Denison Mines Corp (DNN) 2009 Q3 法說會逐字稿

Good morning, and welcome to the third quarter results for Denison Mines on Thursday, November 12, 2009. Your host today for will be Mr. Ron Hochstein. Mr. Ron Hochstein, please go ahead.

Thank you, Jeanette. Good morning, and welcome to the third 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 discussion of the quarter.

Following that, Jim will speak 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 US dollars, unless otherwise indicated.

The quarterly financial results were lower than expected primarily due to lower sales during the quarter. On the uranium side, it is not that we couldn't sell, but we used our discretion, chose not to sell into the spot market during the traditionally slow summer period. On the vanadium side, demand was low and sales were just not available. As a result, earnings were below our forecast.

The quarterly results were also obviously impacted by the write-down of the Zambian Mutanga project. When we purchased that property in August 2007, we were in a different uranium environment. The spot price was around $90 per pound, having peaked at $136 in June, and the long-term price was stable at $95 per pound.

Even though we have nearly doubled the resource, our re-evaluation of the property reflects the current environment, as well as some refinements in our cost estimates. Jim will speak to the details of that later. This write-down is an accounting valuation issue and we continue to work on this project towards a production decision.

With regard to the market, uranium spot price was weak through the traditionally slow summer period, dropping to a low of $42 per pound. A combination of the failure of the main hoist at Olympic Dam and speculation that the US Department of Energy might not transfer or sell its inventory, as had previously been announced, pushed the price upwards to $49.50 per pound.

However, last week, the DOE continued on its plan to sell the equivalent of approximately 4.3 million pounds of uranium in 2010 which resulted in a weakening of the price by $4 to $45.50 per pound. It is disconcerting that the DOE, despite opposition from the entire nuclear fuel cycle, from producers right through to utilities, plus opposition from the US Senate and House, continues on this path, resulting in an overhang in the market that is negatively affecting the price.

We anticipate that due to the continued low demand and the DOE overhang, the spot price will remain flat in the $45 to $47 per pound range through the fourth quarter. In the vanadium market, several major vanadium producers in Russia, South Africa and China shut down their V205 and ferrovanadium production resulting in the vanadium price strengthening to a high of $6.75 per pound V205.

However, in September, one of the South African producers announced that they were restarting operations. And prices have softened to the current $6 per pound. Vanadium demand is currently low and not likely to improve through year end. Price will likely stay in the current $6 per pound range for the remainder of the year and strengthen as demand hopefully increases in the first quarter.

Over the past quarter, we have been selling into both the vanadium and 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.

There were a number of operational highlights during the quarter. Production has exceeded expectations in both Canada and the United States. We received the air quality permit for Arizona 1 and now have all of the permits necessary to commence production, and on Tuesday, we announced a production decision for Arizona 1. I will discuss the details later on this call.

At Wheeler River, where Denison is the operator and 60% owner, the Phoenix Zone uranium discovery continues to expand. The joint venture partners were so pleased with the summer drilling results that a 7,500-meter fall drill program was commenced to accelerate the evaluation of this discovery. In Mongolia, exploration drilling has confirmed continuity of uranium mineralization of Ulzit, or at Ulzit, and a new zone of mineralization was discovered at the Choir depression near our Haraat deposit.

As I mentioned earlier, our sales were lower than forecast. We sold only 128,000 pounds U3O8 at an average of $54.82 per pound. And vanadium sales totaled $846,000. Now for the numbers. Jim?

Thank you, Ron. Good morning, everyone. Revenue was $12.7 million for the third quarter of 2009 compared with $36.5 million for the third quarter of 2008. For the nine months ended September 30, 2009, revenue was $48.1 million compared with $86.4 million in the same period in 2008.

Uranium sales revenue for the third quarter was $7.5 million. Sales from US production were 30,000 pounds U3O8 at an average price of $61.28 per pound. Sales of Canadian production were 98,000 pounds U3O8 at an average price of $52.84 per pound. Sales volumes were lower this quarter because we sold only into our long-term contracts and sold no spot volume due to pricing.

During the quarter, the Company also sold 3,300 pounds of vanadium, as blackflake, at an average price of $5.83 per pound and 69,000 pounds of ferrovanadium at an average price of $11.96 per pound. Total vanadium sales revenue was $846,000. No vanadium was sold in 2008.

Revenue from Denison's Environmental Services division was $4.1 million for the quarter, compared with $1.4 million during the same period last year. The increase in activity at DES is due to the Company's contract for care and maintenance at the FARO mine complex in the Yukon which was signed in late 2008.

Revenue from the management contract with Uranium Participation Corporation was $344,000 compared to $425,000 in the third quarter of last year. Consolidated net loss was $91.3 million, or $0.27 per share, for the three months ended September 30, 2009 compared with consolidated net income of $332,000, or roughly break-even per share, for the same period in 2008.

For the nine months ended September 30, 2009, consolidated net loss was $110.8 million, or $0.41 per share, compared with a consolidated net loss of $23.8 million, or $0.13 per share, for the same period last year. Net cash used by operations during the quarter was $15.4 million compared with $11.1 million for the three months ended September 30, 2008. For the nine months ended September 30, 2009, net cash used by operations was $48.1 million compared with $9.4 million in the same period in 2008.

Denison ended the quarter with inventory of 715,000 pounds of U3O8 worth approximately $32.5 million at current spot prices, and 928,000 pounds of vanadium and 57,000 of ferrovanadium, together worth approximately worth $6.3 million at current prices.

During the quarter, Denison determined that it should take an impairment charge against the carrying value of its mineral property investment in Zambia and accordingly has recorded a pre-tax impairment charge of $100 million. The impairment recognizes revisions in the latest mine plant, increases in the project cost estimates, and a decline in the long-term uranium price outlook.

We assessed the fair value of the Mutanga project in comparison with published market values of mining companies operating in a similar geographic area to arrive at the magnitude of the write-down taken. Denison also recorded a $30 million future tax recovery as a result of the impairment charge. Denison is engaged in uranium exploration in Canada, the US, Zambia, and Mongolia. Exploration expense totaled $3 million for the months ended September 30, 2009 compared to $7.6 million during Q3 of 2008.

For the nine-month period ended September 30, 2009, exploration expense totaled $7.6 million compared with $17.9 million in the same period last year. The Company had cash and cash equivalents of $11.3 million at September 30, 2009, trade and other receivables of $13.4 million, and portfolio investments with a market value of $24.7 million.

The Company has amended its revolving credit facility to reduce the amount of the facility to $60 million which will be used primarily for working capital purposes. The term of the facility remains to June 30, 2011. Bank indebtedness under the facility at September 30, 2009 was nil, however, $7.5 million of the line is used as collateral for certain letters of credit.

The covenants under the facility have also been reduced and the Company is currently in compliance with all covenants. For a more detailed discussion of our financial results, I refer to you 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 906,000 pounds U3O8 for the three months ended September 30, 2009 and 2,675,000 pounds for the nine months ended September 30, 2009, compared with 818,000 pounds and 2,566,000 pounds for the three and nine months ended September 30, 2008 respectively.

Denison's 22.5% share of production totaled 204,000 pounds in the third quarter and 602,000 pounds for the nine months of 2009 compared to 184,000 and 577,000 pounds for the three months and nine-month periods of 2008. Production costs in Canada declined for the quarter and nine-month period of 2009 as compared with 2008.

Canadian production costs were $44.10 per pound U3O8 for the quarter, and $43.98 per pound for the nine months ended September 30, 2009. For comparable periods in 2008, the production costs were $56.60 and $54.92 per pound U3O8. Production costs less amortization, depletion and depreciation for the quarter and nine-month period ended September 30, 2009 were $18.31 per pound and $19.36 per pound respectively.

Comparative costs for the same periods in 2008 were $22.99 per pound, and $21.65 per pound. Uranium inventory from Canadian production was 330,000 pounds at September 30, 2009. The McClean Lake mill ore stockpile at September 30 had approximately 243,000 tons of ore from the Sue E, B and A deposits containing approximately 3.7 million pounds U3O8 with Denison's share being 842,000 pounds.

The Sue E, Sue B, and Sue A deposits are mined out and no new mine production is planned for the remainder of 2009. Milling other stockpiled ore is ongoing and total production for 2009 in McClean Lake is expected to 3.5 million pounds U3O8 of which Denison's share is 788,000 pounds, up from our previously budgeted 761,000 pounds.

Development of the Midwest and Caribou projects at this time continues to be on hold. The regulatory process for both projects is ongoing. As well, the Midwest capital and operating cost estimates are being updated. In the US, processing of conventional ore at the White Mesa mill in Blanding, Utah was temporarily halted in May 2009 and it is expected to resume in the first quarter of 2010.

Processing of alternate feed material began in early June using the newly constructed alternate feed circuit, and production for the three months ended September 30, 2009 was 85,000 pounds. Combined with the 423,000 pounds U3O8 produced from conventional ore, uranium production for the first nine months of 2009 totaled 508,000 pounds.

In the comparable periods in 2008, production was 286,000 pounds U3O8 for the three months and 399,000 pounds U3O8 for the nine months. The Company produced 502,000 and 250,000 pounds V205 for the nine months ended September 30, 2009, and 2008, respectively.

Production costs for the processing of alternate feed material, plus the cost for conventional ore stand-by and fixed mill administration costs were $52.13 per pound U3O8. Deducting depletion, amortization, and depreciation yields a production cost of $39.69 per pound. The production costs for the nine months ended September 30, 2009 were $72.42 per pound U3O8 and vanadium equivalent. Deducting depletion, amortization and depreciation yields a production cost of $36.19 per pound.

Inventory available for sale from US production was 385,000 pounds of uranium, 928,000 pounds of vanadium as blackflake, and 67,000 pounds of ferrovanadium at September 30, 2009. On the Colorado Plateau, the Pandora and Beaver mines are currently operating. Four other Colorado Plateau mines remain on active care and maintenance as well as 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 September 30, 2009, a total of 142,000 tons of conventional ore are on the stockpile at the mill containing approximately 571,000 pounds U3O8. The Company also has approximately 745,000 pounds contained in the alternate feed material, stockpiled at the mill at September 30, 2009.

The Company expects to produce close to 600,000 pounds of U3O8, and has produced 500,000 pounds of V205 at the White Mesa mill in 2009. As I mentioned earlier, Denison now has all the necessary permits to commence production of the existing Arizona 1 mine located in northeastern Arizona.

On Tuesday, we announced that production is expected to commence in the first quarter of 2010. Work has already begun on shaft and hoist inspections, preparation of the underground facilities, and work on the surface to ensure we meet all of our new permit requirements. Production of 855,000 pounds U3O8 worth approximately $50.8 million, based on projected realized selling prices, is scheduled during the period 2010 to 2012 at an all-in cash cost of $30.50 per pound U3O8.

The capital costs of completing the development is forecast at $2.3 million. Also to note, there is exploration potential on this deposit yet deeper. The Arizona 1 deposit is only one of a number of breccia pipe deposits in Arizona owned by Denison which include Pinenut, EZ-1 and EZ-2 and Canyon. These are expected to be developed sequentially to produce over 4.7 million pounds of uranium.

The Company continues to expect to sell 1.2 million to 1.3 million pounds of U3O8 in 2009. Due to lower demand, we have reduced our vanadium sales guidance from 1.5 million pounds to 975,000 pounds.

Turning now to exploration, in the Athabasca Basin, Denison is currently participating in 32 exploration projects primarily located in the southeast part of the Basin. Denison's exploration spending in 2009 is expected to total $8.3 million. As I mentioned earlier, drilling on the Wheeler property continued to expand the Phoenix Zone discovery.

The uranium mineralization now extends along a stripe over 1,000 meters with the best intersection to date being 52.6% U3O8 over six meters in drill hole 273. The mineralization remains open. While this mineralization is similar to all locations to that of the McArthur River ore bodies and occurs in a similar geological environment, the joint venture is observing stronger and more intense basement alteration as the rigs progress to the northeast. The significance of this remains unknown at this early stage.

Favorable results from the summer drill program prompted the joint venture, which consists of Denison at 60%, Cameco Corp. at 30% and JCU (Canada) Exploration at 10% to authorize a $1.5 million, 7,500-meter fall drilling program using two drill rigs. This program commenced late in the quarter.

The results of the fall program are expected to be released once all results are received, likely in mid-December. Plans are also underway for a major 2010 program utilizing two rigs with one rig concentrating on delineation drilling of this exciting discovery.

During the fourth quarter, ground geophysical surveys in support of future drilling are continuing on Moore Lake, Wheeler River and the Turkey Lake property. An AEM survey will also be completed on our Key Lake South property during the fourth quarter.

In Mongolia, a limited exploration program was completed during the quarter. Work at the Ulzit prospect has confirmed continuity of uranium mineralization discovered below the water table in the 2008 program and further drilling will be necessary to evaluate its economic significance. Similarly, a new zone of mineralization was discovered at the Choir depression near our Haraat deposit which will necessitate further follow-up.

In October, the reserve report for the Gurvan Saihan Joint Venture's deposit of Hairhan and Haraat was formally approved by the Mongolian government. This approval is the first official registration of the uranium resource in Mongolia. In addition, the general environmental impact assessments were approved on October 30 by the Ministry of Nature, Environment, and Tourism.

These are important steps for the registration of the Joint Venture licenses under the new Mongolia nuclear energy law. In Zambia, work continued on the review by the applicable government agencies of the mining license application, environmental report, and radioactive license application. We anticipate receipt of these licenses in November.

Geological mapping and prospecting also continued during the quarter on a variety of targets in preparation of future further drilling.

That concludes the formal presentation. Thank you for your time and now we'd be happy to answer any questions. Jeanette?

Thank you, and I will take questions from the telephone lines. (Operator Instructions) There will be a brief pause for participants to register for the questions. Thank you for your patience.

(Operator Instructions) Thank you. Our first question is from David Wargo from GMP. Please go ahead.

Hey, Ron. I had a quick question regarding capital spend. What is the new budget for the Company in 2010, and maybe you can provide 2011 and 2012 as well?

Dave, right now, we're just finalizing our 2010 budgets for approval of the board in mid-December. We would kind of like to withhold that.

Okay.

Also, with regards to 2011, 2012, we're also in the process of putting together a five-year strategic plan --

Okay.

-- which will be also presented to the board in mid-December, and so we will be coming out shortly thereafter, early in the new year with the 2010 numbers, plus also a new strategic plan which will lay out Denison's objectives for the next five years.

Okay. And then just one quick question, I mean where is AREVA's head with regard to the development of the Athabasca properties that you have a JV with them? And when do you expect to be able to have an actual go-ahead on those properties?

We -- it is a good question. We have our joint venture meetings actually next week. And we continue to try to push AREVA to move those projects forward as quickly as possible.

Obviously, AREVA has many priorities that they have to be dealing with and some of those priorities may not always jive with Denison's, but we continue to try to work with them to move both Caribou and Midwest forward. Also, McClean North, the potential underground project also I think in our opinion looks quite encouraging.

Okay. And, I guess, last question, if your JV meetings are -- they go well, and they were to say, okay, let's build it, when could we start modeling Midwest coming into production? And Caribou? Realistically, if all went well at the meeting?

Well, the meeting is just the one decision. There is still, I think, a big part of those time frames is going to be driven by the regulatory process. And we still -- Caribou, there is not too many issues. That should be able to be moved fairly quickly, David.

The issue with Midwest is still, that fish habitat compensation is still an unresolved issue, and we're having to work with a multiple of government agencies on that. So that --

Welcome to Canada.

Yes, that is the wild card for Midwest, is still going to be permitting and regulatory.

Okay. Thank you very much, Ron.

You're welcome.

Thank you. Our next question is from Edward Sterck from BMO Capital Markets. Please go ahead.

Hello, chaps. Thanks very much for taking my question. I've just got a bit of a question regarding sales. And I came on to the call a bit late so I think you may have already answered this. But in terms of uranium sales, it didn't look as though you made any spot sales in Q3. Do you expect those sales to be correspondingly higher in Q4?

Yes, that's right. We just sold into our long-term contracts in Q3. And we still are holding our sales guidance, so, yes, there will be higher sales in Q4.

And is that going to be regardless of the spot price of uranium? Or did you basically not sell because the uranium price wasn't -- didn't meet your expectations?

No, that's correct. As you know, it is a traditionally kind of a slow period, and I think this year it was even slower than normal. There was essentially little to no demand at all through that third quarter.

So we are seeing slight increases in demand, and we already have some spot sales that have occurred, and some that are in place for the fourth quarter.

Okay. And I mean just looking at the figures, it looks as though, given your cash position in the inventory build, and the money that has gone into production, that really there needs to be some realization of the assets that are held in inventory.

How much do you think the inventory will be drawn down in the fourth quarter? Is that hard to say at the moment?

It's Jim Anderson, Ed.

Hello.

The inventories will be drawn down a fair bit by the year end because of the spot sales. The exact levels, I don't know just yet. But they will be quite lower, quite a bit lower than they are at the third quarter.

Okay. Fantastic. I think that's it for me.

Thank you. Our next question is from Pat Donnelly from Salman Partners. Please go ahead.

Hi, Jim, and Ron. How are you guys doing?

Good, thanks.

Just a question on your investments. I'm trying to figure out what your investment holdings are. I assume it is -- you guys are still holding on to Uranerz and Mantra. I'm just curious what your positions are on those companies?

Well, we don't really like to say what we're planning to do. It kind of signals to the market, Pat. But we consider, we're looking at any opportunities with our portfolio investments to essentially, to see whether it is a strategic decision as to whether it is to hold or liquidate. Jim, do you have anything more to add to that?

The investments are as you mentioned plus Energy Metals. Energy Metals does have -- Energy Metals is in Australia -- it does have a -- there is a bid out for 70% of those shares. So we're looking at that as well. So it is those three companies primarily.

Okay. And then my other question is, in terms of EZ-1, EZ-2, Pinenut and Canyon, what would be -- I mean what stage are you at with those? Have you started the permitting and licensing and what is the timeline on those deposits?

I will answer the last part first. The timeline on those deposits is all part of sort of our five-year strategic plan, so it would be a much more, better information coming out when that plan comes out. But, yes, Pat, all -- permitting on all of those deposits is underway in various stages.

At the same time that we've received our air quality permit for Arizona 1, we also received aquifer protection permits, groundwater permits, for both Pinenut and Canyon which were key permits. Air quality permits are still required for both of those deposits. And EZ-1, EZ-2 is a little further back. It is going to require an EIS but that is already well underway with the BLM.

Great. Thanks, guys. That's all I need.

Thank you.

Thank you. (Operator Instructions) Our next question is from Bart Jaworski from Raymond James. Please go ahead.

Hi, Ron. This is a question for Jim. Regarding the cash flow from financing, I was expecting about $30 million more than what was shown from both the $94 million financing with Kepco and the $94 million equity deal. Where was the shortfall? Or if you can add some color there?

I don't know what you're referring to, or what your expectations were based on, Bart, but those transactions were completed in June, as you know, so they were all recorded in the second quarter.

Yes, but it shows about $150 million or $148 million.

The only thing I can think is that those finances were in Canadian dollars, and, of course, we are reporting in US dollars, so that might account for it.

Okay. All right. And then the $60 million credit facility, maybe I missed this, but did you provide some color as to why that was lowered from $125 million?

Well, basically, we wanted to reduce the covenants and give us better access to the funds. That is primarily it. We're looking at using the facility as a working capital line. And the covenants weren't really suitable for that. So we reduced it and really transformed it into a working capital line.

Got you. Okay. Perfect. Thanks very much.

Thank you. There are no further questions. Please go ahead, Mr. Hochstein.

Okay, well, thank you very much for attending the call and as I mentioned earlier, our budgets and guidance for 2010 and our five-year strategic plan, we anticipate releasing those early in the new year. So thank you, everyone.

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