Denison Mines Corp (DNN) 2010 Q2 法說會逐字稿

All participants, please stand by, your meeting is about to begin. And please be advised that this conference call is being recorded. Good morning and welcome to the second-quarter 2010 results conference call for Friday, August 6. Your host for today will be Mr. Ron Hochstein. Please go ahead, Mr. Hochstein.

Thanks, Katherine. Good morning. Participating with me today is Jim Anderson, Executive Vice President and Chief Financial Officer. We will start with a brief look at the quarter's highlights. Following that, Jim will speak to the three months and six-month financial results, and then I'll review the Q2 production performance and update you on the Wheeler River, Phoenix exploration program. 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 regarding forward-looking information section of our press release. All amounts are in US dollars unless otherwise indicated.

Denison reported a net income of $16.7 million or $0.05 per share for the quarter, our first profitable quarter since Q4 2007. For the six months, we reported net income of $7.6 million or $0.02 per share. Our cash flow from operations was $14 million for the quarter and $14.4 million for the six-month period.

During the quarter, we produced 528,000 pounds U3O8 and sold 417,000 pounds U3O8 for a total of $19 million. We also produced 911,000 pounds of vanadium and sold 113,000 pounds as V2O5 and 238,000 pounds of ferrovanadium. Total vanadium sales revenue for the quarter was $4.3 million. As well, Denison qualified its vanadium blackflake with a US titanium alloy producer, which confirms the high quality of our vanadium production.

There was good news regarding Denison's Arizona 1 mine, where a motion for a preliminary injunction to hold operations at the mine was denied. The court ruled that the plaintiffs had not shown that they were likely to succeed in their claim and Denison's existing plan of operations was invalid, or that the US Bureau of Land Management or BLM had failed to supplement its prior environmental review. The plaintiffs have subsequently filed an appeal on the injunction decision.

Denison continues to believe that the original allegations are without legal merit, are not supported by the administrative record, and should be dismissed. A court ruling on the merits of the original matter is expected to occur by December of this year.

And the best news was that the drilling program at the Phoenix discovery on our 60% owned Wheeler River property in the Athabasca region of Northern Saskatchewan continue to extend the strike length of the high-grade mineralized Phoenix Zones A and B. I'll talk more about the progress of the summer drill program later in the call, but just suffice to say that we've continued to believe that Phoenix is one of the most promising new discoveries in the past 20 years in this uranium-rich area.

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

Thank you, Ron. Good morning, everyone. Revenue for the three months ended June 30, 2010, was $27.2 million. This included uranium sales of $19 million, which consisted of 417,000 pounds U3O8 at an average price of $45.56 per pound. For the six months ended June 30, 2010, uranium sales revenue totaled $34 million on sales of 683,000 pounds U3O8 at an average price of $49.74 per pound. This compares with $27.6 million from the sale of 451,000 pounds U3O8 at an average price of $58.67 per pound for the first six months of 2009.

For the three months ended June 30, 2010, total vanadium sales revenue was $4.3 million compared to just over $2 million in the same period last year. During the six months ended June 30, 2010, we sold 391,000 pounds of ferrovanadium at an average price of $13.96 per pound or $6.58 per pound V2O5 equivalent. We also sold 113,000 pounds V2O5 at an average price of $6.89 per pound. This compares with last year's six-month sales of 506,000 pounds of V2O5 at an average price of $3.67 per pound and 18,000 pounds of ferrovanadium at an average price of $8.75 per pound.

Revenue from Denison's Environmental Services division was $3.5 million for the three months ended June 30, 2010, compared with $2.8 million in the same period in 2009. The increase in revenue is due to the increased activity related to DES' contract with the Yukon Government for site and maintenance -- site maintenance and water treatment for the Faro mine site in Yukon.

Revenue from the management contract with Uranium Participation Corporation was $378,000 for the three months ended June 30, 2010, as compared to $1.2 million in the same period in 2009. The 2009 period included transaction fees related to a $100 million financing undertaken and subsequent purchases of uranium by UPC.

The total revenue for the six months ended June 30, 2010 was $49.2 million, compared with $35.4 million for the first six months of the previous year.

Cash flow from operations was $14.4 million for the six-month period. Net cash used in investing activities was $11.6 million, and net cash used in financing was $550,000. In total, our cash balances as of June 30 were $2.2 million higher than they were at December 31, 2009, and $9 million higher than they were at March 31, 2010.

Exploration expenses during the second quarter totaled $1.8 million. Approximately $1.1 million was spent at Wheeler River. Denison is engaged in exploration as part of the AREVA-operated McClean, Midwest, and Wolly joint ventures, as well as 29 other projects. However, by the second quarter, the five winter exploration programs had been completed, and Wheeler River was the only property where a summer drilling program had commenced.

Other income totaled $20.9 million for the quarter. Other income includes foreign exchange movements, interest income, investment gains, and other miscellaneous income. For the three months ended June 30, 2010, foreign exchange gains totaled $8.7 million. This is compared to a foreign exchange loss of $5.8 million in the same period of 2009.

Other income also reflected the fact that during the quarter, the Company agreed to terminate one of its sales contracts in exchange for a termination fee of $11 million. The first installment of $6 million was received in June 2010 and a final installment is due in March of 2011.

Consolidated net income for the quarter was $16.7 million or $0.05 per share, compared with a net loss of $18.2 million or $0.07 per share in Q2 of 2009. Consolidated net income for the six months ended June 30 was $7.6 million or $0.02 per share, compared with a net loss of $19.5 million or $0.08 per share for the first six months of 2009.

Inventory available for sale at the end of June totaled 636,000 pounds U3O8, 757,000 pounds V2O5, and 45,000 pounds ferrovanadium. Based on spot prices at June 30, this inventory had an estimated value of $31.9 million.

As of June 30, the Company had $22 million in cash, working capital of $81 million, and portfolio investments of $5.7 million. Also, at June 30, our bank indebtedness under our revolving credit facility was nil. For a more detailed discussion on our financial results, I refer you to our MD&A.

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

Thanks, Jim. Now, for production. McClean Lake joint venture produced 748,000 pounds U3O8 for the three months ended June 30, 2010, compared with just over 1 million pounds for the three months ended June 30, 2009. Denison's 22.5% share of production totaled 168,000 pounds for the 2010 period, compared to 230,000 for the 2009 period. McClean Lake's production for the year is 1.634 million pounds U3O8, of which Denison's share was 368,000 pounds, down slightly from projections due to an unexpected drop in ore grade.

Production costs in Canada were $29.89 per pound U3O8 for the quarter ending June 30, 2010. For the comparable period in 2009, the production costs were $23.89 per pound U3O8. As planned, processing of ore at the McClean Lake mill ceased at the end of June. The circuits are being cleaned out and the mill will be put on care and maintenance in August. The standby costs to Denison should be negligible, as most of them will be picked up by the Cigar Lake joint venture, going forward. The mill is not expected to reopen until it begins receiving ore from either McArthur River, Cigar Lake and/or from the McClean Lake joint venture projects, Caribou, Midwest, or McClean North.

At White Mesa, we're currently receiving ore from three 100% owned mines. As of the end of June, the mill ore stockpile totaled 150,000 tons of ore, containing approximately 661,000 pounds U3O8 and 3 million pounds vanadium. Processing of conventional ore resumed in March at White Mesa, while processing of alternate feed material continued. Production from conventional ore yielded 250,000 pounds U3O8 in the three months ended June 30, and production from alternate feed material for the same period was 110,000 pounds U3O8. Vanadium production at White Mesa was 911,000 pounds V2O5 for the second quarter.

The ability to simultaneously process conventional ore and alternate feed materials, as well as significant improvements in our vanadium recovery have reduced our overall operating costs. For the three months ended June 30, 2010, operating costs were $34.39 per pound U3O8 and for the six months were $38.83 per pound.

Turning to our exploration and drilling activities at Wheeler River, the summer drill program has successfully extended the Phoenix Zones A and B and identified two new zones of mineralization along strike. So far this summer, we have completed 31 holes for 14,813 meters of the anticipated 45-hole program. In the new Zone D to the northeast, WR-325 intersected strongly altered graphitic pelite with three low-grade intersections within a 66-meter section of continuous graphite.

There were elevated equivalent uranium values over the full 66 meters. As well, new mineralization was discovered in Zone C, where WR-328 intersected 9.65% eU3O8 over 0.8 meters, with an alteration in signature indicating the start of a new zone.

This week, we reported additional results from the summer program. Hole WR-334 returned 10.7% eU3O8 over 2.7 meters, thus further extending the high-grade mineralization of Zone A by 25 meters to the northeast. Similarly, the strike length of Zone B was extended 50 meters to the northeast by Hole WR-333, which returned 20.7% eU3O8 over 2.2 meters. Both these zones are opened along strike and confirmed Denison's belief that the Phoenix discovery is a major deposit with at least four zones of mineralization over a length of 1,300 meters. These zones will be followed up in the upcoming winter drill program.

The summer program is anticipated to be completed by the end of August. Our goal for the remainder of the program is to concentrate on Zones A and B to expand the high-grade mineralization. In addition to the drilling activity, a National Instrument 43-101 compliant resource report, incorporating all of the summer drill results, is currently in preparation and is scheduled to be completed in the fourth quarter of 2010.

As well, we have engaged Golder Associates to complete a concept study on Phoenix. The study will have three objectives. One, to establish criteria for development; two, to help define further exploration targets, and three, begin to establish project concepts and fundamentals for environmental permitting. The concept study will be completed at about the same time as the 43-101 report.

As to our outlook for the remainder of 2010, we have not changed our price forecast for the remainder of the year. Our Canadian production is on target, while our American production is above plan. As well, our production costs in the US for the quarter were $34.39 per pound U3O8, as compared to our target of $35.52 per pound. Production costs for the remainder of the year should be at or below the second-quarter figures.

Our sales targets of 1.8 million pounds of uranium and 3.2 million pounds of -- for vanadium remain the same. However, due to the termination of a long-term sales contract, our mining revenue forecast is slightly down at approximately $104.7 million from $110 million. The lower revenue will be offset by the termination fee included in other income.

Our average realized price per pound U3O8 is now $45.62 for the rest of the year, down from $49.08 per pound. $20.8 million of the total revenue is to be from vanadium sales. Total operating capital expenditures and development spending remain the same, while our exploration spending in Canada and the US will total approximately $5.9 million; $1 million in the US and $4.9 million in Canada. This is higher by $600,000 due to an increase in the summer drill program at Wheeler River.

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

Thank you. We will now take questions from the telephone lines. (Operator Instructions). Our first question is from Martin Lavigueur from Macquarie, please go ahead.

Thank you guys. Good morning, it's actually -- it's Duncan McKeen here. Just I want to ask about the uranium sales contract that was terminated, that you received $11 million for. Maybe just some color on why it was terminated and maybe if you could tell us what pricing level that was at or who it was with? Thanks.

The reason that it was terminated, Duncan, is that both parties were interested in terminating that contract. And for us, it was that it's going to give us a lot more flexibility with our US operations going forward. The issue was with Canada being shut down earlier than what we had anticipated back when this contract was put in place. All of our production now is focused on the US and this would give us a lot more flexibility with our US operations. Also, we anticipate seeing the spot price continuing to rise and the way this contract was structured, we'll have a lot more pricing flexibility as well.

Okay.

Just to add one other point, we were approached by the customer to do it. It wasn't initiated by us; it was initiated by the customer.

Yes, okay. Okay. Thanks very much.

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

Hi, guys. Just returning back to that terminated contract, can you just give us a little bit of an idea of how many pounds that was going forward and when that was supposed to terminate? And I guess how was that structured? Was that a fixed pound per year contract or was that a percentage of production contract? And does that affect the production plans that you've put in place here, sort of a fixed number of pounds per year for the next two or three years? And has that changed?

The contract was not for fixed pounds, it was for a percentage of production, Adam; and it does not change our production plans going forward.

Was that the 17% contract?

Correct.

With AREVA, I guess.

And so, what that does is -- it was for a percentage of production, and it just gives us a lot more flexibility as we've stated previously going forward. But, it has no impact on what our plans are at this time.

Okay, great. Thank you.

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

Yes, good morning, guys. Just a quick question on how much uranium was sold in Canada versus the US for the quarter?

It was about 100,000 pounds were sold out of the US; the remainder was out of Canada, Bart.

Perfect, thanks. And you mentioned about this canceled contract from your end, why you wanted it cancelled. What was the reasoning from the customer's end?

They never really gave us a complete reasoning for it. They -- we were just approached by them as to looking at whether we were interested in canceling that contract.

Okay. So, can we presume that the prices they would have paid were above the market and that could have been one of the reasons, or do you suppose there are some other reasons?

I believe there is some other reason because if we thought that the price was above market, it would have been worthwhile for us to keep it. So, some other reasons.

All right, thanks.

Thanks, Bart.

Thank you. Our next question is from Adam Schatzker from RBC Capital Markets, please go ahead.

Hi, again. Just not a follow-up, on the other one is a different question. With respect to the other projects that you have with AREVA in the Athabasca, the Caribou, etcetera, how are things progressing on those?

The second round on the Midwest, questions are in and responses are back to the regulators. I believe we're still waiting for one regulator or one government agency, I guess, Adam, to respond to our second round or the revised EA that went forward. There has been some movement forward with the fish habitat compensation, which, as you know, is one of the sort of stickier issues, but there's been some movement forward on that.

Caribou, we received approval of the EA. So, the next step is to move forward with the licensing. So, on the regulatory front, things are moving forward and we anticipate seeing a feasibility study on McClean underground at our upcoming joint venture meetings in November. We'll make a decision on that probably going forward as well.

And I believe you're doing a fair amount of work with AREVA on a revised Midwest plan, how is that coming?

That is -- it's more or less complete, the revised plan, and we're still looking at trying to reduce operating and capital costs obviously. A lot of the focus, as you know, Adam, is more so on the McClean underground. The economics look very attractive for that project. It enables us to go after not only in the McClean North deposits, but potentially Caribou, McClean South, and Sue D as well. So, that's actually becoming a little bit more of a focus, while the permitting and regulatory focus is with Midwest.

And when do you think you'd be able to provide us with more detail on mine plans, CapEx, timing, sort of the usual stuff?

For McClean North?

Right.

[That's] to say, that's to be presented at the November meeting -- joint venture meeting. So, I'd just say right after that.

Okay, great. Thank you.

Thank you. My next question is from Martin Lavigueur from Macquarie. Please go ahead.

Hi, guys. It's just Duncan again. I wanted to just ask, you mentioned this concept study for Wheeler River and just wanted to find out what kind of stuff that we'll be seeing in -- I mean will we actually be getting sort of CapEx estimates or timing estimates? And also, I would -- just to confirm, did you say that would be out in Q4 or is that going to be a little later? Thanks.

Thanks, Duncan. No, it will be out in Q4.

Okay.

And the objectives of this, as I mentioned, is sort of the development. Yes, we are going to be putting together order of magnitude capital and operating costs for this to essentially help us to determine at what point do we go underground, how many pounds of resource do we need to justify going underground to do further exploration because as you all know, with these types of deposits, given their tight dimensions and you really need to get -- in order to get a good feel, you have to get underground. So, Yes, there will be CapEx, OpEx, and obviously that was one of the reasons that we chose Golder, as their experience on permitting is -- we've asked them for a schedule to show this thing moving forward when we would anticipate being able to put this into production.

Okay. Thank you.

And by doing this study as well, we hope that we can shave time off of the permitting process because we're actually going to knocking some concepts off the table, which will help us accelerate some of the environmental impact statements in that going forward.

Okay. Thanks.

Thank you. We have no more questions at this time. I'd like to return the meeting over to Mr. Hochstein.

Well, thanks, everyone, for attending the call and as mentioned to Adam and that we'll have further information coming on McClean North and also look for December in terms of -- November-December for a lot of information with regards to Wheeler River as well. Thank you, everyone, for attending.

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