, with China and India accounting for 30 by 2020 and 17 by 2012, respectively. And Japan is building 5 new plants by 2010.¹ More significantly, these new power plants are currently planned for construction, most of which will require fuel that is neither part of the existing inventory nor anticipated production. This projected need for fuel is obviously the driving force behind the current boom in uranium exploration.

Moreover things have changed since Three Mile Island and Chernobyl. And the rebirth of the uranium industry has generated the need for leases and other agreements that are in harmony with today's laws, business needs and practices. The focus of this paper is on some of the provisions in these agreements.²

Overview

What is different?

Exploration for, mining and reclamation of uranium deposits involves the typical use of geology and the usual exploration tools of field mapping and sampling, literature searches, the long-standing use of old geologists and their knowledge of old properties and prospects, and the use of equipment that detects radioactivity. But the differences are more than this. The distinct character of uranium and its mine products has a persistent, pervasive effect on the nature of a number of contractual provisions. In this regard, see Attachment 1 for a list of both legal and industry references. But first the character of the product should be well understood.

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The product

Uranium is:

An energy source, but not oil and gas. It is a solid mineral, but not coal.

Radioactive, a hazardous substance, and therefore in an industry subject to strict safety standards.

Highly regulated. Permitting and closure of mines and treatment facilities that treat ore and produce the marketable product, yellowcake, is rigorous, slow and costly. Uranium mining operations, and in situ leaching ("ISL") operations involve unique environmental, reclamation and water issues. ³ We must wait to see if the regulatory and permitting regime will be modified to allow the construction of the new treatment facilities to meet expected new production.

In Situ Leaching Operations

Of particular interest to the uranium industry is ISL technology, a low-cost technology that removes uranium from sedimentary rock by using an injection and withdrawal system utilizing a leaching solution, commonly a combination of sodium bicarbonate (which happens to be the active ingredient in Alka-Seltzer) and oxygen. This process, the uranium equivalent to gold heap leaching technology, originated in the 1960's and has undergone significant technological improvements over the years and is a growing method of uranium production. For example, even though the Province of Saskatchewan is blessed with some of the world's highest grade Uraninite ("pitchblende") uranium deposits, exploration is being conducted to locate classic sedimentary roll-front deposits amenable to ISL operations. In addition to facilitating cost-effective production from low-grade sedimentary deposits, ISL operations are attractive because of their minimal surface disturbance and cost-effective remediation following the cessation of operations.

Surface Use Agreements

Surface use agreements are important for uranium exploration, development and operations because so much of the Western lands are split estates. This requires separate agreements with owners of the surface and either unpatented mining claims or mining leases with respect to the mineral estate.

If the minerals are privately owned, they are often former railroad lands granted to the railroad companies as an incentive for construction of the rail system in the early West. If the minerals are U.S. Public Domain lands open for mineral entry with Stockraising Homestead Act surface, specific legal requirements and regulations must be followed to acquire the minerals by staking unpatented mining claims.⁴

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Another question regarding surface use agreements is, "What consideration should the surface owner receive?" Traditionally, and during the last uranium boom of the 1970's, surface owner consideration called for the payment of an annual rental, and was more focused on compensating the landowner for surface damages. It is different now, in that a surface owner is frequently given a royalty, albeit smaller than that granted a mineral owner under a lease.

Provisions for damages to crops or grazing values are in both mining and surface leases. A typical damage provision is:

Damages. XCO shall pay Owner reasonable compensation for any damage to livestock, crops, timber, fences, cattleguards, buildings an other tangible improvements on the Property that result from XCO's activities on the Property.

This provision may be modified with respect to amounts for specific damages.⁵ An example of a more detailed provision is:

Damages. (a) XCO shall pay Owner as compensation for any crops or _______ damaged or destroyed, ____________ Dollars ($ ____) for each exploration drill hole drilled on the property.

(b) XCO shall pay Owner, as compensation for the use of or damage to any land within any open pit, shaft, stockpile, waste dump, or road:

$ ____ for each acre used for growing and cultivating crops,

$ ____ for each acre of improved pasture (pasture which has been planted in grasses and other vegetation for livestock),

$ ____ for each acre of cleared native pasture, and

$ ____ for each acre of brush land.

There shall be credited against the payments provided in this Subsection (b) all payments made under the above Subsection (a). The payments provide for in this subsection shall be made on or before the next anniversary of this Agreement following the use or damage and shall be full and complete compensation for the use or damage for the entire term of this Agreement.

(c) In addition to the compensation provided for in the above Subsections (a) and (b), XCO shall pay Owner reasonable compensation for any damage to livestock, timber, fences, gates, buildings or other tangible improvements on the Property resulting from XCO's activities on the Property.

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Specific Provisions

Grant Clause

Along with the parties, consideration, term, and subject property description, the grant clause in any contract is one of the basic provisions necessary for a valid contract. But, in addition to clearly describing the minerals a grantee has rights, it is particularly important in uranium agreements because if a mineral deposit is to be mined, the grantee must have the clear right to develop, operate and mine the deposit by all feasible methods, methods which surely include in situ leaching ("ISL"), and should also include the right to remove minerals by the "bore-hole" hydraulic mining method, a method that is becoming more feasible as the price of uranium increases and mining technology improves.⁶ A single sentence can be used containing general language such as:

It is the intent of the parties to allow mining of Minerals by whatever method, including, but not limited to, surface, open pit, underground, use of solutions, whether...