VANCOUVER — The economic downturn has hit the uranium market hard and Canadian producer Denison Mines (DML-T, DNN-X) is feeling the pinch. In recent months, the company reported a 2008 loss of US$80.6 million, halted operations at its newly refurbished Tony M mine in Utah, and put on hold development plans in Saskatchewan’s Athabasca basin.
The loss stems primarily from US$59 million in non-cash impairment charges in the fourth quarter. The largest chunk — US$36.5 million — was an impairment charge against the goodwill Denison carried from the 2006 takeover of Denison Mines by International Uranium that created the current company.
Two other components contributed to the significant impairment charge. Stock market valuations of the company’s investments in Uranerz Energy (URZ-T, URZ-X) and Energy Metals (EYMTF-O, EME-A) resulted in a US$13-million impairment charge and the decline in the vanadium price forced Denison to write down the worth of its vanadium inventory by US$9.5 million.
Factoring in US$20.1 million in exploration spending and US$5.3 million relating to forfeiture of stock options, the company’s net loss for 2008 totalled US$80.65 million or US42¢ per share.
In 2008, Denison brought in US$114.6 million from uranium sales. In the U. S., the company sold 920,000 lbs. U3O8, attaining an average price of US$67.27 per lb.; Canadian sales totalled 742,950 lbs. at an average price of US$57.40 per lb. But much of that revenue was sucked right back into production costs, which averaged US$55.29 per lb. U3O8 at Denison’s Canadian operations and US$65.86 per lb. at its American mines.
The McClean Lake mine in Saskatchewan is a joint venture between Denison, Paris-listed Areva (ARVCF-O), and OURD Canada. In 2008, the mine produced 3.3 million lbs. U3O8, of which Denison’s 22.5% share was 731,250 lbs.
At McClean Lake, a central mill facility processes ore from several deposits. Over the last year, the company finished mining out all of the pits already started; for 2009, the McClean mill will process stockpiled ore and should produce more than 3 million lbs. U3O8. The joint-venture partners had planned to start mining another deposit on the project, called the Caribou deposit, but that has been delayed for at least a year.
And the partners also decided to postpone development of the Midwest project, a larger deposit that would have added 8 million lbs. U3O8 to McClean production annually for five years. Pointing to the current economic climate, delays and uncertainties associated with the regulatory process, increasing capital and operating costs, and the current uranium market, the Midwest partners plan to spend some $12 million on regulatory and engineering work this year.
Denison is also participating in 30 other exploration projects concentrated on the eastern edge of the Athabasca basin. One of those is the 60%-owned Wheeler River project where, in February, the third and fourth holes of the winter drill program returned significant uranium intercepts at the unconformity.
The third hole, hole 258, intersected locally massive pitchblende grading 18.7% U3O8 from 396 metres depth.
The fourth hole, hole 259, was collared 50 metres along strike to the southwest and intersected 4.6 metres grading 12.8% U3O8 from 396 metres depth. Wheeler River sits along strike from Cameco’s (CCO-T, CCJ-N) producing McArthur River mine, which taps into the world’s largest high-grade uranium deposit.
All told, the company spent US$13 million on exploration in Canada in 2008. In 2009, more than 25,000 metres of drilling is planned for projects in which Denison is involved. For its part, Denison will spend US$7.7 million on Canadian exploration in 2009.
On the other side of the border, Denison had five mines in operation on the Colorado plateau in 2008, one of which it opened in 2008. Two of the mines — Rim and Sunday — have since been placed on care and maintenance because their production costs are above current spot prices. Denison is still producing 430 tons of ore daily from the other three mines.
But after spending US$50 million in 2007 to refurbish the Tony M mine, which is near Ticaboo, Utah, Denison suspended operations there in late 2008 after just over a year of production. A new resource estimate for the Tony M and Southwest deposits, which could both feed the mine, recently pegged indicated resources at 1.7 million tons grading 0.24% U3O8 and inferred resources at 900,000 tons grading 0.16% U3O8.
The company had just over US$3 million on hand at the end of 2008, as well as an investment portfolio valued at US$10.7 million. Denison has a US$125-million revolving credit facility with a term to mid- 2011 and had drawn almost US$100 million from it. In January, the company raised US$39 million by issuing almost 29 million shares.
Denison says it is in compliance with all the covenants of its debt facility but analysts are concerned a breach is not far off. RBC Capital Markets analyst Adam Schatzker thinks Denison could be in breach before the end of the year, unless uranium spot prices improve or the company sells assets.
Interestingly, in announcing its year-end financial results in mid- March, Denison said it has “initiated a process to consider and respond to various strategic opportunities which may be available to the company.” The list of possibilities includes offtake agreements, asset sales, purchases, joint ventures, private equity investments and other corporate transactions.
And to reduce expenses, the company has placed its U. S. exploration program on hold for 2009. Its efforts in Mongolia will be limited and in Zambia, where the company last year defined a new resource, Denison will not conduct exploration or development activities but plans to complete a feasibility study and submit a mining application.
According to a mid-March resource estimate, the Mutanga project in southern Zambia is now home to 1.9 million measured tonnes grading 0.0481% U3O8,8.4 million indicated tonnes grading 0.0314% U3O8, and 25.4 million inferred tonnes grading 0.0231% U3O8. Combining all three categories, the project contains 21 million lbs. U3O8.
The resource is based on 45,600 metres of drilling completed on the Mutanga deposit between late 2007 and mid-2008. The effort gave Denison a resource that exceeds the historic estimate of 13.7 million lbs. U3O8.
The 1,893-sq.-km Mutanga property, which used to be known as the Kariba project, is some 200 km south of the country’s capital, Lusaka.
Once the resource definition drill program was complete, Denison embarked on a 26,000-metre expansion program that soon identified three large new mineralized zones. Mineralization in the new zones is similar to that in the Mutanga deposit and exploration continues.
Denison is now working through engineering studies in preparation for a feasibility study, which it plans to complete by April. The company envisions a low-cost, open-pit operation using alkali leach processing for extraction.
Since mid-March, Denison’s share price has sat just below $1. The company has a 52-week trading range of 69¢-$9.21 and 226 million shares outstanding.
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