Denison Mines Corp (DNN) 2010 Q1 法說會逐字稿

Good morning and welcome to the first quarter 2010 results conference call for Friday, May 7, 2010. Your host for today will be Ron Hochstein. Mr. Hochstein, please go ahead.

Thanks, Caroline. Good morning. Participating with me today is Jim Anderson, Executive Vice President and Chief Financial Officer. We'll start with a brief look at the quarter's highlights. Following that, Jim will speak to the financial results and then I'll take a look at the Q1 production figures, discuss the Arizona I situation, update you on the Wheeler River Phoenix exploration program, and then explain our revised outlook for the remainder of 2010. We will then answer questions. This discussion includes forward looking information. Actual future results may differ from expected results for a variety of reasons described in the cautionary statements of forward-looking--regarding forward-looking information section of our press release. All amounts are in U.S. dollars unless otherwise indicated.

Our most exciting news during the quarter continued to come from the Phoenix discovery at our 60% owned Wheeler River property in the Athabasca region of Northern Saskatchewan. We believe that Phoenix is one of the most promising new discoveries in the past 20 years in this uranium rich area. And I'll speak more about Phoenix later.

During the quarter, we produced 307,000 pounds U308. We sold 267,000 pounds U308 at an average price of $56.27 per pound, and 153,000 pounds of ferrovanadium from inventory at an average price of 12.55 per pound or $5.82 per pound V205 equivalent. And in Zambia, we were granted 25-year mining licenses for both our 100% owned Mutanga and Dibwe projects.

Now, I'd like to turn the call over to Jim for a look at the financial results. Jim?

Thank you, Ron. Good morning, everyone. Revenue for the three months ended March 31, 2010 was $22 million, practically identical to revenue in Q1 2009. This included uranium sales of $15 million, which consisted of sales from U.S. production of 210,000 pounds U308 and sales of Canadian production of 56,700 pounds U308. As Ron said, we averaged a price of $56.27 per pound. Sales in the quarter were lower than expected because we reduced spot sales due to the weak uranium spot price. During the quarter we also sold 153,000 pounds of ferrovanadium at an average price of $12.55 per pound or $5.82 per pound V205 equivalent. Revenue from vanadium was lower than expected due to lower sales volumes, but prices were actually stronger than anticipated.

Revenue from Denison's environmental services division was $3.684 million for the three months ended March 31, 2010, compared to $1.344 million in the comparable period in 2009. The decrease in revenue--sorry, the increase in revenue is due to the increased activity related to the ES contract with the Yukon Government for site maintenance and water treatments for the ferro mine site in the Yukon.

Revenue from the management contract with Uranium Participation Corporation was $1.302 million for the three months ended March 31, 2010, compared to $295,000 in the same period in 2009. The increase is due to transaction fees received in the first quarter of 2010. Cash flow from operations was $357,000.

Exploration expenses during the first quarter totaled $1.7 million. The majority of these expenses, approximately $1.4 million worth, were spent in the Athabasca Basin in northern Saskatchewan where Denison was engaged in exploration as part of the Areva operated McClean, Midwest, and [Moore] joint ventures, as well as on five of our other 29 projects. In addition to the Wheeler River drilling and geophysical programs, drilling programs were also completed on the Hatchet Lake, Park Creek, and Turkey Lake properties, as well as a geophysical program on the Moore lake property.

Other income expenses includes foreign exchange movements which resulted in a loss for Q1 2010 of $5 million largely due to the strengthening of the Canadian dollar. This compares to a gain of $6.4 million in Q1 2009. This alone represents a swing of over $11 million between the periods. Consolidated net loss for the quarter was $9.1 million, or $0.03 per share, compared to the net loss of $1.3 million, or $0.01 per share in Q1 2009.

Inventory available for sale as of March 31, 2010 totaled 525,000 U308, 422,000 pounds of V205 and 36,000 pounds ferrovanadium. Based on current spot market prices our uranium and vanadium inventory has an estimated value of about $25 million.

As of March 31, 2010, the company had $13 million in cash, working capital of $71.2 million and portfolio investments with a market value of $13 million. Also at March 31, our indebtedness under our $60 million revolving credit facility was nil. For a more detailed discussion of our financial results, I would refer you to our MD&A.

Now I'd like to turn the call back over to Ron.

Thank you, Jim. Now for production. The McClean Lake joint ventures produced 886,000 pounds U308 for the three months ended March 31, compared with 745,000 pounds U308 for the three months ended March 31, 2009. Denison's 22.5% share of production totaled 199,000 pounds for the 2010 period, compared to 168,000 pounds for the 2009 period. Production for the quarter was essentially on budget. Production costs in Canada were $30.22 per pound U308 for the quarter ending March 31, 2010. For the comparable period in 2009, the production costs were $31.08 per pound U308. It should be noted that we have revised our disclosure on production costs. The costs now include the cost of mining the ore fed to the mill in the period, plus the cost of milling, less a credit for the vanadium produced in the period, if applicable, and excludes amortization and depreciation.

At the White Mesa mill, processing of conventional ore resumed in March while processing of alternate feed material continued. Production from alternate feed in the three months ended March 31, 2010 was 108,000 pounds U308, approximately 48,000 pounds above plan. Production costs for the three months ended March 31, 2010 were $53.56 per pound U308. Costs for the quarter were much higher than expected average for the year because of startup costs for conventional ore processing incurred in March. Production costs were $71.95 per pound U308 in the three months ended March 31, 2009. As you know, on November 16, 2009 and as amended on February 1, 2010, the Center for Biological Diversity, Grand Canyon Trust, Sierra Club, and the Kaibab Band of Paiute Indians filed a lawsuit against the U.S. Secretary of the Interior and the U.S. Bureau of Land Management, or BLM seeking an order declaring that the BLM had violated environmental laws in relation to the company's Arizona I mine.

On February 8, BLM filed an answer to the plaintiff's complaint denying the allegations. Denison has been added as an intervener in this lawsuit and we too believe that each of these allegations is without legal merit, is not supported by the administrative record, and should be dismissed. On April 8, 2010, these same groups filed a motion requesting preliminary injunctive relief, essentially requesting that the mine be shut down due to environmental degradation. BLM and Denison are currently preparing their responses to the request for an injunction, which will be considered by the court at a hearing on June 11, 2010. The court is expected to issue a ruling within 30 days of the hearing. If the motion for preliminary injunctive relief is granted, the company will likely be required to stop mining activities at the Arizona I mine pending resolution of the matter. If the motion for preliminary injunctive relief is denied, the company will be allowed to continue operating until the court issues a ruling on the merits of the original matter which is expected to occur by December of this year.

More recently, the United States Environmental Protection Agency, or EPA, issued a finding of violation to Denison alleging noncompliance with a provision of the Clean Air Act for not obtaining a second EPA approval. In August 2009, the Arizona Department of Environmental Quality, or ADEQ, issued an air quality permit that authorized the restart of the Arizona I mine. Despite this authorization by ADEQ and a previous authorization for construction and operation of the mine by the EPA in 1988, the EPA has alleged that ADEQ did not have the authority to authorize the restart of operations at the mine and that a second new EPA approval is required notwithstanding the ADEQ permit.

EPA has not issued an order or brought civil enforcement action at this time. I want to be clear that at the present time the EPA finding of violation is strictly allegations. Denison is working with the EPA and ADEQ to sort out the jurisdictional and legal issues raised by EPA and will make any application determined to be so appropriate in order to resolve this issue.

Turning to our exploration drilling activities at Wheeler River, we drilled 16 holes during the winter drilling program, totaling 8,020 meters focusing primarily on Phoenix Zone A. The winter drilling extended both the strike length and the width of the zone. In particular, Hole 306, one of the furtherest south holes in Zone A, intersected 44% in U308 over 4 meters. This hole combined with Hole 305 shows that the high grade mineralization is continuous over at least a 250 meter strike length. The zone continues to remain open in all directions.

We are even more excited about the drill results in the northeast corner, (inaudible), Holes 309 and 309A. The evidence of a silicified cap plus the sandstone and intense basement alteration are all characteristics of other key deposits in the basin and lead us to believe we are on the verge of discovering another major pod.

Based on internal estimates, we believe the Phoenix deposit is already at this early stage the fifth largest deposit discovered in the Athabasca Basin. Drilling on the 29 hole 14,500 meter summer program is anticipated to start in early June and will entail adding a second rig. A JV meeting is scheduled for today and the partners will review the results of the winter program and make recommendations for the summer program. Our primary goal will be to continue to expand the Phoenix deposit and in particular explore the significant new zone of alteration in the northeast. Our other goal this year is to gather enough data to complete a 43-101 resource estimate by the end of the year.

As to our outlook for 2010, as a result of continued weak uranium prices, we have adjusted our price forecast for the remainder of the year. We are now assuming a spot price of $42 per pound U308 and a long term price of $59 per pound. Based on the uranium prices I just noted and what was achieved in the first quarter, we expect to attain an average realized price of $49.08 per pound U308 sold during the rest of the year.

In terms of vanadium, the strengthening of the vanadium market from a low of 3.50 per pound in 2009 to the current $8 has enabled us to upgrade our vanadium price forecast to 650 per pound V205 from 575 per pound. We anticipate uranium production remaining at 1.6 million pounds and uranium sales at 1.8 million pounds. Vanadium production is also unchanged at 2.8 million pounds, while vanadium sales are anticipated to decline slightly to 3.2 million pounds from 3.4 million pounds.

The cost of production in Canada is expected to average $32.65 per pound U308. As has been previously announced, the McClean joint venture plans to shut down the McClean Lake mill in July 2010 until new feed sources are available. The standby costs to Denison should be negligible as most of them will be picked up by the Cigar Lake joint venture. The cost of production in the U.S. is expected to be $35.52 per pound U308, net of vanadium credits. Mining revenue is forecast to be approximately 110 million of which 20.8 million is expected to be vanadium sales. Total operating capital expenditures are projected now to be approximately 18.4 million, due to increases in the costs of tailing cell 4B at the White Mesa mill. Due to the lower revenue projections and higher CapEx we have modified our mining operation plans and reduced development spending such that we are forecasting near breakeven cash flow for 2010, very similar to the previous forecast issued earlier this year.

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

Thank you. (Operator Instructions.) The first question is from Adam Schatzker from RBC Capital Markets.

Good morning, everyone.

Good morning.

A few questions, if I could. I guess first on vanadium. And there seems to be a little bit of a recurring topic on the volume of sales. It seems as though perhaps it was again a little bit challenging to sell the material. And I'm wondering if that was sort of price dependent or what is the driver behind it, just given that you seem to have a fair amount of inventory?

The driver behind it, Adam, was conversion capacity. There's only one converter in the United States and as a result of the drop in steel demand last year, they had actually shut down to just a single shift and were very hesitant to increase their production. And as a result, we were essentially almost keeping them as full as we could with our material. They also have their own material that they convert. And so, we were limited on conversation to put it into ferrovanadium. There wasn't much of a market for the black flake here recently that we were--that we could pursue, so we were every--just about every way trying to do this through ferro, so we were limited because of that limited conversion.

Have they changed to more than one shift or is it still limited there?

No, they have upped their production and we're shipping about a truckload a week now for conversion.

Did you say--were you doing that?

Pardon me?

Obviously, there is only converter. I'm not familiar with who it is. Are you able to say who it is?

It's Bear Metallurgical.

Okay. The other question for you is with respect to spending. What is the CapEx and exploration spending total out of your pocket this year?

The CapEx spending for the year is estimated at--for operating capital, Adam?

I'm just trying to figure out basically the line on cash flow from investing and exploration just to see how much money you guys are planning on spending, just so I get my modeling right.

Yes, I think looking at your numbers this morning, I think, yes, you're a bit off. Capital expenditures for the year in operating are about 18.4 million, as listed in the release of which about 6 million was spent in the first quarter already. And then, for development spending, which is exploration and--well, just exploration, Jim, what's the--.

--5.3.

5.3 on exploration.

Development was 8.7.

Did you get that, Adam?

Yes. So 5.3 and 8.7 are yet to come?

Well, no--.

--That's the total for the--.

That's the total estimated for the year. So as Jim had laid out we had already spent 1.7 million in exploration in the first quarter.

Okay. Yes, I'm just basically trying to get the next nine months what is going to come out.

Yes.

Obviously with the cash balance there and the spending you have to get that inventory moved.

The development that was spent in the first quarter, Jim laid out the exploration and the development was about 2.4 million.

Okay, very good. And the last question I'll ask you is looking at your revolving facility, you're required to keep 665 million of tangible net worth. And I'm wondering, looking at the book values of the assets that you have, what uranium price are you using when you do your impairment test? And do you think there's a risk that given with the Canadian operations shutting down and the uncertainty going forward there, that you--the auditors might put a little pressure on you on that side?

No. The forecast we're using is the UX forecast, the strip that they published earlier this year. And the net worth covenant is based on the financial statements, obviously. And we look for impairment--check for impairment under--on a regular basis to determine whether there's any need for impairment. And so far there has been no need for that other than the impairment charges we did take, which is at goodwill and in (inaudible).

Right. Because I look and you've got--I guess the mill is probably one that's pretty easy to keep. The mineral properties and goodwill - 330 and 53 million. In the mineral properties I guess is the assumption that something goes into production. So you have explicit assumptions as to when things are put into production to do that test?

Yes.

Can you share those with us?

Not off the top of my head, but yes, we have expectations. Midwest, for example, I think is 20.15, 20.14 perhaps. And we made assumptions on all the properties going into production.

And so when you look at Midwest 2014, I think Areva even has a later date, when you switch to IFRS and the impairment test is done on a present value basis instead of a sum of the cash flows, is that something that might cause that book value to change, do you think?

Yes, they likely will.

All right. So are you guys worried that might put you below the 665?

At this stage, it may. We haven't done those calculations yet. But the credit facility only goes to June of 2011. So--and it explicitly includes reopeners I guess or recalculations for IFRS.

Okay, very good.

So we'll have to deal with that when we get there.

Perfect. All right. Thanks very much, guys. I appreciate it.

Thank you. Your next question is from Duncan McKeen from Macquarie Securities.

Yes, thanks. Good morning, guys. I just wanted--Ron, I just wanted to go over the plans for the United States for this year, just what production levels you're expecting and maybe the breakout between alternate feed and fresh ore and then what kind of ore you're going to be putting through, if it's going to be all Colorado Plateau. Thanks.

It's essentially almost 100% Colorado Plateau, Duncan. There's--right now, I'm anticipating maybe out of a total of just over 200,000 tons fed, about 17,000 tons from Arizona I.

Okay.

The alternate fee, we were originally projecting 300,000 pounds of production from alternate feed pounds of U308. But as you've seen in the first quarter, we're almost--we're double what we had projected already for the first quarter. So we're still holding right now for the time being our projection of 300,000 pounds of alternate fed.

Okay. How will the feed change as you move into 2011? Are you planning on switching over into almost 100% Arizona ore at that point?

Oh, no. Arizona ore, we would run that maybe for a couple months, 2.5 months. And then, the--it's still going to be primarily Colorado Plateau ores.

Okay. Through 2011?

Yes.

Okay. Great. Thanks very much.

Just a note, if I can, to Adam. I mentioned Midwest at 20.15, maybe 14. It's actually 20.16.

Thank you. Your next question is from [Edward Sterck] from BMO. Please go ahead.

Good morning, gentlemen. On--you might have already answered this question, but I was just wondering what the development plan is for Mutanga going forward now that you've got the money (inaudible)?

At the present time, Edward, it's going to be--at these uranium prices, obviously, that project is--it needs better uranium prices in order to move forward. So the development plan right now is we are actually doing some drilling right now to get metallurgical core to do the heap leach test work. We're sort of--we should probably put that test work on hold given these low uranium prices. What's needed is that met test [works], a little bit more engineering and then we have some great exploration plays that we would like to drill to maybe try and expand the resources. Right now, we're showing the tone in our plan coming in at 2014 in around there or so I believe.

And what's the--what would you say the threshold price would need to be for the project (inaudible)?

I would say that we would need--long term--if you look at the long term price we're probably getting pretty close there. I'd like to probably see about $65 in terms of the long term price. So if we were able to get some contracts in place, $65 or so, then we might look at putting that one.

Just one further questions. On the sales from--the contracted sales prices that were achieved in the first quarter, would those be broadly what you would expect for the balance of the year?

Assuming that you don't have any significant changes in the long term price, yes.

Okay, excellent. Thank you very much, indeed.

Thank you. There are no further questions at this time. I'd now like to turn the meeting over to Mr. Hochstein.

I'd like to thank everyone for attending the first quarter call, and as always, if there are further questions, please do not hesitate to contact us. Thank you, everyone, and have a good weekend.

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