Denison Mines Corp (DNN) 2009 Q4 法說會逐字稿

Good morning, and welcome to the year-end 2009 results conference call for Friday, March 12, 2010. Your host for today will be Mr. Ron Hochstein. Mr. Hochstein, please go ahead, sir.

Thank. Good morning, and welcome to the fourth quarter and year-end 2009 financial results conference call of Denison Mines Corp. Participating with me today is Jim Anderson, Executive Vice President and Chief Financial Officer. We'll start with a look at the year's highlights. Following that Jim will speak to the financial results, and then I'll look ahead to 2010 and beyond. We will then answer questions. This discussion includes forward-looking information. Actual 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 release. All amounts are in US dollars, unless otherwise indicated.

The most exciting development in 2009 was the Phoenix discovery at our Wheeler River property in Athabasca region of northern Saskatchewan. We believe that Phoenix is one of the most promising new discoveries in this uranium rich area in the past 20 years. Dennis owns 60% of the Wheeler, and is the operator. Chemical Corp owns 30%, and JCU Canada Exploration Company Limited owns 10%. Some of the best intersections of the three 2009 drill programs included 62.6% U3O8 over six meters, 32.8% eU3O8 over 7.6 meters, and 16.8% U3O8 over nine meters. Uranium mineralization is at a depth at approximately 400 meters, and extends over one kilometer strike length, and remains open in both directions. We're looking at a discovery with a potential to host more than 75 million pounds, and there are at least five additional target areas with known mineralization.

Other highlights in 2009 included a paying down all of our debt. At year end, we are debt free, and we had a cash balance of $19.8 million and working capital of $75.6 million. One of the means that contributed to our debt repayment was the agreement we struck in June 2009 with the Korean Electric Power Corporation, or KEPCO. KEPCO purchased 17% stake in Denison, and just importantly signed an off take agreement of 20% of Denison uranium production from 2010 to 12015, with a minimum purchase of 350,000 pounds per year. They will continue to be a valuable ally, offering Denison global exposure and a cooperative business relationship. We ended the year having met our production targets, producing 1.4 million pounds U3O8, and 501,000 pounds of V205. At McClean Lake, production was up almost 7% over Areva's 2009 target. In June, at White Mesa, we completed the new alternate feed circuit, on time and on budget. We had targeted 160,000 pounds from the circuit in 2009. Our final figure was approximately 19% higher than targeted, or 191,000 pounds U3O8.

In December, we opened the fully-permitted Arizona 1 mine, which has an estimated resource of 856,000 pounds U3O8. Mine development and production are well underway at this operation. In Mongolia, the Gurvan Saihan Joint Venture which is 70% owned by Denison, had it's licenses renewed for three years, and submitted its resource report, which was formally accepted by the Mongolia government. This is the first uranium resource accepted by the government, and is the first stage in the receipt of mining license. In Zambia, the Mutanga project environmental report or environmental impact statement was accepted by the Zambia government. At the White Mesa Mill, the Company worked through 2009 without a loss time accident, and surpassed the admirable milestone of over one million hours work without a loss time accident. Finally, in December, the board approved a five-year strategic plan which will position Denison to achieve its long-term goal of 10 million pounds of sustainable U3O8 production by 2020. But more about that later. Now I'd like to turn the call over to Jim, for a look at the financial results.

Thank you, Ron. Good morning, everyone. Because of the lower outlook for uranium prices in early 2009, we cut back on production, putting some of our higher costs US mines on temporary stand-by, while keeping the lower cost mines open. In May we ceased conventional ore processing at White Mesa, stock piling ore for future processing, while proceeding with the lower cost alternate feed production. As a result of the decrease in overall production, and therefore sales volumes, revenue for the year was down to $79.2 million, compared to the $123 million in 2008. The revenue included uranium sales of $59.9 million. Sales of US production were 635,000 pounds U3O8, at an average price of $53.04 per pound. Sales of Canadian production were 492,000 pounds U3O8 at an average price of $48.76 per pound. Total U3O8 sales were 1,127,000 pounds at an average price of $51.17 per pound. Of the 1.1 million pounds, 677,000 pounds were sold into long-term contracts, and the remainder was sold in spot market.

As we said at the end of the third quarter, we were holding off on spot sales until the fourth quarter of 2009, because we believed that uranium prices would rise. This did prove to be true. The combination of our -- of the terms of our long-term contracts and a rise in spot prices yielded a higher average price per pound in Q4 as compared to Q3. In 2009, we sold 520,000 pounds of V205 at an average of $3.73 per pound, and 229,00 pounds of ferrovanadium at an average price of $11.09 per pound. Total vanadium sales revenue for the 12 months was $4.48 million. Net cash used in operations during the year was $42.4 million, compared with $8.7 million for the 12 months ended December 31, 2008. Consolidated net loss for the year was $147 million or $0.51 per share, compared to the net loss of $80.6 million or $0.42 per share in 2008.

A good deal of our net loss was attributable to three non-cash charges. First, during the third quarter, the Company determined that it should take an impairment charge against the carrying value of it's mineral property investment in Zambia, and accordingly recorded a write down of $100 million. The impairment recognizes a decline in the long-term uranium price outlook, and the refinements in the mine plan and project cost estimates. The Company also recorded a future tax, a future income tax recovery of $30 million as a result of the impairment charge. Second, Denison Mines evaluates the carrying amount of goodwill annually to determine whether it has become impaired. The goodwill amount arises from the acquisition of Denison Mines Inc. in 2006, and was allocated to the Canadian mining segment.

We examine the fair value of assets and liability of the segment, at December 31, 2009, based on a discounted cash flow analysis for production assets, using expectations for future uranium prices, foreign exchange, future costs and a discount rate of 10.5%. Exploration properties were valued at their estimated market value at December 31, 2009. Based on this analysis, the Company determined that a goodwill impairment charge of $22.1 million should be made, and charged to operations in the fourth quarter. And third, we also included an expense of $3.7 million in the fourth quarter relating to the net realizable value of the Company's vanadium and uranium inventory, based on the current price outlook. Denison ended the year with inventory available for sale of 484,000 pounds U3O8, 773,000 pounds vanadium, and 2,000 pounds of ferrovanadium, with a combined worth of approximately $24.6 million at current market prices.

Denison Mines is engaged in uranium exploration in Canada, the US, Zambia, and Mongolia. Explorations expenses were one of the areas targeted for cutback in 2009, in order to conserve cash. As a result, exploration expense totaled $10.1 million for the 12 months ended December 31, 2009, compared with $20.1 million during 2008. However for the three months period ended December 31, 2009, exploration expenses totaled $2.5 million, compared with $2 million for the same period in 2008. The increase was attributable to the decision to carry over the fall drilling program at Wheeler River. Normally there are two fall drilling programs, winter and summer. However, in 2009 buoyed by the summer results, we instigated a third fall drilling program which showed up in the Q4 expenses. As Ron mentioned, it was money well spent.

From an liquidity perspective, the Company had cash and cash equivalents of $19.8 million at December 31, 2009, trade and other receivable of $13.7 million, and portfolio investments with a market value of $10.6 million. The Company has in place a revolving credit facility of $60 million, which will be used primarily for working capital purposes. The term of the facility is the June 30, 2011. Bank indebtedness under the facility at December 31, 2009, was nil. However, a $9.2 million of the line is used as collateral for certain letters of credit. For a more detailed discussion of our financial results, I do refer you to our MD&A. Now I'd like to turn the call back over to Ron.

Thanks Jim. Now for our production. McClean Lake Joint Venture in northern Saskatchewan produced 934,000 pounds U3O8 for the three months ended December 31, 2009, and 3,609,000 pounds for the 12 months, compared with 682,000 pounds and 3,248,000 pounds for the three and 12 months ended December 31, 2008, respectively. Denison's 22.5% share production totaled 210,000 pounds in the fourth quarter, and 812,000 pounds for the 12 months of 2009, compared to 154,000 and 731,000 pounds for the three month and 12 month periods of 2008. Canadian production costs were $50.47 per pound U3O8 for the quarter, and $45.49 per pound for the 12 months ended December 31, 2009. For comparable periods in 2008, the production costs were $57.99 and $55.29 per pound U3O8.

Productions cost, less amortization, depletion and depreciation for quarter and year-ending December 31, 2009, were $19.99 per pound and $19.49 respectively. Comparative costs for the same periods in 2008, were $28.71 and $23.19 per pound. In the US, processing of conventional ore at the White Mesa Mill in Blanding was temporarily halted in May 2009, and is expected to resume next week. Conventional ore processing yielded 423,000 pounds U3O8, and 501,000 pounds of vanadium for the year. Processing of alternate feed material began in early June, and production from the alternate feed material in the three months and year ended December 31, 2009 was 107,000 and 191,000 pounds U3O8 respectively. Production costs for the three months ended December 31, 2009, were $52.06 per pound U3O8 equivalent, deducting depletion, amortization, and depreciation yields a production cost of $39.52 per pound. The production costs for the year ended December 31, 2008, were $70.26 per pound U3O8 and vanadium equivalent. Deducting depletion, amortization, depreciation yields a production cost of $37.62.

Now, looking forward to 2010, uranium production is expected to total 1.6 million pounds U3O8. This includes 418,500 pounds from McClean Lake where the lower value is due to the decision to put the McClean Lake Mill in care and maintenance mode in mid 2010, until the feed sources are available. The White Mesa mill is is projected to produce 1.2 million pounds U3O8, and 2.8 million pounds V205 in 2010. In terms of sales, we currently have five U3O8 contracts in place. Sales are based on a mix of long-term, fixed, and spot prices, with an average floor price in 2010 of $48.68 per pound U3O8. Uranium sales are expected to be approximately 1.8 million pounds, at an average realize the uranium price of $54.34 per pound, based on an assumed long term price of $64 per pound, and spot price for $49 per pound U3O8. About 55% of our sales will be into our long-term contracts.

The vanadium sales are expected to be 3.4 million pounds in 2010. And vanadium revenues is expected to be $19.3 million, based on an assumed price of $5.75 per pound V205. With regards to sensitivities, for each $5 per pound change in U3O8 spot price, the revenue changes by $4.8 million. And a $4 change in the long-term price changes revenue by $2.3 million. A $1 per pound change in the vanadium price results in a $3.4 million change in revenue. Cash costs of production is expected to average $35.15 per pound U3O8, net of vanadium credits. This compares to $44.27 in 2009 calculated on the same basis.

Capital expenditures for 2010 of the Company's operations is estimated at $17.5 million, of which $3.6 million is for mine development, and the remainder for tailing sub-construction of the White Mesa, and other plant and equipment at our various operations. In 2010, Denison will participate in exploration programs on properties in Canada and the United States. In Canada, we're focused on Wheeler River, where we have a 45 hole, 22,500 meter drill program underway. The drilling, this drilling is continuing to the evaluation of the Phoenix discovery, and initial results are anticipated in the next seven to 10 days. We will also have programs at Hatchet, Turkey, Wolly, McClean Lake, Park Creek and Moore Lake. In the US, we're focus on drilling near our existing Pandora and Beaver mines in Utah, with goal of discovering new resources to expand the mine life. The total budget for exploration is estimated at $11.5 million of which Denison Mines share will be approximately $6.3 million, of which $4.4 million will be spent in Canada. On development stage projects, a total of $8.8 million will be spent in 2010, of which $6.5 million will be incurred to advance the Zambian and Mongolia projects. The remainder will be spent on Denison's US and Areva operating Canadian projects. Our goal is to bring these on-line within the next two to five years, assuming satisfactory uranium prices.

Now looking further than 2010. Denison Mines has a geographic diversified resource base. This, these figures that you see, do not include our historical resources at Elliot Lake, which contain more than 200 million pounds U3O8. This resource base, includes a global portfolio of development projects, including the 100% owned Mutanga project in Zambia, the 70% Gurvan Saihan Joint Venture in Mongolia, our 25.17% stake in the high-grade open pittable Midwest deposit estimated to contain 43.3 million pounds U3O8, and our 100% owned US properties, including three breccia pipe deposits, containing an estimated 4.5 million pounds.

In addition to these development projects, there is a 60% owned Wheeler River Phoenix discovery. Along with this resource base, are the 22.5% owned McClean Lake mill and the Athabasca Basin, the only conventional ore processing mill in the basin, and it's designed to process high grade, which is why the Cigar Lake Joint Venture ore is contractually destined for McClean Lake. And our wholly owned and recently refurbished White Mesa Mill in Utah with it's vanadium co-processing line, and newly constructed alternate feed circuit. The combination of our diversified resource base, and modern mill capacity, forms a solid asset starting point for building a new, newer, stronger Denison Mines. In December, the Board approved the new five-year strategy, which focuses our business development activities, including exploration, project development, and acquisitions, with a goal of increasing Denison Mines annual production to a sustainable level of 10 million pounds U3O8 by the year 2020. This would give Denison Mines roughly 5% of global production, estimated by UxCo to reach 210 million pounds by 2020.

Denison Mines will accomplish this goal in two ways. One, by bringing existing projects into production. For instance, based up Areva's current projections and subject to regulatory approvals, the Midwest project could be operational by 2016. Denison is working towards bringing the Wheeler River project on stream by 2018. And the Mongolian and Zambia projects could be up and running by 2012. Secondly, we will expand our asset based by pursuing new opportunities. We are especially interested in supplementing our existing assets, but also in leveraging the ISR knowledge, and experience we're gaining in Mongolia, and diversifying our production methodologies through the acquisition of ISR amenable deposits.

New projects and acquisitions aside, based on Denison's current stable of projects, uranium production is projected to increase from 1.6 million pounds U3O8 in 2010, to 11.7 million pounds by 2018. Although the current uranium market conditions are not encouraging, with current spot prices near $40 per pound U3O8, we believe the near and longer term fundamentals remain strong. We've dealt with a number of issues in the first half of 2009. We strengthened the balance sheet, focused on reducing our operating costs, and established a good portfolio of uranium sales contracts, and made a great discovery at Wheeler. All of these will contribute to a much more positive outlook for 2010, and beyond. That concludes the formal presentation. Thank you for your time, and now we would be happy to answer any questions. Diane?

(Operator Instructions).

The first question is from Adam Schatzker from RBC Capital Markets. Please go ahead.

Hi, good morning, everyone, it's Adam Schatzker here. Just a few questions if I can start with. Curious, Ron, when you say that Wheeler could start by 2018. I'm just trying to figure out how that time line might flow, given there are no resource yet, obviously since successful drilling. And as well, where would that be processed, because looking at the plans for McArthur and Cigar, and should of course, Midwest come on line, I don't know where the capacity would be?

Well, Adam, our goal with the drilling this year is to have a 43-101 resource by the end of this year, and aggressively move into permitting next year. And with regards to mill capacity, there is capacity. We believe there would be capacity at McClean with the expansion of -- the mill could be expanded to 16 million pounds, it's currently been expanded, but not licensed to go to 12, so there would be opportunities to begin milling of ore at McClean.

Okay. So that's, that's obviously a lot to accomplish between now and 2018 to get to that. The other question I have, is the alternate feed, now that you've got a fair amount of that produced and under your belt, what is the operating cost of that?

The cost, if you look at our fourth quarter costs, those are primarily, the operating costs for the alternate feed, because that's the only production at the mill. But that includes also, Adam, all of standby costs for the mill, and all the mill admin. If you look at the pure incremental costs of what it costs us to produce alternate feed, just running that circuit, it's between $15.00 and $20.00 per pound.

Okay. I'll ask one more, and let others ask for now. Ferrovanadium is something relatively new for you guys. And I'm just wondering why the switch there, from the previous plans, it was always just the V205. And I'm wondering if that's a reflection on your ability to get into the V205 market, and the need to go to ferrovanadium.

No, actually we have spoken well over a year ago, at looking at ferrovanadium as an option. It's not any issue with regards to being able to pursue the V205 market. It really is looking at opportunities with regards to the market. There are times, such as right now, where when you look at the net back on a V205 basis, the ferrovanadium market is better. We have just been pushing more into ferrovanadium in the last quarter, just for moving that, being able to make those sales more than anything else.

Okay. Great. Thank, I'll let someone else have a chance here.

Thank you.

(Operator Instructions).

I have a follow-up question from Adam Schatzker from RBC Capital Market.

I hope you don't mind guys, it looks like nobody else has any questions.

No problem.

Looking at the projects in Canada, Midwest and Caribou, etc., what's the progress on those?

We have our joint ventures meetings coming up this week, Midwest Capital continues to be evaluated. The actual EIS I believe was filed last week, which was ahead of schedule for Midwest. And the work on McClean north, and there's not, the permitting work is ongoing with Caribou, but the focus right now, obviously on Midwest. And then with regards to our McClean north deposit, Areva is just completing up the final stages of our pre-feasibility study, which evaluates the underground mining of McClean north.

Okay, so we should see something maybe this year on one of those.

Oh, yes, for sure.

Okay. Well, that's good. I'm just, curious also in your commentary today, the verbal for the written, you mentioned that McArthur River ore might be going through McClean. And I'm just wondering what would Denison make from that? Is there a toll charge, is there some benefit that you would receive?

Yes, there would be a benefit that we would receive, a toll milling charge that -- it's the very early stages, Adam, really all that's happened is November of last year, Areva submitted the documents to CNSC and the Saskatchewan government authorities for the beginning of the amendment process of the license to receive McArthur ore.

So at this time, do you have any idea what you might make, or is it still too early for that?

It's still too early for that.

Okay. And, I guess sort of the corollary to that is, while the McLean mill is in closure, stand-by, call it what will, is there a holding cost to Denison Mines that you can break out?

There is, there will be a holding cost to Denison Mines, but it's minimal. It's under the Cigar Lake Joint Venture agreement. The Cigar Lake Joint Venture picks up almost all of stand-by costs. Based on the current formula, it will be approximately, they would be responsible for approximately 97% of the estimated $5 million per year stand-by cost, so our costs are 22.5% of the remaining 3%, so very small.

Okay. I'm going to ask you one more question if I could. When you present your cost per pound, you give the total in the one, less DD&A. And I'm just wondering, is there a portion of that DD&A that was the original mining cost, that you can break out. I'm trying to equate it to a C1 cost that other companies incur.

The answer is yes to that. And we are, we will be looking at how we, I guess, disclose our mining or productions costs for Q1 2010, so to get better comparability to like, what you say, a C1 cost, Adam, that's happening right now. We're going through that analysis.

Okay. I will be patient and wait for it. Thank you very much again for answering the questions.

No problem.

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

Well , thank you, everyone, for attending the call, and look forward to speaking to everyone again at the end of Q1. Thank you.

Thank you, the conference has now ended. Please disconnect your line at this time. We thank you for your participation.