Denison, Ont. Hydro negotiate new pricing contract for uranium

Officials from Denison Mines (TSE) and Ontario Hydro have begun crucial discussions that will almost certainly lead to a dramatic reduction in the price Hydro is paying for the company’s Elliot Lake, Ont., uranium. If the two sides can’t agree on a new pricing formula by the end of March, Ontario Hydro has the right to cancel a long-term contract established in 1977 and force Denison to shut down its costly Elliot Lake mine by the end of next year.

Although the price contract runs until the year 2112, it contains a clause allowing either side to ask for a price correction to reflect significant changes in the market price of uranium.

As Hydro is believed to be paying Denison at least US$40 per lb. to cover production costs plus a US$10 premium, Hydro could save millions by obtaining its uranium supplies from producers that may be prepared to sell their product for as little as US$15 per lb. Uranium was selling recently at US$9.70 per lb. on the spot market.

Last year, about half of the two million pounds of uranium purchased by Ontario Hydro from mines in Elliot Lake came from the Denison operation, according to Doug Smith, director of Ontario Hydro’s fuels division. The other half was supplied by Toronto-based Rio Algom (TSE).

In a telephone interview with The Northern Miner, Smith said that although discussions are continuing, Hydro has not yet served Denison with an official notice stating the price it is willing to pay.

“We all know what price Hydro can ask for,” said Smith who claimed the figure is confidential. So far, he has had one meeting with Denison’s new President Bill James.

If Denison refuses to accept a new Hydro offer, a notice of cancellation would automatically follow and the utility would be free of its obligations to the uranium miner by the end of 1992. That would almost certainly mean more layoffs at Elliot Lake where 450 jobs were cut last summer.

But as some 1,050 Denison employees and possibly the entire population of Elliot Lake would be affected, any decisions on the Denison situation must be made by Ontario Hydro’s board of governors and may involve the Ontario government.

Meanwhile, as part of a plan to reduce debt and buy more time from bankers, Denison has agreed to sell its 60% interest in the Denison-Potacan Potash operation in New Brunswick to Toronto-based partner Potash Co. of Canada for $15 million cash.

As part of the agreement, Potash, which owns 40% of the 970,000-ton-per-year New Brunswick project, will assume Denison’s liabilities with respect to the mine. Should the agreement be approved by project lenders, Denison’s debt load will drop by $104 million.

“It is unfortunate that we couldn’t maintain our interest in DPPC, but we have obtained the best price presently available,” said James. The net book value of Denison’s interest in DPPC is about $160 million.