Denison Mines Corp (DNN) 2011 Q4 法說會逐字稿

Please be advised that this conference call is being recorded. Good morning and welcome to the Denison Mines year end 2011 results conference call for Friday, March 9, 2012. Your host for today will be Mr. Ron Hochstein.

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 year's highlights. Following that, Jim will speak to the 2011 financial results, and then I'll recap our production and development activities and look ahead to 2012. 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.

At the beginning of 2011, the uranium market was strong with rising prices and much optimism. Almost exactly one year ago, Japan was hit by the earthquake and tsunami that resulted in the crisis at Fukushima. Our hearts went out to the Japanese people as they struggled to recover, a recovery that is still going on.

In our industry, all uranium producers were hit by the uncertainty in the marketplace as governments scrambled to reevaluate their nuclear power programs. After a heart-stopping drop in the spot price, it recovered, but not to the levels we had seen previously. By the beginning of 2012, things seem to have stabilized, though the spot price is about $10 per pound lower than last year at this time. And spot market volumes are almost non-existent, especially when compared with last year. But the market has begun to show signs of a possible strengthening later in the year.

In 2011, we had a great year in terms of exploration success. We more than replaced production through exploration in the US and overall, our 2011 exploration programs increased our resource base substantially. Drilling in 2011 expanded the Phoenix deposit located on the 60% owned Wheeler River project in the Athabasca basin in northern Saskatchewan.

Denison is the operator on Wheeler and its two partners include Cameco at 30% and JCU owning the remaining 10%. The 2011 summer drill program focused primarily on zone A and was very successful in expanding the potential estimated resources of the Phoenix deposit with the discovery of the zone A extension.

At our 100% owned Mutanga project in Zambia, the phase 2 drilling program, totaling approximately 9,600 meters, further delineated and expanded the mineralization Dibwe East, a new deposit. As a result of this drilling, Denison prepared a new mineral resource estimate in the first quarter of 2012 for the Dibwe East deposit in the Mutanga project in accordance with the requirements of national instrument 43101. The new estimate increased the inferred resources at Mutanga by 28.2 million pounds, bringing total resources to just under 50 million pounds.

In Mongolia, mining license applications were submitted on four of the five license areas and in preparation for meeting the ownership requirements under the Mongolian nuclear energy law, we negotiated terms for acquisition of the Russian participants' share in the Gurvan Saihan joint venture. The terms included a nominal cash consideration and release of the Russian share burden of unfunded joint venture obligations.

We continued development at the Pinenut mine in Arizona where production is expected to commence in mid-2012 and also in Arizona, drilling at depths has increased the mine life at Arizona 1 by at least four to six months.

In terms of business development, we completed the acquisition of White Canyon Uranium in August 2011. WCU's assets included the 100% owned Daneros uranium mine in Utah, which currently produces approximately 200,000 pounds U308 per year, plus the advanced Lark Royal project and the Thompson, Geitus, Blue Jay and Marcy Look exploration projects. In terms of production, we ended 2011 having produced 1 million pounds U308 and 1.3 million pounds of vanadium.

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

Thank you, Ron. Good morning, everyone.

Revenue for the year was $96.8 million, compared with $128.3 million in 2010. The decrease in revenue is primarily volume related, offset somewhat by higher prices. Revenue included uranium sales of $63.8 million from 1.1 million pounds of U308, at an average price of $58.04 per pound. This compares with uranium sales in 2010 of $87.9 million from 1.8 million pounds U308, at an average price of $47.67 per pound. Of the 1.1 million pounds sold in 2011, half was sold into long-term contracts and the remainder was sold on the spot market.

In 2011, we sold 1.8 million pounds V205 equivalent at an average price of $6.41 per pound. Total vanadium sales revenue for the 12 months was $11.6 million, compared to $16.9 million in 2010. This compares with 2.4 million pounds of V205 equivalent sold last year at an average price of $7.04 per pound for a total of $16.9 million. Revenue from the environmental services division for the year ended December 31, 2011 was $16.2 million, compared to $15.5 million in 2010. Revenue for the management contract with Uranium Participation Corporation for the year was $1.9 million, compared to $2.6 million in 2010.

Denison is engaged in uranium exploration in Canada, the US, Zambia and Mongolia. Exploration expenditures totaled $13.8 million for the 12 months ended December 31, 2011, compared to $7.6 million in 2010. Of the $13.8 million we spent this past year on exploration, $6.8 million was spent on the Canadian properties, with the majority of that being spent on our high-priority Wheeler River project. We also spent $678,000 on exploration drilling on our properties in the Colorado plateau, $4 million in Mongolia and $2.4 million in Zambia.

Consolidated net loss for the year was $70.9 million, or $0.19 per share, compared with a net loss of $5.3 million, or $0.02 per share in 2010. The net loss for 2011 includes a non-cash impairment charge of $32.6 million in the fourth quarter against the goodwill of the United States mining segment. This charge is largely the result of the impact of the reduced price outlook post Fukushima in the near term on the entire US mining segment.

In addition to the impairment charge, our net loss for the year can be attributed to our lower than anticipated uranium sales, increased exploration costs, which are expensed, but which have resulted in substantial increases in our resources. We also recorded increases in our reclamation liabilities and incurred costs for the White Canyon acquisition, which are expensed. Denison ended the year with inventory available for sale of 196,000 pounds nuclear weight at an approximate the value of 10.1 million pounds at spot market prices at December 31, 2011. We had no vanadium inventory for sale at the end of December.

From a liquidity perspective, the Company had cash and cash equivalents of $53.5 million at December 31, compared with $96.6 million at the end of 2010. The decrease of $44 million was due primarily to cash used in operations of $20 million, the acquisition of White Canyon totaling $59.7 million, and expenditures on property, plant and equipment totaling $24.3 million, offset by common share issues of $62.4 million.

The Company has in place a revolving credit facility of up to $35 million which expires on June 29, 2012. Bank indebtedness under the facility at December 31, 2010 was nil, however $9.5 million of the line is used as collateral for certain letters of credit. For a more detailed discussion of our financial results, I would refer you to our MD&A. Now I'll turn the call back over to Ron.

Thanks, Jim. Now for production. As I stated earlier, production for the year totaled just over 1 million pounds U308 and 1.3 million pounds of vanadium. As planned, we ceased conventional ore processing at the end of June and restarted in November. Alternate feed material processing continued throughout the year.

Production costs at White Mesa were $47.60 per pound for the year, compared to $38.46 per pound in 2010. Production costs are higher than last year due to a change in mill feed sources, particularly the level of production from alternate feed and higher reagent costs, in particular sulfuric acid. We are also experiencing higher than normal start up costs in November due to lower throughput of Daneros ore. The US production costs include mining and milling costs, less a credit for vanadium and exclude depreciation and amortization.

At December 31, 2011, a total of 91,000 tons of conventional ore was stockpiled at White Mesa, containing approximately 616,000 pounds U308 and 1.4 million pounds of vanadium. We also had approximately 533,000 pounds of U308 in the alternate feed material stockpile. The McClean Lake mill continued on stand by throughout 2011. In December 2011, the Cigar Lake joint venture and the McClean Lake joint venture agreed to amend the toll milling agreement. Under the new milling arrangement, the McClean Lake mill operation is expected to process and package 100% of the uranium produced from the Cigar Lake mine.

To accommodate the production of 18 million pounds U308 annually from the Cigar Lake joint venture, the plans are to expand the mill to an annual capacity of 22 million pounds from the current constructed capacity of 12 million pounds. All costs for the expansion at McClean Lake mill are planned to be paid for by the Cigar Lake joint venture. First ore from Cigar is expected in 2013.

Turning now to some of our legal disputes. Earlier this week on March 5 a hearing was held on the Athabasca regional government's appeal regarding their challenge of the legality of the McClean Lake mill license renewal. ARG's challenge was based on issues related to the federal and provincial government's duty to consult with aboriginal people. In September 2010, ARG lost the initial decision and this time the court of appeals unanimously dismissed their appeal. ARG now has 60 days to seek leave to appeal to the supreme court of Canada.

In the ongoing dispute regarding the environment impact of the Arizona 1 mine, on October 7, 2011, the district court issued its final ruling in favor of the US Bureau of Land Management, or BLM, and Denison and against the plaintiffs on all counts. The plaintiffs appealed this decision to the ninth circuit court of appeals in November 2011. The plaintiffs also filed a preliminary junction in district court and an emergency motion for an injunction pending appeal of the ninth circuit court of appeals. Both have been denied. The plaintiffs appeal to the ninth circuit court of appeals is still ongoing.

Now looking forward to 2012. Denison's uranium production is expected to total 1.4 million pounds U308. All of it at the White Mesa mill. This is an increase of 40% over 2011 production. Approximately 900,000 pounds are expected to be produced from ore delivered from our Beaver, Pandora, Daneros and Arizona 1 mines, while the remainder will be produced from alternate feed production.

Vanadium production is projected to be approximately 600,000 pounds V205 occurring late in 2012. The decrease in vanadium production compared to 2011 is because the mill is planned to process only non-vanadium ores from Arizona 1 and Daneros until we start Colorado plateau ores in November 2012. The production cost at White Mesa is expected to average approximately $33.50 per pound of U308, net of vanadium credits.

Anticipated decline in operating costs, as compared to 2011, is due to the different types of ore that the White Mesa mill is expected to process in 2012, combined with an expected decline in the price of key reagents. Sustaining capital expenditures at the mine and mill facilities are estimated at $15.3 million. 2012 uranium sales are expected to be approximately 1.6 million pounds, of which 810,000 pounds are expected to be sold into long-term contracts, and the remainder will be sold on the spot market. Vanadium sales are projected to be 500,000 pounds.

In 2012, we plan to continue to aggressively pursue our exploration and development projects in Canada, the US, Mongolia and Zambia. Total expenditures on development and exploration projects in 2012 are estimated at $25.4 million. In Canada, Denison will manage or participate in eight exploration programs, of which Wheeler River will continue to be the primary focus. The total budget for these programs is CAD11.7 million, of which Denison's share is CAD7.8 million.

Exploration work will be carried out on the Moore lake, Murphy Lake, Bell Lake, Ahenakew Lake, South Dufferin, McClean Lake, and Wolly projects at a budgeted cost of CAD4.9 million, of which Denison's share is CAD3.7 million. Unfortunately, due to poor ice conditions, drill programs were canceled at Hatchet Lake, a 50/50 joint venture with Virginia Energy and at Moore lake, 75% owned by Denison and 25% by J&R Resources. A summer relogging program is still planned for Moore lake.

At Wheeler River, a 28,000-meter winter and summer drill program and geophysical surveys are planned at a total cost of CAD6.8 million, of which Denison's share is CAD4.1 million. Follow-up drilling this winter at wheeler has already resulted in delineating a new east/west mineralized extension of zone A with significant results in drill hole WR435, which returned 25.8% EU308 over 4.9 meters and hole 437 which intersected 3.7-meters, grading 27% EU308. Two drills are currently drilling and the focus of the program is definition drilling in zones A and B, as well as testing of some of the various regional targets.

In the United States, drilling is planned on the La Sal complex to attempt to expand resources at the Beaver and Pandora mines and on certain of its other properties. The total planned cost of the US exploration program is $1.2 million. In 2011, the exploration program in the La Sal trend identified resources that more than replace the production from this area last year. In addition to the drilling, we plan on preparing mineral resource estimates in accordance with national instrument 43101 for the Redd Block area in the La Sal complex and the Daneros operation.

In Canada and the US, a total of $5.4 million is budgeted to be spent on development stage projects in 2012. Yesterday the Board approved the decision to move forward with the development of the canyon project in Arizona. Pending final regulatory approvals anticipated this month, surface work will begin immediately and sinking of the shaft is planned to begin in late 2012.

The canyon mine is our best deposit in the Arizona strip with grades averaging close to 1% U308. Surface infrastructure is in place and the shaft was collared in the late 1980s. Denison expects to advance permitting for the EZ1, EZ2 deposits in Arizona and the Redd Block mine located west of the Beaver mine in Utah. The cost of these programs is estimated at $4.8 million.

On the McClean underground project, work is continuing on adding the Caribou and Sue D deposits to the feasibility study. Our production decision is anticipated in the fourth quarter of this year. We did get some good news, in that the scope of the McClean underground project falls within the scope of the original McClean joint venture EA. As a result, only licensing is required for this project.

In Zambia, we plan to follow up on our successful 2011 drill program on our 100% owned Mutanga project. In April, a 15,000-meter exploration drill program will begin, which will focus on several targets that have been identified near the existing resources. The Zambian program will total an estimated $7.1 million. In Mongolia, a $4.1 million exploration and development program is projected. Included in this budget is a $1.6 million, 17,500-meter exploration program focused on the Ulziit and Urt Tsav 2011 discoveries.

As you heard earlier, roughly 50% of our 2012 uranium sales will be to the spot market. How spot prices will play out over the next 10 months is anybody's guess, but we feel that there will be a strengthening in the spot price before the year is finished. UXCo Consulting has speculated that spot price may escalate late in 2012 in advance of the end of the US/Russian HU deal. The high end of the uXCo's 12-month price outlook is $60 per pound, still lower than pre Fukushima prices, but better than what we're at right now.

Denison is anticipating a 40% increase in uranium production at White Mesa this year and a 45% increase in the volume of uranium sales. However, roughly 50% our sales will be in the spot market, so a strong spot price is crucial to us. In the meantime, we are aggressively pursuing our exploration and development projects. Wheeler River continues to be an exciting project with enormous potential. The Mutanga project is also shaping up to be a world-class find, and we have the assets, physical, financial and personnel-wise to take these projects to the next level. We're looking forward to a strong year in 2012.

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

(Operator Instructions)

Adam Schatzker, RBC Capital Markets.

With respect to 2012, the US mines, can you give us quick detail of what mine rates and grades you expect from the various mines?

The mine rates are pretty well consistent with what we've done. We're anticipating about 50,000 tons from each of Pandora and Beaver. Arizona 1 is about 35,000 to 40,000 tons currently projected, although that may increase as we're still drilling at depth and finding more ore, and Daneros is running at about 60,000 tons.

Is Daneros in line with what you had expected when you bought it?

Yes. Yes, it is. We had a little bit of delay. We had to get some permitting on a new ventilation shaft which we got in late last year, so that's opened up a whole new area for us. The grades, Adam, are pretty much as they were, running about 2,200, so uranium just over 1.05% to 1.1% vanadium on Pandora, Beaver. Daneros is running about 2,800 to 3,000. Arizona 1, the tail end of this year, right now we're getting grades of 0.9% to 1% out of Arizona. Pinenut will just start ramping up mid-year. We're not going to be processing any Pinenut ore this year. We're building up stockpiles to process that next year.

If you get more of that Arizona higher grade ore, does that imply that 2013 could be even higher than 2012 production?

Yes, I think so, Adam. For sure. As we've laid out, we're not running -- even though we've got two mines running on the plateau, we're not running much ore, so we're going to have both higher uranium production and much higher vanadium production in 2013.

With respect to the alternate feed, how much feed do you see over the next two years? Is that a consistent, flat amount or do you see some variation?

We see some variation. There are certain streams we get from Cameco from their port hole combined river facilities that we build up a little bit. We can see a bump where we'll be running 500,000 pounds, probably about every second or third year and then it's about 160,000 pounds otherwise.

Thank you. If I could just switch quickly to the sulfuric acid, you mentioned higher price. Can you comment on the driver of the higher price and remind me how you buy that?

This last year we were cut back by Kennecott because of the switch reduction and throughput out through the smelter there at Bingham Canyon, so we were cut back. We had to source other supplies, mostly out of Long Beach and out of Texas. That's why the price was higher at 2011. We're back on full stream with Kennecott this year and that's under a long-term contract for the year.

Can you comment on the price that you're paying for that?

It's in the 95 to 105 range.

When does that expire?

It's just a one-year contract, Adam.

Looking at the closer to 200 rates that we're seeing for sulfuric acid globally, do you expect it to go up to those rates after this expires?

No, we're a pretty key supplier for Kennecott and we have a good relationship with them.

That's good to hear. Lastly, if I could just ask about the write down, this is an asset that you just bought back in Q3 and, of course, just a goodwill write down on this part. Was there a driver for that write down? Was there something in particular that triggered that?

The write down, it's charged against the goodwill, but it's calculated against the entire US mining segment. All of the assets in the US mining segment, including Daneros, contributed to the reduced value. That reduction in value was primarily due to the price strip which is that we use the latest US gold price strip as being the authoritative source for that; and if you look at that strip, it's particularly lower than previously in the early years. Because we have early year production in the US, that drew down the values. It's not entirely on the Daneros project, although that's obviously a contributor, but it's the entire list of assets in the US due to that price strip primarily.

Okay. Very good. Thank you very much, guys. Appreciate your time, as always.

(Operator Instructions)

There are no further questions registered at this time. I would now like to turn the meeting back to Mr. Hochstein.

Thanks, everyone, for participating in the call and look forward to chatting with you in a couple of months as our results of our first quarter come out. And we anticipate further results on Wheeler as the winter program wraps up. Thank you, everybody.

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