South African Permit Revocation Hurts First Uranium

First Uranium (FIU-T) has gone into capital conservation mode following the South African government’s unexpected decision to revoke environmental permits needed for its Mine Waste Solutions tailings recovery project, about 160 km north of Johannesburg.

Without the permit the company has been forced to discontinue development and scale back operations, and some corporate financing opportunities have been lost.

“If alterative financing is not obtained, (it) could severely compromise the company’s financial position,” the company said in a statement.

The permit for the company’s Tailings Storage Facility, which has been designed to hold future tailings from the Mine Waste Solutions project, is what the government revoked.

The project consists of 14 tailings deposits from three gold and uranium mines that operated for about 50 years, which hold reserves of about 2.9 million oz. gold and 55.8 million lbs. uranium.

Production at MWS will be scaled back from two gold plants to one at the end of March. Construction of a third plant was underway with commissioning expected in May, but that has been suspended due to the permit issue.

First Uranium expects to produce 11,000 oz. gold in the first quarter, 13,000 oz. in the second quarter, 25,000 oz. in the third and about 22,000 oz. in the fourth — down from the planned 35,000 oz. gold per quarter.

If the company is able to get that extra permit, as well as funding to complete the development, it will need about six months to finish off the necessary construction activities to achieve the increased production rate. Making matters worse for the company’s finances, the production start-up at its Ezulwini mine, about 40 km from Johannesburg, has been slower than expected.

Ezulwini is an underground gold and uranium mine that was constructed in the 1960s. It produced 14 million lbs. uranium and 12 million oz. gold until it was put on care and maintenance in 2001. First Uranium bought it in 2006, and is currently bringing it back into production. The production buildup has been progressing slower than expected due to the challenges of training and building up the efficiency of the mining crews, and the company has not yet generated positive operating cash flow. One employee died last September in an accident in the mine.

Because of these difficulties, First Uranium is delaying development expenditures, particularly with the MWS tailings recovery operation as a part of a “company-wide program to conserve capital.”

First Uranium has been in talks with the government and says it is “cautiously optimistic” that the permit will be reinstated.

Gold Wheaton (GLW-V), which has agreed to buy 25% of First Uranium’s gold production, says that First Uranium may have to pay it US$42 million if the project does not pass a technical completion test by June 2010.

Based on the reduced production at MWS, Gold Wheaton has reduced its production by 17%, or by 20,000 oz. for 2010 and 2011.