Denison Mines Corp (DNN) 2010 Q3 法說會逐字稿

All participants, thank you for standing by. Please be advised that this conference call is being recorded. Good morning, ladies and gentlemen, and welcome to the Denison Mines third quarter 2010 results conference call. Your host for today will be Mr. Ron Hochstein. Mr. Hochstein, please go ahead.

Thanks, Michelle. 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 three-month and nine-month financial results, and then I'll review the Q3 production performance. 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 the forward-looking information section of our press release. All amounts are in US dollars unless otherwise indicated.

Denison reported revenue of $39.9 million for the quarter, and $89.1 million for the year to date. This resulted in a net loss of $9.5 million or $0.03 per share for the three months, and a loss of $1.9 million or $0.01 per share for the nine months. Our cash flow from operations was $14.1 million for the quarter and $20.5 million for the nine-month period.

As of the end of the quarter, Denison had a cash balance of $33.1 million, working capital of $78 million including cash, portfolio investments with a market value of $2.3 million, and is essentially debt free.

During the quarter, we produced 373,000 pounds U308 and sold 706,000 pounds at an average price of $44.22 per pound. We produced 1,045,000 pounds of vanadium and sold 114,000 pounds of V2O5 at an average price of $6.28 per pound. And 226,000 pounds of Ferrovanadium at an average price of $13.63 per pound.

On the exploration front, in July we announced that the summer drilling program has discovered two new mineralized zones. At the extreme northeast and southwest edges of the Phoenix trend on Denison 60% owned Wheeler River project.

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 September 30, 2010, was $39.9 million compared with $12.7 million in Q3 of 2009. The $39.9 million included uranium sales of $31.2 million and vanadium sales of $3.8 million.

U3O8 sales for the quarter were at an average price of $44.22 per pound, down from $54.82 per pound last year, a reflection of the stagnant spot price over the summer months. During the quarter, approximately 83% of our U3O8 sales were in the spot market. U3O8 sales for the nine months totaled $65.2 million compared with $35.1 million for the same period last year.

During the nine months ended September 30, 2010, we sold 617,000 pounds of ferrovanadium at an average price of $13.84 per pound or $6.52 per pound V2O5 equivalent. This compares with last year's nine-month sales of 87,000 pounds of ferrovanadium at an average price of $11.29 per pound. We also sold 227,000 pounds V2O5 at an average price of $6.59 per pound. This compares with last year's nine-month sales of 509,000 pounds of V2O5 at an average price of just $3.69. Total vanadium sales for the nine months was $10 million compared with $2.9 million last year.

Revenue from Denison's Environmental Services division was $4.1 million for the three months ended September 30, 2010, compared with $4 million in the same period in 2009. A major portion of DES's revenue is from the contract with the Yukon government for site maintenance and water treatment services at the closed for the Faro mine site. The work began in March 2009 and the contract is for an initial period of three years.

Revenue from the management contract with Uranium Participation Corporation was $409,000 for the three months ended September 30, 2010, compared to $344,000 in the same period in 2009. The total revenue for the nine months ended September 30, 2010 was $89.1 million, compared with $48.1 million for the first nine months of last year.

Cash flow from operations was $14.1 million for the three-month period and $28.5 million for the nine months. And for the nine months, net cash used in investing activities was $14.6 million, and net cash used in financing was $747,000. In total, the net cash inflow for the nine-months after the effect of foreign exchange was $13.3 million.

Exploration expenses during the third quarter totaled approximately $2.5 million. $1.7 million of this was spent in Canada, primarily on the 60% owned Wheeler River project. Other expenses totaled $4.9 million for the quarter and include foreign exchange losses, interest income, and investment gains. For the nine months ended September 30, 2010, foreign exchange losses totaled $3 million. This compares to a foreign exchange loss of $15 million for the same period in 2009.

There was a consolidated net loss for the quarter of $9.5 million or $0.03 per share compared to the net loss of $91.2 million or $0.27 per share in 2009. The consolidated net loss for the nine months ended September 30, 2010 was $1.9 million or $0.01 per share compared with the net loss of $110 million or $0.41 per share for the first nine months of 2009. The substantial loss last year was primarily due to an impairment charge on Denison's wholly owned Mutanga property.

Inventory available for sale as of September 30, 2010 totaled 303,000 pounds of U3O8, 1,143,000 pounds of V2O5, and 107,000 pounds ferrovanadium. Based on spot market prices at September 30, 2010, uranium and vanadium inventory had an estimated value of $22.7 million.

As of September 30, 2010, the Company had $33.1 million in cash, working capital of $78 million, which includes cash, and portfolio investments of $2.3 million. Also, at September 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.

Thank you, Jim. Now for production. As planned, processing of ore at McClean Lake mill ceased at the end of June. The circuits were cleaned out and the mill was put on standby in August. The McClean Lake joint venture produced only 75,000 pounds U3O8 for the three months ended September 30, 2010, compared with 906,000 pounds for the three months ended September 30, 2009. Denison's 22.5% share of production totaled 17,000 pounds for the 2010 period, compared to 204,000 for the 2009 period. McClean Lake's production for the year is on target at 1.7 million -- just over 1.7 million pounds U3O8, of which Denison's share is 385,000 pounds.

McClean production costs at $48.58 per pound U3O8 for the quarter were inflated due to the costs incurred during the clean up process combined with the low production.

Going forward, the standby cost to Denison at the McClean Lake mill will be negligible, as most of them will be picked by the Cigar Lake joint venture. Regrettably, 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 of Caribou, Midwest, or McClean North. At the present time, the earliest projection is 2012.

In June of last year, the Canadian Nuclear Safety Commission renewed the operating license for the McClean Lake operation for a period of eight years to June 30, 2017. The Athabasca regional government, which is comprised of three first nations and four provincial communities from the Athabasca basin, launched an application for judicial review of CNSC's decision to renew the McClean Lake license. An initial hearing was held in June of this year and in September the judge dismissed the application for judicial review. Regional government has since appealed this decision.

At White Mesa, we're currently receiving ore from three 100% owned mines. As of the end of September, the mill ore stockpile totaled 102,000 tons of conventional ore, containing approximately 480,000 pounds U3O8 and 1.8 million pounds vanadium. The mill is also receiving ore from a third party for toll milling later this year. Production during the quarter totaled 356,000 pounds U3O8 and just over 1 million of vanadium. For the nine-month period, production totaled 824,000 pounds of U3O8 and 2 million pounds of vanadium.

The ability to simultaneously process conventional ore and alternate feed materials, as well as significant improvements in our vanadium recovery have reduced our operating costs. For the three months ended September 30, 2010, operating costs were $37.42 per pound U3O8 as compared with $39.69 last year. For the nine months, operating costs were $38.22 per pound compared with $66.14 last year.

To bring you up to date briefly on our legal entanglements in the US, the lawsuit against US Bureau of Land Management over the licensing of Arizona 1 has involved a number of injunctions and appeals bent on shutting down the mine. To date, all motions for injunctive relief and subsequent appeals have been denied. There is one more appeal in the original suit left to hear.

Denison is currently negotiating with US Environmental Protection Agency on a consent agreement and a final order to resolve the ministry of action regarding the Arizona 1 air quality permit previously granted by the Arizona Department of Environmental Quality.

At Pandora, a lawsuit was filed against US Forest Service following their approval of a planned amendment to a plan of operations to construct two vent holes and drill 16 exploration holes at the mine site. The judge denied the plaintiff's request for a temporary restraining order and preliminary injunction against the commencement of the projects. Although the original case is ongoing, Denison has already completed the installation of one of the vent holes and all of the exploration holes have been drilled.

At the La Sal mines complex in Utah, we are in a dispute with the EPA over radon monitoring. Denison's position is that we had prior approval for the industry accepted method because that method had been approved for the previous owner. EPA disagrees and discussions with them are ongoing.

Now turning to a more interesting and exciting topic, our exploration and drilling activities at Wheeler River. The summer program totaled 43 holes for 20,323 meters and extended the overall strike length of zones A and B by approximately 55 and 110 meters respectably. The program also identified two new mineralized zones along the highly prospective Phoenix trend. Both these new zones are open along strike and the results confirm our belief that the Phoenix discovery has great potential with at least four discrete zones of mineralizations known. Further drill testing along these zones will be followed up in the upcoming winter drill program.

To date, we have only explored 1.3 kilometers of the 18-kilometer trend. In addition to the drilling activity, both the National Instrument 43-101 compliant resource report incorporating all the summer drill results and a concept study are being prepared, and both are on target for completion this quarter. There is a meeting of the joint venture partners scheduled for today to approve the 2011 exploration development process.

As to our outlook for the remainder of 2010, we have decided to modify the Q4 processing schedule at the White Mesa mill. We will now be toll milling White Canyon's ore in November, displacing one month's production of Colorado Plateau ore. Even though we've decided to modify the schedule, our uranium production guidance for the year is unchanged at 1.6 million pounds. This is the result of better than planned mill performance, in particular higher than planned uranium recovery and higher Arizona 1 head grades.

However, vanadium production is expected to decline to 2.4 million pounds down from 2.8 million pounds. Uranium sales volumes are expected to remain at 1.8 million pounds U3O8. We are now anticipating an average realized price for the year of $47.09 per pound U3O8. This is up from our previous expectation of $45.62 per pound. The change is due to the recent rise in spot market.

As you know, you've seen the spot price increase over the last month from the mid $40s to this week's price of $53.50 per pound. This is partly due to additional purchasing by ERA in Australia as a result of lower than plant head grades at Ranger. What is different though about this rise in price as opposed to other rises we've seen in the last couple of years is it is not driven purely by supply shortages, but is driven more so by increased demand. It is our opinion that this new level, in the low $50s, will be sustained into 2011.

Due to lower than anticipated demand, vanadium sales are now expected to be 0.1 million pounds V2O5, down from 3.2 million pounds. We expect an average realized price of $6.53 per pound of V2O5. Denison's average US cost of production for the year is expected to be $37.07 per pound U3O8, net of vanadium credits.

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

++ q-and-a

(Operator instructions) Our first question is from Adam Schatzker from RBC Capital Markets. Please go ahead.

Hi. Good morning, everyone. A few questions for you. I guess Ron, I'll start with you. The vanadium market. Can you just comment a little bit as to why the weakness there? It seems like every other metal in the world is very popular and I don't know much about vanadium, so perhaps you can help me out there.

It's primarily -- we're selling most of our stuff into the US, Adam, and it's just a lack of demand in the US steel industry. We've seen some pickup here in this last quarter, but it just did not meet the expectations that we had. We could have continued to push and sell the material, however we just would have seen the price chase itself down. So we've decided to pull back a bit on sales.

We are looking at -- we have qualified for that one titanium alloy producer that now is a pretty steady sales lot and the rest is just going into the -- we're playing the ferrovanadium and the vanadium markets against each other.

Could you not sell overseas?

We are looking at selling overseas. Part of the issue that we had to do for overseas is we had to do some new specification measurements and that that we never had to do before. And so we're looking at putting in instrumentation at the mill to do that.

Okay. Another question for you, if I could, is with the increase in uranium price, and I guess looking forward I would hope we see continued increases there. At what price would you start looking seriously at reopening some of the US operations, I guess expanding stuff in the Colorado Plateau and in particular looking at Tony M, perhaps Bullfrog as well?

We've already -- we already are actually starting on the work, Adam, to re-look at Tony M both -- Tony and Bullfrog. As you know, that was originally thought we would go into Tony M and then develop on to Bullfrog. We are engaging, working with an engineering company to reevaluate Tony M Bullfrog. We actually started that work at the request of the Board here just recently.

The price that we need, we're starting to get into that neighborhood and we need to be at better visibility on what the true price would be and how we can look at optimizing that resource.

And what kind of CapEx do you think might be necessary to get in there?

It would actually depend on the way we go about it. If we go into just straight back into Tony M and develop across over to Bullfrog, the CapEx wouldn't be all that large. We would have to replace some mining equipment because we've been using mining equipment we've acquired for Tony M at Arizona 1 and on the Plateau. But it will mostly be just getting people back in. We've kept the mine dry. And then driving across over there, we're only probably looking at in the neighborhood of to drive those drifts probably in the neighborhood of about $25 million to $30 million.

Can I read between the lines there that you're looking at going to Bullfrog, not Tony M?

That's right. We're looking at trying to see how we can get into that higher-grade resource quicker. That's exactly correct.

Okay. That makes sense. And with respect to Wheeler, are you getting any further down the road to refining potential timelines to development there, including all of the necessary permitting with the CNSC?

That's part of the -- that's probably -- I don't want to have anyone's expectations that this concept study is anymore than it is. It's purely a concept study. It's not a scoping study or a preliminary economic assessment. We will have some very rough capital and operating cost numbers, but probably the more important part of the concept study is firming up the schedule, Adam. And putting together what we believe would be a realistic permitting schedule for that moving forward.

Okay. I guess I'll have to hold on for that. And one quick one. (Inaudible), do you guys still own any of that?

No.

Okay. I'll let somebody else have a chance. Thanks very much, guys.

Thank you. Our next question is from David Wargo from GMP Securities. Please go ahead.

Good morning, guys. Congratulations on the quarter. You've built some cash on the balance sheet, which is nice to see. Adam asked a lot of my questions, but just a couple. Is there any visibility on Midwest and the potential to bring that online?

Good morning, Dave. At the present time, no. We have our joint venture meetings coming up in November. There's been no new developments on Midwest other than they're continuing to push the regulatory aside. I guess I look at the announcement last night by AREVA with the signing of the large uranium contract with the Chinese --

Oh, that's significant (inaudible).

-- as a potential driver maybe to get them moving a little bit faster in Canada.

Okay, perfect. And then Ron, what about the Wheeler budget for next year? Do you have any idea how much you're going to spend there?

The joint venture meetings are today and the preliminary budgets, David, yet to be approved by the joint venture in the neighborhood of about $10 million.

And then I guess the last question. I mean we've seen the spot price move in the last month and the term price went up $2.00, which is even more important in my opinion. How are -- how is it -- how are you guys finding negotiating off-takes? Are you finding the utilities a little more nervous? Or is it -- are you seeing improved leverage in your negotiations I guess is what I'm trying to ask.

At the present time, we feel pretty comfortable with our contract position. Mix of contract and spot. So we actually haven't been too much into the market at this point in time, Dave. There is an interesting thing happening though. There was a sort of a rash of FRPs from US utilities here recently. And it's going to be interesting to see their response to the level of -- amount of response they get. I think it's going to be enlightening on the industry as to how much is really already fully contracted and how much is available.

Oh, absolutely. And with what's going on with uranium 1, I mean those pounds are gone now, too. Right? So.

Those --

(Inaudible) much better position.

It's going to be interesting to see what happens.

Okay. Well, perfect. I'll pass the mic over to somebody else. Congratulations and we'll talk soon, Ron.

Thank you.

Cheers.

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

Good morning. I was going to ask (technical difficulty) of my questions have been answered though.

Okay. Well, I guess it's good afternoon for you, isn't it, Ed?

It is good afternoon for me, yes.

Okay.

Thank you. Our next question is from David Talbot from Dundee Securities. Please go ahead. Mr. Talbot? You may now proceed with your question.

Hi there, guys. Sorry about that. I hit the mute this time. Your production schedule going forward, are you going to try to target some vanadium rich ore to send that through the plant? How do you expect to schedule the change as potentially more toll contracts come into play?

We're not. Dave, at this point really we only have the one toll contract. We've obviously been approached by others to have discussions about it, but those mines are in -- are still sort of in the permitting stage. We have actually hit some ore at Beaver at parts where it is almost 100% vanadium ore, very little uranium. And we are looking at putting that through the mill. But the -- we don't really -- can't target the higher vanadium ores. We have one mine, the Rim mine, which has a higher ratio. Otherwise the ratios are pretty well flat across the plateau on our properties.

Okay. So this isn't something that you're doing to actually try to seek out in order to help drop costs. And I guess if you're not selling all your production at this point anyways, there doesn't seem to be a need for stockpiling a lot of this.

Not -- that's correct. And really the vanadium, it's always -- at White Mesa it has always been sort of you manage your inventory to take advantage of spikes. Back when Umetco used to own the mill and Energy Fuels, there was always significant inventory sitting on the site in order to be able to take advantage of run ups in price, which occur in a commodity such as vanadium. We just don't want to keep pushing it. We have the capability now to take advantage of that if it happens, but also too we don't have a lot of selectivity, Dave, on the plateau. The mines give you what they give you.

Okay, thank you very much.

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

Hi. You knew I'd be back anyway. I guess going onto some other questions here, can you give me the sales breakdown from the US and Canadian? And probably this is the last time I'll ask that for a while.

Yes, we don't actually -- right now we're actually -- since we no longer sell into MUL, McClean Uranium, we have one contract that's left under MUL, we really commingle our production. And it's a -- we're moving a lot of it to [Converdine] and so we -- it's not that important like it used to be where we keep track of Canada and US. I think the rough split -- actually, Jim, do you know what the rough split is?

In the quarter I don't think there was any Canadian.

It was all US.

I believe it was all US production.

Yes. Well, Adam, we'll get that figured out back to you.

Okay. Moving to another question then. With respect to I guess the few projects that you have there with AREVA in Canada, can you just give me an idea of what will be going in front of the CNSC and then if things move ahead positively sort of which ones can be developed soonest?

Well, I'll give you our impression. I can't say this is AREVA's impression. But the ones that we would like to see moved in front of -- and could be put in front of the CNSC first is the McClean underground. That's McClean North and now includes Caribou, Sue D, and McClean South pods. That project is looking very interesting, very attractive. And it's AREVA's opinion that we already have the EA for that and so we can move that straight forward to licensing.

Midwest is still going through the EA approval process and still to this date the fish habitat compensation plan is still sort of the largest unknown with regards to Midwest.

And so I guess on the McClean underground, can you just -- if you're looking at this, I guess it sounds like more sort of one project of multiple zones. Can you just remind me what kind of pounds there, what kind of production range, CapEx? Is there anything to sort of wrap one's mind around?

We'll have some more information on that after this upcoming joint venture meeting, Adam, because they are supposed to be presenting the feasibility study at that time. Or pre fees or fees. I can't remember what level it's at. It's pretty detailed, but we'll have more visibility on that after this upcoming meeting at the end of November.

Okay. And timeline then to get through licensing with the EA in hand. How long do you figure that is?

That one, well typically licensing you're looking at nine months to a year.

Okay, so things could actually happen a little more quickly. And also --

Yes. In front of it, in terms of what's in front of the CNSC, the amendment to treat McArthur ore is also in front of the CNSC right now with regards to McLean.

Right. Okay. And one last thing. You went through a fairly long list of legal issues in the US. And I just was hoping you could put that in a little bit of context. Or -- is there something special about I guess your activities there? Or is this just what you might be able to expect in the US with NIMBI type of attitude in uranium, which attracts a lot of attention, just being uranium?

Well, seeing as we're in the center of it, sometimes you feel like it's only you. But interestingly enough, I saw an interview of Paul Wright of El Dorado Gold on a recent MSNBC show. And they talked about his issues that he's having permitting some operations in, I believe it was in Nevada. And for absolutely silly reasons, very similar to us getting stopped for exploration drill holes. And so I think it is -- I think you're -- you hit it, Adam, it's a US issue. It's not a uranium -- particularly uranium issue. It's a US issue that we're facing right now.

And are there -- is there any one of the bunch there that causes you to lose any sleep? Or do you think these all just disappear with time?

I think majority of them will disappear with time. The one appeal for injunction is -- with Arizona 1 is going in front of the Ninth Circuit Court of Appeals here shortly. Always see the Ninth Circuit as many of you know as a bit of a wildcard. We've already won one appeal there. But even if they do appeal it, all that means is it goes back to the judge for a further decision. So we're charging forward and we're moving forward with both Arizona 1 and moving forward with evaluating development in that. Moving forward with Pinenut as well.

Okay. And one last thing if I could, is Mongolia and Zambia. Where do things stand? Where do you see things going now? And do things change with this different uranium price?

With regards to Zambia, yes certainly things change with the better uranium price with Zambia. Zambia we're looking at really trying to move that project forward. We own 100%; we don't need to own 100%. So we're looking at trying to bring a partner in to fund that through to do some more exploration drilling.

With regards to Mongolia, it's not really a price issue at this point. It's more getting sorted out the ownership issues. We have a joint venture agreement, which specifically states the Mongolian government's interest is to be 15%. This is contrary to the Nuclear Energy Law, which talks about ownerships of 34% for these types of deposits. I'm actually heading over to Mongolia on the weekend to try and really carry out these discussions.

As mentioned in the MD&A, we did sign a MOU, Memorandum of Understanding with Mon-Atom with the prime minister when in Vancouver earlier this year to try and resolve this issue. So we hope to really try and bring the -- get the ownership issue resolved here within the next couple of months so that we can really move forward with Mongolia.

Okay, Ron. Thank you for you time and safe travels.

Thank you.

Thank you. Our next question is from Craig Hutchison from TD Newcrest. Please go ahead.

Good morning. When may we expect your 2001 production guidance for the US operations?

2011 you mean?

Yes, 2011.

Yes, that would be -- in terms of news flow for us, I'll just a minute. We're looking at Wheeler. Sort of the resource estimate over the next few weeks, concept study would follow shortly after that. 2011 guidance more than likely early December.

Okay, thank you.

Thank you. There are no further questions registered for the moment. I'd like to turn the meeting back over to Mr. Hochstein.

Thank you, Michelle. Yes, as I just mentioned, everyone, in terms of thank you very much for attending the call. And I guess in terms of things to look forward to we are on track with the Wheeler resource estimate to have it out here within the next few weeks. It will be followed, probably a week or two after that at least by the -- some estimates of the concept study. What some of the findings of the concept study were and then look for the 2011 guidance shortly -- early December. So thank you very much and have a good weekend.

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