Denison Mines Corp (DNN) 2011 Q1 法說會逐字稿

Please be advised that this conference call is being recorded. Good morning, and welcome to the first quarter 2011 results conference call for Thursday, May 12, 2011. Your host for today will be Mr. Ron Hochstein. Mr. Hochstein, please go ahead.

Thanks, Jason. Good morning, everyone, apologize for a little bit of a late start, we had some technical glitches there. 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 will take a look at the Q1 production figures, update you on the Wheeler River-Phoenix exploration program and then explain some revisions to our outlook for the remainder of 2010. We'll then answer any questions.

This discussion includes forward-looking information. Actual future results may differ from expected results for a variety of reasons described in the cautionary statement regarding forward-looking information section of our press release. All amounts are in US dollars, unless otherwise indicated.

Although the results of the 2011 winter drilling on our 60% owned Wheeler River property were a bit disappointing, the drill program further expanded Zone A and identified opportunities for increasing the existing resource estimates. There'll be more about that later. In other business development news, the takeover bid for White Canyon uranium is proceeding.

We closed the $66 million equity offering to finance this acquisition in mid-March, and are currently awaiting receipt of the shareholders' acceptances. Our offer is conditionally getting 90% of the shares tendered and as of today about 65% of White Canyon shareholders have tendered their acceptance. Overnight, we announced the bid offer period will be extended from May 20 to June 10. We are very pleased with the level of acceptance to date and have received no resistance to our bid. It's just plain taking longer than expected to reach our goal of 90% acceptance.

During the quarter, we produced 340,000 pounds U3O8, 11% higher than last year, and we sold 267,000 pounds U3O8 at an average price of $63.26 per pound. We also produced 413,000 pounds of vanadium and sold 856,000 pounds of V2O5 at an average price of $6.20 per pound. In March, we released an updated mineral resource estimate for the Hairhan deposit in Mongolia where we hold a 70% interest in the Gurvan Saihan joint venture. Uranium contained in the indicated resources increased 151% to 19.8 million pounds U3O8, and inferred resources increased 67% to 5.8 million pounds U3O8. Now, I would like to turn the call over to Jim.

Thank you, Ron. Good morning, everyone. Before I begin, I should mention that this is our first reporting period under International Financial Reporting Standards, or IFRS as it is known, and we have restated our 2010 comparative financial numbers to IFRS. Revenue for the three months ending March 31, 2011 was $26.8 million compared with $22 million in Q1 of 2010.

Revenue included uranium sales of $16.8 million from the sale of 267,000 pounds U3O8, at an average price of $63.26 per pound, and vanadium sales of 856,000 pounds at $6.20 per pound. Revenue in Environmental Services division was $3.5 million for the three months ended March 31, 2011 compared to $3.7 million in the comparable period in 2010. Revenue from the management contract with Uranium Participation Corporation was $551,000 for the three months ended March 31, 2011 compared with $1.3 million in the same period in 2010. The higher income in 2010 was due to transaction fees that we earned in that period. Cash flow from operations was $4.7 million compared to $357,000 for the first quarter of 2010.

Exploration expenses during the quarter totaled approximately $3.2 million. The majority of these expenses, or approximately $2.7 million, were spent in the Athabasca Basin in northern Saskatchewan where Denison is engaged in exploration that is part of the AREVA-operated McClean and Wolly joint ventures, as well as on four other projects including Wheeler River. Operating costs for the quarter include a provision of $868,000 relating to the net realizable value of our vanadium inventory. In 2010, we had recovery relating to the net realizable value of our Canadian -- our uranium and vanadium inventories of $7.3 million.

This swing of more than $8 million is the major reason for operating costs appearing higher this year than in 2010. These are all non-cash adjustments. Consolidated net loss for the quarter was $7.1 million, or $0.02 per share, essentially the same as last year's first quarter. Inventory available for sale from US production at the end of March totaled 220,000 pounds U3O8, 240,000 pounds V2O5 and 2,000 pounds of ferrovanadium. As of March 31, 2011, the Company had cash and cash equivalents of $158.7 million. Our bank indebtedness under our revolving credit facility was nil. For a more detailed discussion of our financial results, I refer you to our MD&A. Now I'd turn the call back over to Ron.

Thank you, Jim. Now for production. The McClean Lake mill was placed on standby last August, so there was no production during the quarter. Denison's 22.5% share of operating costs for the quarter was only $143,000. At the White Mesa mill, production was primarily from conventional ore. The alternate feed circuit was down for a period during the quarter, in order to modify the circuit for a different alternate feed material which we began processing in March.

In the three months ended March 31, 2011, we produced 340,000 pounds U3O8 at an average cost net of vanadium credits of $50.18 per pound. This compares to $53.56 per pound year ago. Although our costs are lower when compared to last year, they were higher than expected for the quarter. Our costs rose primarily due to lower vanadium recovery and as a result, lower vanadium byproduct credit. The vanadium recovery was lower due to mechanical issues, and to a lesser degree, lower head grades.

For those of you who follow are permitting battles, we had a great quarter. The legal actions pertaining to the new vent holes and exploration drilling at our Pandora mine have now been settled, with no significant impact on our operations there. At the La Sal mine complex in Utah, we are making excellent progress on our dispute with the US Environment Protection Agency over four alleged violations of the Clean Air Act. On April 8, the EPA withdrew its finding of violation in regards to the validity of our air quality permit for the restart of Arizona 1.

Also around that time, the EPA also granted our final permit necessary to begin the underground rehab work at Pine Nut. So, that work is in full gear. And finally, last week, the Ninth Circuit Court of Appeals upheld the original judge's verdict denying the plaintiffs' request for an injunction to close Arizona 1, pending the outcome of their legal case. There have now been four applications for injunctions filed, and all have been denied.

The actual case itself, whereby the plaintiffs alleged that agencies of the US federal government violated environment laws in granting licenses for the mine's operation, is to be heard in a couple of weeks. Denison is an intervener in this case.

Now turning to our exploration drilling activities at Wheeler River. We drilled 30 holes during the winter program, totaling 14,551 meters with mixed results. Drilling at Zone D resulted in no significant mineralization intersections, however, we remain optimistic based on the geochemistry and alteration we are seeing. We will continue to evaluate this interesting and complex zone this summer.

Drilling at Zone C was also frustrating. Many holes had either over shot or under shot this narrow mineralized zone. But we did extend the favorable horizon by about 800 meters to the southwest and we will be testing that the summer. The most exciting results were from Zone A where we extended the deposit along its eastern boundary. Final assay results showed drill hole WR-376 returned 12.3% over 8.5 meters in an area which was previously expected to be low grade.

WR-283, 10 meters southwest of 376, returned just over 3% U3O8 over 2 meters. And two other holes, 366 and 369, returned low-grade intersections outside the margin of the previously recognized mineralization. These results seem to indicate that there may well be a previously unknown East/West structured deposit which could possibly change the 3D model of the zone. This summer, we'll explore the possibility that there is more extensions to be found, and we anticipate updating the 43-101 sometime in the fourth quarter.

Elsewhere in Northern Saskatchewan, we had a degree of success at Moore Lake and Hatchet Lake. At Moore Lake, we found a new zone and mineralization in an untested area, about three kilometers east of the Maverick deposit. This area will be a prime target for follow-up drilling next winter. And at Hatchet Lake, limited drilling returned some interesting results with anomalous radioactivity intersected in the basement. What needs to be remembered about Hatchet Lake is that though the grades may appear low, the mineralization is at a shallow depth suitable for open pit mining.

As I mentioned earlier, rehab work at Pine Nut has begun in earnest, and drilling of potential deeper resources at Arizona 1 has been successful. In Zambia, drilling is underway on three potential new areas on our Mutanga project. All three of these areas are within the corridor between our known Mutanga and Dibwe resources. It is still in the early stages, but initial results are very encouraging. Large-scale column leach tests are also underway. From this test work we will be able to better define are process design criteria.

In Mongolia, drilling on a few of our licenses will begin in the next couple of weeks. The objective of this drilling is to firm up additional resources on licenses other than our main Hairhan and Haraat licenses. In addition to the drilling, our work this year will focus on advancing all of our exploration licenses to mining licenses and designing a semi-commercial scale ISR plant. Discussions with the Mongolian government are proceeding regarding resolution of the ownership issue.

As to our outlook for the remainder of 2011, our production and sales figures for uranium remain the same, 1.2 million pounds U3O8 produced, and 1.3 million pounds U3O8 sold. However, vanadium production is now expected to be approximately 1.7 million pounds. This decrease from 2.2 million is a result of lower head grades, lower recoveries, and some process issues experienced in the first quarter. All have been rectified.

As a result of this and production timing issues caused by rescheduling of uranium/vanadium ore processing we now expect to sell 2.1 million pounds of vanadium as opposed to the earlier planned 2.8 million pounds. Despite the minor setback with vanadium production, we are looking forward to a good rest of the year. Even taking into account the events of March 11, we remain bullish on the future of our industry .

We're sitting in an enviable position with cash in the bank and existing portfolio producing assets, diversified exploration and development projects on three continents, and the unfolding potential of Wheeler River. That concludes the formal presentation. Thank you for your time, and now we would be happy to answer any questions. Jason?

Thank you, Mr. Hochstein. (Operator Instructions) The first question is from Adam Schatzker of RBC Capital Markets. Please go ahead. Mr. Schatzker, your line is now open.

Sorry, hello?

Hi, Adam.

Hi. Good morning, everyone. First question is for Jim, if I could. Regarding the changes from GAAP to IFRS, I'm noting that the book value of the assets has dropped. First, I guess, is that correct? And the second question is, would that change affect the debt covenants that you have?

Adam, the first, your assumption or reading of the material is right there. Carrying value did come down significantly. The major reason for that is the impairment testing under IFRS uses a discounted cash flow basis, and under Canadian GAAP it was an undiscounted cash flow basis, just a recoverability test. So, the carrying value has come down. We received a waiver from the bank, it was predetermined. We knew that when we went into the credit line, that we were going to be facing IFRS adjustments at some point. And so that was predetermined, and they give us a waiver so that there's no issue on our covenant as a result of adjustments from IFRS.

My understanding is that debt facility is going to be expiring shortly. Do you think that's going to make it more challenging to get debt in the future?

No, I don't believe so. We are well along in terms of discussions for a new line.

Okay. Good to see the banks are understanding here.

Yes, they are well aware of IFRS and its implications.

Okay.

IFRS has no impact on cash flow, those kinds of issues, revenue issues and so forth, for us at least. It's primarily the carrying value of the assets.

Sure, I agree, it's just adding such clarity to the statements, absolutely. Ron, question for you is on vanadium. Looking back through the history of your vanadium production, it seems like it's been challenged quarter over quarter over quarter, and I'm wondering, do you see a potential upside there? Maybe you could give us a little bit more of a description as to what the problems have been?

The problem, yes, Adam, you're right, it's been a pretty checkered past with our vanadium. I have to say, the third and fourth quarter though, our recoveries were consistently up at 70% when we were running uranium/vanadium ores. The issue is, with this last quarter, is that our guys at the mill just got distracted in February. We started back up in January on uranium/vanadium ore, so it took a little bit of time to build the circuit back, the inventory back up.

And then in February we had some mechanical issues. However, the guys thought they were dealing with some chemical issues, different things with the ores, and got distracted, and finally saw the mechanical issue late in the quarter, and our recoveries were in the 30% to 40% there through January and February. But we fixed that mechanical issue, and both March and April were back up above 70%.

So it was really, I feel pretty good, we are back on, and we are also producing a very high quality product. Now V205, 98%-plus, which is required for one of our customers. And so I think we are there. It was just a temporary loss of focus there for a little while, Adam.

Okay, and you mentioned also, you'll be processing some new, alternate feed. Can you give us a little description of what is the feed, what's the difference, and will there be a different cost structure?

This alternate feed is actually, it is a little different. Previously we were a waste away stream from chemical. We processed all of that, that we have, we are still receiving it, but we've ran out, we're building inventories back up again. We've switched now to a waste stream from ConverDyn, Honeywell, and it's a little bit lower grade, but actually the costs aren't going to be that different. Our alternate feed costs are still down in the $10 to $15 a pound range. We had to just adjust the circuit a bit to -- we need to feed a little bit more of this material in than we were of the chemical material. And it's handled a little different on the tail end.

And what would you say the production outlook is for 2011, 2012 of the alternate feed?

2011, 2012, I think we're still looking at 200,000 to 300,000 pounds per year coming from alternate feed.

Okay, so that's coming along nicely. Turning to Canada, any discussions with AREVA regarding future production? I know I ask this every quarter, but I'm just looking for an update.

We actually have our joint venture meetings next week, Adam. I am like you, I am hoping that we will be able to move some things forward with clarity on Canada. AREVA is moving forward on the McClean underground project, and we will be discussing that quite extensively at the upcoming meetings here. We are still hopeful that we'll be able to make a decision on that this year. And that would help a lot for clarity.

With regards to Midwest, there's really been no changes there, Adam. We are still working through the permitting and the regulatory aspects. I think this year, though, we will see, hopefully see the final approval of the EA.

And on the McClean underground, if you get some positive momentum there, how long before that can be in production?

The current plan, if we move forward this year, I believe would show first ore around 2014, but we've been discussing with AREVA, we think we can accelerate that a bit. They have quite a long timeframe to put the decline in. It would go in from the Sue B across over to McClean, and we think that we could shorten that a bit.

Any idea on CapEx yet?

Nothing that I can disclose at this point. We're still working through that with AREVA.

Okay. And just one last thing on Wheeler, this last round of drilling, it sounds like you had some disappointments and misses and things not where you want them or drill holes not where you want them. Does that change the outlook at all? Or is this just a temporary hiccup?

Mostly with C, we undershot and overshot, but I think the holes were where we wanted them. I think what it ended up showing is C is just very, very thin. So we have to move, but we still have the stratigraphy and we have another resistivity anomaly further to the south. So everything has showed it is still there, it is just that mineralization isn't there.

And D, it is just more complex. We now believe that we've drilled up close to the edge of the fault with A. We are getting the higher grade there. We just now have to find where is the other piece of A that we think now there's another piece of A on the other side of this fault, and we just have to determine whereabouts it is. Yes, D was a bit frustrating, and it's just complex up there. We're still hopeful, Adam, that there's another part of A that is on the other side of that fault.

Were all these holes infill drilling or step-out? Or a combination?

Pretty well, just about everything was step-out drilling.

So this shouldn't necessarily affect the previous resource calculation in that sense?

No, the only thing it will affect is that it will actually have increased it because it is stepped out on the eastern boundary in areas that we thought were essentially cut off and we've added mineralization. So a good chunk -- the Wheeler joint venture meeting is tomorrow actually, and the program shows a good chunk of drilling on A, to try to expand it along the eastern edge and further to the north.

Great. Again, thank you, as always, for your time, guys.

Thanks, Adam.

Thank you.

Thank you. (Operator Instructions) The next question is from Ralph Profiti of Credit Suisse. Please go ahead.

Good morning, and thanks for taking my question. With respect to the new plan on vanadium with respect to rescheduling and timing, given that you're 40% through your annual guidance for 2011, how's it going to spread out over the quarters? Are we expecting to exhaust the vanadium sales over the next 2 quarters and leave Q4 a bit light?

Yes, Ralph, that's probably what is going to happen. The one customer that we have, this high-grade one I was talking to Adam about, they have got some pretty heavy demands here early on. So they're trying to essentially take everything that we can produce at this point. And then, we are moving into more Arizona Strip ore, and then won't be getting back into uranium/vanadium ore until very late in the year. So, yes, you're right, the vanadium revenue is going to be more heavily to the front of the year.

Okay, that's great. And just turning the focus to uranium. How are you seeing the contract structure evolve in this new dynamic with spot and long-term prices? Are you and the industry moving more towards fixed-price mechanisms? And how has the floor and ceiling moved, say, in the past 3 months or so with respect to uranium contract pricing?

We actually, at the present time, we are in a pretty good position with our contracts, Ralph, so it's difficult for us to say. We haven't been in the market that heavily recently. All of our contracts have a mix. You have a mix of base, long-term, and spot prices. And based on our commercial stuff, I can't say that we've really seen much of a change over the last little while.

I will comment, there's been a few comments that our uranium sales were light in the first quarter. It was primarily because of spot -- we've held off on some spot sales, much like I think a lot of people did after they were scheduled for March. And obviously after Fukushima, like the rest of us, we just pulled in our horns a bit. So our uranium sales were a little lighter than what we'd anticipated for Q1.

That's great. Thanks for the color. That's it for me.

Thank you. The next question is from Edward Sterck of BMO Capital Markets. Please go ahead.

Good morning, gentlemen. I'm afraid I dialed in a bit late, so this question might have already been asked, but I was wondering, for the course of what the split was in terms of production from the Arizona Strip and the Colorado Plateau, for uranium obviously?

In the first quarter, Ed?

Yes.

It's all 100%, there was a little bit of a holdover of Arizona Strip in January because we ran that at the tail end of last year, so there was just some inventory that came out, but it was 100% Colorado Plateau production in the first quarter.

Okay, thank you very much. That's the only question I had to ask.

We will be switching back to some Arizona Strip here in the second, and then running again in the third quarter.

Great, thank you.

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

Hi, again. Just a quick follow-up. On operating costs, the guidance that you provided for the year, obviously was a fair amount lower than what you came in at. Can you just describe where the differences were, and how things look for the rest of the year? With the switch of ore, do you expect to see costs coming down even though Arizona doesn't have the vanadium credit? Or how do you see the rest of the year playing out?

Our costs, actually, on a dollar basis, Adam, were lower than we budgeted. It was just that the vanadium recoveries were so much lower, that we just didn't get that vanadium credit that we had anticipated. Vanadium prices are still good, so that is why the costs are higher. Our acid consumption is actually lower than we had budgeted even though -- and prices are roughly where we thought they would be. And Arizona Strip, even though you don't have the vanadium credit, the grades are pretty good, actually grades are very good. That mine is still coming in higher than budgeted. And so we'll see. I believe we will still be able to get back down to where we wanted to be for costs for the year.

And just remind me if you would, please, what the current acid price is that your paying, and what the Arizona Strip grades are expected to be?

Acid prices that we are paying right now are between about $180 and $195 a tonne. So about $100 a tonne higher than what we paid last year. And grades on Arizona are running, right now, just under 0.6%.

Okay, great. Thanks, again.

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

Thanks, Jason, and thanks, everyone, for attending. Hopefully, if anyone is in Toronto, maybe you can come by, and if there's any further questions we have our AGM here in about an hour, and maybe, hopefully, see you there. Thanks, everyone, for participating.

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