Denison Mines Corp (DNN) 2011 Q2 法說會逐字稿

Good morning and welcome to the Denison Mines second quarter 2011 results conference call for Friday, August 5, 2011. Your host for today will be Mr. Ron Hochstein. Mr. Hochstein, please go ahead.

Thanks Ann. Good morning. Participating with me today is Jim Anderson, Executive Vice President and Chief Financial Officer. We'll start with a brief look at the quarter's highlights, following that, Jim will speak to the financial results and then I'll address the Q2 production, review the current results from the Wheeler River and Mutanga exploration programs and update you on our outlook for the remainder of the year. 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 our press release in the cautionary statement section. All amounts are in US dollars unless otherwise indicated.

During the quarter we produced 339,000 pounds U3O8 and sold 116,000 pounds U3O8 at an average price of $65.94 per pound. We also produced 689,000 pounds of vanadium and sold 801,000 pounds vanadium equivalent at an average price of $6.27 per pound. At the end of the quarter we completed the takeover of White Canyon Uranium Limited, with 96.98% of shares outstanding accepting the offer. Compulsory acquisition proceedings to acquire the remaining shares commenced on June 20th and are expected to be completed in early August.

At our Mutanga project in Zambia, our phase one drilling returned a number of strongly mineralized holes and confirmed the continuity of mineralization at the Dibwe East Zones 1 and 2. The Phase II program has now begun.

Our summer drilling program at our 60% owned Wheeler River project has expanded the previously known uranium mineralization of the Phoenix zone A deposit and hit the second highest mineralized intervals so far. I'll speak more about the results later.

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, 2011 was $17 million. This compares with revenue of $27.2 million during the same period last year. For the six months ended June 30, 2011 revenue was $43.8 million compared with $49.2 million for the first six months of 2010.

Q2 revenue included uranium sales of $7.7 million that consisted of 116,000 pounds U3O8 at an average price of $65.94 per pound. This compares with sales of $19 million from 417,000 pounds U3O8 at an average price of $45.56 per pound in the same period last year.

Uranium sales revenue for the six months ended June 30, 2011 totaled $24.6 million from the sale of 383,000 pounds U3O8 at an average price of $64.08 per pound. This compares with $34 million from the sale of 683,000 pounds U3O8 at an average price of $49.74 per pound for the first six months of 2010.

Sales volumes were lower during the quarter due to lower spot sales. The timing of spot sales is discretionary and Denison has deferred its spot sales due to the market pricing experienced during the quarter. Denison expects spot pricing to improve in the second half of the year.

Inventory available for sale though at the end of June totaled 570,000 pounds of U3O8 as well as 145,000 pounds of V2O5. Based on spot prices at June 30th this inventory had a value of $31.9 million.

For the three months ended June 30, 2011 the total vanadium sales revenue was $5.1 million from the sale of 801,000 pounds of vanadium at an average price of $6.27 per pound. This compares to $4.3 million from the sale of 557,000 pounds of V2O5 equivalent at an average price of $7.20 per pound in the same period last year. During the six months ended June 30th we sold 1.7 million pounds of vanadium at an average price of $6.24 per pound, for a total of $10.7 million. This compares with last year's six-month sales of 841,000 pounds of V2O5 equivalent at an average price of $6.59 per pound for a total of $6.2 million.

Revenue from Denison's environmental services division was $3.6 million for the three months ended June 30, 2011 compared to $3.5 million in the same period last year. Revenue from the management contract of Uranium Participation Corporation was $476,000 for the three months ended June 30, 2011 as compared to $378,000 in the same period in 2010.

Net cash used in operating activities was $11.9 million during the six months ended June 30, 2011. Net cash used in investing activities was $13.6 million and net cash from financing activities totaled $63.3 million, consisting primarily of $62.4 million from the issue of common shares. In total, these sources and uses of cash resulted in net cash inflow after the effect of foreign exchange of $40.2 million during the period.

Exploration expenditures during the second quarter totaled approximately $2.5 million compared to $1.8 million during the second quarter of 2010. During the quarter exploration expenditures in the Athabasca Basin of Northern Saskatchewan were focused on the company's 60% owned Wheeler River project. Denison's share of exploration spending on Wheeler River totaled just under $1 million for the three months ended June 30, 2011 and for the three months ended June 30, 2010 Canadian exploration spending totaled $1.7 million.

Exploration expenditures of $785,000 and $889,000 for the three and six months ended June 30, 2011 were incurred at the Mutanga project in Zambia. That compares to $11,000 for the three months and six months ended June 30, 2010.

In Mongolia on our joint venture properties, exploration expenditures were $664,000 and $969,000 for the three and six months ended June 30, 2011 compared to $77,000 for the three months and $355,000 for the six months ended June 30, 2010.

Regarding the White Canyon acquisition, the full amount of the $61 million purchase price has been recorded as a payable at June 30, 2011. Consideration for the initial 96.98% interest was paid on July 1, 2011 and payment for the remaining shares was made in early August of 2011, after the conclusion of a compulsory acquisition process.

Consolidated net loss for the quarter was $13.7 million or $0.04 per share compared with a net income of $16.7 million or $0.05 per share in Q2 of 2010. Consolidated net loss for the six months ended June 30th was $20.8 million or $0.06 per share compared with a net income of $9.6 million or $0.03 per share in the first six months of 2010.

As of June 30, 2011 the company had $137.7 million in cash and cash equivalents. This compares with $97.6 million at December 31, 2010. The $40.2 million difference was primarily due to the issuance of common shares, which yielded $62.4 million, offset by cash used in operations of $11.9 million and expenditures on property, plant and equipment of $12.7 million. Also at June 30th we had no indebtedness under our $35 million revolving credit facility.

For a more detailed discussion of our financial results, I refer you to our MD&A. Now I'd like to turn the call back over to Ron.

Thanks Jim. The McClean Lake mill has been on standby since last August, so there was no production during the quarter. Standby costs for the three and six months ended June 30, 2011 were $274,000 and $417,000 respectively.

During the quarter, the White Mesa mill in Utah processes both uranium and uranium vanadium orders, as well as alternate feed materials. The mill continues to receive ore from three of our wholly owned mines plus ore from the newly acquired Daneros mine. Production at White Mesa during the second quarter totaled 339,000 pounds U3O8 and 689,000 pounds V2O5. For the six months ended June 30th, production totaled 679,000 pounds U3O8 and just over 1.1 million pounds V2O5. As planned, conventional ore processing ceased at White Mesa at the end of June and is planned to resume in the fourth quarter of 2011. Alternate feed processing is continuing.

US production costs for the three months and six months ended June 30th were $48.83 and $49.51 per pound U3O8. Operating costs are higher than planned due to lower mill head grades and recoveries. Costs are up year-over-year due to the lower recoveries and less production from alternate feed due to a change in the type of alternate feed materials processed. Operating costs are projected to decline later in the year as we process lower cost Arizona 1 and Daneros ores.

In regard to the ongoing permitting disputes over Arizona 1, on May 6th the Ninth Circuit Court of Appeals upheld the original ruling denying the injunction to shut down operations at the mine. On May 20th the District Court held a hearing on the merits of the original case and on May 27th, one week later, the District Court ruled in favor of the US Bureau of Land Management and Denison on four of the five counts and remanded the fifth count to BLM for further consideration.

The fifth count deals with a gravel pit on BLM ground that is used to provide gravel for the County and mine access road. It has essentially nothing to do with the Arizona 1 operations. Although this matter cannot be considered fully decided until the District Court rules on the fifth count, the main substance of the plaintiff lawsuits appears to have been decided in favor of BLM and Denison by virtue of the District Court's ruling on the other four counts. The plaintiffs will have the right to appeal the District Court's ruling once it rules on all five counts.

At our La Sal Complex in Utah, we're currently in discussion with the Environmental Protection Agency or EPA over four alleged violations of the Clean Air Act dating from 2009. Settlement may involve the payment of a stipulated penalty, but this penalty is not expected to be material.

In terms of other developments on the Arizona strip, at Arizona 1, drilling of the deeper extensions of the ore body has identified additional resources. At the present time, initial indications are that the mine life has been extended by two to three months. The drilling is ongoing. Elsewhere on the strip, development of Pinenut is on schedule and first ore is planned for the first quarter of 2012.

On the development front in Canada, a production decision on the McClean North or McClean Underground project is expected in the fourth quarter of this year. On Midwest, it appears that the issues holding up the Environmental Impact Statement are near resolution and the final EIS is planned to be submitted this quarter.

Turning to our exploration drilling activities now at Wheeler River. The 55-hole, 24,000-meter summer drilling program is underway and results to date have been very encouraging. To date, 22 holes have been drilled with the major focus being to add to the existing mineral resource estimates at Zone A. 14 holes totaling 6,646 meters have been completed to date in Zone A and have expanded the previously known area of mineralization along the Northeastern boundary of the zone.

In particular, Hole WR-405 cut high-grade unconformity mineralization totaling 15.26% eU3O8 over 2.3 meters. While Hole 403, which is located 25 meters northeast of 405, intersected two zones of strong mineralization. The first zone straddled the unconformity and yielded 14.71% eU3O8 over 5.8 meters. While the second zone was 7.5 meters below the unconformity and it intersected 9.2 meters, averaging 9.85% eU3O8. This second intersection is of particular interest to us and our partners, because this has opened up the potential for further mineralization in the basement.

The best intersection though so far this year was an infill hole, WR-401, which is only 10 meters west from previously drilled 318, which returned 7.7% eU3O8 over 10.5 meters. 401 intersected high-grade mineralization, straddling the unconformity, totaling 38.5% eU3O8 over 8.4 meters, starting at 404.5 meters depth. The interval included a zone of massive pitch blend from 411.3 to 414 meters. This is the second highest grade mineralization and grade thickness we've hit at Phoenix.

In addition to the drilling activities at Wheeler, an environmental baseline sampling program began this spring. We've also been very busy at our 100% owned Mutanga project in Zambia, where approximately 5,790 meters were drilled in three zones; Dibwe East Zones 1 and 2; and Mutanga West. A number of strongly mineralized holes were located in all three zones. These zones are along the mineralized trend between the Mutanga and Dibwe deposits.

The preliminary results in Dibwe East Zones 1 and 2 has confirmed the continuity of the mineralization identified in a 2008 drilling program with a combined strike length greater than 2.5 kilometers. They've also identified a deeper higher grade zone. The drilling indicates that mineralization in the area occurs in three distinct tabular horizons, extending from the surface to approximately 120 meters depth. Tables of the complete Phase 1 drill results are available on our website.

The Phase 2 drilling program which is now underway is planned to be a total of 11,240 meters and is aimed at further delineating and expanding the mineralization in Dibwe East Zones 1 and 2. Subject to the results of the Phase 2 drilling program, Denison intends to prepare a revised mineral resource estimates for the Mutanga project in accordance with the requirements of National Instrument 43-101 later this year.

In Mongolia, discussions continue with our partners regarding the resolution of the ownership structure of the Gurvan Saihan Joint Venture and issuance of mining licenses. As to our outlook for the remainder of 2011, as a result of the acquisition of White Canyon, we have revised our ore processing plans for the remainder of the year. Currently we plan to process Daneros, an Arizona 1 ore in the fall of 2011 and defer processing of Colorado Plateau ore until 2012, when a longer run of uranium or vanadium ore can be obtained.

2011 production is expected to remain at 1.2 million pounds, however, as a result of the changes to the ore processing schedule, vanadium production will be lower at 1.3 million pounds, down from our projected 1.7 million pounds. Uranium sales are expected to be approximately 1.2 million pounds of U3O8, down from our projected 1.3 million pounds, due in part to the timing of production and in part due to a decision to defer some sales.

Vanadium sales are now projected to be about 1.7 million pounds V2O5 in 2011, down from a projected 2.1 million pounds. The decline of V2O5 sales is due to the lower production expectations.

The events earlier this year in Japan have negatively impacted the markets and we have taken measures, mostly in our sales schedule to accommodate the downturn. We were able to delay sales until the market rebounds because of our current liquidity position. We continue to expand our assets both through acquisitions like White Canyon and successful exploration programs, as demonstrated this quarter at Wheeler River and Mutanga. We remain bullish on the future of our industry and welcome its challenges.

That concludes the formal presentation. Now we would be happy to answer any questions. Ann?

(Operator instructions) Adam Schatzker, RBC Capital Markets.

A couple of questions, I guess a very high level question with respect to your US operations and given where we are now with the uranium market and uranium price, where do you see the level of operations from a production standpoint, 2012-2013-2014 in very general terms?

In general terms we see continuing operation at Beaver. We're doing some more drilling underground on Pandora to hopefully extend the mine life there, but those two operations, given the vanadium credits, we see continuing to operate those. And then moving through the strip with Arizona 1 to Pinenut and we're hoping to move Canyon forward as well. So it'll just be moving from on operation to the next on the strip to maintain production down there.

Daneros obviously is a key component now. We're formulating, getting the permitting in place to do some more exploration out there to look at expanding production out of Daneros. In terms of Henry Mounds and that, we're going to have to wait until some higher price curves, till we see some higher price or better contract prices in place before we can really move on that.

What kind of prices would you need there?

We'd probably need north of, I'd say contract prices north of 70.

Okay, so on a millions of pounds basis, how would all those add up? Should we look for sort of stabilized in the 1.5 range or do you expect increases?

I would say stabilized in the 1.5 range until probably 2014-2015 is when we hopefully will see prices improve and also we'd start potentially with the positive production decision in Canada, we'd start to see production in Canada in those later years.

I hope the price goes up before 2014-2015.

I do too, but that's the advantage we have, Adam. Tony M. is we've maintained that mine dry, as a lot of you on the call have been there. It is one of our only wet operations but we've maintained the water level down and we have plans in place that we could start that up. We can be very opportunistic to start that up.

And so the Canadian operations you refer to 2015, that would be the McClean underground, is that correct?

That's right.

And looking at prices, you obviously held material back because the market was soft. I imagine at some point you're going to have to start selling inventory material regardless of prices and what are you seeing in the long-term market now?

In terms of long-term market, we haven't been too active in there. We started to see some new contracts coming out just recently that are looking out in that 2012-2014 range, so we are putting offers in on those. And yes, we still would like to sell some spot material later this year and we're starting to see some activity, some offers coming in to try to fill some spot volumes for later this year.

And turning quickly to Wheeler, just curious, looking at the high-grade zones which look quite promising, I'm just wondering, what mining method would you guys use on something of let's say sub 5 meters, when you look at Cigar and McArthur they're quite a bit thicker, using their raised bores and jet bores. What would you use for Wheeler?

The concept study that we talked about and the operating costs that we threw out in there was all based on raised bore. Obviously given the configuration of our ore body, raised bore mining is not the most efficient, as you've highlighted. We have had discussions and our partners brought this to our attention that they have had some success using road header type machines at McArthur.

And so that's one of areas we're going to be investigating and was investigated on a high level and the concept study is looking at road header type mining methods. They're also looking at road header methods for McClean underground as well.

Can I assume that road headers can be operated remotely then?

They're finding that with the appropriate shielding around the cab and ventilation that the RAD concerns are nowhere near what everyone anticipated when they first looked at McArthur and Cigar.

Really you're taking road header into 15%-20% you can actually do that then?

Yes.

Wow. Okay. Great, thank you for your help, I appreciate it.

(Operator instructions) Bart Jaworski, Raymond James.

Just the first question; how'd you guys manage to sell at $65 a pound? Are those types of premiums something we can expect over the next few quarters?

Those were contracts that we had in place, Bart.

And is that going to be something we can expect over the next few quarters or was that a onetime contract?

No, those aren't onetime contracts but most of our sales in the latter part of the year are going to be probably into the spot market. We did have a few more deliveries after the second quarter into our contracts, but a majority of our sales for the remainder of the year will be spot. But those contracts are ones in place that go for quite a few more years, so those are the types of prices we will be able to enjoy from those contracts.

And in your segmented information, you had $7.6 million in revenue coming from Canada. What's going on there, just given obviously production from there has stopped?

That was just inventory we had in place from the Canadian productions from last year.

And how much of your current inventory is of Canadian origin right now?

That was it. Very little left.

Just on the Wheeler River, the drilling to date in Zone A, how far deep or below the unconformity have you guys been drilling to test for this type of basement mineralization which you found in the hole you just highlighted?

Bart, all of our holes we take down till we hit that quartzite ridge, so we're talking all of them down, but what's happened is we've moved. There was always the indication, we always thought that Zone A more or less continued along the boundary of the quartzite ridge to the north and there's a major fault there and then we jumped across it to Zone D. What we're seeing is that Zone A is actually tailed off further to the East and the clay alternation that they saw in the basement and the amount of the graphite is what's got everyone fairly excited in that hole that hit below the basement.

We have had some intersections below the basement earlier but they've been stringers and nothing getting of this magnitude.

That's something obviously you'll be focusing on in the near term, I would imagine?

Yes, we've got about 20 holes left of the program and yes, around that 403, 405 area is going to be key. We had planned some holes in Zone B as well. There's some areas there we believe we can add resources to B. Then there's some things we're following up in Zone D yet. Although the holes we've drilled that were outlined there in the press release didn't hit any mineralization, the alteration and the rock types that we're seeing in that is still very interesting and we need to do more follow-up there.

Just a last question, it sounds like the grades at Colorado Plateau have not been as good as expected and that is forcing you to transition over to Daneros and Arizona 1, but can you give us just a bit more color, what went wrong at Colorado or what hasn't been working out? Is it just the mineralization is a lot more wispy than you thought or grades are just not as good? Why is that?

What it is, Bart is actually we probe every truck that comes in and they're probing the holes underground so they estimate the grade, but what we usually typically will use for planning purposes is the probe grades that we get when the ore arrives at the mill. And what we've found out is we had a period there where our probes got out of calibration for some - we don't quite know why. Either they screwed up on the calibration procedures or they just forgot to be calibrating them. And as a result, what we'd assumed we had on the ore pad at the mill, the grades when we actually milled it were slightly lower. So it's actually not as much at the ore, what we're mining, it's what we're anticipated, what we got at the mill.

So, we've tightened up our procedures there and most recent lots that we ran through were much tighter.

(Operator instructions) Adam Schatzker, RBC Capital Markets.

Ron, just a quick follow-up on the Canadian operations that you're looking at. What kind of production levels do you think one might be able to anticipate if you get the go-ahead for the 2015 timeframe?

Jim, do you recall the production levels at McClean underground? It would be a ramp-up. If I remember right, it's about 1 million to 2 million pounds per year, I think, or a bit more than that. Maybe 4.

Obviously on a 100% basis, right?

Correct.

And you mentioned Midwest, that was something that sort of went to sleep for a while. Can I assume that Arriva is now showing renewed interest there?

It went to sleep from the side of sort of evaluating the economics. It's just been a struggle pushing the environmental through, primarily the fish habitat compensation and a couple of other issues. But we finally had some breakthrough on that. I think Arriva has always been pushing it; it's just been a real struggle, Adam. And yes, we get this final EIS in then I think we're moving forward much - that will really help a lot to move that project forward. Move forward then to licensing and look at the economics once again.

And the economics, last time we looked at it was a large open pit, I think the CapEx was in the billion range; any changes do you think to that?

Arriva and the partners are looking at what are our other options. Midwest originally was underground. We've also had some great success with MED, the jet hole boring - jet boring. So that will probably be the first step once we have this EIS in is to reevaluate is the open pit still the best way to go.

And what do you think a timeframe now is realistic? We sort of lost a few years here. Originally we were looking at 2017-2018; are we pushing out a couple of years then?

I couldn't say right now till we get a little further into it, Adam, but obviously we lost a little bit but it depends on what mining method we choose. If you end up going MED, you could see that happening fairly quickly.

But more conventional could be closer to 2020?

Underground, I don't know if you'd delay it pushed out two or three years, maybe a year or two.

There are no further questions registered at this time, Mr. Hochstein.

Okay, thanks Ann. Thank you everybody for attending the call and look forward to talking to you in a few months. Thank you.

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