Denison Mines Corp (DNN) 2009 Q1 法說會逐字稿

Good morning and welcome to the first quarter 2009 results conference call for May 14, 2009. Your host for today will be Mr. Ron Hochstein. Mr. Hochstein, please go ahead.

First of all, I'd like to ask Lukas to say a few words.

Okay. Thank you very much. Good morning, ladies and gentlemen. I am the Interim CEO for Denison Mines. Just introduce who's on the call, Ron Hochstein, President and Chief Operating Officer is on the call, Jim Anderson, our Executive Vice President and Chief Financial Officer, and Andre Desautels, Vice President of Legal on the call, too.

Ron is going to do the highlights presentation and Jim will do the financials. We'll turn out over to Ron now and then we'll open to questions. Go ahead, Ron.

Thanks, Lukas. This discussion includes forward-looking information with respect to Denison's operations and financial results. Actual future results may differ from expected results for a variety of reasons described in the cautionary statements regarding forward-looking information in the section of our press release. All amounts are in US dollars unless otherwise indicated.

During the quarter, a number of significant events occurred. We sold 225,000 pounds of uranium during the quarter from US production at an average price of about $66 per pound and 98,000 pounds U3O8 from Canadian production under an existing long-term contract at an average price of approximately $50 per pound. We issued showed 28.750 million common shares at CAD1.65 per share, raising gross proceeds of CAD47.4 million.

We reported a major and significant discovery at our 60% owned Wheeler River property. Our winter drill program identified significant mineralization over a distance of 700 meters. We announced a 43-101 resource estimate on our Mutanga property in Zambia. Measured and indicated resources are estimated at two million and 5.8 million pounds uranium respectively and inferred resources exceed 13 million pounds U3O8. This represents a 59% increase in total resource from the previous estimate.

We also announced an updated 43-101resource estimate on the Tony M and southwest deposits that are part of the Company's Henry's Mountain complex located in southeastern Utah. Indicated resources are estimated at 8.1 million pounds U3O8 and inferred resources at 2.8 million pounds U3O8. The estimate brings the Tony M resource estimate to current from historic and represents an overall slight increase. We placed the Rim and Sunday mines on temporary stand-by and announced that conventional ore processing at the White Mesa Mill will cease once sufficient volumes have been produced to meet the current year sales commitments of 500,000 pounds U3O8.

We announced that after 24 years with the Company, Peter Farmer was stepping down as CEO effective April 30th, 2009. I would personally like to thank Peter for his dedication and contributions to Denison, and he will be missed.

Consequent to the quarter, Denison announced that it entered into a non-binding memorandum of understanding with Korea Electric Power Corporation, known as KEPCO. The MOU provides that KEPCO will execute a proposed off-take agreement to purchase 20% of Denison's U3O8 production and acquire by private placement approximately 58 million common shares of Denison for gross proceeds of CAD75.4 million. The MOU also stipulates that entities nominated by or affiliated with Denison's Chairman, Lukas Lundin, will acquire 15 million common shares for additional gross proceeds of CAD19.5 million.

During the quarter, the stock price of U3O8 decreased from $53 per pound at December 31st, 2008 to $42 per pound at March 31st, 2009 as quoted by US consulting. The price decline continued into the second quarter, reaching $40 per pound before rising again to $51 a pound as of Monday of this week. The long-term price for U3O8 remained at $70 per pound throughout the quarter before dropping to $65 at the end of April. We expect to see the spot price trading much closer to the long-term price later this year, and believe the long-term price will remain near its current level in the short term, rising back to the $70 to $80 range in the mid-term. We remain bullish about future uranium prices in the mid to long-term because uranium supply and demand fundamentals remain strong and the market for uranium continues to expand.

In terms of our own sales and marketing at the end of 2008, we ended our joint venture marketing arrangement with AREVA Canada, with the exception of one remaining contract. Denison is now marketing its share of production from McClean Lake directly. With the April 27th announcement of a new one million pound contract over five years, Denison currently has four long-term U3O8 contracts in place; and if the KEPCO transaction closes, five long-term contracts.

All but one of these contracts have floor prices; three of which are subject to escalation and protect us on the downside. We expect to be in a position to sell 1.2 million to 1.3 million pounds of U3O8 in 2009, including 500,000 to 600,000 pounds from US production. Our contracted sales in 2010 is 790,000 pounds with 1.2 million pounds in 2011. We are continuing to pursue additional long-term contracts for our future Canadian and US production, primarily based upon a fair price given our costs and risks.

In the vanadium markets, prices continued to weaken through the quarter from $6.50 per pound V2O5 at January 1st, 2009, to $4.25 per pound at the end of the quarter, as quoted by Ryan's Notes. As of May 11th, the average quoted price was $3.90 per pound V2O5. Subsequent to the quarter, Denison sold approximately 396,000 pounds of V2O5 at an average price of $3.50 per pound and currently holds approximately 957,000 pounds in inventory. We anticipate selling 1.5 million pounds in total in 2009. At the present time, the vanadium market is relatively thin, and Denison has been careful to sell its vanadium at a rate which doesn't put too much downward pressure on the price. We do see some firming up in prices as vanadium inventories held by primary vanadium producers and traders decline. Now for the numbers. Jim?

Thank you, Ron. Good morning, everyone. Revenue was $21.998 million for the first quarter of 2009, compared with $18.181 million for the first quarter of 2008, an increase of 21%.

Consolidated net loss was $1.327 million or $0.01 per share for the 3 months ended March 31st, 2009, compared with a net loss of $10.462 million or $0.06 per share for the same period of 2008. Net cash used by operations during the quarter was $30.005 million, compared with net cash from operations of $7.622 million for the three months ended March 31st, 2008. The level of cash used in operations during the quarter results primarily from changes in working capital components, including inventory levels, accounts receivable and accounts payable.

Uranium sales revenue for the quarter was $20.338 million. Sales from US production were $225,000 -- pardon me, 225,000 pounds of U3O8 at an average price of $66 per pound. Sales of Canadian production were 98,000 pounds at an average price of approximately $50 per pound.

Revenue from the environmental services division was for the three months ended March 31st, 2009, compared to $1.141 million in the comparable period in 2008. Revenue from the management contract with Uranium Participation Corporation was $295,000 for the three months ended March 31st, 2009, compared to $839,000 in the same period in 2008. Other income totaled $5.627 million for the three months ended March 31st, 2009, compared to $2.226 million for the same period in 2008. This consists primarily of foreign exchange gains offset by interest expense on the Company's debt facilities, totaling $689,000 for the three months ended March 31st, 2009.

Denison is engaged in uranium exploration as both operator and non-operator of joint ventures and is operator of its properties in Canada, the US and Mongolia. The Company expects its exploration expenditures on mineral properties that are not deficiently advanced to identify their development potential. For the three months ended March 31st, 2009, exploration expenditures totalled $2.077 million, compared to $6.509 million for the three months ended March 31st, 2008. Denison's share of exploration spending on Canadian Athabasca Basin properties totaled $2.214 million, of which $1.856 million was expensed for the three months ended March 31st, 2009. Exploration expenditures of $217,000 for the three months ended March 31, 2009, were spent in Mongolia on the Company's joint ventures.

General and administrative expenses were $4.322 million for the three months ended March 31st, 2009, compared to the $3.563 million for the three months ended March 31st, 2008. The increase was primarily due to increased personnel expenses during the quarter. Operating costs for the quarter include a writedown of $1.224 million related to the net realizable value of the Company's vanadium inventory due to continued weakness in the vanadium market. Operating costs also include expenses related to Denison's environmental services division amounted to $1.354 million for the three months ended March 31st, 2009, and $1.007 million in the comparable period in 2008.

The Company had cash and cash equivalents of $2.505 million at March 31st, 2009, and portfolio investments with a market value of $7.778 million. The Company has in place a $125 million revolving credit facility with a term to June 30th, 2011. Bank indebtedness under the facility at March 31st, was $100.646 million. The Company is currently in compliance with its covenants under the facilities.

As Ron mentioned, in April, we announced a non-binding memorandum of understanding with KEPCO that includes the private placement of 58 million common shares, plus the acquisition of an additional 15 million shares by entities affiliated with Lukas Lundin. The potential combined gross proceeds from these two deals is CAD94.9 million and will be used to reduce our bank debt. For a more detailed discussion of our financial results, I refer you to our MD&A. Now I'll turn the call back to Ron for an operations update.

Thank you, Jim. The McClean Lake joint venture produced 745,000 pounds of uranium for the three months ended March 31st, 2009, compared to 591,000 pounds for the three months ended March 31st, 2008. The increase in production was due to higher throughput. Denison's 22.5% share production totaled 168,000 and 133,000 pounds respectively.

Unit production cash costs in Canada are driven primarily by production volumes as the majority of costs do not vary with volume. These fixed costs from McClean operations total approximately CAD58 million per year. Reagent costs are in addition to this cost as are amortization, depletion and depreciation. Canadian production costs for the quarter were $48.70 per pound U3O8, including $24.58 per pound for amortization, depletion and depreciation. This compares to production costs of $66.94 per pound U3O8, including $36.17 per pound for amortization, depletion and depreciation in the first quarter of 2008. The decline in operating costs is due to the impact of FX and higher throughput.

Uranium inventory from Canadian production was 92,000 pounds at March 31st, 2009. Production at the White Mesa Mill from conventional ore was 308,000 pounds of U3O8 for the three months ended March 31st, 2009, which was above budget. The mill process, primarily Tony M ore, so vanadium production was only 131,000 pounds in the quarter. Production costs for processing conventional ore in the quarter totaled $77.24 per pound uranium and vanadium equivalent, including $44.29 per pound amortization, depletion and depreciation. In 2008 first quarter, the mill was only processing alternate feed, and the total cost was approximately $38.37 per pound, including depreciation of $3.65 per pound.

At March 31st, US uranium and vanadium inventories were 245,000 pounds and 1.350 million pounds respectively. In April, the mill personnel surpassed one million man hours without a lost time accident. This is a very admirable accomplishment.

In 2009, no mining activities are projected at McClean Lake in northern Saskatchewan. Mining at the Caribou deposit which was originally expected to commence in 2009, has been delayed at least a year after review of the prospect economics. Small-scale test mining using the bore hole mining technique, that has been the subject of three years of development, will continue in 2009 on the McClean north deposit. At March 31st, 2009, the McClean Lake mill ore stockpile had approximately 330,000 tonnage of ore, containing 5.7 million pounds of U3O8 with the Company's share being 1.3 million pounds. Milling of the stockpiled ore from Sue E, Sue B and Sue A is ongoing and the U3O8 production at the McClean Lake mill in 2009 is expected to be 3.380 million pounds of U3O8, of which Denison's share is 761,000 pounds.

Development of the Midwest project continues to be on hold. The regulatory process for the project, which has been ongoing since December 2005, is continuing through 2009, as well as detailed engineering and capital cost reviews. This will enable the project to be advanced the stage that it is ready to be developed quickly when the economic conditions improve. The status of the project will be reviewed later this year at the November joint venture meeting.

During the quarter, three Colorado plateau mines were operating, Pandora, West Sunday and Beaver. In Q1, these mines produced at an average rate of 390 tons per day, at an average grade of 0.21% uranium and 1.13% vanadium. Four mines remain on active care maintenance, including the Topaz, Rim and Sunday mines on the Colorado plateau and the Tony M mine in the Henry Mountains complex. The condition of these mines are being maintained in a state to resume mining operations quickly.

Production from the mines is hauled to Denison's White Mesa Mill, and on March 31st, 2009, a total of 81,000 tons remain on the stockpile at the mill, excluding alternate feed stock piles. The White Mesa Mill processed conventional ore for the first three months in 2009. In April, the mill was shut down for planned maintenance. The mill has restarted and will process Colorado plateau ores through the end of May to produce enough uranium to meet the committed contract sales of 500,000 pounds for 2009.

The construction of the new $5 million alternate feed circuit is on schedule with startup anticipated in June. Production from this circuit is anticipated to be up to 160,000 pounds in 2009. In total in 2009, we expect to produce between 500,000 and 800,000 pounds of U3O8 and 0.5 million pounds of V2O5 at White Mesa.

Turning now to exploration, in the Athabasca Basin, Denison is participating in 33 exploration projects. On Denison's operated and non-operated projects a total of approximately 25,000 meters of drilling was carried out this winter. Denison's exploration spending in the Athabasca Basin is an expected total of $7.7 million in 2009.

Near the McClean Lake mill, joint venture partner AREVA Resources Canada, operator of the Midwest, Wooley, Water Fund and McClean projects drilled 74 holes, totaling approximately 18,640 meters. Although results were interesting and have generated some future targets for follow-up, no significant mineralization was intercepted. Denison completed a drill program of 14 holes, totaling approximately 6,620 meters on its 60% owned Wheeler River project. A major and significant discovery has been made on Wheeler River with the winter drill program identifying significant mineralization over a distance of 700 meters This mineralization is virtually identical in composition, mineralogy and grade to that of the to the McCarthy River ore bodies and occurs in the same geological environment.

Some of the intercepts include 15.5% equivalent U3O8 over 2.9 meters and approximately 300 meters along strike, 19.7% over four meters and 24.6% over 2.5 meters. The mineralization is open along strike and also across strike. The Company believes that this is the most significant McCarthy River style mineralization yet discovered in the basin since the discovery of the McCarthy River in 1988. A summer 2009 drill program is planned of approximately 5,500 meters. One drill rig will be dedicated to the program this summer, and at least two rigs are planned for winter 2010, with one full-time dedicated to development drilling of this very exciting discovery.

In the US, Denison is carrying out two exploration programs near its West Sunday and Pandora mines. In April 2009, in Mongolia, the GSJV exploration licenses were extended for a three-year period. In addition, we expect to release an updated 43-101 for the Harahan and [Harath] deposits. Our Mongolia program this year will be a combination of limited exploration drilling and engineering type studies in the area of the initial test ISR well fields with the goal to bring the Harahan project into production by late 2011.

In Zambia, based on the results of the alkaline leach pilot plant test work and heat leach test work which was undertaken in parallel with the pilot plant work, a decision has been made to change the processing flow sheet from the alkaline leach to an acid heat leach flow sheet. The acid heat leach provides similar recoveries to the alkaline leach, but a much lower capital and operating cost. The acid leach is also much more flexible and amenable, given the distances between the Mutanga and Gibley ore bodies. Our focus in 2009 will be on completing the Mutanga feasibility study in the second quarter and in this document along with an environmental report will form the basis for the mining license application, which will be submitted shortly thereafter.

Subsequent to the quarter, on April 30th, we announced a deal to acquire all of the outstanding shares of Northern Continental Resources, Inc. in an all-share transaction. Northern Continental holds a 60% interest in the Russell Lake uranium property that is located immediately adjacent to our Wheeler River property. Northern Continental's current partner in the project is Hathor Exploration Limited.

The Russell Lake property exhibits a number of strong targets. This transaction will consolidate in one continuous package a land position from Wheeler River to another important Denison discovery, Moore Lake. We're very excited about the possibilities of this deal.

Given the current climate, we will continue to be vigilant in our cost savings and discretionary spending, preserving our capital resources. We will continue to avoid production of uranium that would be held in inventory or sold at below cost. We have a potential new equity partner in KEPCO and that gives us improved financial stability and all but eliminates the issue of a covenant breach with our bank debt this year.

Denison will weather this economic storm just as it has others in its 50-year history. Thank you very much. Are there any questions?

(Operator Instructions). The first question will be from Lawrence Smith from Scotia Capital. Please go ahead.

Good morning. Just a question on the KEPCO deal. What still has to happen for that deal to close? Is there due diligence involved on the part of KEPCO? What's required in terms of definitive documentation? And what's the expectation for timing? Thank you very much.

Thanks, Lucas. The KEPCO due diligence is going on as we speak. Currently, site visits are actually happening this week. There's extensive due diligence by their accounting, legal and financial advisers as well. There are two main agreements, definitive agreements and an off-take agreement which drafts of those have been exchanged. We anticipate closing the deal by June 15th.

All right. Thank you very much.

Thank you. The next question will be from Adam Schatzker from RBC Capital Markets. Please go ahead.

Thank you. The first is a follow-up to Larry's question. Is there any risk or mechanism whereby the KEPCO deal may not go forward?

Do you want to handle that Lucas or do you want me to?

Go ahead. Ron.

Adam, at any point in time, as you go through due diligence, yes, there is potential risk. But at this time, we don't foresee anything.

Yes. They seem very keen.

Okay.

I think the risk is small.

That's good. Thank you. The next question is with respect to the vanadium. I'm just wondering are there any issues with the quality of the vanadium that resulted in the slowness of sales? Or it just how you've decided to sell it?

There's been no issues with regards to quality. In some respects, actually we're trying to get into some higher quality markets because it's a very high-grade vanadium black plate. It has just been breaking into the market; Denison or IUC or even Energy Fuels has not been in the vanadium market for over 10 years. We just had to build up some reputation and build up the content.

One last thing, when you refer to the Midwest and the permitting, what are the major permitting issues there that you guys are trying to work through?

There really isn't any issues, Adam. Essentially, it's just working through the process. Right now, the CNSC team that is focused on the renewal of the McClean Lake license and the Caribou licensing so there's a little bit of just allocation of resources at the present time on the regulators part.

Okay. No surprise there. Thanks very much. I appreciate your time, guys.

Thank you. The next question from David [Wargo from GMG Securities]. Please go ahead.

Hey, Ron, just a quick question with regards to Arizona strip. When do you think you'll have the permit in place? Based on getting the permit, how long would it take you to ramp up those operations and actually get ore to the mill?

In the Arizona, there's been significant progress made in the last few weeks with the Arizona Department of Environmental Quality. We currently have in front of them two of the groundwater permits for Canyon and [Pineya] and the air quality permit. We have been able to work with them and I think we will be seeing, subject to a public hearing on the air quality, receipt of those permits this summer.

Okay.

And for Arizona one, once we receive the air quality permit, there's about six months of development required. We've completed the shaft and the ventilation, but there's some pre-production development required. We would see a little bit of ore delivered to the mill during that period, but really production starting six months after we get going.

You're looking at more like Q1 2010 for the ore really coming into White Mesa?

That's right, on a continuous basis.

Yes.

We would be able to start probably milling on a campaign basis end of first quarter.

Okay. And then one other question. I noticed your cash cost ex-depreciation, we were down to about $33 in the US. Do you see the ability to actually lower those further with further contract wins? Or how do you see those cash costs going for the rest of this year?

The cash costs -- we will be shutting the mill down. The cash costs on a uranium basis are going to come down significantly, because we'll be producing alternate feed for -- the uranium from alternate feed for the remainder of the year. And those costs are -- those costs will come down. It's just higher grade material and lower reagent costs.

One last question. What are you paying for your asset right now in the US?

Right now in the US, we're paying in the $90 to $95 per ton range.

Can you lock that in for a period of time?

It's locked in for the remainder of this year. We are in discussions with our major suppliers down there to see if we can do something longer term, but they're hesitant to do that at this point.

Okay. One final question if I can. What's the status of the CEO? Have you short-listed it? And when can we expect an announcement on that?

I enjoy the interim job so much. No, no. in about two, three weeks you're going to hear something.

Okay. Thanks, Lukas. All right, guys. Thank you very much.

Thank you. The next question will be from [Duncan McKeen from McCory Capital]. Please go ahead.

Thanks very much, guys. I was just wondering on Wheeler River, I think you're talking about now 5,500 meters of drilling. Has that come down? Earlier I thought you were talking about 7,500 meters of drilling --

No, Duncan. That's what we proposed and we talked about in our presentations last week,was about 5,500 meters. Actually, no. You're right. Sorry. It did come down.

You said 7,500.

It did come down because the partners have requested that we do some [resistivity] work as well.

Okay. Super. And then, when this agreement coming together with KEPCO? Is there an opportunity with the cash injection and potentially with better contract pricing that you're able to open up more of the mines in the United States and feeding the mill to full capacity or closer to full capacity now?

There is that opportunity. That would be the first decision to reopen some of the mines. At the present time, we don't see a change in the milling philosophy for 2009, but we may make the decision to open up some of the mines, in particular mines on the plateau or Tony M.

Okay. Okay. This could be like starting backup early in 2010 story?

Yes. It's all price-driven. Uranium price jumps high enough, we will do it.

What kind of contract do you need to see in the United States to make that decision to go ahead, price-wise?

It's combination of not only the contracts, but also, as Lukas just said, the uranium price because your contracts are largely dependent on either a combination of spot and/or long-term.

Okay. I was just trying to get a feel for what price level you would make the go-ahead decision. If the term price was $65, would that work for you?

It would be better to be closer to $70.

Okay. Perfect. Thanks, guys.

Thank you. And there are no further questions at this time. I'll return the call back to Mr. Hochstein.

I would like to thank everyone for attending this first quarter call. Appreciate the attendance. Lukas, do you have any final closing words?

No. I thank you very much. I think the Company is in good shape with the KEPCO deal and I'm very excited about what we found in Saskatchewan and Wheeler, the next major discovery in Canada. Everybody should stay tuned. Thank you very much. Bye-bye.

The conference call has concluded. You may disconnect your telephone lines at this time. We thank you very much for your participation.