Denison Mines Corp (DNN) 2010 Q4 法說會逐字稿

Please be advised that this conference call is being recorded.

Good morning and welcome to the year-end 2010 results conference call for Friday, March 11, 2011. Your host for today will be Mr. Ron Hochstein. Mr. Hochstein, please go ahead.

Thank you, John. Good morning, everyone. Participating with me today is Jim Anderson, Executive Vice President and Chief Financial Officer. We'll start with a brief look at the year's highlights. Following that Jim will speak to the 2010 financial results and then I'll recap our production and development activities and look ahead to 2011. 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.

We've faced a tough uranium market over the past two years. We've dealt with it by reducing our operating costs, improving recoveries, expanding our sales activities, and strengthening the balance sheet. In 2010 our exploration efforts were successful in increasing Denison's resource base by more than 30%. Drilling in 2010 expanded the Phoenix deposit located on the 60% owned Wheeler River project in the Athabasca basin of northern Saskatchewan. Denison is the operator on Wheeler and its two partners include Cameco and JCU, owning the remaining 10%.

In November, we received initial estimates of mineral resources on Wheeler, which on 100% basis at a cut-off grade of 0.8 U3O8, estimated that Zone A has indicated resources of 89,900 [tonnes] at a grade of 185, containing 35.6 million pounds U3O8. And Zone B showed inferred resources of 23,800 tonnes at a grade of 7.3% containing 3.8 million pounds U3O8. Denison's share of these resources would be approximately 23.7 million pounds U3O8.

These estimates are highly encouraging for the potential of Wheeler in terms of both its high grade and its size.

On the development front, we began rehab work at our Pinenut mine on the Arizona Strip. Pinenut is a fully developed underground mine that in 1989, its only year of production, produced 0.5 million pounds at an average grade of 1.02% U3O8. Since that time, it has been on standby. The hoist, head frame and compressor are in place and upon completion of the rehab and development program, production is expected to commence in 2012.

The market for Denison's shares strengthened in the fall of 2010. In December, we raised CAD61.3 million through the private placement of 25 million special warrants worth CAD2.45. At the same time we completed a private placement of 1.4 million flow through special warrants at CAD3.00 per warrant. Gross proceeds were CAD4.2 million.

Both of the warrants were exercised in the common shares. And subsequent to the year end, we raised a further CAD65 million in a bought deal financing of 18.3 million shares at CAD3.55. The proceeds from this deal will largely be used to finance our announced takeover of White Canyon Uranium Limited.

The White Canyon acquisition is a cash deal worth approximately AUD57 million. The transaction is a great opportunity for Denison to establish a fourth mining district. White Canyon's Daneros Mine, located about 50 miles from our White Mesa mill in Utah, has been in operation for just over a year and currently produces about 200,000 pounds U3O8 annually. Their ore is already processed at our White Mesa mill, so we are very familiar with their operations, making the deal a low-risk situation.

We believe there is opportunity to expand the mine's output and expand the resource base in this historically high grade uranium district in Utah.

In terms of production, we ended the year having produced 1.4 million pounds U3O8 and uranium sales for 2010 totaled $800,978,000, a 47% increase in sales over 2009.

In 2010, we produced 2.3 million pounds of vanadium, more than 4 times what we produced in 2009. Vanadium sales revenue for 2010 totaled $16.9 million, again, almost 4 times 2009 figures.

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

Thank you, Ron, and good morning, everyone. 2010 was certainly a turnaround year financially for Denison. Our key goal for the year was to attain positive cash flow, and we more than accomplished that ending the year with $35.6 million in cash provided by operations. So I'm happy to say we outperformed one of our most important financial measures.

Also with the increase in both the uranium spot market price and our share price, we were able to go back to the capital markets for some equity financing. This is our first foray into the market since June of 2009. The result is a strengthened balance sheet with a strong cash position that will allow us to fund our development projects and take advantage of the current rising price environment.

Now for the details. Revenue for the year was $128.3 million, up from $79.2 million the previous year. Revenue included uranium sales of $88 million from 1.8 million pounds of U3O8 at an average price of $47.67 per pound. This compares with uranium sales in 2009 of $59.9 million from 1.1 million pounds U3O8 at an average price of $51.17 per pound.

Of the 1.8 million pounds sold in 2010, 549,000 were sold into long-term contracts and the remainder was sold in the spot market.

In 2010, we sold 541,000 pounds V2O5 at an average price of $6.44 per pound and 1 million pounds of ferrovanadium at an average price of $13.40 per pound. Total vanadium sales revenue for the 12 months was $16.9 million compared with $4.5 million in 2009.

Revenue from the environmental services decision for the year ended December 31, 2010, was $15.5 million compared with $12.2 million in 2009. And revenue from our management contract with Uranium Participation Corporation for the year was $2.6 million compared with $2.5 million in 2009. Revenue also included $4.9 million earned through processing third-party ore as part of a toll milling agreement.

That cash provided by operations during the year was $35.6 million compared to net cash used of $42.4 million in 2009.

Denison is engaged in uranium exploration here in Canada, the US, Zambia and Mongolia. Exploration expenditures totaled $7.5 million for the 12 months ended December 31, 2010, compared with $10.1 million in 2009. Of the $7.5 million we spent this year in exploration, $3.3 million was spent on our high-priority Wheeler River project, resulting in the very promising results that Ron outlined earlier.

Consolidated net loss for the year was $14.2 million, or $0.04 per share compared with a net loss of $147 million or $0.51 per share in 2009. It should be noted that 2009's loss included $95.8 million in three non-cash impairment charges.

Denison ended the year with inventory available for sale of 87,000 pounds U3O8; 679,000 pounds of vanadium; and 11,000 pounds of ferrovanadium, with a combined value of approximately $9.8 million at spot market prices on December 31, 2010.

From a liquidity perspective, the Company had cash and cash equivalents of $97.6 million at December 31, 2010, compared with $19.8 million at the end of 2009. The increase of $77.8 million was due primarily to cash provided by operations of $35.6 million; sales of long-term investments of $8.1 million; and new common share issues totaling $61.3 million, less $27.3 million expended on property, plant and equipment during the year.

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 to June 30, 2011. Bank indebtedness under the facility at December 31, 2010, was nil. However, $19.8 million of the line was used as collateral for certain letters of credit.

Next week, we expect to close our recent equity financing, which will raise CAD65 million in gross proceeds. At the present time, we do not know if KEPCO will exercise their right to participate in order to maintain their ownership percentage. For a more detailed discussion of our financial results, I refer you to our MD&A. Now I'll turn the call back over to Ron.

Thanks, Jim. Now for production, delays in permitting and development of new mines [both] for McClean Lake joint venture in northern Saskatchewan with a shortage of ore. The last ore was fed into the mill in June 2010 and in August the mill was put on standby. As a result, the McClean Lake joint venture produced only 1.7 million pounds U3O8 for the 12 month compared with 3.6 million pounds for the same period ended December 31, 2009. Denison's 22.5% share of production for the year totaled 389,000 pounds compared to 812,000 pounds for the 12 months of 2009. Canadian production costs were $30.63 per pound U3O8 for the 12 months ended December 31, 2010. For 2009 production costs were only $27.51 per pound. The increase is attributable to the strengthening Canadian dollar and extra cleanup costs of placing the mill on standby. Canadian production costs including mining and milling costs and exclude depreciation and amortization.

In the US, production for the year totaled just over 1 million pounds U3O8 and 2.3 million pounds of vanadium. Production costs at White Mesa were $38.46 per pound for the year compared to $60.33 in 2009. US production costs include mining and milling costs less a credit for vanadium and exclude depreciation and amortization.

At December 31, a total of 92,800 tons of conventional ore was stockpiled at White Mesa, containing approximately 369,000 pounds U3O8 and 1.7 million pounds of vanadium. We also had approximately 392,000 pounds of U3O8 in the alternate feed materials stockpiles.

Looking forward to 2011, Denison's uranium production is expected to total 1.2 million pounds U3O8, all of it at the White Mesa mill. This will be produced from existing ore on the stockpile, new ore from the Beaver, Pandora and Arizona 1 mines and from the ongoing production from the alternate feed circuit. We anticipate processing conventional ore at White Mesa during most of 2011 except for scheduled maintenance shutdowns.

Vanadium production is expected to total 2.2 million pounds in 2011. The cash costs of production at White Mesa is expected to average approximately $43.50 per pound U3O8 net of vanadium credits. The cash cost per pound reflects the impact of an increase of more than 200% in the cost of sulfuric acid as compared to 2010.

Capital expenditures on the mines and mill facility for 2011 are estimated at $9.7 million. 2011 uranium sales are expected to be approximately 1.3 million pounds of which just over 0.5 million pounds will be sold into long-term contracts, and the remainder will be sold into the spot market. Vanadium sales are projected to be 2.8 million pounds.

In 2011, Denison will participate in exploration programs in Canada, the United States, Mongolia, and Zambia. In North America, the total budget for these programs will be $15 million, of which Denison's share will be $8.8 million. The Wheeler River program represents the most significant of these. The total cost of Wheeler River in 2011 will be approximately $10 million, of which Denison's share is $6 million. A 35,000 meter drilling program has begun to test additional areas with known uranium mineralization along the same mineralized trend hosting the Phoenix deposit. In addition to the drilling, environmental baseline programs will also be initiated.

Exploration work in Canada will also be carried out on the Moore Lake, Hatchet Lake, Murphy Lake, Bell Lake, McClean Lake and Wolly projects, of a total cost of $3.8 million, with Denison's share being $1.6 million.

In the United States, drilling is planned on the Beaver mine trend and at the Sunday complex. In Arizona, an exploration program on the Company's DB1 breccia pipe is also planned. The total cost of US exploration program is $1.3 million.

Exploration and development activities will be restarted this year at the Company's Mutanga project in Zambia, where, in 2010, we received 25-year mining licenses for our Mutanga and Dibwe deposits, as well as a radioactive materials license and all environmental approvals.

The Zambia program will total an estimated $6.2 million. Large-scale column heap leach metallurgical test work will be undertaken to further define process design criteria and operating costs. As well, a 17,000-meter exploration drill program will follow up on very positive drilling results which were obtained in 2008 and have not been followed up on to date.

In Mongolia, a $7.4 million exploration and development program is projected. A $3 million, 38,000 meter exploration program is anticipated to be undertaken on licensed areas that currently do not have defined resources in order to support future work on these license areas. Development activities on license areas which are more advanced will include drilling of initial test patterns and pilot plant design.

On Monday of this week, the joint venture received approval of the detailed environmental impact assessment for the Hairhan ISR project. This is an important step in converting the exploration license to a mining license.

The implementation of the full Mongolian program is contingent, however, upon resolution of outstanding issues with the Mongolian government regarding the nuclear energy law and the structure of the Gurvan Saihan joint venture. The Company remains hopeful that these issues will be resolved early in 2011 such that the planned programs can be completed.

In Canada and the US, a total of $6.4 million will be spent by Denison on development-stage projects in 2011. In the United States, development of the Pinenut mine is moving forward and permitting will be advanced for the easy one, EZ1, EZ2, and Canyon deposits. The cost of these programs is estimated at $5.6 million.

The Company is also evaluating the restart of its [20M] operation in Utah. In Canada, under the operator-ship of majority owner AREVA Resources Canada, the McClean North underground development feasibility study will be advanced and we anticipate a production decision within the next 12 months. AREVA is also continuing the evaluation of the Midwest development project.

We saw a different uranium spot market emerge in late 2010, a market based on fundamentals rather than being driven by speculation. As you heard earlier, more than half of our 2011 sales will be to the spot market, a market that in the last few years has gone from being marginally important to being a significant player in the sector. According to Ux [Co.] Consulting, three years ago in 2007, only 19 million pounds of U3O8 were sold in 100 spot deals; in 2010, 49.5 million pounds of U3O8 were sold in 269 separate spot deals -- 2.5 times the volume. And 49.5 million pounds represents more than 25% of the current total annual uranium requirements for nuclear power generation.

In terms of vanadium, as a consequence of the economic crisis that began in mid-2007, world steel production declined significantly and remained at depressed levels throughout 2009. The global steel industry has been undergoing a general recovery and has now surpassed 2008 production levels, primarily due to increased production in China. Since 92% of the world demand for vanadium goes to the steel industry, this has had a pronounced effect on the vanadium demand and price. Spot prices averaged $6.29 per pound in 2010, up from an average of $5.43 in 2009. We are expecting vanadium spot prices to remain in the $6 to $7 range for the rest of 2011. That being said, the unknown factors whether continued unrest in the Middle East and the subsequent rise in oil prices will cause an overall slowdown in the economy that could impact steel consumption.

As I mentioned at the start of the call, we have put a tough couple of years behind us, but we're healthy again, and we have progressed from survival mode to development mode. We have a positive outlook for 2011 and you can now look forward to a new period of growth for Denison mines.

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

(Operator Instructions). Adam Schatzker, RBC Capital Markets.

Ron, I was wondering, you having your MD&A, and I think you mentioned on the call there, plans to get to 10 million pounds per year by 2020. And I'm wondering if you could give us some detail there on how you plan to get there, which deposits and what kind of volumes you would expect and timing.

Right now, Adam, actually, we just completed a five-year plan for the United States, so we're revising that a little bit, but we see production coming from continuing to open up Arizona Strip operations. Actually, last night we just received our air quality permits for EZ1, EZ2 and Canyon, so that's a further step along the development of those.

We continue to operate Beaver along -- heading to the West. Obviously bringing the Tony M Henry Mountains complex is a key component to that. And also the new White Canyon district, once we complete that acquisition, we see increasing production from there from 200,000 to potentially 400,000 pounds.

The next step is Canada. I mentioned that we are looking forward to making a exploration -- or production decision for McClean underground. The timing for that is probably 2014, 2015 for production and then Midwest to follow. And with everything going on now if our exploration is successful in Zambia this year, we could potentially be making a production decision on that project by the end of this year, and then we could see production by mid-2013. And very similar with Mongolia -- it could be first production from pilot plant operations by early 2013.

Now those all kind of add together to bring us up to a good chunk of the way there, but it is obviously Wheeler River which is the biggest step. And based on our concept study, we would see first production by 2019. Obviously that assumes making a project decision by the end of next year. So some things have to happen, such as improved -- we've got to increase the resources. But we're not stopping. We're making steps to make that happen. And as a result, a joint venture approved this week to go ahead and start an environmental baseline program, which is in excess of $100,000 to be done this year, all intent of being -- at least being able to keep that goal in mind, assuming we have some further exploration success.

So just to break that down, in the US if you have Arizona, Beaver, Tony M, White Canyon, what do you think the total production could be from that?

I think we could be up in the range -- as you know, Adam, the Arizona strip operations come and go, right? They have about two years mine life to them, although EZ1, EZ2 and Canyon could have about three each. Really we're looking at getting up I think in that 2 million -- 2 million to 3 million pound range. It might vary a little bit as different pipes come on, on the strip.

Okay. And looking at the Canada plans there, you mentioned both Midwest and Wheeler. Is there sufficient mill capacity you have access to, to do both of those?

Wheeler would be -- Wheeler is something that was identified in the concept study. There would have to be some discussions that would have to start probably within the next year or two, again assuming positive exploration results on milling strategy. A key component to that is getting the road in place between Cigar and Arthur.

Right. So is that to say that there is capacity currently or you would need to add capacity in order to do both simultaneously?

If you looked -- it depends a lot on, Adam, whether Millennium is also on; where Cigar is at, McArthur. If you look at what's coming on potentially at the same time, we're looking at Millennium, McArthur, Cigar, and potentially Midwest/McClean and Wheeler. And so how are we going to maximize that capacity amongst the mills? And as you know, there is plans underway with Cameco as well looking at -- really looking hard at Rabbit and Key. So you're looking at those sort of five deposits that's all coming on at the same time. And yes, I think we would need some expansion of mill capacity.

Okay, fair enough. I just wanted some clarification as to how you get there. Thank you.

You mentioned sales volume that you would be selling into the spot market. From what I've seen so far with the Chinese selling, now the DoE Auction, the spot market, as tight as it is, unfortunately, react so unbelievably negatively to even the slightest incremental sales. Is there a way you might be able to avoid the spot market?

Not in this year, but we have a lot of discretion. And when we enter the market, not -- like we have sort of sales plan throughout the year. But we have a lot of -- with the stronger balance sheet now, we have much more discretion as to whether we actually need to go into the spot market and we can time it better.

I guess a follow-on to that, your -- any participation -- could that -- have you sort of figured out how that might move forward and whether or not you'll be able to acquire more pounds? I know it obviously has a lot to do with value.

It is. It is 100% driven by value, Adam. If the stock gets to the point where it's trading at a sufficient premium [10AV], we're not -- we're not saying no to going out and potentially looking at more acquisitions for UPC.

Okay. And you mentioned Tony M, Bullfrog; just to clarify, are you doing anything there, or is it still in the planning stage?

No, we're not actually actively on the -- we've been maintaining it dewatered since we shut down in November. So we have people on the ground. And the mine is ready to go at any point in time. But right now the staff are preparing the restart decision, so they are putting together the documentation, manpower, planning and everything as to what we need to bring it back. And it wasn't prepared for the board meeting we had yesterday but it's pretty close.

Okay, great. Thank you very much. I appreciate your time as always.

(Operator Instructions). There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Hochstein.

Thank you, everyone, and as you all know, we have Japanese partners with us in our joint ventures in Canada. And on behalf of myself, the board, and all the employees at Denison, obviously, our thoughts and prayers go out to them and their families with the tragedy in Japan.

I'd like to thank everyone for attending the call, and as always, Jim and I are always open for questions if there are any further. Thank you very much.

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