Denison Mines Corp (DNN) 2009 Q2 法說會逐字稿

Good morning, and welcome to the second quarter 2009 results conference call for Thursday, August 13, 2009. Your host for today will be Mr. Ron Hochstein. Please go ahead.

Thank you. Good morning, welcome to the second quarter 2009 financial results conference call of Denison Mines Corp. Participating with me today is Jim Anderson, Executive Vice President and Chief Financial Officer. We will start with some of the highlights of the quarter, followed by Jim speaking to the financial results, and then I will give a report on operations. We will then answer questions.

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 section of our press release. All amounts are in USD unless otherwise indicated.

There were a number of highlights during the quarter, including the raising of $155 million in new equity and the repayment of all of our bank debt. As you know, at the end of the first quarter, Denison had bank indebtedness of approximately $100 million. However with two deals that closed in June, we were able to refinance the company.

First of all, we completed definitive agreements with Korea Electric Power Corporation, or KEPCO, whereby KEPCO purchased 58 million common shares of Denison at an issue price of CDN1.30 per share for gross proceeds of $65.5 million.

In conjunction with the KEPCO equity transaction, Denison also issued 15 million common shares at CDN1.30 to entities affiliated with Lukas Lundin, a director of Denison, for gross proceeds of 17 million. This was an important component of the KEPCO transaction, as KEPCO wanted the major shareholder to also invest to exhibit their backing of the company.

Finally, we issued 40 million common shares at CDN2.05 per share, raising gross proceeds of $71.1 million. Based on these deals, Denison is once again on a solid financial foundation. As of June 30, we had working capital of approximately $93.9 million including $33.4 million in cash. In addition we have a valuable new shareholder and business partner in KEPCO. We look forward to this relationship with them.

Also during the quarter we were able to sign two new long-term uranium sales contracts. An off take agreement with KEPCO was signed in conjunction with the equity financing for a minimum of 20% of Denison's production or 350,000 pounds of uranium per year for the period 2010 to 2015 inclusive. The contract volumes are subject to a 10% flexibility and the pricing is at industry standard terms. In addition to the KEPCO contract, Denison also signed a long-term contract for the sale of 1 million pounds from its production facilities in the United States and Canada over a period of five years beginning in 2011.

On the exploration front, the 2009 summer drill program on the 60% owned Wheeler River property yielded encouraging results on the new Phoenix Zone. The most significant was Drill hole 273, which intersected a 6 m interval averaging 62.6% U3O8 at a depth of 405 m. As a result of the 2009 summer and winter drill programs, the Phoenix Zone now extends over 1 km and remains open along and across strike. The results of the summer program will be released in a couple of weeks once all of the assays are received.

Finally, the new alternate feed circuit was started up at White Mesa mill essentially on budget and on time. The circuit is running well with both recovery and throughput higher than originally anticipated. Now for the numbers. Jim?

Thank you Ron and good morning everyone. Revenue was $13,372,000 for the second quarter of 2009 compared with $31,713,000 for the second quarter of 2008. For the six months ended June 30, 2009, revenue was $35,370,000 compared with $49,894,000 for the same period in 2008.

Uranium sales revenue for the second quarter was $7,258,000. Sales from US production were 30,000 pounds at an average price of $61.75 per pound. Sales of Canadian production were 98,000 pounds at an average price of $49.59 per pound. Sales volumes were somewhat lower than prior periods because we sold only into our long-term contract and sold no spot volumes during the period due to pricing.

During the quarter the company also sold 506,000 pounds of vanadium as blackflake at an average price of $3.67 per pound and 18,000 pounds of ferrovanadium at an average price of $8.75 per pound. Total vanadium sales revenue was $2,018,000. This is the first vanadium the company has sold for many years. While prices achieved in the quarter were relatively low, the future looks somewhat brighter as blackflake prices are currently quoted at $6.25 per pound.

Revenue from Denison's Environmental Services Division was $2,843,000 for the quarter compared with $1,354,000 during the same period last year. And revenue from the management contract with Uranium Participation Corporation was $1,247,000 compared to $1,347,000 in the second quarter of last year.

Consolidated net loss was $18,215,000 or $0.07 per share for the three months ended June 30, 2009 compared with the consolidated net loss of $13,756,000 or $0.07 per share for the same period in 2008. For the six months ended June 30, 2009, consolidated net loss was $19,542,000 or $0.08 per share compared with a consolidated net loss of $24,218,000 or $0.13 per share for the same period last year.

Net cash used by operations during the quarter was $2,623,000 compared with net cash used by operations of $5,952,000 for the three months ended June 30, 2008. For the six months ended June 30, 2009, net cash used by operations was $32,628,000 compared with net cash provided by operations of $1,670,000 for the same period in 2008.

Denison ended the quarter with 554,000 pounds of U3O8 worth approximately $26 million at current spot prices and 1,180,000 pounds of vanadium worth approximately $7 million, again at current prices.

Operating costs for the three months ended June 30, 2009 included a recovery of $1,041,000 related to the net realizable value of the company's vanadium inventories. The recovery is due to a strengthening in vanadium prices. Operating costs also include costs relating to Denison's and Environmental Services Division amounting to $2,551,000 in the three-month period ended June 30, 2009 and $1,513,000 in the comparable period in 2008.

Denison is engaged in uranium exploration in Canada, the US, Zambia and Mongolia. Exploration expense totaled $2,502,000 for the three months ended June 30, 2009 compared with $3,729,000 during Q2 of 2008. For the six-month period ended June 30, 2009, exploration expense totaled $4,579,000 compared with $10,238,000 for the same period last year. Approximately $3.4 million of these expenses were made in the Athabasca Basin in Canada.

The company had cash and cash equivalents of $33,440,000 at June 30, 2009; trade and other receivables of $12,591,000; and portfolio investments with a market value of about $18 million. The company has in place a $125 million revolving credit facility with a term to June 30, 2011 and nothing was drawn on the facility at the end of June 2009. However $6,933,000 of the line is used as collateral for certain letters of credit which secure some of our reclamation liabilities. For a more detailed discussion of the financial results, I refer you to our MD&A.

Now I would like to turn the call back over to Ron for an operations update.

Thank you Jim. The McClean Lake joint venture in northern Saskatchewan produced 1,024,000 pounds for the three months ended June 30 and 1,769,000 pounds for the six-month period ended June 30, compared with 1,157,000 pounds for the three months and 1,748,000 pounds for the six months ended June 30, 2008.

Denison's 22.5% share of production totaled $230,000 in the second quarter and 398,000 pounds for the six months of 2009 compared to $260,000 and 393,000 pounds for the three-month and six-month periods of 2008. Canadian production costs were $40.66 per pound U3O8 for the quarter and $43.95 per pound for the six months ended June 30, 2009. For comparable periods in 2008, the production costs were $47.56 and $54.14 per pound U3O8.

Production costs less amortization, depletion and depreciation for the quarter and the six-month period ending June 30, 2009 were $16.74 per pound and $19.86 per pound respectively. Comparative costs for the same periods in 2008 were $16.02 per pound and $21.01 per pound.

Uranium inventory from Canadian production was 224,000 pounds at June 30, 2009. The McClean Lake mill or stockpile at June 30 had approximately 287,000 tonnes of ore from the Sue E, B, and A deposits containing 4,640,000 pounds U3O8 with Denison's share being 1,044,000 pounds. Milling of the stockpile ore is ongoing and Denison's share of production for the remainder of the year is expected to be 363,000 pounds. Total production for 2009 at McClean Lake is expected to be 3,380,000 pounds of which Denison's share is 761,000 pounds U3O8.

On June 30, 2009, the Canadian Nuclear Safety Commission or CNSC renewed the operating license for the McClean Lake operation for a period of eight years until June 30, 2017. The eight-year term is a first for the Canadian uranium mining industry.

Subsequent to the quarter, the Athabasca regional government which is comprised of three First Nations and four provincial communities from the Athabasca Basin region launched a judicial review of CNSC's decision to grant the McClean Lake operating license. The Athabasca regional government are challenging the legality of the new license, primarily on the basis of issues related to the federal and provincial government's duty to consult with aboriginal people. The legal review process will not impact operations directly.

Development of the Midwest and Caribou projects has been postponed due to a number of factors. The regulatory process, however, for both projects is ongoing. As well, the Midwest capital and operating cost estimates are being updated.

Moving to the United States. Production at the White Mesa mill in Blanding, Utah was 114,000 pounds U3O8 for the three months ended June 30 and 422,000 pounds U3O8 for the six months ended June 30, 2009. In the comparable periods in 2008 production was 62,000 pounds for the three months and 114,000 pounds for the six-months, primarily from alternate feed material as the mill did not begin processing conventional ore until April 2008.

The company also produced 370,000 and 501,000 pounds of V2O5 for the three months and six months June 30, 2009 respectively. During the last conventional ore run in May 2009, vanadium recoveries improved significantly to 65% from the average run to date of only 38%. This is still below our target of 75%, but a marked improvement.

Production costs for processing conventional ore for the second quarter and first six months of 2009 were $73.85 and $76.20 per pound U3O8 and vanadium equivalent respectively. Deducting depletion, amortization and depreciation yields a production cost of $41.65 per pound and $35.62 for the quarter and first half of 2009. The production costs for the same periods for 2008 are not comparable, as the mill is being refurbished and was in transition from processing alternate feed to processing of conventional ore during the first six months of 2008 which resulted in intermittent operations.

Inventory from US production was 330,000 pounds U3O8 and 1,180,000 pounds V2O5 at June 30, 2009. In the US, the Pandora, West Sunday and Beaver mines are operating. Four other mines remain on active care and maintenance, including the Topaz, Rim and Sunday mines on the Colorado Plateau and the Tony M mine in the Henry Mountains complex. These mines are being maintained in a state to resume mining operations quickly when uranium prices improve or the company is able to obtain new sales contracts at prices which justify reopening the mines.

At June 30, 2009 a total of 95,800 tons are on the stockpile at the mill containing approximately 359,000 pounds U3O8. The company also has approximately 848,000 pounds contained in alternate feed material stockpiled at the mill at June 30.

Processing of conventional ore has been completed for 2009. The construction of the new $5.3 million alternate feed circuit is complete and the circuit began processing material in mid-June. Production from this circuit is anticipated to be 160,000 pounds in the second half of 2009. The mill will only process alternate feed until we restart conventional ore processing early next year. The company expects to produce 500,000 to 600,000 pounds of U3O8 and has produced 500,000 pounds of V2O5 at the White Mesa mill in 2009.

At the Arizona 1 mine located in northeastern Arizona, a hearing was held on the air quality permit on July 22nd. Based on the outcome of that hearing and discussions with the Arizona Department of Environmental Quality, we anticipate receipt of the permit later this year. Mine development is expected to commence shortly thereafter with full production reached within six months.

The company expects 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. We also anticipate selling 1.5 million pounds of vanadium.

Turning now to exploration, in the Athabasca Basin, Denison is participating in 33 exploration projects, primarily located in the southeast part of the basin. Denison's exploration spending in 2009 in the basin is expected to total $7.7 million, of which approximately $3.7 million will be spent in the balance of the year.

As I mentioned earlier, we have had some excellent results on the Wheeler River property. Planning is underway for a major 2010 program utilizing two rigs with one full-time dedicated to delineation drilling of the Phoenix Zone.

During the third quarter, small drilling programs will be commenced on the company's Ford Lake and Brown Lake projects and geophysical programs are planned for Ford Lake, Moore Lake and Wheeler River properties as well as other field programs on other projects.

In Mongolia in July 2009 the Gurvan Saihan Joint Venture exploration licenses were formally extended for a three-year period. A limited exploration drilling and development program has begun.

In Zambia Denison submitted its environmental report for review by the Environmental Council of Zambia during the quarter. Subsequent to the quarter, the mining and radioactive license applications were also submitted. Work for the balance of this year will focus on the receipt of the necessary licenses and permits to move forward.

In closing, a couple of comments on the uranium and vanadium markets. The uranium price continues to be weak through the anticipated summer doldrums. It has dropped from its 2009 high of $54 per pound U3O8 on June 22 to a recent price of $48 per pound.

Utility requirements are generally covered for the next 18 months, however there continues to be discretionary purchasing. We anticipate that the spot price will rise, but only moderately beginning in mid-September through the end of the year and will continue to close the gap between the spot and long-term price.

In the vanadium market, prices have firmed up substantially in the past four months with quoted prices rising 79% from a low of $3.50 to the current price of $6.25. Whether this price is sustainable is largely dependent on whether or not recently shut-in production from South Africa is restarted or not. Even if production is restarted, we anticipate prices holding at about $5 per pound due to increased demand.

Over the past quarter we have been selling into both the vanadium and the ferrovanadium markets. We will continue this strategy in order to take advantage of swings in margins between the two products in order to maximize our netback. Thank you for your time and we would be happy now to answer any questions.

(Operator Instructions) Mike Kozak, Cormark Securities.

Good morning guys. Thanks for taking my call. First question, what have mining costs been on a per ton basis at Pandora, West Sunday and Beaver? Call it whatever is easiest over the last two or three months.

Mike the costs have been averaging pretty well what we anticipated, about $140 per ton. On average across those three mines they have actually been a bit lower at Pandora because we're into some very good ore there.

Perfect. And Tony M, exactly what is going on there now if anything? And what floor price do you guys need on a contract to seriously take a look at restarting that mine?

What is going on currently is we are continuing the dewatering and rehabilitation of the main drifts. This will give us more flexibility to decide whether we want to push back, invest more capital push back into the Southwest Bullfrog deposits. That is going on quite well as the rehabilitation work continues. We also actually are producing a little bit of ore as we move down through there.

In terms of what kind of price we need, it is in the $60 to $65 range based on our current estimates of costs and haulage costs for there. Obviously if we get back into Southwest and Bullfrog where we have significantly higher grades we have a lot more flexibility. So this is what we're looking at at Tony M.

Okay, thanks for that. And last one, could you give us any color on 2010 plant production and how that splits out between conventional ore and alternate feed at White Mesa?

We have not issued our 2010 guidance. But generally we plan on continuing to run the alternate feed circuit throughout the year. So just as an estimate for that, if we are producing 160,000 pounds for the first half, you can kind of estimate what we would anticipate producing from there for 2010. But conventional ore in that, we're still going through our budgets.

Okay, thank you very much for that guys.

Adam Schatzker, RBC Capital Markets.

Just a couple of questions here. First is with respect to the spot market. Ron you made some commentary there and I am wondering if you are seeing any action from China in the spot market. And do you deal directly with Chinese utilities?

Yes, I think that is discretionary purchasing that is happening in the market. As you know, the volume in the spot market is very high so far this year. So, I think there is definitely some activity there.

At the present time, we have not sold to any Chinese utilities. But obviously as we have stated we're looking at selling approximately 600,000 pounds here through the remainder of the year and that is still to be negotiated.

Okay. Second question is with respect to the Canadian operations, are there any further developments as to when mining might restart there? Do you have any sense as to what is necessary, what AREVA is looking for? And is this the kind of thing that is keeping you guys awake at night?

I wouldn't say it is keeping us awake at night, but it is certainly something we are all focused on and we have a series of meetings planned with AREVA in September and October going through our 2010, 2011 plans. As I mentioned in the call, they're actively reviewing the Midwest capital cost right now and we anticipate receiving new estimates at that time.

You're expecting that, obviously, to be quite a bit lower.

We anticipate that, but as I said, we haven't seen the numbers yet. But we anticipate that they will be lower, yes. There's been significant -- or has been a lot of engineering work that has been done to try and economize or reduce capital costs and operating costs, and also work on the mine schedule on that as well to more or less optimize the operation.

And what happens then if they decide to defer it for yet another year or two. How does that affect your position with contracts?

It really doesn't affect our position with contracts because of the flexibility we have with our US operations and production in 2010. But it obviously impacts the operation of the McClean Lake mill going forward past 2010. But we don't have any issues with regards because we can fulfill those contracts from US production.

Okay. So it just increases the risk as it shifts to one source as opposed to two, I guess would be the conclusion.

That is right. But don't forget too we also have Zambia that we are moving forward with.

Okay. Thank you very much. That is it.

Craig Miller, TD Securities.

Good morning. Can you tell me what your recovery rate is at the alternative feed circuit?

We were anticipating recoveries around 90% but we're actually reaching 95% plus. That is based on just going through the circuit itself, Craig. We have just actually took a while to build up inventory in the thickeners and dryers. We started up our dryer last Friday and we're actually putting yellowcake in the can today. So, the final recoveries we don't have the numbers for, but it will be around 95% plus.

What kind of CapEx are you expecting for the remainder of the year? And where?

The only -- we have talked about if you look at true CapEx, we don't anticipate a lot. A lot will depend on whether we get the decision on the permit on Arizona 1 whether then we move forward with that, if it happens in the third -- say in the third quarter or early fourth quarter we move forward with that. That would not be significant.

The only other CapEx potentially is moving forward with Cell 4B at the White Mesa mill, which we anticipate might be about $1.5 million. Is there anything else Jim?

There is always some capital portion of the mining cost as we extend shafts and that kind of thing. So just in the mining activity you will see some capital additions into the mineral properties.

Not a big deal though.

No. We have a number of ventilation raises in that that we have to do here in the remainder of the third and fourth quarter.

Thanks. That is all I have.

David Wargo, GMP Securities.

Just a quick couple of quick questions. One, what price do you need to bring on the Arizona strip? If you were to receive the permit today what price would you need?

I think we could bring it on today.

So even if you were to sell into the $48 spot price it would be economic?

That's based on our preliminary reviews, but we're finalizing everything, but yes.

That is actually quite good. And then you had the 9.9% stake in [URZed]. Are you guys still interested in pursuing ISL in the US? Or would you look to monetize that investment, maybe put it towards the capital for Zambia or whatnot?

Those are all options the board is looking at. As you all know we have a new chairman, Mr. Gill, who is really looking at the strategic direction and he is getting all the board and management focused on that over the next few weeks. So those are all things that potentially could be considered, but I cannot give you any firm answers right now.

Okay, and did you have -- just a quick question with regard to Zambia, obviously you have the resource update you put out I think it was last quarter and whatnot. But what capital would you guys be looking at to bring that operation on?

As you know, we made the transition very late in the game to move to the heap leach processing methodology versus the plant. We are still sort of optimizing the mining in that. But the rough capital right now would be between $100 million and $120 million.

That's it. Perfect. Thank you.

(Operator Instructions) Duncan McKeen, Macquarie Capital.

Good morning Ron. I just had a question, with the higher recoveries you're getting on the alternate feed circuit, is there an opportunity for you guys to go beyond 160,000 pounds per six months?

Yes, there is the potential.

Can you just remind us on what kind of cash costs you're getting on that circuit?

The cash costs on that circuit will be between $30 and $35 per pound including all of the mill overheads.

Okay and then for Caribou, is AREVA looking at going through a similar study to update CapEx and OpEx on that deposit as well, that project?

I would say the primary focus right now is on Midwest not as much on Caribou. But actually in terms of where AREVA is focused, it would be Midwest is number one and McClean North is number two, then Caribou.

Okay. Also on -- with the stockpile you have with the Sue A, B, and E material, 287,000 tons, how long can that keep the mill going for?

That can keep us going right through to 2010.

Through to the end of 2010?

Yes. Depending on the milling strategy we choose, it could even take us a little bit into 2011, but more or less take us through 2010.

Okay. And then for Phoenix is it six holes that are left outstanding to be reported this year?

I think it was four holes that are left outstanding.

Okay. Two weeks, you said, approximately on that timing?

Yes. We made the decision to, rather than putting out releases, let's try and put out the complete picture as to what the results of the summer program are. We felt it was better to do it that way.

With the release of those holes will you be providing more information about the 2010 drilling program?

Not much more than what we have already done, because obviously we have to meet with the partners which will occur in September/October to approve the program. So we won't be able to do that until the partners have signed off.

Okay. Any idea of sort of dollar value or number of holes that you may look at for that program?

I think you could kind of estimate it, but at this point in time I don't want to say anything until the partners have signed off.

Yes, that's fair. Appreciate that, thanks very much.

Adam Schatzker, RBC Capital Markets.

Just a follow-up on the Zambia stuff. Given that you mentioned the CapEx there, I'm wondering if maybe with the new heap leach plant you can speak a little bit to production levels, cash costs and recoveries that you are expecting as well.

We are still -- we only did preliminary column leach tests. That is one of the things we need to do in 2010, likely, is to do some larger diameter column work. But the preliminary recoveries were 75 to 85%. In terms of cash costs, the numbers we have are too rough right now. We need to do more work on. Them but I think definitely we would be economic at today's prices for sure. And was there another component or does that answer it?

Just production levels.

Production levels, we're looking at between 1 million to 1.5 million pounds per year.

So, cash costs would you say in the 20s, 30s -- (multiple speakers)

Latter.

Okay, great. Thank you.

There no further questions registered at this time. I would like to turn the meeting back over to Mr. Hochstein.

I would like to thank everyone for participating in this call and look forward to -- and again, Jim and I are available for any questions that you might have following up. But thank you again for participating.

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.