Denison Mines Corp (DNN) 2011 Q3 法說會逐字稿

All participants, please stand by, your conference is about to begin. Please be advised that this conference call is being recorded. Good morning, and welcome to the third quarter 2011 results conference call for Denison Mines Corporation for Friday, November 4, 2011. Your host for today will be Mr. Ron Hochstein. Mr. Hochstein, please go ahead, sir.

Thanks, Dave. Good morning, everyone. Participating with me today is Jim Anderson, Executive Vice President and Chief Financial Officer. 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 Statements section. All amounts are in US dollars unless otherwise indicated.

During the quarter, conventional ore processing at the White Mesa Mill in Utah was on hold for planned maintenance and to manage our ore stockpiles. During the shutdown, we did continue to process alternate feed material and the mill received and stockpiled ore from four of our wholly-owned mines, including the newly acquired Daneros mine.

Uranium production at White Mesa during the third quarter totaled 88,000 pounds. Since we're not processing uranium/vanadium conventional ores, there was no vanadium production during the quarter. For the nine months ended September 30, uranium production totaled 767,000 pounds and vanadium production was 1.3 million pounds. US production costs for the three months and nine months ended September 30 were $23.64 and $46.54 per pound U3O8.

The plan to process Daneros and Arizona 1 ore commencing this month and we will defer processing of Colorado Plateau ore until late 2012 when a longer run of uranium and vanadium ore can be attained.

In regard to the ongoing permitting disputes over Arizona 1, on October 7, the District Court of Arizona issued its final ruling in favor of the US Bureau of Land Management and Denison, and against the Plaintiffs on all counts. The Plaintiffs have until December 6 to file an appeal. To date, no such notice has been filed.

Last quarter, we reported that we were in discussion with the Environmental Protection Agency over four alleged violations of the Clean Air Act related to our La Sal Complex in Utah. These alleged violations dated from 2009. During the quarter, the EPA decided not to pursue two of the alleged violations relating to the monitoring of radon at the site. The remaining two violations, related to gaps in data collection and reporting, are behind us. Denison has signed a Consolidated Complaint and Consent Agreement, and paid a stipulated fine, which is not material in amount. That issue is now fully behind us.

On October 26 this year, the US Department of the Interior released the final EIS that recommends the withdrawal of more than 1 million acres near the Grand Canyon National Park. Once the final EIS has been made publicly available for 30 days, Secretary Salazar can issue a final decision on the withdrawal, even though this decision is counter to the conclusions of the EIS, which concluded that mining activity would have no or negligible impact on water sources, fish and wildlife, and recreation and tourism.

There's currently legislation in both the US House and Senate that will prohibit the withdrawal without Congressional approval. Additionally, there is a rider on the House Interior Appropriations Bill that would similarly prohibit the withdrawal. Any new mines in withdrawn areas, if a withdrawal is in fact ordered, can only be developed on valid mining claims that existed before the segregation of withdrawal took effect and the BLM must prepare a mineral examination to determine that the mine will be economically viable.

Our plant EZ mine site is in the area that had been segregated for mineral entry by the Secretary of Interior. In order to avoid delay in the event that an additional 20-year withdrawal is ordered, we will request the BLM to conduct a mineral examination on the EZ project, simultaneously with the EIS. Any final withdrawal decision, if passed, should have no effect on Arizona 1, which is in full operation; Pinenut, which is being developed with first ore planned for mid-2012; or Canyon, where final permitting is near completion.

Before we leave the subject of US production, I'd like to speak to some accomplishments that are close to me. We're extremely proud of the fact that two of our mines were recognized at the US Department of Labor's Mine Safety and Health Administration 2010 Sentinels of Safety Awards. The employees at Arizona 1 won the award for small underground metal mines, having achieved 56,417 injury-free hours. Our recently acquired Daneros mine in Utah was the runner-up with a total of 23,674 injury-free hours.

The Arizona 1 mine also was awarded the Arizona State Mine Inspector's Annual Mine Safety Award. Meanwhile, the White Mesa mill was awarded the Utah Mining Association's Annual Mine Safety Award for Outstanding Performance in 2010. It's very gratifying to see this kind of recognition. The health and safety of our workers are the core of Denison's operating culture.

In Canada, the McClean Lake mill has been on standby since August 2010. So there was no production during the quarter. Denison's share of standby costs for three and nine months ended September 30, 2011 were $181,000 and $598,000, respectively.

In October, Cameco, as the operator of the Cigar Lake Joint Venture, announced that all of the Cigar Lake ore will now be milled completely at McClean Lake, commencing in late 2013. The net result of this to Denison is increased cash flow from toll milling, with adequate capacity available from McClean and Midwest ores. I'll update the status of these projects later in this call. The final details of the toll-milling arrangements are still to be negotiated.

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, 2011 was $17 million. This compared with revenue of $39.9 million during the same period last year. For the nine months ended September 30, 2011, revenue was $60.8 million compared with $89 million for the first nine months of 2010.

Q3 revenue included uranium sales under a long-term contract of $10.3 million, that consisted of 167,000 pounds U3O8 at an average price of $62.04 per pound. This compares with sales of $31.2 million from 706,000 pounds U3O8 at an average price of $44.22 in the same period last year.

Uranium sales revenue for the nine months ended September 30, 2011 totaled $34.9 million from the sale of 550,000 pounds of U3O8 at an average price of $63.46 per pound. This compares with $65.2 million from the sale of 1.4 million pounds U3O8 at an average price of $46.93 per pound for the first nine months of 2010.

Spot market prices were lower than expected during the quarter, due to declines in spot market demand, resulting from the events in Japan earlier in the year. Spot prices have been trading in the range of $50 to $55. Since the timing of spot sales is discretionary, Denison has deferred some of the spot sales to later in the year.

Uranium inventory available for sale as of September 30, 2011 totaled 502,000 pounds U3O8. Based on spot prices at September 30, this inventory had a value of $26.4 million.

For the three months ended September 30, 2011, total vanadium sales revenue was $849,000 from the sale of 144,000 pounds V2O5 equivalent at an average price of $5.89 per pound. This compares to $3.8 million from the sale of 534,000 pounds V2O5 equivalent at an average price of $7.11 per pound in the same period last year.

During the nine months ended September 30, 2011, we sold 1.8 million pounds of vanadium at an average price of $6.41 per pound for a total of $11.6 million. This compares with last year's nine-month sales of 1.4 million pounds of V2O5 equivalent at an average price of $7.30 per pound for a total of $10 million.

Revenue from Denison's Environmental Services division was $5 million for the three months ended September 30, 2011, compared with $4.1 million in the same period last year. And revenue from the management contract with Uranium Participation Corporation was $449,000 for the three months ended September 30, 2011, as compared to $409,000 in the same period in 2010.

Net cash used in operating activities was $24.1 million during the nine months in 2011. Net cash used in investing activities was $81 million, consisting primarily of acquisition of White Canyon for $59.7 million, expenditures on property, plant, and equipment of $19 million, and an increase in restricted cash of $3.4 million.

Net cash from financing activities totaled $62.3 million, consisting of $62.4 million from the issue of common shares in March, less a small payment of on-debt obligations. In total, these sources and uses of cash resulted in a net cash outflow during the period after the effect of foreign exchange of $44.8 million.

Exploration expenditures during the third quarter totaled approximately $6.9 million, as compared to $2.6 million during the third quarter of 2010. The increase was due to increased exploration commitments this year at all three of our major exploration projects; the 60% owned Wheeler River project in Saskatchewan, the wholly-owned Mutanga project in Zambia, and the 70% owned Gurvan Saihan Joint Venture in Mongolia.

During the quarter, exploration expenditures in the Athabasca Basin was focused on the Wheeler project. Denison's share of exploration spending on its Canadian properties totaled $2.5 million for the three months ended September 30, 2011; almost all of this was spent on Wheeler River.

For the three months ended September 30, 2010, Canadian exploration expenditures totaled $1.8 million. Our exploration expenditures of $1 million and $1.9 million for the three and nine months ended September 30, 2011 were incurred at the Mutanga project in Zambia. This is compared with only $13,000 and $24,000 for the three and nine months ended September 30, 2010.

In Mongolia, on our joint-venture properties, exploration expenditures were $2.8 million and $3.8 million for the three and nine months ended September 30. This is compared to $486,000 for the three months and $841,000 for the nine months ended September 30, 2010.

Regarding the White Canyon acquisition, we closed the deal in June and completed the compulsory acquisition proceedings in early August. The total purchase price was $61.027 million. Consideration for the initial 97% interest was paid on July 1 and payments for the remaining shares was made in early August.

Consolidated net income for the quarter was $15.5 million or $0.04 per share compared to a net loss of $5.5 million or $0.02 per share in Q3 of 2010. Consolidated net loss for the nine months ended September 30, 2011 was $5.3 million or $0.01 per share, compared to the net income of $4 million or $0.01 per share in the first nine months of 2010.

As of September 30, 2011, the Company had $52.8 million in cash and cash equivalents. And as mentioned earlier, we had approximately $26 million in U3O8 inventory. Also, at September 30, we had no bank indebtedness under our revolving credit facility. For a more detailed discussion of our financial results, I refer you to our MD&A.

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

Thanks, Jim. On the development front in Canada, the McClean Underground project licensing activities are ongoing, and engineering is planned to incorporate the Caribou and Sue D deposits into the project. At Midwest, the Environmental Impact Statement Study was finally submitted in the quarter and we anticipate that it will take about a year to work through the regulatory review and approval process.

Turning to our exploration drilling activities at Wheeler River now, the 24,000-meter summer drilling program was completed. In Q3, we continued to hit some very high-grade uranium intercepts. In Zone B, hole 421 returned 19.13% eU3O8 over 2.1 meters. But the most exciting news was from Zone A, where hole 409 returned just over 10% eU3O8 over 4.1 meters and hole 419 intersected 5.1 meters, grading 10.97% eU3O8.

The summer drilling has significantly expanded the width of Zone A and successfully delineated numerous stacked Northeast and East trending mineralizing structures that indicate an extension to Zone A. The Zone A Extension, as we're calling it, currently has widths varying from 10 meters to 70 meters and a strike length of nearly 100 meters, and is open to the Northeast. 10 mineralized holes presently define this trend, including WR-403 with 20.63% U3O8 over 6 meters and 13.3% over an additional 11.5 meters.

One of the best intersections this summer was an infill hole in Zone A, hole 401, which intersected high-grade mineralization straddling the unconformity, totaled 38.5% eU3O8 over 8.4 meters, starting at 404.5 meters depth. The interval included a zone of massive pitchblende from 411.3 meters to 414 meters. This is the second highest grade mineralization and grade thickness we've hit at Phoenix.

Based on internal estimates, Denison believes that the results from the 2011 drill program could potentially lead to an increase in Denison's mineral resource estimates in Zone A by 10 million pounds to 15 million pounds U3O8. However, there has been insufficient exploration to properly define an increase in the mineral resource estimate at this time. Moreover, it is not certain that further exploration will result in the categorization of additional mineral resource estimates in accordance with the requirements of National Instrument 43-101.

As Jim mentioned, we've ramped up exploration drilling at Mutanga this year. We completed the Phase II drilling program a couple of weeks ago, which totaled 9,600 meters and was aimed at further delineating and expanding the mineralization at Dibwe East Zones 1 and 2. The preliminary results have confirmed the continuity to mineralization identified in the 2008 drilling program, with a combined strike length greater than 2.5 kilometers. They have also identified a deeper higher-grade zone.

Results from the 2011 program will be released in the next few weeks. Denison intends to prepare a revised mineral resource estimate for the Mutanga project in accordance with the requirements of National Instrument 43-101 and release the new resource estimates early in the fourth -- first quarter of 2012.

In Mongolia, exploration and definition drilling, totaling approximately 51,000 meters, was completed on the Gurvan Saihan Joint Venture license areas in 2011. At the Hairhan, Haraat, and Gurvan Saihan license areas, drilling totaled 14,800 meters and was directed towards determining the extent of potential mineralized horizons to support delimiting boundaries for mining license applications.

At the Ulziit project, just under 28,000 meters of drilling was conducted to confirm mineralization initially discovered in 2008. Based on the 2011 drilling at Ulziit, an initial resource estimate, in compliance with Mongolian requirements, is being prepared. Discussions continue with our partners regarding the resolution of the ownership structure at the Gurvan Saihan Joint Venture and issuance of mining licenses.

As to our outlook for the remainder of 2011, I talked earlier about our plans for White Mesa. We have begun processing uranium-only ore from Daneros this month and will follow up with Arizona 1 ores later this year. Processing of the Colorado Plateau uranium/vanadium ores will be deferred until 2012, when we can get a longer run from stockpiled ore.

Our 2011 estimates for production remain the same. Uranium production is expected to be 1.2 million pounds U3O8 and vanadium production will be 1.3 million pounds. Uranium sales are expected to be approximately 1.2 million pounds of U3O8. Vanadium sales will be about 1.8 million pounds V2O5, up 100,000 pounds from our previous expectation.

We're weathering a very tough year. The events in Japan negatively impacted the markets and our sector in particular in that it in turn affected our sales schedule and revenue expectations in regards to spot sales. Fortunately, we have long-term contracts in place at reasonable pricing levels and the capital resources to delay spot sales until the market rebounds.

On top of Fukushima, we had the recent major capital market meltdown, which affected all sectors. We're all slowly recovering from that. The good news is our exploration successes; Wheeler River, Mutanga, and Mongolia.

Our drilling results this summer encourage us and should encourage our investors also. Denison is in for the long haul and we remain bullish on the future of the uranium industry.

That concludes the formal presentation. Now, we will be happy to answer any questions. Dave?

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

Good morning, Ron and Jim. Ron, I was wondering if you could, because I know you're certainly in touch with the subject, give us a quick update and your take on the Whitfield proposal.

The Whitfield proposal, Adam, I think the major sort of update there is the revised proposal has been put forward by URENCO & ConverDyn to at least put in the market a commercial response to rather than the Whitfield proposal. We -- [I see] -- it's been a bit quite, I would say, over the last couple of weeks on the Whitfield proposal. The focus seems to be now mostly on the withdrawal in terms of what's going on in our industry on the Hill, but I haven't heard much new on the Whitfield proposal probably in the last couple of three weeks.

Okay. Is it being pushed back at all with respect to how the funds are appropriated and how they get redirected to the DOE?

Yes, it is, Adam. There was some -- I can't recall what it was, there was a report out of the Hill earlier this week, that again is pushing on the DOE and further clarification on their bartering arrangements and also on the use of funds essentially, going around Congressional approval. So that was I think a little bit more in support of the industry.

Okay. Well, it's good to hear something positive there. And another question for you, totally a different subject. You mentioned, of course, the Cigar Lake going through your mill, and I know it's a little early, but is there any idea you can give us on what kind of range of cash flows that might generate to you once it's up and running at 18 million pounds a year?

No, we can't right now, Adam, because we're still sort of in the final negotiations of the revised toll-milling agreement as a result of making that decision. So I can't really say what that would be at this time.

Okay. And if I may ask another question then with respect to your joint operations with or projects with AREVA in Canada, you mentioned a few bits and pieces there. I'm wondering if you could just sort of give us an idea of how things might go forward and which projects are moving to the front burner and timing, any of those issues.

I'm sorry, Adam, again, we got our joint-venture meetings in a couple of weeks and also AREVA has been stating to us internally as well that there would be some decisions at the joint-venture meeting, but a large part of it's going to be held up until that strategic plan is announced in mid-December.

Okay. Well, that's unfortunate.

Yes.

Okay. I'll let someone else ask a question. Thank you very much.

You're welcome.

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

Hey, again, Ron.

Hey.

Just wondering as well if you could give us a quick update then on the vanadium market. It seems to have been a little bit stagnant, if you're seeing any signs of light there?

No, it is so flat, Adam, it's stayed at -- it's been at $6.50 since April, not much there. And we had some contract -- not contracts, but sort of sales arrangements with a couple of people, that they're obviously disappointed that we've switched our plans for processing uranium/vanadium ores, but the market is extremely quiet and flat.

Okay. And on your uranium sales, I think in the nine months, you did 550,000 pounds. You're planning on 1.2 million for the year. So can we assume -- would it be fair to assume that, that remaining bit of more than 0.5 million pounds will be sold into the spot market, would that be fair or do you still have contract material available for the year?

No, it's all in spot and we already have concluded sales of about 200,000 pounds.

Okay, great. Thank you very much.

You're welcome. Thanks, Adam.

Thank you. Ralph Profiti, Credit Suisse.

Good morning. Thanks for taking my question. Ron, with regards to the joint venture in Mongolia, is there a minimum spending requirements to re-register those exploration licenses? And if so, is it your plan before the ownership structure is finalized to continue spending at least the minimum requirement?

Morning, Ralph. No, there is actually spending requirements and it varies with the duration of the license. It's tied to the size of the license, it's sort of so much per hectare. Our whole thing right now is to move forward to mining licenses and the whole ownership structure is tied to moving to mining licenses. The Nuclear Energy Law states that the government ownership would be at that 34% to potentially 51%, but in our case, we believe it's 34%, when the mining licenses are granted. So that's our whole push right now this year and early next year is to get our exploration licenses converted to mining licenses and simultaneously resolve the ownership issue.

Okay, I see. And under the current Energy Law right now, if the government were to go to 34%, would the remaining be taken out on a pro rata basis, so that you'd end up with 54% and then the Russian minority partner, I think, the number is around 12%? Is that right?

That's correct, yes.

Okay. Thanks very much.

Thank you. (Operator Instructions) I have no further questions registered at this time.

Okay. Thanks, Dave. Thank you, everyone, for participating in the call and the questions. And we'll talk to you, I guess, at year-end. I hope everyone has a great weekend. Thank you.

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