First Uranium reports production and financial results for the three and twelve months ended March 31, 2010
All amounts are in US dollars unless otherwise noted.
The Management Discussion & Analysis ("MD&A") for FY 2010 has been
appended to this release.
For the F2010 Financial Statements, please see the Company's website,
www.firsturanium.com under "Investor Centre/Annual Reports".
HIGHLIGHTS
Key developments in Q4 2010 and Q1 2011 to-date include:
- Environmental authorization ("EA") for the new Tailings Storage
Facility ("TSF") at Mine Waste Solutions ("MWS") reinstated;
- Successful recapitalization program raises cash proceeds of
C$150 million;
- Penalty payment of $42 million and completion tests under MWS gold
stream transaction restructured and outstanding loan to Simmer & Jack
Mines, Limited ("Simmer and Jack"), settled;
- Deon van der Mescht appointed President and Chief Executive Officer
of the Company ("CEO");
- Long-awaited new order water user license ("WUL") for MWS granted by
the Department of Water Affairs ("DWA") on June 15, 2010;
- Transfer of the new order mining right pertaining to the Ezulwini
Mine from Simmer and Jack to the Ezulwini Mining Company was
registered; and
- Sale of first shipment of uranium out of Ezulwini Mine.
The financial crisis that was precipitated by the unexpected withdrawal of the EA for the new TSF at MWS early in
On the permitting front, the long-awaited WUL for the MWS project was granted on
Post the recapitalization, Ezulwini Mine continues to ramp up production. The new management team at the mine is focused on completing a detailed review of the mine plan by
Although the gold production at MWS had been negatively impacted by the withdrawal of the EA, gold recoveries continued to improve through the year, allowing the operation to return in excess of 100% cash operating margins. During FY 2010, 62,019 ounces of gold were sold from MWS which exceeded the mine’s plan.
“While the quarter got off to a disappointing start, I am pleased to report that the initial problems have largely been resolved thanks to the successful recapitalization program and the fact that two key permits for MWS, namely the EA and the Water Use License were reinstated and granted, respectively. This effectively gives the green light to accelerate the expansion program of this highly profitable operation,” commented Deon van der Mescht, President and Chief Executive Officer of First Uranium. “Now that these uncertainties have been addressed, we will be able to deliver value to our shareholders by meeting our near-term production goals, with careful control of the costs.”
The following table provides a brief review of the Company’s performance:
Overview
-------------------------------------------------------------------------
Q4 2010 Q4 2009 FY 2010 FY 2009
-------------------------------------------------------------------------
Ezulwini Mine
Tonnes Milled (000) 130 109 425 233
Ounces of Gold Sold(a) 8,327 4,267 26,965 10,678
Average Selling Price
per Ounce ($) 1,404 917 1,149 920
Average Cash Cost per
Ounce($)(b) 2,929 2,032 2,858 1,941
Pounds of Uranium Produced 20,638 - 44,399 -
Pounds of Uranium Sold 22,500 - 22,500 -
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Mine Waste Solutions
Tonnes Reclaimed (000) 3,232 1,693 11,071 6,995
Average Gold Recovery
Grade(g/t) 0.19 0.19 0.19 0.19
Percentage Gold Recovered 56% 46% 51% 47%
Ounces of Gold Sold 18,505 10,417 62,019 42,857
Average Selling Price per
Ounce ($) 889 948 985 881
Average Cash Cost per
Ounce($)(b) 402 379 392 397
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Summary of Consolidated
Financial Results
(in thousands of dollars,
except per share amounts)
Revenue
- Ezulwini Mine(a) 12,104 3,915 31,393 9,825
- MWS 16,457 9,872 61,067 37,771
-------------------------------------------
28,561 13,787 92,460 47,596
-------------------------------------------
Cost of Sales (including
amortization)
- Ezulwini Mine(a) (26,330) (8,829) (82,269) (20,883)
- MWS (10,162) (4,288) (27,827) (17,933)
-------------------------------------------
(36,492) (13,117) (101,789) (38,816)
-------------------------------------------
Gross (loss) profit
- Ezulwini Mine (14,226) (4,914) (50,876) (11,058)
- MWS 6,295 5,584 33,240 19,938
-------------------------------------------
(7,931) 670 (17,636) 8,780
-------------------------------------------
Operating loss(c) (15,904) (5,668) (47,100) (17,247)
Loss for the period (26,041) (10,722) (92,178) (16,342)
Basic and diluted loss
per common share (0.14) (0.08) (0.56) (0.12)
Cash flow (utilized in)
generated from operations 13,515 (11,005) (34,855) (11,745)
Cash flow from investing
activities (31,646) (36,913) (229,665) (211,896)
Cash flow from financing
activities - 120,907 162,692 170,907
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Notes:
(a) For the six months ended September 30, 2009, the costs of production
from the Ezulwini Mine were capitalized and related proceeds of sales
credited against capital. Thereafter, the gold processing plant at
the Ezulwini Mine was regarded as ready for commercial use from an
accounting perspective, and accordingly, from October 1, 2009 the
revenues and related costs derived from the gold processing plant
were included in the Company's financial results.
(b) Cash cost per Ounce is defined as total cash costs divided by ounces
of gold sold. Total cash costs exclude amortization expense and
inventory purchase accounting adjustments. For further information on
this non-GAAP performance measure see page 14 of the Company's FY
2010 MD&A.
(c) This is a non-GAAP measurement. Operating loss is loss before
interest income, interest and accretion expenses, fair value gain or
loss on derivative liability, foreign exchange gain or loss and
income tax charges.
The information contained in this news release is qualified in its entirety by the information contained in the Company’s audited consolidated financial statements for the year ended
Financial Results: Release and Conference Call
First Uranium will conduct a conference call with investors to discuss the information in this news release at
The conference call will be available simultaneously to all interested analysts, investors and media. Callers may dial 1 800 319-4610 (
The call will be webcast at https://services.choruscall.com/links/firsturanium100622.html and available for replay shortly after the call for 90 days.
A telephone replay of the conference call will be available for 30 days. To access the replay, callers may dial 1 800 319-6413 (
About First Uranium Corporation
First Uranium Corporation (TSX:FIU, JSE:FUM) is focused on its goal of becoming a significant low-cost producer of uranium and gold through the expansion of the underground development to feed the new uranium and gold plants at the Ezulwini Mine and through the expansion of the plant capacity of the Mine Waste Solutions tailings recovery facility, both operations situated in
Cautionary Language Regarding Forward-Looking Information
This news release contains and refers to forward-looking information based on current expectations. All other statements other than statements of historical fact included in this release including, without limitation, statements regarding the timing and amount of estimated future production, processing and development plans and future plans and objectives of First Uranium are forward-looking statements (or forward-looking information) that involve various estimates, assumptions, risks and uncertainties. For more details on these estimates, assumptions, risks and uncertainties, see the Company’s most recent Annual Information Form on file with the Canadian provincial securities regulatory authorities on SEDAR at www.sedar.com. These forward-looking statements are made as of the date hereof and there can be no assurance that such statements will prove to be accurate, such statements are subject to significant risks and uncertainties, and actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements that are included herein, except in accordance with applicable securities laws.
Non-GAAP Measures
The Company believes that in addition to conventional measures prepared in accordance with Canadian GAAP, the Company and certain investors and analysts use certain other non-GAAP financial measures to evaluate the Company’s performance including its ability to generate cash flow and profits from its operations. The Company has included certain non-GAAP measures in this document. Non-GAAP measures do not have any standardized meaning prescribed under Canadian GAAP, and therefore they may not be comparable to similar measures employed by other companies. The data is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with Canadian GAAP. Readers are advised to read all GAAP accounting disclosures presented in the Company’s financial statements for more detail.
FIRST URANIUM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
of the financial results
for the year ended
March 31, 2010
Management’s discussion and analysis of the unaudited consolidated financial condition and results of operations for the year ended
This Management’s Discussion and Analysis (“MD&A”) of the consolidated financial position and results of operations reviews the activities, audited consolidated results of operations and financial condition of First Uranium Corporation and its subsidiaries (“First Uranium” or the “Corporation”) as at and for the year ended
-------------------------------------------------------------------------
Abbreviation Period Abbreviation Period
-------------------------------------------------------------------------
FY 2009 April 1, 2008 to FY 2010 April 1, 2009 to
March 31, 2009 March 31, 2010
Q1 2009 April 1, 2008 to Q1 2010 April 1, 2009 to
June 30, 2008 June 30, 2009
Q2 2009 July 1, 2008 to Q2 2010 July 1, 2009 to
September 30, 2008 September 30, 2009
Q3 2009 October 1, 2008 to Q3 2010 October 1, 2009 to
December 31, 2008 December 31, 2009
Q4 2009 January 1, 2009 to Q4 2010 January 1, 2010 to
March 31, 2009 March 31, 2010
FY 2011 April 1, 2010 to Q1 2011 April 1, 2010 to
March 31, 2011 June 30, 2010
-------------------------------------------------------------------------
This MD&A is intended to supplement and complement the audited consolidated financial statements for the year ended
The reporting currency for the Corporation is the US dollar, and all amounts in the following discussion are in US dollars (“$”), except where otherwise indicated.
This MD&A includes certain forward-looking statements. Please read the cautionary note at the end of this document.
Financial Condition
During FY 2010, the Corporation relied, in part, on cash generated from the operations to fund the significant capital expenditure obligations to complete construction and commissioning of the current capital projects at Mine Waste Solutions (“MWS”). The slower build-up of production at the Ezulwini Mine during the year, delays in commissioning additional plant modules at both the Ezulwini Mine and MWS, along with increased capital requirements have resulted in less cash being generated by the Corporation than previously anticipated.
In an effort to improve the Corporation’s financial position, the Corporation entered into various financing arrangements during FY 2010. In
The Corporation’s requirement to raise capital to fund both the Ezulwini Mine’s operating losses and the remaining capital expenditure program at MWS became increasingly critical during the latter part of Q3 2010 and into Q4 2010. The Corporation was actively engaged in exploring additional financing options.
The financing initiative was interrupted by a change in status of the Corporation’s Environmental Authorization (“EA”) for the new Tailings Storage Facility (“TSF”) designed to accommodate future tailings deposition capacity requirements at MWS, including a withdrawal of the EA in
The withdrawal and subsequent reinstatement of the EA not only interrupted construction activities for the new TSF but, combined with the slower production build up at the Ezulwini Mine, also disrupted financing options, severely compromising First Uranium’s financial position. The Corporation revised the Ezulwini Mine plan and the capital programme at MWS and also curtailed future development expenditures as part of a company-wide program to conserve cash.
The Board of Directors of the Corporation formed a Special Committee to review the financial position of First Uranium and to review and advise the Corporation on the various strategic alternatives that were available at that time.
On
(i) Cdn$40 million in South African Rand ("ZAR") denominated Notes (the
"Rand Notes") to be purchased by Simmer & Jack;
(ii) Cdn$20 million in Canadian dollar ("Cdn$") denominated Notes (the
"Canadian Notes") to be purchased by Gold Wheaton Corporation
("GW"); and
(iii) a minimum of Cdn$65 million and maximum of Cdn$90 million Canadian
Notes to be offered to accredited investors by RBC Capital Markets
Inc. acting as exclusive placement agent for the Corporation.
In connection with the Offering and in addition to the
Also in connection with the Offering, GW agreed to settle the
Changes to management and the board of directors were conditions of the Offering. These changes included the appointment of Deon van der Mescht as Interim President and Chief Executive Officer (“CEO”). On
On
As a result of the
Subsequent to the Offering, senior management within the organisation were restructured. With the Offering concluded, and with a restructured management team in place, the Corporation will focus on underground development and work to achieve increased production at the Ezulwini Mine and attain optimal output from gold and uranium facilities at both operations. At the Ezulwini Mine, management is reviewing the historical performance of the mine in detail with the intention of understanding the reasons for underperformance against past plans. The mine plan is also being reviewed using a bottom-up approach to ensure buy-in from production staff and to identify critical activities which need to be addressed in a timely manner in order to meet planned objectives. At MWS, the operations are being optimized to ensure maximum cash generation while the remaining capital programme is being re-structured to manage peak funding risk.
Business Overview
First Uranium Corporation has been focused on becoming a significant, low-cost producer of gold and uranium. Both the Ezulwini Mine and MWS are located in
First Uranium went public in
In
In
As discussed earlier in this MD&A, in
The common shares and the Debentures are listed on the Toronto Stock Exchange (the “TSX”). In addition, the common shares are listed on the Johannesburg Stock Exchange (the “JSE”). The Corporation intends to apply to have the Canadian Notes listed on the TSX after the expiry of a four-month hold period dating from the closing in escrow of the Notes on
As of
Summary of Quarterly Results
The table below sets out selected financial data for the periods indicated (as derived from First Uranium’s consolidated financial statements):
-------------------------------------------------------------------------
(Loss) Basic &
Fiscal Quarters Ended income diluted
(thousands of for the (loss) Long-term
dollars, except three earnings Total liabil-
per share amounts) Revenue months per share assets ities
-------------------------------------------------------------------------
March 31, 2010 28,561 (26,041) (0.14) 684,643 (287,785)
December 31, 2009 31,979 (14,432) (0.09) 695,581 (264,446)
September 30, 2009 19,025 (18,441) (0.11) 658,989 (252,591)
June 30, 2009 12,895 (33,264) (0.22) 640,672 (245,800)
March 31, 2009 13,787 (10,722) (0.08) 566,472 (239,162)
December 31, 2008 16,458 1,281 0.01 439,721 (159,396)
September 30, 2008 10,546 (1,106) (0.01) 395,188 (132,817)
June 30, 2008 6,805 (5,795) (0.04) 394,416 (131,741)
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Operations Overview
Mine Waste Solutions
MWS is a uranium and gold tailings recovery operation located in the western portion of the Witwatersrand Basin, approximately 160 kilometres from
In
Pursuant to the MWS Gold Stream Transaction, MWS was obliged to deliver a minimum of 20,000 ounces of gold into the transaction during calendar year 2009, such deliveries to be comprised of at least 5,000 ounces per quarter (the 2009 Guaranteed Ounces). The 2009 Guaranteed Ounces were satisfied in full as at
The table below sets out certain selected operational data of MWS per quarter for FY 2010:
-------------------------------------------------------------------------
Quarterly Production
Summary Q1 2010 Q2 2010 Q3 2010 Q4 2010 FY 2010
-------------------------------------------------------------------------
Tonnes reclaimed (000s) 1,835 2,476 3,528 3,232 11,071
Average gold recovery
grade (grams/tonne) 0.18 0.17 0.19 0.19 0.19
Percentage gold recovered 44% 47% 58% 56% 51%
Ounces of gold produced 11,007 13,422 21,891 19,693 66,013
Ounces of gold sold (total) 10,676 11,739 21,099 18,505 62,019
Ounces of gold delivered
into MWS Gold Stream
Transaction 7,460 4,817 5,510 4,982 22,769
Average gold selling price
per ounce ($) 905 1,007 1,096 889 985
Average Cash Cost per ounce
of gold sold ($) (as defined
in note a on page 14) (338) (467) (368) (402) (392)
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During Q1 2010, MWS commenced commissioning of the second gold plant module, continued construction of the first two uranium plant modules and finalized the plans for construction and commissioning of the third gold plant module.
During Q2 2010, MWS commissioned the second reclamation station that feeds ore to the second gold plant module and also commenced construction of the third gold plant module.
During Q3 2010, MWS completed the commissioning of the second gold plant module, increasing the processing capacity of the first two gold plant modules from 633,000 tonnes of tailings per month to 1.3 million tonnes. The additional production from the second gold plant module resulted in tonnage throughput increasing by 43% from 2.5 million tonnes in Q2 2010 to 3.5 million tonnes in Q3 2010. Gold production during Q3 2010 increased by 63% from 13,422 ounces of gold in Q2 2010 to 21,891 ounces of gold in Q3 2010. Construction of the first two uranium plant modules and the third gold plant module continued.
During Q4 2010, tonnage throughput decreased by 8% to 3.2 million tonnes and gold production by 10% to 19,693 ounces of gold from Q3 2010 due to uncharacteristically high seasonal rainfall affecting density delivered to the plant as well as decreased grade delivered from the Buffelsfontein # 2 tailings dam.
The 58% increase in tonnage throughput and the 54% increase in gold production year over year as per the Consolidated Results of Operations table on page 14 is primarily attributable to the additional production from the second gold plant module, offset slightly by the diminished grade from the Buffelsfontein # 2 tailings dam which feeds the first gold plant module.
At the start of Q4 2010, the construction of the third gold plant module was progressing ahead of schedule and scheduled for completion in
Subsequent to extensive discussions with NWDACERD, the EA was reinstated in
Construction of the first two uranium plant modules was substantially completed during
Under the revised business plan upon which the associated technical report is based, it was anticipated that the MWS # 5 tailings dam (the current tailings deposition facility) would provide sufficient tailings deposition capacity for one gold plant module until the end of
On
During FY 2010, management performed and concluded test work to finalize heat and oxygen control elements within the pressure leach process. The outcome of the test work was integrated into the historical Cost Budget Estimate (“CBE”) of the pressure leach process and the revised CBE was finalized during Q4 2010. The test work highlighted a significant requirement for oxygen. A market survey indicated that supply of oxygen could not be easily secured, which will necessitate the requirement for an oxygen plant, consequently the CBE has increased from
Ezulwini Mine
The Ezulwini Mine is located approximately 40 kilometres from
The Ezulwini Mine is part of the Ezulwini mining right, which includes certain surface and underground assets, acquired by the Ezulwini Mining Company (Proprietary) Limited (“EMC”). When First Uranium acquired EMC from Simmer & Jack in
In
Pursuant to the Ezulwini Gold Stream Transaction, the Ezulwini Mine is obliged to deliver a minimum of 16,500 and 19,500 ounces of gold into the transaction during calendar years 2010 (the 2010 Guaranteed Ounces) and 2011 (the 2011 Guaranteed Ounces) respectively, such deliveries to be comprised of at least 4,125 and 4,875 ounces per quarter respectively (see Note 11.2 to the Financial Statements).
Pursuant to the Ezulwini Gold Stream Transaction, the Ezulwini Mine granted to GW a special bond over certain plant and equipment and a pledge of 7% of the gold production from the Ezulwini Mine. First Uranium has guaranteed the obligations owed by the Ezulwini Mine to GW.
The table below sets out certain selected operational data of the Ezulwini Mine per quarter for FY 2010:
-------------------------------------------------------------------------
Quarterly Production
Summary Q1 2010 Q2 2010 Q3 2010 Q4 2010 FY 2010
-------------------------------------------------------------------------
Tonnes hoisted 64,965 98,831 117,164 130,822 411,782
Tonnes milled 92,468 94,599 108,503 129,532 425,102
Average gold recovery
grade (grams/tonne) 1.3 2.5 2.8 2.4 2.3
Ounces of gold produced 3,794 7,952 10,685 7,526 29,957
Ounces of gold sold (total) 3,378 7,047 8,213 8,327 26,965
Ounces of gold delivered
into Ezulwini Gold Stream
Transaction - - 102 2,571 2,673
Average gold selling price
per ounce ($) 957 1,022 1,078 1,404 1,149
Average Cash Cost per ounce
of gold sold ($)(as defined
in note a on page 14) (3,545) (2,689) (2,648) (2,929) (2,858)
Pounds of uranium
("U(3)O(8)") produced - - 23,761 20,638 44,399
Pounds of U(3)O(8) sold - - - 22,500 22,500
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The establishment of the Ezulwini Mine, which was substantially completed during Q4 2009, included the rehabilitation and re-engineering of the mine’s main shaft through the installation of a floating steel tower and the construction of a 200,000 tonne per month gold plant and a 100,000 tonne per month uranium plant. With the capital intensive projects substantially completed, management turned its focus at the start of FY 2010 on underground mine development to accelerate the amount of ore being fed to the gold and uranium plants. The primary objective is to increase available mineable faces (“face length”) to allow a higher rate of mining in the future. The build-up of production at the Ezulwini Mine as planned is key to the success of this operation. To ensure the build-up and production ramp-up is realistic and achievable, management is currently reviewing a detailed ‘bottom-up’ production plan. This detailed review of the plan is expected to be completed by the end of
The Ezulwini Mine has yet to build up sufficient production to generate positive operating cash flow. The production build-up to date has progressed much slower than originally anticipated due to a number of factors including:
- The estimation of gold available compared to the gold accounted for
was significantly below expectations, a relationship better known as
the mine call factor. The planned mine call factor for the year was
87% whereas the mine achieved a factor of lower than 70% during the
first nine months of the year.
- The face length creation proceeded as planned but the start-up and
conversion from development to stoping was slower than anticipated.
Significant improvements are expected in FY 2011.
- The face length utilization was relatively low during the year due to
the newly appointed mining teams as well as inadequate face
equipping. Special attention is being paid to the training of crews
and equipping of panels, thus mining readiness is expected to improve
in the forthcoming year.
- During the fiscal year, some seismic activity occurred in the shaft
pillar which caused delays but more importantly required special
attention to resolve it in a safe manner. The extra precautions and
diligence paid to rock engineering issues resulted in slower than
anticipated performance in FY 2010. The majority of the engineering
issues are now resolved, thus improved mining performance is
expected.
Due to the lower production achieved, management reviewed the actual mine call factors achieved by the mine during the first nine months of the year. One of the issues identified was in the primary evaluation of gold and uranium estimation as well as mining techniques resulting in cross mining of various stratigraphic units. Based on the results of the review, management changed its focus to extracting higher grade ore from the ME gold and uranium ore-body. Opening up and development work was reduced to a minimum while refinancing discussions were being held and the focus went on to maximizing the potential of the face length being mined by increasing the pay limit used for mining decisions. The mine call factor at the Ezulwini Mine proved to be problematic during Q2 2010 and Q3 2010 and necessitated an additional review of the valuation methods used. This resulted in lower grades being forecasted in the revised plan, but better mining efficiencies being achieved, thereby increasing the mine call factor from 64% in Q3 2010 to 78% in Q4 2010.
Although the Ezulwini gold plant is capable of working to design specification, the plant was not utilized optimally during FY 2010. Utilization of the gold plant was on average approximately 25% to 50% of design capacity during the year. The under-utilisation of the plant is in accordance with the plan as the build-up of the Ezulwini Mine is only expected to reach peak production in two years’ time. The underground production has been less than originally planned, which resulted in lower mill utilization and lower gold production. As the underground development increases, the mine production and mill throughput will increase, and thus gold production will improve. It is expected that metallurgical processes will further improve when operations are running at design capacity.
During Q1 2010, the Ezulwini Mine commissioned the first of two streams of its 100,000 tonne per month uranium plant. The mine calcined its first batch of yellowcake through a third-party calciner producing 23,761 pounds of uranium at the end of Q3 2010. This first container of uranium was shipped to an overseas converter on
In
The plant is still experiencing some commissioning issues, which include corrosion, due to the design and material selection. Management is in the process of resolving these issues. The uranium plant, however, is operational and has been modified to effectively treat the current tonnages delivered from underground. A project engineer has also been engaged to ensure focus on addressing the challenges in the uranium plant.
Permitting at MWS
In
The expansion of the MWS operations and the future realization of the MWS assets is dependent on the addition of a new life-of-mine TSF. The TSF is designed to store all of the future tailings depositions for the remaining life of the operation. The older tailings deposits are to be rehabilitated once the tailings from each such deposit are reprocessed.
MWS received the EA to construct the TSF from the NWDACERD in
On
On
Market Overview
During the latter half of FY 2010, the financial markets improved, as demonstrated by the easing of credit risk spreads, lower levels of volatility in many markets and some improvement in investor confidence. While access to equity was selectively available, other forms of capital, including debt financing on acceptable terms remained difficult to obtain.
Gold
The price of gold is subject to volatile price movements over short periods of time, especially in the current market environment, and is affected by numerous industry and macro-economic factors. Gold price volatility remained high in FY 2010, with the price ranging between
Management believes that the world’s gold production will continue to decline. Obtaining permits for new mines is a primary deterrent to starting up new gold mines, but new projects are also becoming more difficult to find, are facing increasing public scrutiny, need to be bigger to be economically viable and are subject to inflationary pressures on capital and operating costs. In
Uranium
According to an industry source, The Ux Consulting Company, LLC (“UxC”), the spot price per pound for uranium ranged between
In the current environment, the uranium spot price has been variable within this range, with demand increasing as the price falls and diminishing as the price rises. While this pattern is expected to continue for the remainder of FY 2011, the range of this volatility has narrowed considerably to the low
Demand for uranium as a clean source of base-load power is expected to grow over the next 20 years in excess of four percent, perhaps even stronger around the end of the next decade. Many countries are making announcements about building new nuclear power plants, none more aggressively than
The US is recommending a tripling of its existing loan guarantee program in its proposed budget for its 2011 fiscal year, which the country’s Energy Secretary has indicated could support construction of seven to ten new nuclear power plants. The renaissance of nuclear power will, however, have to overcome the major challenges of the economics of building nuclear power plants and the waste disposal issue. For instance, in the US, funding for Yucca Mountain was recently cut, formalizing the end of this US nuclear waste storage project.
Currency exchange rates
During FY 2010, both the Canadian dollar (“Cdn$”) and the ZAR experienced significant exchange rate swings relative to the US dollar as a result of uncertainty in global markets and US dollar weaknesses highlighted by fluctuations in commodity prices.
During FY 2010, in US dollar terms the ZAR traded in a range of
At
The 2008 worldwide economic downturn and US government-sponsored bailouts in 2009, have driven investors to seek countries with proven track records and conservative fiscal policies. Due to fiscal and monetary policies and high interest rates,
Swings in the value of the US dollar also continued to have an impact on the ZAR and Cdn$ denominated costs and on assets and liabilities reported in US dollar terms, resulting in the significant foreign exchange movements in the Corporation’s financial results. In Q4 2010 and FY 2010, currency movements produced a loss, primarily unrealized, reflecting the impact of the weakening US dollar relative to the Cdn$ and ZAR.
Inflation
The Corporation’s operations are subject to inflation. Over the past twelve months there has been a steady decline in the
Financial Review
At the Ezulwini Mine, gold production for Q4 2010 and FY 2010 increased by 65% and 161%, respectively, compared to Q4 2009 and FY 2009 as per the Consolidated Results of Operations table on page 14. As indicated by the increase in production year-over-year and quarter-over-quarter, the mine is steadily increasing output, although the build-up is much slower than anticipated. The Ezulwini Mine’s gold plant was deemed to be in commercial production as of Q3 2009 and accordingly, from the beginning of that quarter, the revenues and related costs derived from the gold processing plant at the Ezulwini Mine were no longer capitalized. While revenues are increasing (resulting from increased production and increased gold selling prices), the cost of production remains high due to the fact that the mine is still ramping up production and currently operates at considerably less than capacity.
The losses at the Ezulwini Mine for both Q4 2010 and FY 2010 were as a result of the mine’s fixed operating costs being spread over the limited early-stage production. It is anticipated that the high unit costs will decrease and operating and financial performance will improve as the underground mine development and production levels increase, albeit at a slower pace than initially indicated. The ounces delivered by the Ezulwini Mine to settle the 2010 Guaranteed Ounces during Q4 2010 were sold at the contract price of
At MWS, the overall increase in revenues and cost of sales in Q4 2010 and FY 2010 compared to its comparative periods was mainly attributable to additional production through the second gold plant module which was commissioned in Q1 2010. The ounces delivered by MWS to settle the 2009 Guaranteed Ounces were sold at the contract price of
Consolidated Results of Operations
-------------------------------------------------------------------------
Production Summary Q4 2010 Q4 2009 %Change FY 2010 FY 2009 %Change
-------------------------------------------------------------------------
Ezulwini Mine
Tonnes milled 129,532 108,622 19% 425,102 232,715 83%
Ounces of gold
produced 7,526 4,569 65% 29,957 11,494 161%
Ounces of gold
sold (total) 8,327 4,267 95% 26,965 10,678 153%
Ounces of gold
delivered into
Ezulwini Gold
Stream Transaction 2,571 - 100% 2,673 - 100%
Average gold
selling price
per ounce ($) 1,404 917 53% 1,149 920 25%
Average Cash Cost
per ounce of gold
sold ($)(a) (2,929) (2,032) 44% (2,858) (1,941) 47%
Average cost per
ounce sold ($) (3,112) (2,069) 50% (3,036) (1,956) 55%
Pounds of U(3)O(8)
produced 20,638 - 100% 44,399 - 100%
Pounds of U(3)O(8)
sold 22,500 - 100% 22,500 - 100%
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MWS
Tonnes reclaimed
(000s) 3,232 1,693 91% 11,071 6,995 58%
Ounces of gold
produced 19,693 10,513 87% 66,444 43,099 54%
Ounces of gold
sold (total) 18,505 10,417 78% 62,019 42,857 45%
Ounces of gold
delivered into
MWS Gold Stream
Transaction 5,392 2,540 112% 26,145 3,293 694%
Average gold
selling price
per ounce ($) 889 948 (6%) 985 881 12%
Average Cash Cost
per ounce of gold
sold ($)(a) (402) (379) 6% (392) (397) (1%)
Average cost per
ounce sold ($) (549) (412) 33% (449) (418) 7%
-------------------------------------------------------------------------
Revenue 28,561 13,787 107% 92,460 47,596 94%
-------------------------------------------------------------------------
Ezulwini Mine 12,104 3,915 209% 31,393 9,825 220%
MWS 16,457 9,872 67% 61,067 37,771 62%
-------------------------------------------------------------------------
Cost of sales
(excluding
amortization) (32,248) (12,623) 156% (101,789) (37,735) 170%
-------------------------------------------------------------------------
Ezulwini Mine (24,807) (8,671) 186% (77,479) (20,725) 274%
MWS (7,441) (3,952) 88% (24,310) (17,010) 43%
-------------------------------------------------------------------------
Amortization (4,244) (494) 759% (8,307) (1,081) 669%
-------------------------------------------------------------------------
Ezulwini Mine (1,523) (158) 864% (4,790) (158) 2,932%
MWS (2,721) (336) 710% (3,517) (923) 281%
-------------------------------------------------------------------------
Gross (loss) profit (7,931) 670 (1,284%) (17,636) 8,780 (301%)
-------------------------------------------------------------------------
Ezulwini Mine (14,226) (4,914) 190% (50,876) (11,058) 360%
MWS 6,295 5,584 13% 33,240 19,838 68%
-------------------------------------------------------------------------
Other income 62 869 (93%) 2,231 2,008 11%
Other
expenditures(b) (8,035) (7,207) 12% (31,695) (28,035) 13%
-------------------------------------------------------------------------
Operating loss(c) (15,904) (5,668) 181% (47,100) (17,247) 173%
Investment income (363) 251 (245%) 1,163 3,439 (66%)
Fair value gain
(loss) on
derivative
liabilities (991) (697) 42% 128 (983) 113%
Accretion expense on
asset retirement
obligations (607) (424) (43%) (2,142) (1,511) 42%
Interest and
accretion
expenditures (4,193) (3,031) 38% (15,663) (12,720) 23%
Foreign exchange
(loss) gain (8,727) 3,063 (385%) (30,123) 18,404 (264%)
-------------------------------------------------------------------------
Loss before income
taxes (30,785) (6,506) 373% (93,737) (10,618) 783%
Income tax
recovery (charge) 4,744 (4,216) 213% 1,559 (5,724) 127%
-------------------------------------------------------------------------
Loss for the period (26,041) (10,722) 143% (92,178) (16,342) 464%
Other comprehensive
income 812 - 100% 812 - 100%
-------------------------------------------------------------------------
Comprehensive loss
for the period (25,229) (10,722) 135% (91,366) (16,342) 459%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss)
per common share (0.14) (0.08) 75% (0.56) (0.12) 367%
-------------------------------------------------------------------------
Notes:
(a) "Cash Costs" are costs directly related to the physical activities of
producing gold and uranium and include mining, processing and other
plant costs; third-party refining and smelting costs; marketing
expense, on-site general and administrative costs; royalties; on-mine
drilling expenditures that are related to production and other direct
costs. Sales of by-product metals such as uranium and silver are
deducted from the above in computing cash costs. Cash costs exclude
depreciation, depletion and amortization, corporate general and
administrative expense, exploration, interest, and pre-feasibility
costs and accruals for mine reclamation. Cash costs are calculated
and presented using the "Gold Institute Production Cost Standard"
applied consistently for all periods presented. The Gold Institute
was a non-profit industry association comprised of leading gold
producers, refiners, bullion suppliers and manufacturers. This
institute has now been incorporated into the National Mining
Association. The guidance was first issued in 1996 and revised in
November 1999. Total cash costs per ounce is a non-GAAP measurement
and investors are cautioned not to place undue reliance on it and are
advised to read all GAAP accounting disclosures presented in the
Corporation's Financial Statements.
(b) Other expenditures include general, consulting and administrative
expenditures, pumping feasibility and rehabilitation costs,
stock-based compensation, the settlement fee regarding the Auramet
claim and non-production related amortization. See page 5 to the
Financial Statements for detail.
(c) This is a non-GAAP measurement. Operating loss is loss before
interest income, interest and accretion expenses, fair value gain or
loss on derivative liability, foreign exchange gain or loss and
income tax charges. See page 5 to the Financial Statements for more
detail.
MWS started amortizing the capital costs relating to the second gold plant module at the start of Q4 2010 resulting in amortization for Q4 2010 and FY 2010 increasing by 710% and 281%, respectively, compared to Q4 2009 and FY 2010. The increase in revenues more than offset the increase in costs and amortization due to the additional production in both Q4 2010 and FY 2010, resulting in the operating margin at MWS increasing by 20% and 70% compared to Q4 2009 and FY 2009, respectively.
The consolidated gross losses in Q4 2010 and FY 2010 compared to the gross profits in Q4 2009 and FY 2009 were primarily attributable to the substantial losses resulting from the activities at the Ezulwini Mine which more than offset the additional profits generated by MWS from the second gold plant module.
The Corporation incurred a larger operating loss in FY 2010 compared to FY 2009. The larger loss reflected the fact that for the first six months of FY 2009, the Ezulwini Mine was not in commercial production. During that six-month period the costs of production from the Ezulwini Mine were capitalized and the related proceeds of gold sales were credited against property, plant and equipment.
Other income consisted primarily of fees for sludge pumping services to a third party, scrap sales and rental income at the Ezulwini Mine and varies from period to period relative to the pumping activity, sales and occupation (see Note 20 to the Financial Statements).
Other expenditures (as defined in Note b) to the Consolidated Results of Operations table on page 19) increased in both Q4 2010 and FY 2010 relative to the comparative periods and were mainly attributable to increased corporate activities, increased pumping costs due to increased mining activities at the Ezulwini Mine, the inclusion of
Investment income primarily related to interest income earned on cash and cash equivalents invested in short-term deposits with the Corporation’s bankers until required for capital projects or to fund operating costs. The overall lower interest income in FY 2010 reflected the on average lower cash balances compared to FY 2009, as well as lower interest rates.
The interest and accretion expenditures include interest and accretion expenses related to the convertible debentures based on the
The accretion expense on Asset Retirement Obligations in Q4 2010 and FY 2010 mainly increased compared to its comparative periods as a result of the stronger ZAR compared to the US dollar.
The fair value loss on the derivative liabilities in Q4 2010 related to the movement in fair value on the derivative liability related to the Ezulwini Mine, while the fair value loss in Q4 2009 related to the movement in fair value on the derivative liability related to MWS. MWS satisfied the 2009 Guaranteed Ounces pursuant to the MWS Gold Stream Transaction and settled its derivative liability at the end of Q3 2010. In both quarters the fair value loss was driven by a higher gold price at the end of the quarter compared to the gold price at the end of the preceding quarter. The fair value loss for FY 2010 comprises of the fair value loss on the derivative liability related to MWS offset by the fair value gain on the derivative liability related to the Ezulwini Mine. The fair value loss related to the MWS derivative liability reflects the increase in fair value (due to the increase in the gold price at the end of FY 2010 from the gold price at end of FY 2009) of the 2009 Guaranteed Ounces delivered pursuant to the MWS Gold Stream Transaction during the year (see Note 11.1 to the Financial Statements).
The fair value gain related to the Ezulwini Mine derivative liability reflects the decrease in fair value (due to the decrease in the gold price at the end of FY 2010 from the gold price at initial recognition) of the 2010 and 2011 Guaranteed Ounces to be delivered pursuant to the Ezulwini Gold Wheaton Transaction from initial recognition to the end of FY 2010 (see Note 11.2 to the Financial Statements).
The foreign exchange gain (loss), which was primarily unrealized, results from the translation of the value of Canadian and South African denominated assets, liabilities, revenues and expenses into US dollars. The foreign exchange loss in Q4 2010 and FY 2010 reflects primarily the weakening of the US$ against the Cdn$, but also its overall weakening against the ZAR during the respective periods. During Q4 2009 and FY 2009 both the ZAR and the Cdn$ weakened against the US dollar resulting in the foreign exchange gains during these periods.
The income tax recovery in Q4 2010 and FY 2010 is primarily the result of the net increase in the asset base at MWS, along with the reversal of the
The substantial consolidated losses in Q4 2010 and FY 2010 were attributable to the gross losses incurred at the Ezulwini Mine during Q4 2010 and FY 2010 (inclusion of its operating results for the full twelve months) combined with the significant foreign exchange loss on translation during Q4 2010 and FY 2010. The much lower consolidated loss in FY 2009 only included the operating results from the Ezulwini Mine as of Q3 2009 and the loss incurred during FY 2009 was offset by the significant foreign exchange gain during that year.
Other comprehensive income in Q4 2010 and FY 2010 was comprised of unrealized gains resulting from increases in the value of investments included in the asset retirements funds from the end of the previous period.
Consolidated Financial Position
Summary Balance Sheet and Key financial ratios
-------------------------------------------------------------------------
(thousands of dollars) FY 2010 FY 2009 % Change
-------------------------------------------------------------------------
Cash and cash equivalents 10,177 112,005 (91%)
Other current assets(a) 17,345 12,670 37%
Current liabilities 123,728 58,629 111%
Total assets 684,643 566,472 21%
Total liabilities 411,513 296,375 39%
Debt(b) 169,462 121,710 39%
Total shareholders' equity 273,130 270,097 2%
-------------------------------------------------------------------------
Key financial ratios:
Current ratio(c) 0.22:1 2.13:1
Debt-to-equity(d) 0.62:1 0.45:1
-------------------------------------------------------------------------
Notes:
(a) Other current assets include accounts receivable and inventories.
(b) Convertible debentures liability of Cdn$150 million translated to US$
at the exchange rate at the end of the reporting period plus Facility
with Simmer & Jack at the end of the reporting period.
(c) Current assets divided by current liabilities at the end of the
reporting period.
(d) Debt divided by total shareholders' equity at the end of the
reporting period.
Balance sheet review
Total assets were primarily comprised of property, plant and equipment, reflecting the capital intensive projects at the Ezulwini Mine and MWS, cash and cash equivalents, accounts receivable, inventories, asset retirement funds and future tax asset.
The 21% increase in total assets since FY 2009 was primarily attributable to a substantial increase in property, plant and equipment as a result of the capital projects at both operations, the addition of a future tax asset relating to MWS, increases in accounts receivable and inventories related to increased production at the Ezulwini Mine during the year, and an increase in asset retirement funds, partially offset by reduced cash and cash equivalents resulting from capital expenditures and cash operating losses.
The 39% increase in total liabilities since FY 2009 represented an increase in the Cdn$ denominated debt portion of the senior unsecured convertible debentures (the US dollar equivalent is higher because of the weaker US dollar relative to the Cdn$), a drawdown of the Facility with Simmer & Jack in
Liquidity and Capital Resources
As a result of the
At
Management believes that the available cash resources of
-------------------------------------------------------------------------
2011 2012 2013 2014 2015 Beyond
-------------------------------------------------------------------------
Gold price ($/oz) 1,152 1,142 1,047 1,004 971 867
Uranium price ($/lbs) 42 56 61 57 55 55
ZAR/$ 7.73 8.11 8.55 8.93 9.33 9.64
Cdn$/$ 0.97 0.96 0.95 0.93 0.92 0.88
-------------------------------------------------------------------------
The current revised and restructured mine plans are based on the assumption that it will take the Corporation up to the end of
Cash Flows
Cash flows for the three months ended
-------------------------------------------------------------------------
(thousands of dollars) Q4 2010 Q4 2009 % Change
-------------------------------------------------------------------------
Cash flows generated from (utilized
in) operating activities 13,515 (11,005) 223%
Cash flows utilized in investing
activities (31,646) (36,913) (14%)
Cash flows from financing activities - 120,907 (100%)
-------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents for the period (18,131) 72,989 (125%)
Cash and cash equivalents at beginning
of period 28,308 39,016 (27%)
-------------------------------------------------------------------------
Cash and cash equivalents at end of
period 10,177 112,005 (91%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Corporation recovered
During Q4 2010, capital expenditures of
The cash from financing activities during Q4 2009 was attributable to
Cash flows for the year ended
-------------------------------------------------------------------------
(thousands of dollars) FY 2010 FY 2009 % Change
-------------------------------------------------------------------------
Cash flows utilized in operating
activities (34,855) (11,745) 197%
Cash flows utilized in investing
activities (229,665) (211,896) 8%
Cash flows from financing activities 162,692 170,907 (5%)
-------------------------------------------------------------------------
Net decrease in cash and cash
equivalents for the year (101,828) (52,734) 93%
Cash and cash equivalents at
beginning of year 112,005 164,739 (32%)
-------------------------------------------------------------------------
Cash and cash equivalents at end
of year 10,177 112,005 (91%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The higher cash consumption from operating activities in FY 2010 was primarily attributable to the increased mine activities, and limited production at the Ezulwini Mine. For FY 2009 the first six months’ operating costs and related revenues from the Ezulwini Mine were capitalized.
During FY 2010, cash used in investing activities increased marginally compared to FY 2009. The significant increase in expenditures at MWS due to the ramp up of its capital programs over the year, was substantially offset by a decrease in the current capital expenditure program at the Ezulwini Mine, which is mostly complete. During FY 2010, capital expenditures of
The cash from financing activities during FY 2010 was attributable to
Use of Proceeds
Inclusive of the Offering in
To date, the Corporation has brought both of its operations into gold production and the Ezulwini Mine into uranium production, while having to manage a myriad of challenges including: a global economic crisis and the resultant tightening of credit and funding opportunities; power shortages; the temporary withdrawal of the EA of the TSF at MWS; high clay content in the MWS tailings being reclaimed; escalating costs for construction materials and considerable fluctuations in the price of re-agents such as sulphuric acid and cyanide. In addition to building and commissioning new processing plants, First Uranium refurbished the Ezulwini Mine shaft, installed diesel-fired generators at both operations as insurance against future shortages of electrical power, commissioned two tailings reclamation stations and pipelines at MWS and, to achieve its business goals, negotiated key supplier contracts with various partners, including labour and the local uranium calcining operation. With the most recent financing and changes to the management team, management believes that the Corporation is positioned to complete its primary capital projects and progress to full production at the Ezulwini Mine and MWS.
Financial Instruments
First Uranium uses a mixture of cash, long-term debt and shareholders’ equity to maintain an efficient capital structure and ensure adequate liquidity exists to meet the cash needs of its operations. In the normal course of business, the Corporation is inherently exposed to currency and commodity price risk. The Corporation does not currently hedge its exposure to currency or commodity price risk. The Corporation does hold certain derivative instruments that do not qualify for hedge accounting. These non-hedge derivatives are described in note 11 of the Financial Statements. For a discussion of certain risks and assumptions that relate to the use of derivatives, including market risk, market liquidity risk and credit risk, refer to notes 2 and 27 of the Financial Statements. For a discussion of the methods used to value financial instruments, refer to note 2 of the Financial Statements.
Commitments and Contingencies
At the end of FY 2010, the Corporation had
Pursuant to the terms of the Offering, GW agreed to settle the completion penalty of
Any payment made by MWS related to the delay in construction completion of the third gold plant module or the satisfaction of the Technical Completion Test including but not limited to the 14 million common shares and the further potential penalty of
First Uranium issued 14 million common shares to GW on
In
On
The Corporation entered into an agreement with a third party, commencing in
At
-------------------------------------------------------------------------
Payments due by date
-------------------------------------------------------------------------
3
Months Between
Within 3 to 1-3 After 3
(thousands of dollars) Months a Year Years Years Total
-------------------------------------------------------------------------
Senior unsecured
convertible debentures 3,101 3,152 156,539 - 162,792
Asset retirement obligations 304 911 2,783 22,517 26,515
Derivative liabilities 4,063 9,391 10,464 - 23,918
Facility with Simmer
& Jack* 22,462 - - - 22,462
Purchase obligations 22,311 - - - 22,311
Provision for GW penalty** 17,857 - - - 17,857
Capital leases 55 178 584 1,163 1,980
Operating leases 48 144 576 - 768
-------------------------------------------------------------------------
Total contractual
obligations 70,201 13,776 170,946 23,680 278,603
-------------------------------------------------------------------------
* The Facility with Simmer & Jack has been settled with Rand Notes
subsequent to March 31, 2010.
** The GW penalty was settled with the issue of 14 million common
shares subsequent to March 31, 2010.
Outlook
The Corporation continues to focus on attaining optimal output from gold and uranium facilities at both of its operations under the restructured plans being developed. At the Ezulwini Mine, the underground mine and development plans are being restructured to focus additional attention on the targets that need to be achieved. At MWS, the current operations are being optimized to ensure maximum cash generation and the remaining capital programme is being reviewed in detail to identify any opportunities to reduce peak funding requirements without compromising project sustainability or efficiency. Future expansion and production activities will be subject to capital availability.
In addition to these initiatives, a cost cutting exercise has been initiated across the Corporation. The key focus is to reduce corporate and non-core costs to ensure that the Corporation’s overall cost base can be reduced to enhance operational margins. This exercise is also intended to create flexibility with respect to cash flow and ensure that the Corporation is able to execute on its plans.
MWS
As discussed under the Operations Review section in this MD&A, management has decided to continue utilizing two gold plant modules with two-stream deposition, albeit at reduced throughput of 975 ktpm until the end
The table below summarizes the production forecast under the two-stream deposition plan for the financial years ending
-------------------------------------------------------------------------
Two Streams to
end May 2011 Technical Report
-------------------------------------------------------------------------
FY 2011 FY 2012 FY 2011 FY 2012
-------------------------------------------------------------------------
Gold production
Production (oz) 72,000 128,000 48,000 128,000
Estimated Cash Cost ($/oz)(1) 479 494 474 494
-------------------------------------------------------------------------
Uranium production
Production (lb) - - - 498,000
Estimated Cash Cost ($/lb)(2) - - - 33
-------------------------------------------------------------------------
Notes:
1. Gold "Cash Costs" are costs directly related to the physical
activities of producing gold and include mining, processing and other
plant costs; third-party refining and smelting costs; marketing
expense, on-site general and administrative costs; royalties; on-mine
drilling expenditures that are related to production and other direct
costs. Sales of by-product metals are deducted from the above in
computing cash costs. Cash costs exclude depreciation, depletion and
amortization, corporate general and administrative expense,
exploration, interest, and pre-feasibility costs and accruals for
mine reclamation. Cash costs are calculated and presented using the
"Gold Institute Production Cost Standard" applied consistently for
all periods presented. The Gold Institute was a non-profit industry
association comprised of leading gold producers, refiners, bullion
suppliers and manufacturers. This institute has now been incorporated
into the National Mining Association. The guidance was first issued
in 1996 and revised in November 1999. Total cash costs per ounce is a
non-GAAP measurement and investors are cautioned not to place undue
reliance on it and are advised to read all GAAP accounting
disclosures presented in the Corporation's audited consolidated
financial statements for FY 2009 and accompanying footnotes thereto.
2. Uranium "Cash Costs" calculations take into account the incremental
ounces of gold recovered when the ore is run through the atmospheric
leach tanks of the uranium plant.
On the expected completion of the third gold plant module and TSF by
Ezulwini Mine
The key elements that drive production and operating results at the Ezulwini Mine are:
- the creation of available face length, with uranium and gold grades
within planned ranges;
- increasing available face length, trained mining crews and equipping
of panels thereby increasing production build-up;
- reducing dilution and improving its mine call factor, including gold
and uranium recoveries;
- favourable ZAR prices for uranium and gold; and
- the sale of uranium to nuclear power utilities.
As discussed in the Ezulwini Mine Operations Review section in this MD&A, the mine production forecast is being revised in response to slower than expected mine production build-up to date and the capital constraints. To ensure the build-up and production ramp-up is realistic and achievable, management is currently reviewing a detailed ‘bottom-up’ production plan. This detailed review of the plan is expected to be completed by the end of
Technical Disclosure
All technical disclosure in this MD&A relating to MWS has been prepared in accordance with National Instrument 43-101 (“NI 43-101) by
Related Party Transactions
On
Pursuant to the Offering, Simmer & Jack also subscribed to a further R296.1 million of Rand Notes for a cash consideration of
During Q4 2010 and FY 2010, the Corporation paid
At the end of Q4 2010, the amount payable to Simmer & Jack was
First Uranium has agreed to reimburse Simmer & Jack for 50% of the fees that Simmer & Jack is required to pay to an empowerment company for consulting. During Q4 2010 and FY 2010, the Corporation paid
On
On
Pursuant to the Buffelsfontein Tailings and Rights Agreement and the Aberdeen Arrangement (Refer to the Corporation’s AIF for more detail), MWS is liable to pay: (i) to Simmer & Jack, an amount equal to the royalty payable by Simmer & Jack to
Disclosure Controls and Procedures and Internal Control over Financial Reporting
Disclosure Controls and Procedures
The CEO and Chief Financial Officer (“CFO”) are responsible for establishing and maintaining adequate disclosure controls and procedures, as defined in National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109). Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the Corporation’s filings under securities legislation is accumulated and communicated to management, including the CEO and CFO as appropriate, to allow timely decisions regarding public disclosure. They are also designed to provide reasonable assurance that all information required to be disclosed in these filings is recorded, processed, summarized and reported within the time periods specified in securities legislation. Management regularly reviews the disclosure controls and procedures; however, they cannot provide an absolute level of assurance because of the inherent limitations in control systems to prevent or detect all misstatements due to error or fraud.
Management, including the CEO and CFO, conducted an evaluation of the effectiveness of the Corporation’s disclosure controls and procedures as of
Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in NI 52-109. Internal control over financial reporting means a process designed by and under the supervision of the CEO and CFO, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. All internal control systems have inherent limitations and therefore the internal control over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements due to error or fraud.
Management, including the CEO and CFO, conducted an evaluation of the effectiveness of the Corporation’s internal control over financial reporting as of
Changes in Internal Control over Financial Reporting
During the most recent period there were no changes in the Corporation’s internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Critical Accounting Policies and Estimates
The preparation of these consolidated financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the year. Areas of judgement that have the most significant effect on the amounts recognized in the financial statements are estimation of asset lives, determination of ore reserve estimates, capitalization of exploration and evaluation costs, and identification of functional currencies. Key sources of estimation uncertainty that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities are the estimation of close-down and restoration costs and the timing of expenditures, the review of asset carrying values and impairment charges and reversals, the estimation of environmental clean-up costs and the timing of expenditures and the recoverability of potential future income taxes. Financial results as determined by actual events could differ from those estimated. Management estimates are also applied in arriving at the useful lives of items of property, plant and equipment and in determining the fair value of stock options. Note 2 to the Financial Statements describes the Corporation’s significant accounting policies.
Property, plant and equipment
The cost of an item of property, plant and equipment is recognized as an asset when:
- it is probable that future economic benefits associated with the item
will flow to the Corporation; and
- the cost of the item can be measured reliably.
Costs include expenditures incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. If a replacement cost is recognized in the carrying amount of an item of property, plant and equipment, the carrying amount of the replaced part is written off.
Property, plant and equipment are carried at cost less accumulated amortization and any impairment losses. Exploration costs incurred to the date of establishing that a property has mineral resources are expensed. Exploration and development expenses incurred subsequent to this date and which have the potential of being economically recoverable are capitalized. If the project becomes feasible, the costs are amortized over the life of the mine. If the project is stopped, the costs are written off immediately.
Management carries out a review at each financial year-end to determine the appropriateness of the residual value and the useful life of each asset. Each component of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is amortized. Amortization is provided on all property, plant and equipment other than freehold land, to write down the cost, less residual value over their useful lives. Land is not amortized. The amortization charge for each period is recognized in earnings or loss unless it is included in the carrying amount of another asset.
Asset retirement obligations
The Corporation recognizes the fair value of a future asset retirement obligation as a liability in the year in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that results from the acquisition, construction, development, and/or normal use of the assets. The Corporation concurrently recognizes a corresponding increase in the carrying amount of the related long-lived asset that is depreciated over the life of the asset. The fair value of the asset retirement obligation is estimated using the expected cash flow approach that reflects a range of possible outcomes discounted at credit adjusted risk-free interest rate. Provision is made in full for the estimated future costs of pollution control and rehabilitation, in accordance with statutory requirements. The fair value of asset retirement obligations is recognized and provided for in the financial statements and capitalized to mining assets when incurred.
Subsequent to the initial measurement, the asset retirement obligation is adjusted at the end of each year to reflect the passage of time and changes in the estimated future cash flows underlying the obligation.
Changes in the obligation due to the passage of time are recognized in income as an operating expense using the interest method. Changes in the obligation due to changes in estimated cash flows are recognized as an adjustment of the carrying amount of the long-lived asset that is depreciated over the remaining life of the asset.
Annual increases in the provision are accreted into income and consist of financing costs relating to the change in present value of the provision and inflationary increases in the provision estimate. The present value of additional environmental disturbances created is capitalized to mining assets against an increase in rehabilitation provision.
Impairment of Long-Lived Assets
The Corporation’s long-lived assets consist of property, plant and equipment. At the end of each accounting period, the Corporation reviews the carrying value of its long-lived assets based on a number of factors. These factors include analysis of net recoverable amounts, permitting considerations and current economics. Estimates of the recoverable amount of long-lived assets may also be impacted by changes in commodity prices, currency exchange rates, operating costs, production levels and other factors that may be different from those used in determining the recoverable amount. Changes in estimates could have a material impact on the carrying value of the long-lived assets. Should impairment be determined, the Corporation would write-down the recorded value of the long-lived asset to fair value.
Changes in accounting policies
Goodwill and Intangible Assets
Canadian Institute of Chartered Accountants (CICA) Handbook Section 3064 – Goodwill and Intangible Assets, establishes revised standards for recognition, measurement, presentation and disclosure of goodwill and intangible assets. Concurrent with the introduction of this standard, the CICA withdrew EIC 27, Revenues and Expenses during the pre-operating period. The changes were effective for the Corporation’s interim and annual financial statements beginning on or after
Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
In
Mining Exploration Costs
In
Future and new accounting standards
The CICA issued the following amendments to the accounting standards for periods beginning on or after
Business Combinations/Consolidated Financial Statements/Non-Controlling Interests
In
These new sections replace existing guidance on business combinations and consolidated financial statements to harmonize Canadian accounting for business combinations with International Financial Reporting Standards. These sections will be applied prospectively to business combinations for which the acquisition date is on or after
International financial reporting standards (“IFRS”)
In terms of the requirements of the Canadian Accounting Standards Board, First Uranium has to adopt IFRS for interim and annual financial statements relating to its fiscal year ending
The impact analysis and design phase is currently underway. During management’s analysis phase to date, it has been established that all of First Uranium’s subsidiaries (directly and indirectly owned) are required (and have been since the listing of the Corporation on the TSX in
IFRS are premised on a conceptual framework similar to Canadian GAAP, however, significant differences exist in certain matters of recognition, measurement and disclosure. While adoption of IFRS will not change the cash flow of the Corporation, the adoption of IFRS will result in changes to the reported financial position and results of operations of the Corporation. The Corporation identified a number of key areas where differences between Canadian GAAP and IFRS exist and the Corporation reviews any new financial information on an ongoing basis to identify further areas of differences.
The key areas identified where the most substantial differences exist are as follows:
- the accounting treatment of the gold stream transactions;
- the valuation methods used for the debt and equity portions on
convertible debentures;
- the discount rates and foreign exchange rates used to determine the
value of the asset retirement obligations at the end of reporting
periods; and
- the determination of functional currency and the treatment of foreign
exchange differences resulting from the translation of functional
currencies of the different reporting entities within the group to
reporting currencies.
Over the next twelve months, management plans to:
- analyze and select ongoing accounting policies where alternatives are
permitted including IFRS 1 exemptions, if required;
- quantify the key differences between IFRS and Corporation's
application of Canadian GAAP;
- revise the Corporation's accounting policy manual; and
- prepare IFRS consolidated financial statements including first-time
adoption reconciliations.
To maintain effective disclosure controls and procedures and internal controls over financial reporting throughout the IFRS project, management is also in the process of evaluating the impact of the conversion to IFRS on the Corporation’s control environment in order to identify the additional controls that need to be developed. Management plans to have the additional controls identified and developed by the end of Q2 2011 for the review of the IFRS comparative financial information.
All key personnel will undergo ongoing training as and when needed. Management will also review the financial information systems to identify changes required by the transition date and setup processes to ensure that financial information is recorded under both Canadian GAAP and IFRS for comparative purposes.
Outstanding Share Data
-------------------------------------------------------------------------
FY 2010 FY 2009
-------------------------------------------------------------------------
Common shares outstanding at beginning
of the year 151,574,037 131,074,037
Shares issued during the year 15,250,000 20,500,000
Restricted share unit shares issued 23,000 -
-------------------------------------------------------------------------
Common shares outstanding at end of the year 166,847,037 151,574,037
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unexercised common share purchase warrants
at end of the year 10,250,000 10,250,000
Unexercised restricted units outstanding
at end of the year 177,000 -
Unexercised stock options outstanding
at end of the year 3,204,622 3,588,194
Average strike price of
outstanding options (Cdn$) 7.74 7.79
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At
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Risks and Uncertainties
Uncertainties
There are a number of uncertainties in the mining business of First Uranium, some of which are beyond First Uranium’s control:
- government legislation regarding mining companies in South Africa,
including without limitation, securing authorizations and permits
required thereunder within the timeframes required to achieve the
Corporation's plans and objectives;
- the ability of the Corporation to provide financial assurance for
rehabilitation liabilities to the satisfaction of the DMR;
- prices for the Corporation's future production of uranium and gold;
- foreign exchange and interest rates;
- the supply and cost of other re-agents, including sulphuric acid,
used by the Corporation in the process to extract gold and uranium;
- the consistent supply of sufficient electrical power;
- the decisions and activities of the Corporation's competitors in the
uranium and gold mining business, which impact the supply of uranium
and the demand for available services, construction materials, labour
and the rights for prospecting and mining;
- the continued endorsement of nuclear power as a preferred source for
the world's growing energy needs;
- the decisions of investors to continue to buy and hold the securities
of the Corporation;
- securities regulation regarding public listed companies in Canada and
South Africa; and
- natural disasters, war or random occurrences or acts that could
result in a material change to economic and market performance,
business conditions or operations.
Risks
In addition, First Uranium’s mining properties are in the development stage and are subject to the risks and challenges similar to other companies in a comparable stage of development and production startup. The risks include, but are not limited to, certain business, operational and market risks. For a detailed discussion of the Corporation’s risks please refer to the Corporation’s most recent AIF, which is available on the Corporation’s website www.firsturanium.com and on www.sedar.com or upon request from the Corporation.
Business Risks
Mining and Prospecting Rights
The Corporation has not secured all mining rights and government approvals required to develop its proposed uranium and gold project at MWS. In
Gold Stream Transaction Obligations
If the MWS Project experiences further construction delays, including labour stoppages, delays supplies of goods and services or lack of availability of equipment, it may impact MWS’ ability to meet certain obligations under the MWS Gold Stream Transaction (see Commitments and Contingencies section to this MD&A for a description of obligations and repercussions if such obligations are not satisfied).
Foreign Currency Exchange Rates
The Corporation has exposure to the risk of significant change in foreign currency exchange rates between US dollars, Canadian dollars and the South African rand. Most of the Corporation’s expenses are currently in ZAR. The Corporation’s current and future gold and uranium production will be sold in US dollars. As a result, an increase in the US dollar value relative to the ZAR would decrease profitability. In addition, the Corporation runs a small office in
Financing
Management has considered the market turbulence arising from the credit crises and taken the related risks into consideration and is carefully monitoring future developments, the impact they may have on the Corporation’s operations, financial condition and outlook and is actively assessing non-critical capital expenditures and opportunities to reduce overheads and operating costs and improve returns.
Business Interruption
The Corporation is exposed to risks that could interrupt its business. One of the Corporation’s two projects, the Ezulwini Mine, is an underground mine that has historically had ground movement problems in the Upper Elsburg shaft pillar. On one occasion it was necessary to cease shaft operations and excavate the lava unit around the shaft to reinstall the necessary shaft hardware. To eliminate the ground control problems in the shaft area, the Corporation is executing its plan to mine out the shaft pillar and to stabilize the main shaft.
There is a risk of flooding at the Ezulwini Mine, where the Corporation daily pumps approximately 65 million litres of water from the site. The pumps are well maintained and there are several contingency arrangements including multiple power sources, large diesel generators, back-up pumps and catch basins in the event of failure of the main pumps. The mine has never been flooded, including during the period of 2001 through 2006 when the mine ceased operations and was on care and maintenance.
Black Economic Empowerment (“BEE”) Requirements
In all industries in
Broad-based BEE has as its goal, the economic empowerment of all black people, including women, youth, people with disabilities and people living in rural areas through strategies which seek to, amongst others, increase the number of black people that manage, own and control enterprises and productive assets.
In the South African mineral industry the Mining Charter and the Codes promulgated thereunder in
The Mining Codes establish compliance targets across nine elements comprising: ownership, Management control, employment equity, human resource development, preferential procurement, mine community and rural development, beneficiation, housing and living conditions standards. The ownership or equity participation by HDSA’s target for 2009 and 2014 is 15% and 26%, respectively. (For more information on BEE, please refer to the Corporation’s most recent AIF).
Although compliant with the above set requirements for shareholder representation of 15%, the proportion of BEE holdings in the Corporation’s shares have recently declined to approximately 16% as a result of recent equity financings by the Corporation and Simmer & Jack. Both the Corporation and Simmer & Jack are considering securing more investment interest in their companies by BEE investors in advance of the higher 2014 shareholder representation requirement of 26%. Failure to comply with BEE requirements may complicate the ability of applicants to obtain and retain mining and prospecting rights.
Disclosure
The Corporation is required to comply with securities reporting legislation and accounting standards in
Insurance
First Uranium’s insurance coverage does not cover all of its potential losses, liabilities and damage related to its business and certain risks are uninsured or uninsurable. The Corporation makes its insurance decisions based on the likelihood of any risk occurring, the cost of the insurance and the Corporation’s tolerance for risk.
Simmer & Jack
Simmer & Jack and First Uranium share several services that benefit both companies. In addition, Simmer & Jack maintains a significant interest in the Corporation, which investors view as an overhang on the value of the Corporation’s shares in the event that Simmer & Jack should decide to further dilute their shareholding in the Corporation. First Uranium also relies on Simmer & Jack for the majority of its BEE credentials, among other things.
Litigation
From time to time, the Corporation is involved in litigation, investigations, or proceedings related to claims arising out of its operations in the ordinary course of business. In the opinion of the Corporation’s management, these claims and lawsuits in the aggregate, even if adversely settled, will not have a material effect on the consolidated financial statements.
Operational Risks
Mining
The business of mining generally involves a high degree of risk and First Uranium has a limited operating history. No assurance can be given that the development and bringing into commercial production of a mine or tailings processing facility will be completed as contemplated and for the estimated capital costs or within the estimated schedule. Also, no assurance can be given that the intended production schedule, metal recoveries, estimated operating costs and/or that profitable operations will be achieved.
Confidence in Resources
The economic analysis for the Ezulwini Mine is based, in part, on inferred resources, and is preliminary in nature. Inferred resources are considered too geologically speculative to have mining and economic considerations applied to them and to be categorized as mineral reserves. There is no certainty that the reserves, development, production and economic forecasts on which such preliminary assessments are based, will be realized.
Labour
The Corporation will employ most of its labour at its two operations. There has historically been much higher employment in the areas in which the two operations are situated and management does not consider availability of general labourers a risk. The higher demand for uranium, gold and other metals has raised the demand for skilled professionals, such as mining engineers, metallurgists and geologists.
The cost of labour is a risk since labour costs have risen significantly from the last time uranium mines were in production at these sites. Higher costs have been identified and factored into the economic forecasts for these operations.
A trend that could increase risk for the Corporation is the heightened labour unrest in
Operational safety is considered a top priority by management and the Board has established an Environmental, Health and Safety Committee. The Committee has the responsibility to review and make recommendations regarding the Corporation’s health and safety programs and compliance issues.
Power
Power outages beset
On
Construction Costs
First Uranium is in the development stage and is continuing construction of additional gold and uranium modules at the MWS plant. To complete the construction of the additional plant modules requires steel, concrete and construction tradespeople.
Fuel
Rising costs of fuel impact the costs of running the plants and the transportation of labour and materials to the sites and eventually the costs of moving rock from the underground mine and the metals that are to be produced at both operations. Higher costs of other fuels have increased the demand for uranium, offsetting the negative impact of the increase in the costs of these fuels in the Corporation’s operations.
As a result of the Corporation’s decision to install diesel-fired generators, it will be exposed to changes in the availability and price of diesel fuel. Close geographic proximity to a government source of fuel provides the Corporation with some confidence in its ability to source some of its diesel fuel requirements domestically, but it may also have to transport diesel fuel from South African ports. To mitigate the risk of price escalation for the transport of diesel fuel, the Corporation will seek long term transportation contracts.
The Corporation had factored additional costs into the economic models at both operations for the expected need to run its diesel generators to fill peak electricity demand, in the event that Eskom fails to provide sufficient power. To date, the Corporation has not yet had to use its diesel-fired generators and has, therefore, kept costs for electricity below planned levels.
Environmental and hazardous materials
Laws and regulations involving the protection and remediation of the environment and the governmental policies for implementation of such laws and regulations are constantly changing and are generally becoming more restrictive. Mining operations have inherent risks and liabilities associated with pollution of the environment and the disposal of waste products and hazardous materials occurring as a result of mining and production. First Uranium cannot give any assurance that, notwithstanding its precautions, breaches of environmental laws (whether inadvertent or not) or environmental pollution will not materially and adversely affect its financial condition and its operations’ results.
First Uranium’s proposed mining projects are subject to the risk of uranium exposure. The Corporation has put systems in place to manage exposure to uranium or uranium metal and no known exposures have occurred at First Uranium to date. Exposure by First Uranium’s employees, however, could result in the Corporation having to incur extra compensation costs.
Market risks
Uranium and Gold Prices
First Uranium’s future revenues will be directly related to the world market prices of uranium and gold as its revenues will be derived primarily from gold and uranium mining. Uranium and gold prices can be subject to volatile price movements, which can be material and can occur over short periods of time and are affected by numerous factors beyond First Uranium’s control.
If, after the commencement of commercial production, uranium and/or gold prices fall below the costs of production at First Uranium’s operations for a sustained period, it may not be economically feasible to continue production at such operations. This would materially and adversely affect production, profitability and First Uranium’s financial position. A decline in uranium and/or gold prices may also require First Uranium to write down its mineral reserves and mineral resources, which would have a material adverse effect on its earnings and profitability. First Uranium’s future profitability may be materially and adversely affected by the effectiveness of any hedging strategy. Apart from the two gold stream transactions with GW, the Corporation currently does not hedge any of its future gold and uranium production.
In
Public Perception and Acceptance of Nuclear Energy
Growth of the uranium and nuclear power industry will depend, amongst other factors, upon continued and increased acceptance of nuclear technology as a means of generating electricity. Because of unique political, technological and environmental factors that affect the nuclear industry, the industry is subject to public opinion risks that could have an adverse impact on the demand for nuclear power and increase the regulation of the nuclear power industry. An accident at a nuclear reactor anywhere in the world could impact the continuing acceptance of nuclear energy and the future prospects for nuclear power generation, which may have a material adverse effect on First Uranium.
Uranium and Gold Industry Competition
International uranium and gold industries are highly competitive. There is no guarantee that First Uranium will be able to compete successfully with other mining companies, particularly the larger, seasoned mining companies. The Corporation cannot assure that it will be able to compete successfully with its competitors in developing or acquiring uranium or gold projects or in attracting and retaining skilled and experienced employees.
First Uranium intends to market its uranium in a number of potential markets in direct competition with supplies available from a relatively small number of mining companies. Current and future international trade agreements and policies, governmental policies and trade restrictions are beyond the control of First Uranium and may affect the supply of uranium available to the market.
Competition from other energy sources
Nuclear energy competes with other sources of energy, including oil, natural gas, coal and hydroelectricity. These other energy sources are to some extent interchangeable with nuclear energy, particularly over the longer term. Sustained lower prices of oil, natural gas, coal and hydro-electricity may result in lower demand for uranium concentrates.
Additional Information
Additional information relating to First Uranium is contained in the Corporation’s filings with the Canadian Securities regulator, including the AIF. These are available on SEDAR at www.sedar.com and on the Corporation’s website at www.firsturanium.com.
Forward-looking Information
This MD&A and consolidated financial statements for the year ended
Non-GAAP Measures
The Corporation believes that in addition to conventional measures prepared in accordance with Canadian GAAP, the Corporation and certain investors and analysts use certain other non-GAAP financial measures to evaluate the Corporation’s performance including its ability to generate cash flow and profits from its operations. The Corporation has included certain non-GAAP measures in this document. Non-GAAP measures do not have any standardized meaning prescribed under Canadian GAAP, and therefore they may not be comparable to similar measures employed by other companies. The data is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with Canadian GAAP. Readers are advised to read all GAAP accounting disclosures presented in the Corporation’s Financial Statements for more detail.
SOURCE First Uranium Corporation