<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
AMENDMENT NO. 3 TO
FORM 20-F
[X] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934.
OR
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended _________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______ to ______________________
Commission File Number:
INTERNATIONAL URANIUM CORPORATION
(Exact name of Registrant as specified in its charter)
ONTARIO, CANADA
(Jurisdiction of incorporation or organization)
INDEPENDENCE PLAZA, SUITE 950, 1050 SEVENTEENTH STREET, DENVER, CO 80265
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NONE
Securities registered or to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK WITHOUT PAR VALUE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
NONE
(Title of Class)
Indicate the number of outstanding shares of each of the Registrant's classes of
capital or common stock as of the close of the period covered by the annual
report:
ISSUED AND OUTSTANDING
TITLE OF CLASS AS OF MARCH 31, 1998
Common Stock, Without Par Value 65,743,066 common shares
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
NOT APPLICABLE
YES NO
----- -----
Indicate by check mark which financial statement item the registrant has elected
to follow:
ITEM 17 X ITEM 18
----- -----
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CURRENCY TRANSLATIONS
In this Registration Statement, unless otherwise specified, all dollar amounts
herein are expressed in United States dollars. The following table sets forth
the exchange rates for one Canadian dollar expressed in terms of one U.S. dollar
for the past five fiscal years and the calendar quarters ended 12/31/97,
3/31/98, 6/30/98 and 9/30/98.
<TABLE>
<CAPTION>
- --------------------- ------------------- -------------------------- -------------------------
YEAR AVERAGE LOW - HIGH SEPTEMBER 30
- --------------------- ------------------- -------------------------- -------------------------
<S> <C> <C> <C>
1994 0.7365 0.7166 - 0.7731 0.7457
- --------------------- ------------------- -------------------------- -------------------------
1995 0.7275 0.7023 - 0.7478 0.7438
- --------------------- ------------------- -------------------------- -------------------------
1996 0.7329 0.7235 - 0.7513 0.7301
- --------------------- ------------------- -------------------------- -------------------------
1997 0.7221 0.6947 - 0.7483 0.7236
- --------------------- ------------------- -------------------------- -------------------------
1998 0.6898 0.6321 - 0.7292 0.6533
- --------------------- ------------------- -------------------------- -------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------- ------------ -------------------- ----------------------------
CALENDAR QUARTER ENDED AVERAGE LOW-HIGH LAST DAY OF QUARTER
- ------------------------------- ------------ -------------------- ----------------------------
<S> <C> <C> <C>
12/31/97 0.7127 0.6947 - 0.7292 0.6995
- ------------------------------- ------------ -------------------- ----------------------------
03/31/98 0.6994 0.6821 - 0.7105 0.7045
- ------------------------------- ------------ -------------------- ----------------------------
06/30/98 0.6911 0.6782 - 0.7051 0.6817
- ------------------------------- ------------ -------------------- ----------------------------
09/30/98 0.6607 0.6321 - 0.6835 0.6533
- ------------------------------- ------------ -------------------- ----------------------------
</TABLE>
Exchange rates are based upon the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York.
The noon rate of exchange on December 15,1998 reported by the United States
Federal Reserve Bank of New York for the conversion of United States dollars
into Canadian dollars was $0.6485 (Cdn.$1.00 = U.S.$).
GLOSSARY OF TERMS
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<S> <C>
ALTERNATE FEED Ore or residues from other
processing facilities that contain
uranium in quantities or forms that are
either uneconomic to recover or cannot
be recovered at these other facilities,
but can be economically recovered
either alone or in conjunction with
other co-products at the Registrant's
facilities.
BLM Means the United States Bureau of Land
Management;
CCD CIRCUIT The counter current decantation circuit
at the White Mesa Mill, in which
uranium-bearing solution is separated
from the crushed waste solids;
CONCENTRATES Means product from a uranium mining and
milling or in situ leach facility,
which is commonly referred to as
yellowcake or U(3)O(8);
CONVERSION A process whereby the purified uranium
obtained in the refining process is
converted into forms suitable for
making nuclear fuel (UO(2)) or for
enrichment (UF(6));
$ Means United States dollars and "CDN$"
means Canadian dollars;
ENRICHMENT A process whereby the U-235 isotope
content is increased from the natural
level of 0.711% to a concentration of
3% to 5% as required in fuel for light
water reactors;
</TABLE>
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<TABLE>
<S> <C>
EPA The United States Environmental
Protection Agency;
FEE LAND Means private land;
HECTARE Measurement of an area of land
equivalent to 10,000 square meters or
2.47 acres;
MINERALIZATION Means a natural aggregate of one or
more metallic minerals;
MINERAL DEPOSIT Is a mineralized body which has been
delineated by appropriately spaced
drilling and/or underground sampling to
support a sufficient tonnage and
average grade of metal(s). Such a
deposit does not qualify as a reserve
until a comprehensive evaluation based
upon unit cost, grade, recoveries, and
other material factors conclude legal
and economic feasibility. Often
referred to in the industry as
"resources".
NATURAL URANIUM Means uranium, any one of U(3)O(8),
UO(2) or UF(6), neither irradiated nor
enriched and which has a U-235 isotope
content of about 0.711%;
NRC The United States Nuclear Regulatory
Commission;
ORE A natural aggregate of one or more
minerals which, at a specified time and
place, may be mined and sold at a
profit or from which some part may be
profitably separated;
PROBABLE (INDICATED) RESERVES Reserves for which quantity and grade
and/or quality are computed from
information similar to that used for
proven (measured) reserves, but the
sites for inspection, sampling, and
measurement are farther apart or are
otherwise less adequately spaced. The
degree of assurance, although lower
than that for proven (measured)
reserves, is high enough to assume
continuity between points of
observation;
PROVEN (MEASURED) RESERVES Reserves for which (a) quantity is
computed from dimensions revealed in
outcrops, trenches, workings or drill
holes; grade and/or quality are
computed from the results of detailed
sampling and (b) the sites for
inspection, sampling and measurement
are spaced so closely and the geologic
character is so well defined that size,
shape, depth and mineral content of
reserves are well established;
REFINING A process whereby concentrates,
containing an average of 60-80%
uranium, are chemically refined to
separate the uranium from impurities to
produce purified uranium;
S2MS Saskatoon Mining & Mineral Services
Ltd.;
SAG MILL The semi-autogenous grinding mill at
the White Mesa Mill in which the
uranium ore is ground prior to the
leaching process;
TAILINGS Waste material from a mineral
processing mill after the metals and
minerals of a commercial nature have
been extracted;
TON A short ton (2,000 pounds);
TONNE A metric tonne (2,204.6 pounds);
URANIUM OR U Means natural uranium; 1% U=1.18%
U(3)O(8);
</TABLE>
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<TABLE>
<S> <C>
(e)U(3)O(8) U(3)O(8) equivalent;
UF(6) Means natural uranium hexafluoride,
produced by conversion from U(3)O(8),
which is not yet enriched or depleted;
U(3)O(8) Triuranium octoxide. U(3)O(8) is often
referred to as yellowcake.
V(2)O(5) Vanadium pentoxide;
WHITE MESA MILL Means the 2,000 ton per day uranium
mill, with a vanadium or other
co-product recovery circuit, located
near Blanding, Utah that is owned by
IUC White Mesa, LLC
YELLOWCAKE Means U(3)O(8).
</TABLE>
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Except for the statements of historical fact contained therein, the information
under the headings "Item 2 Description of Property", "Item 9 - Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Registration Statement constitutes forward looking statements
("Forward Looking Statements") within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such Forward Looking Statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Registrant to differ materially from
any future results, performance or achievements projected or implied by such
Forward Looking Statements. Such factors include, among others, the factual
results of current exploration activities, conclusions of feasibility studies
now underway, changes in project parameters and the factors set forth in the
section entitled "Risk Factors".
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
International Uranium Corporation (the "Registrant") is the product of an
amalgamation under the Business Corporations Act (Ontario) (the "Act") of two
companies; namely, International Uranium Corporation, incorporated on October 3,
1996 under the laws of the Province of Ontario pursuant to the Act, and
Thornbury Capital Corporation, incorporated under the laws of the Province of
Ontario by Letters Patent ("Thornbury") on September 29, 1950. The amalgamation
was made effective on May 9, 1997, pursuant to a Certificate of Amalgamation
dated that date. The amalgamated companies were continued under the name
"International Uranium Corporation" (see "Amalgamation").
The head office of the Registrant is located at Independence Plaza, Suite 950,
1050 Seventeenth Street, Denver, CO 80265. The registered office of the
Corporation is located at Suite 2100, Scotia Plaza, 40 King Street West,
Toronto, Ontario, M5H 3C2.
The Registrant is engaged in the business of producing uranium concentrates and
in the selling and trading of these concentrates in the international nuclear
fuel market. As a co-product of its uranium production, the Registrant also
produces and sells vanadium.
The Registrant entered the uranium industry in May 1997 by acquiring
substantially all of the uranium producing assets of Energy Fuels Ltd., Energy
Fuels Exploration Company, and Energy Fuels Nuclear, Inc. (collectively "Energy
Fuels"). The Registrant raised Cdn$47.25 million through a special warrant
private placement and used cash of approximately Cdn $29.3 million to purchase
the Energy Fuels' assets (see "Acquisition" for further details). Energy Fuels
was a uranium producer with properties in the United States and Mongolia.
The Energy Fuels' assets acquired included several developed mines on standby,
several partially developed mines, numerous targeted mines and exploration
properties within the states of Colorado, Utah, Arizona, Wyoming and South
Dakota, as well as the 2,000 ton per day White Mesa Mill near Blanding, Utah.
The White Mesa Mill is a fully permitted dual circuit uranium/vanadium mill in
the United States. As a result of the acquisition, the Registrant's U.S.
properties comprise over 50,000 acres and contain proven and probable reserves
of 9.1 million pounds of uranium and 7 million pounds of vanadium in the U.S.
Additional mineral deposits and potential mineral deposits are estimated to
contain 91 million pounds of uranium and 84 million pounds of vanadium. In
addition to the U.S. properties, the Registrant also acquired a 70% interest in
a joint venture with the government of Mongolia and a Russian geological concern
to develop and produce uranium reserves in Mongolia. The Mongolia concessions
encompass approximately 4,000,000 acres with estimated potential uranium mineral
deposits of 100 million pounds.
The following chart illustrates the Registrant's corporate structure, including
all significant subsidiaries, their jurisdictions of incorporation and the
percentage interest held.
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<TABLE>
<S> <C> <C> <C> <C> <C>
INTERNATIONAL URANIUM CORPORATION
(CANADA)
*
*
*
*
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
* * *
* * *
100% * 100%
INTERNATIONAL URANIUM * INTERNATIONAL URANIUM
(ALBERTA) CORPORATION * (BERMUDA I) LTD
CANADA) * (BERMUDA)
* *
* *
* *
* *
* * * * * * * * * * * * * * * * * * * * *
* 100%
* INTERNATIONAL URANIUM COMPANY
* (MONGOLIA), LTD.
100% (BERMUDA)
INTERNATIONAL URANIUM HOLDINGS *
CORPORATION (DELAWARE, USA) *
* *
* *
* *
* 70%
* GURVAN SAIHAN
* * * * * * * * * * * * * * * * * * * JOINT VENTURE CORP.
* (MONGOLIA)
*
*
*
*
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
* * * * *
* * * * *
* * * * *
100% 100% * 100% 100%
INTERNATIONAL IUC WHITE * IUC EXPLORATION IUC RENO
URANIUM (USA) MESA LLC * LLC (COLORADO, USA) CREEK LLC
CORPORATION (COLORADO, USA) * (COLORADO, USA)
(DELAWARE, USA) *
*
*
* * * * * * * * * * * * * * * * * * * * * * * * * * ** * * * * * * * * * * * * * * * * * *
* * * *
* * * *
* * * *
100% 100% 100% 100%
IUC SUNDAY MINE IUC COLORADO IUC ARIZONA IUC PROPERTIES
LLC (COLORADO, USA) PLATEAU LLC STRIP LLC LLC (COLORADO, USA)
(COLORADO, USA) (COLORADO, USA)
</TABLE>
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International Uranium (Bermuda I) Ltd. and International Uranium Company
(Mongolia) Ltd., were incorporated solely for the purposes of holding shares of
Gurvan Saihan Joint Venture Corp. In the event the Registrant expands its
operations to include additional assets or assets in other countries, it is
possible that these assets may also be held through one or more additional
offshore entities, some of the shares of which may be held by International
Uranium (Bermuda I) Ltd. International Uranium Alberta Corporation is a Canadian
company which currently holds the Registrant's inter-company production
royalties.
The White Mesa Mill is held by IUC White Mesa LLC (see "White Mesa Mill"), the
exploration properties are held by IUC Exploration LLC, the Sunday Mine Complex
is held by IUC Sunday Mine LLC (see "Sunday Mine Complex"), the remainder of the
Colorado Plateau mines are held by IUC Colorado Plateau LLC (see "Colorado
Plateau"), the Reno Creek Property is held by IUC Reno Creek LLC (See Reno Creek
Property"), the Arizona Strip mines are held by IUC Arizona Strip LLC (see
"Arizona Strip") and the mines that are in reclamation are held by IUC
Properties LLC, each of which is a limited liability company under the laws of
Colorado. International Uranium (USA) Corporation is the operating company that
is responsible for operations in the United States and Mongolia. It does not
hold assets of any significance other than permits and licenses, and the head
office administrative assets. The operational management team for the United
States and Mongolia and the employees of the United States operations are
employed by International Uranium (USA) Corporation. Most of the remaining
assets purchased from Energy Fuels are held directly by International Uranium
Holdings Corporation.
International Uranium U.S. Finance LLC ("Finance") was a limited liability
company, which was originally formed to provide financing to International
Uranium Holdings Corporation ("Holdings") and its subsidiaries, as required. All
financing previously provided by Finance to Holdings and its subsidiaries has
been repaid and Finance has been merged into Holdings. As consideration in the
merger, Holdings issued preferred stock to the Registrant in the face amount of
$1.5 million.
The Registrant's principal strategy is to maintain and build upon its position
as a producer of uranium concentrates to the international nuclear fuel market.
The Registrant will also continue to produce and sell vanadium as a co-product
of its uranium production. The Registrant intends to implement its strategy
through (i) continued capital expenditures for purposes of exploration and
development; (ii) the restart of developed mines currently on stand-by; (iii)
the purchase of uranium ore mined by third parties; (iv) the processing of
uranium bearing by-products; and (v) the continued mining of the Registrant's
uranium-producing properties. The Registrant continues to actively pursue a
variety of exploration programs and targets, primarily for uranium, in a number
of countries around the world.
THE FOLLOWING SETS FORTH A DISCUSSION OF THE REGISTRANT'S CURRENT PLAN OF
OPERATING OVER ITS NEXT FISCAL YEAR. ALL OF THIS INFORMATION CONSTITUTES FORWARD
LOOKING STATEMENTS WITHIN THE MEANING OF FEDERAL SECURITIES LAWS. THE
REGISTRANT'S ACTUAL OPERATIONS AND THE RESULTS THEREFROM MAY VARY SIGNIFICANTLY
FROM ITS PLAN DISCUSSED BELOW. FACTORS THAT MAY CAUSE THE ACTUAL OPERATIONS AND
RESULTS TO VARY FROM THE PLAN INCLUDE CHANGES IN MARKET PRICES FOR URANIUM AND
VANADIUM AND WHETHER THE REGISTRANT WILL BE SUCCESSFUL IN OBTAINING LICENSE
AMENDMENTS FROM THE NRC TO ALLOW THE PROCESSING OF ALTERNATE FEEDS AT THE MILL.
SEE "SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS" AND ITEM 3 "LEGAL
PROCEEDINGS."
For the remainder of the fiscal year ending September 30, 1998, and for the
first six (6) months of next fiscal year, the Registrant intends to continue its
mining activities at the Sunday Mine complex and the Rim Mine in the Colorado
Plateau. Ore produced from these mines will be stockpiled at the White Mesa
Mill, along with ore purchased from other independent mining operations in the
area. It is anticipated that this material will be milled in the spring of 1999,
once enough ore has been stockpiled to provide for an adequate mill run. The
Registrant will continue to evaluate the feasibility of bringing other mines
into production in this area depending on future uranium and vanadium market
prices.
The Registrant will continue to pursue its alternate feed processing activities
and anticipates that it will be utilizing the mill with a full work force in
place with these operations until the planned conventional mill run in the
spring of 1999. The Registrant must obtain from the NRC a separate amendment to
its Mill license in order to process each alternate feed transaction at the
Mill. The Registrant's ability to continue to process alternate feeds at the
Mill is
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dependent upon obtaining these amendments from the NRC. Through August 31,1998,
the NRC has granted six (6) amendments on alternate feed transactions. The State
of Utah and Envirocare, a private company based in Utah, and one other party
have challenged the amendment issued by the NRC on June 23, 1998, which allows
the Registrant to process alternate feed material from the Ashland 2 FUSRAP
(Formerly Utilized Sites Remedial Action Program) site. The State of Utah,
Envirocare and certain other parties have filed requests for a hearing on the
Registrant's pending application for a Mill license amendment to process
materials from the Ashland 1 FUSRAP site. See Item 3 - "Legal Proceedings."
Additionally, the Registrant anticipates the completion in 1998 of a 55,000
meter drilling program in Mongolia, through its Mongolian enterprise, the Gurvan
Saihan Joint Venture. A leach amenability test, a precursor to running a pilot
production operation will also be conducted in 1998. Expenditures during fiscal
1998 relating to development activities in Mongolia are projected to be
approximately $3.2 million. Based on the analysis of the 1998 drilling program,
and the Company's estimate of future uranium prices, a calendar 1999 development
program will be considered.
In addition to the Registrant's Mongolian activities, the Registrant will
further the development of select U.S. properties dependent upon the prospects
for higher uranium prices and continued high vanadium prices.
The Registrant anticipates expending approximately $3.8 million on properties,
plant and equipment exclusive of the Mongolian development activities mentioned
above. The Registrant is anticipating funding its projected operations as noted
above from the operating profits derived from alternate feed activities and
uranium sales and from its current working capital (which is sufficient to cover
these planned expenditures).
AMALGAMATION
The predecessor, International Uranium Corporation ("Old IUC"), and Thornbury
were amalgamated effective May 9, 1997 under the provisions of the Business
Corporations Act (Ontario) to form the Registrant in accordance with the terms
of an agreement entered into between Old IUC and Thornbury dated February 13,
1997 (the "Amalgamation Agreement"). The primary purpose of the Amalgamation was
to effect an acquisition of Thornbury by Old IUC in that upon completion of the
Amalgamation the shareholders of Old IUC immediately prior to the Amalgamation
would hold the controlling interest in the Registrant, a public company.
BACKGROUND ON THORNBURY
Thornbury was incorporated under the laws of Ontario on September 29, 1950.
Thornbury's common shares were quoted for trading on the Canadian Dealing
Network Inc. Thornbury's principal assets consisted of marketable securities
with a market value as at December 31, 1996 of Cdn$495,480 and eight mining
claims situated in the Mayo Mining District, Yukon Territory, which expire
between 1999 and 2009.
SHARE EXCHANGE RATIOS
The Amalgamation received the approval of the shareholders of both Old IUC and
Thornbury. On amalgamation, each shareholder of Old IUC received one (1) share
of the Registrant, a newly formed amalgamated company, for each one (1) common
share held in Old IUC, and each shareholder of Thornbury received one (1) share
of the Registrant for each five (5) common shares held in Thornbury. Fractional
shares resulting from the foregoing were rounded down to the next whole number.
After giving effect to the amalgamation, there were a total of 65,743,066 common
shares of the Registrant issued and outstanding. This figure was based on
26,500,000 previously issued common shares of Old IUC, 37,800,000 common shares
of Old IUC issued upon conversion of the special warrants and 7,215,334 common
shares of Thornbury which were outstanding prior to the amalgamation being
effective (1,443,066 post-amalgamation common shares).
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AMALGAMATION AGREEMENT
Old IUC and Thornbury entered into an amalgamation agreement (the "Amalgamation
Agreement") which contained such representations and warranties, covenants,
indemnification and other provisions as are customarily found in an amalgamation
agreement entered into by parties dealing at arm's length.
ACQUISITION
The Registrant entered the uranium industry by acquiring substantially all of
the uranium producing assets of Energy Fuels. On December 19, 1996, Old IUC,
through its subsidiary, International Uranium Holdings Corporation, entered into
an agreement (the "Acquisition Agreement") to acquire the Energy Fuels' Assets
for cash of $20.5 million, subject to adjustment. The terms of the acquisition
were approved by the United States Bankruptcy Court following a lengthy bidding
procedure as required under United States bankruptcy laws (see "Bankruptcy of
Oren Benton and Nuexco"). The acquisition was completed on May 9, 1997.
ENERGY FUELS
HISTORICAL BACKGROUND
The Energy Fuels group of companies was founded in August 1976 to capitalize on
uranium mining, purchasing and processing opportunities in the Colorado Plateau
area of western Colorado and eastern Utah.
In order to process the ores mined and purchased from the Colorado Plateau,
Energy Fuels commenced construction of a 2,000 ton per day mill near Blanding,
Utah in June 1979 at a total cost of approximately $40 million. Known as the
White Mesa Mill, the facility is a dual-circuit uranium mill
The cost of construction of the White Mesa Mill was funded in large part by
Kernkraftwerk Goesgen-Daeniken AG, and Nordostschweizerische Kraftwerke AG, the
former limited partners in certain of the Energy Fuels Assets (the "Swiss
Utilities"), who, in consideration for this funding, acquired a 40% limited
partnership interest in all of Energy Fuels' United States assets. In 1995, this
40% limited partnership interest was converted into a 9% royalty on all uranium
produced and a 5% royalty on vanadium and all other minerals produced from the
United States properties. The Swiss utilities have agreed to a reduction in this
royalty on most properties until December 31, 2000. See "Swiss Royalty
Interest".
In the early 1980's Energy Fuels expanded its operations to include breccia pipe
uranium mining in the Arizona Strip district of northern Arizona. The land
position of Energy Fuels in the Arizona Strip district acquired by the
Registrant includes three developed or partially developed mines as well as
several targeted mines and numerous other exploration targets.
In 1984, Energy Fuels formed a limited partnership with Union Carbide
Corporation ("Union Carbide") pursuant to which Union Carbide acquired a 70%
undivided interest in and became the operator of the White Mesa Mill. As a
result of subsequent negotiations in 1987, Union Carbide's mines and properties
in the Colorado Plateau were added to this limited partnership and, as a result,
Energy Fuels acquired a 25% undivided interest in those mines. In 1994 this
partnership was dissolved and Energy Fuels re-acquired 100% of the White Mesa
Mill as well as certain of Union Carbide's mines on the Colorado Plateau. In the
Colorado Plateau district, Energy Fuels then owned several uranium and vanadium
mines on standby, several partially developed mines as well as additional
acreage with exploration potential.
In 1994, in an effort to expand into the global uranium marketplace, Energy
Fuels acquired a 70% interest in a joint venture with the government of Mongolia
and a Russian geological concern to develop and produce uranium reserves in
Mongolia over a vast area.
In the early 1990's, Energy Fuels also acquired two significant ore bodies
intended to be mined by in-situ type mining technology: the Reno Creek property
in Wyoming, and the Dewey Burdock property in South Dakota.
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In early 1995, Energy Fuels filed for protection under Chapter 11 of the United
States Bankruptcy Code as a result of providing guarantees to an affiliated
company and its majority shareholder. See "Bankruptcy of Oren Benton and
Nuexco".
BANKRUPTCY OF OREN BENTON AND NUEXCO
On February 23, 1995, Oren L. Benton ("Benton") and two entities which Benton
controlled - Nuexco Trading Corporation ("Nuexco") and CSI Enterprises, Inc.
("CSI") - filed for protection under Chapter 11 of the United States Bankruptcy
Code.
Energy Fuels, Ltd. ("EFL") and Energy Fuels Exploration Company ("EFEX") filed
for protection under Chapter 11 of the United States Bankruptcy Code on February
23, 1995. EFL and EFEX were both controlled by Benton through Energy Fuels
Mining Joint Venture ("EFMJV"). EFL and EFEX were forced into bankruptcy because
Benton, as controlling shareholder, caused them to guarantee certain of Benton's
and Nuexco's investment and trading activities. EFMJV filed for protection under
Chapter 11 on August 12, 1996.
The bankruptcy of Benton, Nuexco, CSI, EFL, EFEX and EFMJV involved numerous
other affiliated and subsidiary entities, of which Energy Fuels was a relatively
small part.
Under the provisions of Chapter 11 of the United States Bankruptcy Code, Benton
maintained control of the assets of his estate, including the Energy Fuels
Assets, but was under a fiduciary duty to reorganize his estate either under a
plan of reorganization or through the sale of portions of the assets from time
to time ("Section 363 Sales"). In order to protect the rights of creditors in
this process, a committee of selected creditors was formed (the "Creditors
Committee") as required under the provisions of Chapter 11 of the United States
Bankruptcy Code.
Benton and the Creditors Committee filed a joint Section 363 Sale motion on
October 21, 1996 with the Registrant as the lead bidder for the sale of the
Energy Fuels Assets to the Registrant for cash of $20.5 million, subject to
adjustments.
On December 4, 1996, the bankruptcy court approved the Acquisition Agreement and
the sale of the Energy Fuels Assets to the Registrant. The effect of the court
order was to eliminate substantially all known and existing claims and
liabilities of all creditors against the Energy Fuels Assets, so that the
Registrant would acquire the Energy Fuels Assets free and clear of all such
liabilities.
SUMMARY OF ENERGY FUELS ASSETS ACQUIRED BY THE REGISTRANT
UNITED STATES ASSETS
The Energy Fuels Assets acquired by the Registrant pursuant to the Acquisition
Agreement located in the United States included the following:
o the White Mesa Mill, a 2,000 ton per day uranium and vanadium
processing plant in Blanding, Utah. See "White Mesa Mill".
o the Arizona Strip Properties, developed and partially
developed mines and exploration properties in north central
Arizona, including the Arizona 1 and Canyon mines, both
currently on standby. See "Arizona Strip", "Arizona 1 Mine",
"Canyon Mine" and "Pinenut Mine".
o the Colorado Plateau properties, developed and partially
developed mines and exploration properties straddling the
south/central Colorado and Utah border, including the West
Sunday Mine Complex and the Rim Mine, both of which are
currently in production. See "Colorado Plateau" and "Sunday
Mine Complex".
o the Reno Creek in situ leach project, a uranium deposit in the
Powder River Basin area of Wyoming in advanced stages of
exploration and permitting. See "Reno Creek Property".
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o the Dewey Burdock in situ leach project, a uranium deposit in
South Dakota. See "Dewey Burdock Property".
o the Bullfrog project, a uranium deposit in south central Utah.
See "Bullfrog Property".
o substantial mining equipment. See "Other Assets".
o various uranium supply, waste processing contracts, and joint
venture contracts. See "Other Assets" and "Alternate Feeds".
o various field and administrative offices. See "Other Assets".
THE MONGOLIA PROPERTY
Energy Fuels owned a 70% interest in the Gurvan-Saihan Joint Venture in
Mongolia. The Registrant, as a result of the Acquisition, acquired this
interest. The other parties are the Mongolian Government as to 15% and
Geologorazvedka, a Russian geological concern, as to the remaining 15%. The
Gurvan-Saihan Joint Venture currently holds some 4 million acres of uranium
exploration properties in Mongolia. See "Mongolia Property".
SUMMARY OF RESERVES AND MINERAL DEPOSITS
The following is a summary of the reserves and mineral deposits that the
Registrant acquired on completion of the Energy Fuels' Asset Acquisition:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
MILLION LBS U(3)O(8) MILLION LBS V(2)O(5)
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
ADDITIONAL POTENTIAL ADDITIONAL POTENTIAL
PROVEN/PROBABLE MINERAL MINERAL PROVEN/PROBABLE MINERAL MINERAL
RESERVES(1) DEPOSITS(2) DEPOSITS(2) RESERVES(1) DEPOSITS(2) DEPOSITS(2)
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
ARIZONA STRIP - - 39 - - -
(conventional mining)
- ----------------------------------------------------------------------------------------------------------------------------
ARIZONA 1 MINE 1.0 - - - - -
(standby)
- ----------------------------------------------------------------------------------------------------------------------------
CANYON MINE 2.0 - 1.0 - - -
(partially developed)
- ----------------------------------------------------------------------------------------------------------------------------
PINENUT MINE - 0.9 - - - -
(standby)
- ----------------------------------------------------------------------------------------------------------------------------
COLORADO PLATEAU 1.0 (3) 10.3 5.0 7 (3) 55 29
(conventional mining)
- ----------------------------------------------------------------------------------------------------------------------------
BULLFROG PROJECT - 12.9 7.0 - - -
(conventional mining)
- ----------------------------------------------------------------------------------------------------------------------------
RENO CREEK 5.1 2.4 5.0 - - -
(in-situ mining)
- ----------------------------------------------------------------------------------------------------------------------------
DEWEY BURDOCK - 6.6 (4) 1.2 (4) - - -
(in-situ mining)
- ----------------------------------------------------------------------------------------------------------------------------
GURVAN SAIHAN JV - 17.2 (4) 100 - - -
(in-situ mining)
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
TOTALS 9.1 50.3 158.2 7 55 29
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As delineated by S2MS in the S2MS Report.
(2) As stated by management of Registrant.
(3) Does not include 364,000 lbs. of U(3)O(8) and 3,460,000 lbs. of
V(2)O(5) currently in the mine plan at the Rim Mine. See "Rim Mine".
(4) Updated by Registrant
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<PAGE> 12
INDEPENDENT EXPERT'S REPORT
In September 1996, the Registrant engaged Saskatoon Mining & Mineral Services
Ltd. ("S2MS"), an independent engineering firm specializing in the uranium
industry, to review and report on certain of Energy Fuels' assets. S2MS prepared
a report entitled "Acquisition Study of Energy Fuels Nuclear Inc." dated
November 1996 (the "S2MS Report").
Where indicated, S2MS has reviewed certain of the reserves and other costs set
forth herein.
CALCULATION OF RESERVES AND MINERAL DEPOSITS
The Registrant maintains estimates of reserves and mineral deposits on the
various properties. The Registrant estimates that its properties (excluding
Mongolia) contained approximately 9.1 million pounds of U(3)O(8) as proven and
probable reserves. In addition, the Registrant estimates that there are at least
another 40 million pounds of potential mineral deposits of U(3)O(8) in the
Arizona Strip area, and at least another 10 million pounds of potential mineral
deposits of U(3)O(8) in the Colorado Plateau area. In both cases, these
estimates of potential mineral deposits were based upon years of historical
experience in those areas. See "Arizona Strip - Exploration Potential" and
"Colorado Plateau - Exploration Potential".
Of these reserves, the Registrant calculates 10.5 million pounds as mineable in
its current mine plan: 1 million from the Sunday Mine Complex; 0.4 million from
the Rim Mine; 1 million from the Arizona 1 Mine; 3 million from the Canyon Mine
(which includes 1 million pounds that are technically in the potential mineral
deposit category but which management, based on years of experience with breccia
pipe mines, believes will be proven as mineable reserves once underground
drilling is completed in the course of mine development); and 5.1 million pounds
from the Reno Creek Property (to which a 75% recovery factor is applied). See
"Sunday Mine Complex", "Rim Mine", "Arizona 1 Mine", "Canyon Mine" and "Reno
Creek Property".
The Registrant's current mine plan covers anticipated production for the next 5
years from the Sunday Mine Complex, the Rim Mine, the Arizona 1 Mine and the
Canyon Mine and anticipated production from the Reno Creek Property over its
expected mine life of approximately 6 years. The Registrant's current mine plan
does not address other mines that may also be brought into production during the
next 5 years at various price levels of U(3)O(8) and vanadium, nor the
additional reserves and mines that are expected to be developed in the future,
thereby extending the mining plan beyond 5 years.
The Registrant has accepted these reserve numbers and recovery factors as its
base case, rather than the slightly lower numbers calculated by S2MS (see "S2MS
Calculation of Reserves and Mineral Deposits"), because it believes that the
historic production on the Colorado Plateau will continue for many years to
come; that past experience with breccia pipes leads to the reasonable
expectation that additional reserves will be delineated in the Canyon Mine once
underground drilling is completed; and that a 75% recovery factor for the Reno
Creek Property is reasonable.
Furthermore, the Registrant believes that the production estimates set out in
its current mine plan for the next five years can be continued for many
additional years depending on commodity prices, with the additional potential on
the Colorado Plateau and the Arizona Strip.
S2MS' CALCULATIONS OF RESERVES AND MINERAL DEPOSITS
As part of the Registrant's due diligence prior to the completion of the bidding
procedures for the Energy Fuels Assets, S2MS carried out a review of the Sunday
Mine Complex, the Arizona 1 Mine, the Canyon Mine, the Reno Creek Property, the
Dewey Burdock Property, the Mongolia Property and the White Mesa Mill during the
two months prior to the December 4, 1996 Section 363 Sale confirmation hearing.
S2MS spent approximately 1,500 hours completing their review of these
properties. However, given the limited amount of time available, S2MS was not
asked to review any other mines or properties of Energy Fuels, and in particular
did not review the Deer Creek, Rim, Egnar Plains, Thunderbolt or Monogram mines
on the Colorado Plateau, the Pinenut Mine on the Arizona Strip, the Bull Frog
Property or any of the exploration properties on the Colorado Plateau or the
Arizona Strip. In addition, given the absence of historical data in some cases,
S2MS was not able to fully evaluate all of the reserves and mineral deposits in
the Sunday Mine Complex.
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<PAGE> 13
Based on their review, S2MS was able to delineate mineable reserves of 9.1
million pounds. However, S2MS was unable to delineate all of the reserves in the
Registrant's mine plan. The reserve estimates for the Arizona 1 Mine of 1
million pounds of U(3)O(8) were confirmed. However, because S2MS was not able to
recognize formally the additional 1 million pounds that the Registrant
delineated as mineable reserves at the Canyon Mine once underground drilling is
completed, S2MS was only able to delineate 2 million pounds of U(3)O(8) at the
Canyon Mine. Finally S2MS applied a recovery factor of 65% to the reserves at
the Reno Creek Property, compared to the 75% recovery factor applied by the
Registrant, thereby reducing the number of pounds of uranium that is expected to
be recovered from those reserves by approximately 500,000 pounds. In addition,
as S2MS was not asked to review the Rim Mine, the 364,000 lbs. of U(3)O(8) and
3,460,000 lbs. of V(2)O(5) in the current mine plan for the Rim Mine were not
included in S2MS's report. See "Rim Mine".
In its report, however, S2MS did recognize that it was unable to fully evaluate
all of the reserves at the Sunday Mine Complex, given the lack of time and data
and that additional potential exists. S2MS also acknowledged that it is possible
that with additional underground drilling at the Canyon Mine, the Registrant's
estimate of 3 million pounds of reserves at that mine could be achieved.
Finally, S2MS acknowledged that potential exists at the Reno Creek Property to
delineate additional reserves.
CLAIMS ARISING OUT OF THE ACQUISITION
Under the Acquisition Agreement, Energy Fuels represented to the Registrant that
Energy Fuels was conveying good title to the various properties and mining
claims acquired by the Registrant. Energy Fuels agreed to indemnify the
Registrant from any losses and damages incurred by the Registrant (subject to a
cap of $1,500,000) and arising out of a breach of Energy Fuels' representations
and warranties. A total of $1,500,000 of the purchase price paid by the
Registrant was placed in escrow to secure Energy Fuels' indemnity obligations.
On May 8 and 9, 1998, the Registrant submitted a claim against all amounts held
in escrow alleging various breaches of Energy Fuels' representations and
warranties. The liquidating trustee for the bankruptcy estates of Energy Fuels
has denied the claims of the Registrant. The Registrant and the liquidating
trustee are in negotiations attempting to resolve and settle these claims. If a
settlement is not reached, either party may submit the dispute to litigation. At
this time, it is not known whether a settlement will be reached or, if not
reached, whether the Registrant will prevail in any litigation or the amount, if
any, to be recovered on such claims.
The claims relate specifically to the Carnation claims in the Sunday Mine
Complex and a portion of the properties held by the Mongolia joint venture. The
sublease held by the Registrant on the Carnation claims may be invalid due to
the expiration of the primary lease. The Registrant is currently in the process
of contacting the land owners for the purpose of entering into a new lease. If
the Registrant is able to locate and enter into a new lease with all of the land
owners, the claims will be nominal in amount and limited to the amounts paid for
the new lease and the cost of securing such lease. If the Registrant is unable
to enter into a new lease with all of the land owners, the amount of the claim
will be the net value of the uranium and vanadium mineral deposits on the
Carnation claims with an approximate net value to the Registrant of in excess of
$1,500,000).
A portion of the properties held by the Mongolian joint venture (approximately
6.3% of the total properties) is subject to a nature reserve area. Under
Mongolian Law, exploration and mining on nature reserve areas is prohibited
without permission of the Mongolian government. The nature reserve area was in
existence at the time of the closing of the Registrant's acquisition of Energy
Fuel's assets and was not disclosed by Energy Fuels to the Registrant. The
Registrant has been working with the Mongolia government on this matter and has
received permission to conduct limited exploration activities on these
properties. Until the results of this exploration are known, the Registrant will
not be able to quantify its potential claim against Energy Fuels. In addition,
the Registrant does not know at this time whether the Mongolian government will
permit mining on the nature reserve area if the exploration results are
positive.
13
<PAGE> 14
RISK FACTORS
VOLATILITY AND SENSITIVITY TO PRICES, COSTS AND EXCHANGE RATES
Because a significant portion of the Registrant's revenues are expected to be
derived from the sale of uranium and vanadium, the Registrant's net earnings
will be closely related to the long- and short-term market price of U(3)O(8) and
V(2)O(5). Historically, uranium prices have been subject to fluctuation, and the
price of uranium has been and will continue to be affected by numerous factors
beyond the Registrant's control, such as demand for nuclear power, political and
economic conditions in uranium producing and consuming countries, such as the
United States, Canada and Russia and other republics of the CIS, and production
levels and costs of production in countries such as Russia, Canada and other
republics of the CIS and Australia.
During this fiscal year, U(3)O(8) prices have declined from $10.85 on September
30, 1997 to $10.50 per pound as of June 30, 1998. V(2)O(5) prices were $4.10 on
September 30, 1997, rising to $6.90 in January 1998, and declining to $6.25 as
of June 30, 1998.
COMPETITION FROM OTHER ENERGY SOURCES AND PUBLIC ACCEPTANCE OF NUCLEAR ENERGY
Nuclear energy competes with other sources of energy, including oil and gas,
coal and hydro-electricity. These other energy sources are to some extent
interchangeable with nuclear energy, particularly over the longer term. Lower
prices of oil, gas, coal and hydro-electricity for an extended period of time
may make nuclear power a less attractive fuel source for the generation of
electricity, thus resulting in lower demand for uranium. It is anticipated that
production costs will become more of a factor for nuclear and other sources of
energy as utilities continue to be less regulated, receive fewer government
subsidies, and as electrical power becomes more freely traded. Furthermore, the
growth of the uranium and nuclear power industry beyond its current level will
depend 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 which could have an adverse impact on the demand for
nuclear power and increase the regulation of the nuclear power industry.
URANIUM INDUSTRY COMPETITION AND INTERNATIONAL TRADE RESTRICTIONS
The international uranium industry is highly competitive in many respects,
including the supply of uranium. The Registrant markets uranium to utilities in
direct competition with supplies available from a relatively small number of
Western World uranium mining companies, from certain republics of the CIS and
Mainland China and from excess inventories, including inventories made available
from decommissioning of military weapons. To some extent the effects of the
supply of uranium from the CIS republics are mitigated by a number of
international trade agreements and policies, including suspension agreements
entered into by the United States with certain republics of the CIS, including
Russia, that restrict imports into the United States market. In addition, in
January 1994, the United States and Russia signed a 20-year agreement to convert
HEU from former Russian nuclear weapons to a grade suitable for use in nuclear
power plants. During 1995, the United States also amended its suspension
agreements with the Republics of Kazakhstan and Uzbekistan, which increased the
limit on the supply of uranium from those republics into the United States for a
10-year period. The European Community also has an informal policy limiting
annual consumption of uranium sourced from the CIS republics. These agreements
and any similar future agreements, governmental policies or trade restrictions
are beyond the control of the Registrant and may affect the supply of uranium
available in the United States, which is the largest market for uranium in the
world.
IMPRECISION OF RESERVE AND MINERAL DEPOSIT ESTIMATES
Reserve and mineral deposit estimates included in this document for uranium and
vanadium are estimates, and no assurances can be given that the indicated levels
of recovery will be realized. Such estimates are expressions of judgment based
on knowledge, mining experience, and analysis of drilling results and industry
practices. Valid estimates made at a given time may significantly change when
new information becomes available. While the Registrant believes that the
reserve and mineral deposit estimates included in this document are well
established and reflect management's best estimates, by their nature, reserve
and mineral deposit estimates are imprecise and depend, to a certain extent,
upon statistical inferences which may ultimately prove unreliable. Furthermore,
market
14
<PAGE> 15
price fluctuations in uranium and vanadium, as well as increased production
costs or reduced recovery rates, may render ore reserves containing lower grades
of mineralization uneconomic and may ultimately result in a restatement of
reserves. The extent to which mineral deposits may ultimately be reclassified as
proven or probable reserves is dependent upon future inspection, sampling, and
measurement. The evaluation of mineral deposits or reserves is also influenced
by economic and technological factors, which may change over time. Mineral
deposit figures included here have not been adjusted in consideration of these
risks and, therefore, no assurances can be given that any mineral deposit
estimate will ultimately be reclassified as proven or probable reserves.
REPLACEMENT OF RESERVES
The Sunday Mine Complex, Rim, Arizona 1, Canyon and Reno Creek Mines are the
Registrant's principal sources of uranium at this time. Unless uranium
properties such as Dewey Burdock and Mongolia are developed and placed into
production or other reserves on the Colorado Plateau, the Arizona Strip or
elsewhere are discovered or extensions to existing ore bodies are found, the
Registrant's total uranium reserves will decrease over time as its current
uranium producing properties are depleted. There can be no assurance that
additional uranium properties will be developed and placed into production or
that the Registrant's future exploration, development and acquisition efforts
will be successful.
MINING RISKS AND INSURANCE
The mining of uranium is a capital intensive commodity business, and is subject
to a number of risks and hazards. These risks are environmental pollution,
accidents or spills, industrial accidents, labor disputes, changes in the
regulatory environment, natural phenomena (such as inclement weather conditions,
underground flooding and earthquakes), and encountering unusual or unexpected
geological conditions. Depending on the size and extent of the event, the
foregoing risks and hazards could result in damage to, or destruction of, the
Registrant's mineral properties, personal injury or death, environmental damage,
delays in or cessation of production from the Registrant's mines or in its
exploration or development activities, monetary losses, cost increases which
could make the Registrant uncompetive, and potential legal liability. In
addition, due to the radioactive nature of the materials handled in uranium
mining and milling, additional costs are incurred by the Registrant on a regular
and ongoing basis.
The Registrant maintains insurance against certain risks that are typical in the
uranium industry. This includes approximately $47,000,000 of fire and casualty
insurance for damage to the mill and mining properties, $3,000,000 of business
interruption insurance for the mill and mine activities caused by fire or other
insured casualty, and $20,000,000 of general liability insurance. Although the
Registrant maintains insurance in amounts it believes to be reasonable, such
insurance may not provide adequate coverage in the event of certain unforeseen
circumstances. Insurance against certain risks (including certain liabilities
for environmental pollution or other hazards as a result of production,
development or exploration), is generally not available to the Registrant or to
other companies within the uranium mining and milling business.
GOVERNMENTAL REGULATION AND POLICY RISKS
Mining and milling operations and exploration activities, particularly uranium
mining and milling in the United States, are subject to extensive regulation by
state and federal governments. Such regulation relates to production,
development, exploration, exports, taxes and royalties, labor standards,
occupational health, waste disposal, protection and remediation of the
environment, mine reclamation, mine safety, toxic substances and other matters.
Compliance with such laws and regulations has increased the costs of exploring,
drilling, developing, constructing, operating and closing the Registrant's mines
and other facilities. It is possible that, in the future, the costs, delays and
other effects associated with such laws and regulations may have an impact on
the Registrant's decisions as to whether to continue to operate existing mines
or refining and other facilities or, with respect to exploration and development
properties, whether to proceed with exploration or development. Furthermore,
future changes in governments, regulations and policies, could materially
adversely affect the Registrant's results of operations in a particular period
or its long-term business prospects. In addition, should certain recent
proposals being considered by the U.S. Congress become law, a royalty on
production of minerals from unpatented mining claims located on federal lands
could be imposed, which could adversely impact the Registrant's proposed
business and uranium prospects.
15
<PAGE> 16
Worldwide demand for uranium is directly tied to the demand for energy produced
by the nuclear electric industry, which is also subject to extensive government
regulation and policies in the United States and elsewhere. The development of
mines and related facilities is contingent upon governmental approvals which are
complex and time consuming to obtain and which, depending upon the location of
the project, involve various governmental agencies. The duration and success of
such approvals are subject to many variables outside the Registrant's control.
In addition, as described below under "The Uranium Industry", the international
marketing of uranium is subject to certain trade restrictions, such as those
imposed by the suspension agreements entered into by the United States with
certain republics of the CIS and the agreement between the United States and
Russia related to the supply of Russian HEU into the United States.
ENVIRONMENTAL RISKS
The Registrant is required to comply with environmental protection laws and
regulations and permitting requirements, and the Registrant anticipates that it
will be required to continue to do so in the future. The material laws and
regulations that the company must comply with are the Atomic Energy Act, Uranium
Mill Tailings Radiation Control Act of 1978, Clear Air Act, Clean Water Act,
Safe Drinking Water Act, National Environmental Policy Act, Federal Land Policy
Management Act, National Park System Mining Regulations Act, and the State Mined
Land Reclamation Acts or Department of Environmental Quality regulations, as
applicable. The Registrant complies with the Atomic Energy Act as amended by the
Uranium Mill Tailings Radiation Control Act of 1978 ("UMTRCA") by applying for
and maintaining operating licenses from the U.S. Nuclear Regulatory Commission
("NRC"). Uranium milling operations must conform to the terms of such licenses,
which include provisions for protection of human health and the environment from
endangerment due to radioactive materials. The licenses encompass protective
measures consistent with the Clean Air Act and the Clean Water Act, and as
federally-issued licenses, are subject to the provisions of the National
Environmental Policy Act ("NEPA"). This means that any significant action
relative to issuance, renewal, or amendment of the license must meet the NEPA
provisions. At the present time, the NRC also regulates in-situ uranium mining
operations. Therefore, for these types of facilities, the company must comply
with the NRC licensing requirements, as well as with the Federal Land Policy
Management Act, the National Park System Mining Regulations Act, and State Mined
Land Reclamation Acts or Department of Environmental Quality regulations, as
applicable. The Registrant utilizes specific employees and consultants in order
to comply with and maintain the Registrant's compliance with the above laws and
regulations.
Although the Registrant believes that its operations are in compliance, in all
material respects, with all relevant permits, licenses and regulations involving
worker health and safety as well as the environment, the historical trend toward
stricter environmental regulation may continue. The uranium industry is subject
to not only the worker health and safety and environmental risks associated with
all mining businesses, but also to additional risks uniquely associated with
uranium mining and milling. The possibility of more stringent regulations exists
in the areas of worker health and safety, the disposition of wastes, the
decommissioning and reclamation of mining and milling sites, and other
environmental matters, each of which could have a material adverse effect on the
costs or the viability of a particular project.
DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS
Long term demand for uranium is relatively fixed due to the fact that there are
a limited number of nuclear reactors in the world and the lead time for
construction of new reactors is many years. As a result, in any given year the
Registrant likely will rely on a relatively small number of customers to
purchase a significant portion of its production of uranium. The loss of any of
the Registrant's largest customers or curtailment of purchases by such customers
along with the inability to replace such customers with new customers could have
a material adverse effect on the Registrant's financial condition and results
from operations. Factors which may adversely affect purchases by customers from
the Registrant include decisions by customers to forego purchases and use
existing inventories of uranium and competition from other uranium suppliers.
MONGOLIA PROPERTY
An important component of the Registrant's business plan is the development of
the Mongolia Property in Mongolia. As with any foreign operation, the Mongolia
Property may be subject to certain risks, such as adverse political and economic
developments in Mongolia, foreign currency controls and fluctuations, as well as
risks of war and civil
16
<PAGE> 17
disturbances. Other events may limit or disrupt the project, restrict the
movement of funds, result in a deprivation of contract rights or the taking of
property by nationalization or expropriation without fair compensation,
increases in taxation or the placing of limits on repatriation of earnings. No
assurance can be given that current policies of Mongolia or the political
situation within that country will not change so as to affect adversely the
value or continued viability of the Registrant's interests in the Mongolia
Property. The Registrant intends to monitor this investment with a view to
anticipating political, economic or other events that may affect the
Registrant's interests in the Mongolia Property. See "Description of Property -
Mongolian Property".
TITLE TO CERTAIN PROPERTIES
The Registrant may not have good title to the Carnation claims in its Sunday
Mine Complex and may not have the right to mine certain of the properties held
by the Mongolian joint venture. Such matters may adversely affect the ability of
the Registrant to mine these properties. See discussion under "Claims Arising
out of the Acquisition."
RELIANCE ON ALTERNATE FEED REVENUE; DEPENDENCE ON ISSUANCE OF LICENSE AMENDMENTS
A significant portion of the Registrant's expected revenues and income over the
next several years is expected to result from the processing of Alternate Feed
Materials through the White Mesa Mill. These Alternate Feeds are ores or
residues from other processing facilities that contain uranium in quantities
that are either uneconomical to recover or can not be recovered at these other
facilities. The Registrant has demonstrated the capability to "recycle" these
Alternate Feeds through the Mill, recover whatever uranium is present, and
dispose of the remaining waste in the Registrant's tailing cells. The Mill's
co-product recovery circuit also allows the Registrant to recover other valuable
materials that might be present in these Alternate Feeds.
The Registrant's ability to process Alternate Feeds is dependent upon obtaining
amendments to its Mill license from the NRC. There can be no assurance that the
NRC will continue to issue such license amendments. See Item 1 - "Description of
Business" and Item 3 - "Legal Proceedings."
Although the Registrant believes that Alternate Feed sources will continue to
generate revenues and income for the Registrant over this time period, there can
be no guarantees or assurance that this will be the case.
DEPENDENCE ON KEY PERSONNEL
The Registrant's success will largely depend on the efforts and abilities of
certain senior officers and key employees. Certain of these individuals have
significant experience in the uranium mining industry. The number of individuals
with significant experience in this industry is small. While the Registrant does
not foresee any reason why such officers and key employees will not remain with
the Registrant, if for any reason they do not, the Registrant could be adversely
affected. The Registrant has not purchased key man life insurance for any of
these individuals.
CONFLICTS OF INTEREST
Certain of the directors of the Registrant also serve as directors of other
companies involved in natural resource exploration and development, and
consequently there exists the possibility for such directors to be in a position
of conflict. Any decision made by such directors involving the Registrant will
be made in accordance with the duties and obligations of directors to deal
fairly and in good faith with the Registrant and such other companies. In
addition, such directors must declare, and refrain from voting on, any matter in
which such directors may have a conflict of interest. The Registrant believes
that no material conflicts of interest currently exist. Please refer to a
further discussion at "Item 13 - Interest of Management in Certain
Transactions".
LIMITED OPERATING HISTORY
The Registrant began its business in May 1997, following the acquisition of
assets from Energy Fuels. As a result, the Registrant has had a limited history
of operations. Although the Registrant was profitable for the nine month period
ended June 30, 1998, there can be no assurance that the Registrant's operations
will remain profitable.
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<PAGE> 18
ITEM 2 - DESCRIPTION OF PROPERTY
The following is an overview of the properties currently held by the Registrant:
WHITE MESA MILL
OVERVIEW
The White Mesa Mill is located approximately 6 miles south of the city of
Blanding, Utah. Access is by state highway.
Construction of the White Mesa Mill (also referred to herein as the "Mill")
started in 1979, and ore was first processed in May 1980. The Mill is in
compliance with NRC and EPA standards and is a dual-circuit uranium mill.
The Mill is a standard design with both uranium and vanadium circuits.
The ore is received at the White Mesa Mill and stockpiled. Amenability tests are
run on ore lots from individual mines to determine if blending of the ores will
increase overall recovery. The ore is initially fed to an 18-foot diameter SAG
Mill, then stored in slurry form in one of the two pulp storage tanks. The White
Mesa Mill utilizes a two-stage leach process where overflow solution from the
No. 1 CCD Thickener is combined, in an "acid kill" step, with feed from the pulp
storage tanks. The slurry from this first stage leach is then separated in the
pre-leach thickener, with the solids going to the second stage leach and the
solution is clarified and sent to the solvent extraction circuits. Concentrated
sulfuric acid, steam, and an oxidizer are added in the second stage leach. This
slurry is subsequently fed to the 8-stage CCD Circuit where the underflow is
discharged to tailings. In full operation, the Mill employs approximately 100
people.
CURRENT CONDITION
The Mill is generally in good operating condition, but with a need for capital
expenditures to reline tailings Cell #4A, and refurbish the vanadium circuit
before vanadium can be produced. The claricone clarifier has failed structurally
and has been repaired once. Further repairs are currently required at an
estimated cost of $15,000, should it be deemed that the claricone clarifier will
be necessary for future operations. Since the date of the acquisition,
approximately $400,000 has been spent refurbishing the vanadium circuit, which
is expected to be fully restored by mid 1998.
TAILINGS
Synthetic lined cells are used to contain tailings and, in one case, solutions
for evaporation. Currently there is sufficient volume available for another
500,000 tons of tailings solids. Thereafter, an additional cell will be needed,
at a cost of approximately $2.5 million.
The current license for the Mill permits that a total of three forty-acre
tailings cells may be added. Each additional tailings cell can accommodate
approximately two million tons of tailings, for a total of nine years of
operation at 2,000 tons per day.
Difficulties have been encountered with leaking seams in the liner for Cell #4A.
This cell contains no tailings at present, and leaking is due to working of the
liner by thermal stress, since it is exposed to full sunlight. The cell must be
relined with a better quality material before using it to deposit tailings. The
Registrant estimates an expenditure of $1.5 million for this purpose.
18
<PAGE> 19
REQUIRED CAPITAL EXPENDITURES
Four significant capital projects are anticipated over the next three years with
respect to operation of the White Mesa Mill:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
ITEM ESTIMATED COSTS
- --------------------------------------------------------------------------------
Vanadium circuit refurbishing * $460,000
- --------------------------------------------------------------------------------
Modifications to allow operation at reduced tonnage 100,000
- --------------------------------------------------------------------------------
Tailings Cell #4A reline 1,500,000
- --------------------------------------------------------------------------------
Additional tailings cell 2,500,000
- --------------------------------------------------------------------------------
TOTAL $4,560,000
================================================================================
</TABLE>
* To date, approximately $400,000 has been spent in connection with refurbishing
the vanadium circuit.
RECENT OPERATIONS
Since January of 1995 the White Mesa Mill has completed three campaigns: the
processing in 1995 and 1996 of approximately 200,000 tons of stockpiled ore,
mainly from the Arizona Strip; the processing in 1996 of an alternate feed
source, and the processing in 1997 of three alternate feed sources. The
Registrant is currently processing an additional alternate feed source in 1998,
in another campaign.
OPERATION AT REDUCED CAPACITY
Nameplate capacities of the Mill are 2000 tons per day of ore, which would yield
6 million pounds uranium per year from Arizona Strip ore or 3-1/2 million pounds
per year of uranium and up to 18 million pounds per year of vanadium from
Colorado Plateau ores. The Mill in its current 2,000 tons per day design
capacity is oversized for the foreseeable tonnages expected over the next few
years. The Mill is currently only capable of milling ore at its full design
capacity. The larger the capacity, the larger the interval between Mill runs, as
ore is stockpiled to provide adequate millfeed.
The Registrant proposes to bring the White Mesa Mill into production at a
reduced effective capacity of approximately 750 tons per day. (1050 tons per
day, operating 5 of 7 days per week). This will allow the Mill to be run more
frequently and will reduce the amount of time that ore is stockpiled waiting for
processing. However, the unit cost of milling ore increases as the capacity of
the Mill is reduced.
Running at a lower tonnage is possible if relatively minor modifications are
made to the Mill. The Registrant estimates that the capital expenditure required
to reduce the capacity of the Mill is approximately $100,000, and that the
capital expenditures required to increase capacity at a later date, should that
alternative become economically attractive, are approximately the same.
Approximately one half of this amount has been spent in preparation for
alternate feed processing in 1998.
CLOSURE
THE FOLLOWING DISCUSSION OF THE REGISTRANT'S CURRENT PLANS FOR THE FUTURE
OPERATION OF THE MILL CONSTITUTES FORWARD LOOKING STATEMENTS WITHIN THE MEANING
OF FEDERAL SECURITIES LAWS. SEE "SPECIAL NOTE REGARDING FORWARD LOOKING
STATEMENTS."
The Registrant currently plans to operate the Mill continuously to process
conventional ores and/or alternate feed ores except for planned temporary shut
downs in between mill runs. As mentioned above, based on the Registrant's
current tailings capacity and planned construction of future tailings cells, the
Registrant currently anticipates operating the mill for at least nine (9) years
subject to unanticipated business and/or regulatory changes. In the future,
should the Registrant choose to shut down and close the Mill, it would be
subject to certain closure costs. The estimate of closure costs for the Mill was
revised by the Registrant after discussion with the NRC and reviewing costs for
demolition. The current estimated closure costs are summarized as follows:
19
<PAGE> 20
WHITE MESA MILL CLOSURE COSTS
<TABLE>
<CAPTION>
CATEGORY
- --------
<S> <C>
Mill dismantling and decommissioning(1) $ 1,438,636
Cover tailings cell #2(2) 1,674,447
Cover tailings cell #3(2) 2,107,991
Cover tailings cell #4A(2)(4) 304,819
Cover tailings cell #1(2) 1,663,119
Miscellaneous - management, hygiene, radiation, etc. 1,395,372
------------
Direct Costs 8,584,384
Contractors' Profit @ 10% 858,438
Contingency @ 15% 1,287,244
Licensing and bonding 171,976
Long term care fund 567,417
------------
TOTAL ESTIMATED COSTS $ 11,469,459(3)
------------
</TABLE>
(1) In the S2MS report, S2MS was asked to review the cost estimates for the
reclamation of the Mill. As a check, S2MS determined that this equates to
35,000 hours @ $40/hour which S2MS concluded should be sufficient for
this work. S2MS concluded that some equipment could be salvaged and
resold, for example the grinding mill and drive, agitators, gearboxes,
etc. S2MS concluded that as much as $1 million could be realized,
although this has not been included.
(2) The tailings cells are filled up to a 5 foot freeboard then the walls are
"contoured" and the cell contents covered with four layers of material- a
4 foot random fill, then a 2 foot clay cover (to stop radon emission),
then another 2 feet of random fill, and finally a 2 inch top cover of
crushed and compacted rock. The last layer is meant to prevent
re-vegetation on the surface that root action might open as a pathway for
radon emission.
The closure plan would involve transfer of solution from Cell #4A to Cell
#3, followed by sediment and the plastic lining. Cell #2 is already
nearly covered; Cell #3 is partially covered.
(3) The total estimated reclamation costs are bonded. The Registrant has
posted security in the amount of 65% of the bond amount. See "White Mesa
Mill - Reclamation Bond".
(4) The cost estimate for reclaiming tailings Cell #4A assumes that no
tailings sands are deposited in Cell #4A. Tailings sands are expected to
be deposited in to Cell #4A in the second year of operations. Once
tailings sands are deposited in tailings Cell #4A, the reclamation cost
of that cell will be approximately $2 million.
SEQUENTIAL RECLAMATION
Under the Mill's NRC permit, the Mill is only allowed to have two tailings cells
open at any one time. Prior to depositing tailings in to Cell #4A, the
Registrant intends to close tailings Cell #2 and commence reclamation of Cell #2
for approximately $1,675,000. This will allow tailings Cell #4A to be opened.
The result is that the total cost of reclamation at any one time, and hence the
amount of the bond required, is not expected to increase as Cell #4A is brought
into use.
As each pond, or cell, is filled with tailings, the water is drawn off and
pumped to the evaporation pond and the sands allowed to dry. As each cell
reaches final capacity, reclamation will begin with placement of 6 to 8 feet of
clay and rock over the tailings. Additional cells are excavated into the ground,
and the overburden is used to reclaim previous cells. In this way there is an
ongoing reclamation process, and the total cost of reclamation at any point in
time is not expected to increase significantly over the amounts set out in the
table above, other than due to inflationary factors.
20
<PAGE> 21
COLORADO PLATEAU DISTRICT
OVERVIEW
The Uravan mineral belt in the Colorado Plateau (the "Colorado Plateau
District") has a lengthy mining history, with the first ore shipment made to
France in 1898. World War II brought increased attention to the uranium ores in
the Uravan area, and by the 1950's this district was one of the world's foremost
producers of both uranium and vanadium. Production continued more or less
uninterrupted until 1984 when low uranium prices forced the closure of all
operations. Production resumed in 1987 but once again ceased in 1990. Total
production from the Union Carbide mines (many of which were later purchased by
Energy Fuels, and hence the Registrant) in the Uravan area is reported at 47
million pounds of U(3)O(8) and 273 million pounds of vanadium, yielding an
overall ratio of V(2)O(5)/U(3)O(8) of 5.79.
EXPLORATION POTENTIAL
The types of uranium reserves found in the Colorado Plateau were deposited as
alluvial fans by braided streams. The shape and size of the ore seams are
extremely variable. As a result, exploration and mining have historically to a
large part involved conducting exploration to find a seam and then merely
following its erratic path, with little additional exploration other than
development drilling in the course of following the seam. This is unlike other
types of mining where ore bodies are almost completely delineated by explorative
drilling prior to mining.
The unusual nature of these ore bodies has therefore traditionally resulted in a
limited amount of resources being dedicated to delineate reserves prior to
mining. Traditionally, there will be some ore reserves that have been delineated
at the beginning of each year, uranium will be mined during the year and
approximately the same amount of reserves will remain delineated at the end of
the year. This pattern has persisted since the 1940's.
21
<PAGE> 22
The following figure shows the mining history from the Union Carbide Properties
on the Colorado Plateau since 1949:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR TONS %GRADE %GRADE POUNDS POUNDS V/U TONS %GRADE %GRADE POUNDS POUNDS V/U
RESERVE V(2)O(5) U(3)O(8) V(2)O(5) U(3)O(8) RATIO MINED V(2)O(5) U(3)O(8) V(2)O(5) U(3)O(8) RATIO
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
1949 DATA NOT AVAILABLE 54,006 1.80 0.36 1,944,210 388,843 5.00
- ------------------------------------------------------------------------------------------------------------------------------
1950 DATA NOT AVAILABLE 74,410 1.83 0.38 2,723,406 565,516 4.32
- ------------------------------------------------------------------------------------------------------------------------------
1951 917,678 DATA NOT AVAILABLE 89,684 1.94 0.39 2,703,739 543,535 4.97
- ------------------------------------------------------------------------------------------------------------------------------
1952 994,000 DATA NOT AVAILABLE 100,693 1.82 0.35 3,665,225 704,851 5.20
- ------------------------------------------------------------------------------------------------------------------------------
1953 1,068,000 DATA NOT AVAILABLE 113,911 1.75 0.35 3,986,885 797,377 5.00
- ------------------------------------------------------------------------------------------------------------------------------
1954 1,267,580 DATA NOT AVAILABLE 91,026 1.80 0.36 3,278,938 655,387 5.00
- ------------------------------------------------------------------------------------------------------------------------------
1955 1,332,870 DATA NOT AVAILABLE 92,056 1.85 0.33 3,037,848 607,570 5.00
- ------------------------------------------------------------------------------------------------------------------------------
1956 1,784,450 DATA NOT AVAILABLE 162,620 1.80 0.32 5,203,840 1,040,765 5.00
- ------------------------------------------------------------------------------------------------------------------------------
1957 2,242,331 DATA NOT AVAILABLE 310,311 1.28 0.25 7,943,952 1,551,555 5.12
- ------------------------------------------------------------------------------------------------------------------------------
1958 2,141,529 1.46 0.26 82,532,647 11,135,951 5.62 371,183 1.37 0.27 10,170,414 2,004,388 5.07
- ------------------------------------------------------------------------------------------------------------------------------
1959 2,048,028 1.40 0.25 57,361,584 10,243,140 5.60 453,258 1.38 0.25 12,509,921 2,266,290 5.52
- ------------------------------------------------------------------------------------------------------------------------------
1960 2,527,850 1.32 0.25 66,735,240 12,639,250 5.28 541,653 1.27 0.24 13,757,966 2,599,934 5.29
- ------------------------------------------------------------------------------------------------------------------------------
1961 2,107,418 1.32 0.25 55,835,835 10,537,090 5.28 488,914 1.33 0.25 12,951,912 2,434,570 5.52
- ------------------------------------------------------------------------------------------------------------------------------
1962 1,904,184 1.33 0.25 50,651,294 9,520,920 5.32 477,716 1.24 0.24 11,847,357 2,293,037 5.17
- ------------------------------------------------------------------------------------------------------------------------------
1963 1,722,478 1.31 0.25 45,128,871 8,612,380 5.24 359,171 1.32 0.23 9,482,114 1,652,187 5.74
- ------------------------------------------------------------------------------------------------------------------------------
1964 1,406,769 1.25 0.25 35,169,225 7,033,845 5.00 270,398 1.43 0.23 7,733,383 1,243,831 6.22
- ------------------------------------------------------------------------------------------------------------------------------
1965 1,359,730 1.33 0.21 36,168,818 5,710,866 6.33 260,250 1.55 0.24 8,067,750 1,249,200 6.46
- ------------------------------------------------------------------------------------------------------------------------------
1966 1,485,000 1.37 0.23 40,690,644 6,831,276 5.96 355,047 1.35 0.22 9,586,269 1,562,207 6.14
- ------------------------------------------------------------------------------------------------------------------------------
1967 1,543,689 1.31 0.22 40,444,652 6,792,232 5.95 286,233 1.22 0.20 6,954,085 1,144,932 6.10
- ------------------------------------------------------------------------------------------------------------------------------
1968 1,007,200 1.32 0.22 26,590,080 4,431,680 6.00 382,738 1.13 0.21 8,649,879 1,607,500 5.38
- ------------------------------------------------------------------------------------------------------------------------------
1969 860,900 1.32 0.21 22,272,760 3,615,780 6.29 354,538 1.18 0.20 8,367,050 1,418,144 5.90
- ------------------------------------------------------------------------------------------------------------------------------
1970 782,900 1.34 0.22 20,961,720 3,444,760 6.09 391,843 1.26 0.20 9,869,404 1,566,572 6.30
- ------------------------------------------------------------------------------------------------------------------------------
1971 639,600 1.50 0.21 19,188,000 2,686,320 7.14 344,048 1.15 0.20 7,913,104 1,376,192 5.75
- ------------------------------------------------------------------------------------------------------------------------------
1972 736,300 1.43 0.19 21,058,180 2,797,940 7.53 184,605 1.30 0.19 4,799,730 701,499 8.84
- ------------------------------------------------------------------------------------------------------------------------------
1973 1,043,285 1.38 0.19 28,794,666 3,964,483 7.26 140,319 1.32 0.19 3,704,422 533,212 8.95
- ------------------------------------------------------------------------------------------------------------------------------
1974 1,210,872 1.34 0.19 32,451,370 4,601,314 7.05 274,136 1.13 0.15 6,195,474 822,408 7.53
- ------------------------------------------------------------------------------------------------------------------------------
1975 1,733,800 1.24 0.19 42,995,240 6,588,440 8.53 297,508 1.22 0.17 7,259,195 1,011,527 7.16
- ------------------------------------------------------------------------------------------------------------------------------
1976 2,274,650 1.24 0.19 56,411,320 8,643,670 8.53 344,414 1.18 0.18 8,128,170 1,239,890 6.56
- ------------------------------------------------------------------------------------------------------------------------------
1977 2,433,550 1.24 0.20 60,352,040 9,734,200 8.20 413,979 1.09 0.17 9,024,742 1,407,529 6.41
- ------------------------------------------------------------------------------------------------------------------------------
1978 2,489,125 1.15 0.20 57,249,875 9,958,500 5.75 407,350 1.09 0.17 8,880,230 1,384,990 6.41
- ------------------------------------------------------------------------------------------------------------------------------
1979 2,935,550 1.08 0.19 62,233,660 11,155,090 5.58 440,238 1.00 0.16 8,804,720 1,408,755 6.25
- ------------------------------------------------------------------------------------------------------------------------------
1980 3,099,600 1.07 0.19 66,331,440 11,778,480 5.63 446,071 1.03 0.17 9,230,263 1,523,441 6.06
- ------------------------------------------------------------------------------------------------------------------------------
1981 2,967,600 1.07 0.19 63,934,640 11,352,880 5.63 325,266 1.06 0.18 7,025,746 1,170,958 6.00
- ------------------------------------------------------------------------------------------------------------------------------
1982 2,949,500 1.07 0.19 63,119,300 11,208,100 5.63 299,638 1.02 0.18 6,112,615 1,078,697 5.67
- ------------------------------------------------------------------------------------------------------------------------------
1983 2,842,300 1.07 0.19 60,825,220 10,800,740 5.63 167,260 1.02 0.18 3,412,104 802,136 5.67
- ------------------------------------------------------------------------------------------------------------------------------
1984 3,466,000 1.07 0.19 74,172,400 13,170,800 5.63 31,812 1.02 0.17 712,589 106,161 8.59
- ------------------------------------------------------------------------------------------------------------------------------
1985 3,470,750 1.07 0.19 74,274,050 13,188,850 5.63 NO MINING
- ------------------------------------------------------------------------------------------------------------------------------
1986 3,491,550 1.07 0.19 74,719,170 13,267,890 5.63 NO MINING
- ------------------------------------------------------------------------------------------------------------------------------
1987 3,519,625 1.06 0.19 74,636,235 13,342,685 5.59 71,693 1.44 0.25 2,203,763 398,131 5.54
- ------------------------------------------------------------------------------------------------------------------------------
1988 4,450,275 1.11 0.20 98,934,965 17,714,275 5.59 154,868 1.47 0.26 4,553,465 795,003 5.73
- ------------------------------------------------------------------------------------------------------------------------------
1989 3,929,000 1.16 0.22 92,880,760 17,006,540 5.46 235,476 1.42 0.23 6,869,526 1,075,941 6.20
- ------------------------------------------------------------------------------------------------------------------------------
1990 3,798,200 1.16 0.22 88,280,920 16,427,180 5.37 180,927 1.41 0.23 4,552,312 733,384 6.21
- ------------------------------------------------------------------------------------------------------------------------------
1991 3,993,700 1.17 0.22 93,393,860 17,186,760 5.43 NO MINING
- ------------------------------------------------------------------------------------------------------------------------------
1992 3,785,000 1.16 0.22 88,047,960 18,395,340 5.37 NO MINING
- ------------------------------------------------------------------------------------------------------------------------------
1993 3,575,600 1.16 0.22 82,943,220 15,537,900 5.34 NO MINING
- ------------------------------------------------------------------------------------------------------------------------------
1994 DATA NOT AVAILABLE
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
Mining stopped on the Colorado Plateau in 1990 as a result of low uranium and
vanadium prices and not as a result of the depletion of reserves.
Based on this history of production from the Colorado Plateau, the Registrant
believes that the potential to continue this pattern of production exists for
many years to come and that additional reserves will be delineated each year as
mining continues.
Presently 1.3 million pounds of mineable reserves of uranium and 10.3 million
pounds of additional geological mineral deposits of uranium have been identified
by the Registrant. The Registrant has also identified 10.5 million pounds of
mineable reserves of vanadium and 55 million pounds of additional mineral
deposits of vanadium. In addition, the Registrant has identified several
previously unexplored prospective areas in the Colorado Plateau between existing
mines.
GEOLOGY
The Registrant's properties on this geographic area are typical uranium-vanadium
deposits of the Colorado Plateau type located in the southern end of the Uravan
mineral belt. The rocks of the Colorado Plateau are predominately sedimentary
ranging in age from Precambrian to Tertiary and, although uranium mineralization
occurs in sediments of different ages, the most important deposits of the Uravan
belt occur in the Salt Wash Member of the Jurassic Morrison Formation.
The Salt Wash Member consists of light gray to light brown sandstones
interbedded with red-green siltstones and mudstones. The sandstones, which are
generally fine-grained and well to moderately sorted, are considered to have
been deposited as alluvial fans by braided streams. The mineralization occurs in
the lenticular sandstone deposits as tabular, elongate bodies generally parallel
to the bedding following the palaeo-channels. All of the large deposits within
the Morrison Formation are in the upper sandstone lens of the Salt Wash Member,
commonly known as the third rim. Fine-grained uraninite is the dominant uranium
mineral accompanied by lesser amounts of coffinite. The chief vanadium mineral
is nontrosite. In the oxidized parts of the deposits the distinctive yellow
coloured uranyl-vanadate mineral, carnotite, is common.
Individual deposits are small, varying in length from a few hundred to several
thousand feet and in width from a hundred to a thousand feet. thicknesses
vary from a few inches to several tens of feet, but generally average between
two to five feet. Mines often contain several such ore bodies. The host
sediments are generally flat lying to low dipping with little structural
deformation.
The Registrant's principal mining complexes on the Colorado Plateau District
consist of the Deer Creek, Monogram, Thunderbolt, Sunday, Egnar Plains and East
Canyon (Rim) zones.
The Registrant has also established a central office, maintenance shop, and
equipment storage facility at Dove Creek, Colorado approximately 60 miles south
of the Sunday Mine Complex. This facility is used for major repair work such as
overhauls and is centrally located to serve several widely spaced mines.
The bulk of the reserves and mineral deposits and the nearest term mining
potential in the Colorado Plateau District are contained in three areas, the
Sunday Mine Complex, the Deer Creek complex, which includes the La Sal and
Pandora, mines and the East Canyon Area, which includes the Rim Mine, all of
these areas have developed, permitted mines, with the Sunday and Rim Mines
currently in production. Production at certain other mines in these areas could
be resumed on relatively short notice. Given the limited time available, only
the Sunday Mine Complex, which is currently in production, was examined by S2MS.
See "Sunday Mine Complex". Since the Acquisition, given the current high prices
of V(2)O(5), the Registrant has elected to bring the Rim Mine into production.
The Rim Mine has a high ratio of V(2)O(5) to U(3)O(8). See "Rim Mine".
23
<PAGE> 24
SUNDAY MINE COMPLEX
OVERVIEW
The Sunday Mine Complex is located in the Colorado Plateau District of Colorado
approximately 100 miles by road from the White Mesa Mill. Access is by state
highway and county roads.
The Sunday Mine Complex is comprised of the Sunday, West Sunday, Carnation,
Topaz, Le May and Leonard Clark zones which are contiguous or near contiguous
partially worked mines and virgin exploration areas.
The Sunday Mine Complex is held by the Registrant under a large number of 1,500
feet x 600 feet rectangular standard BLM mining claims, some of which were owned
outright and some of which were purchased or leased from former holders and are
subject to various NSR royalty agreements.
The Sunday Mine Complex is one of several mining areas owned by the Registrant
in the Colorado Plateau District. See "Colorado Plateau District".
PERMITTING
The Sunday Mine Complex is permitted for mining. However, recent changes in
Colorado laws gives the Colorado state authorities the right to require mines
such as the Sunday Mine Complex in certain circumstances to submit a revised
Environmental Protection Plan for approval when mining activities are
re-initiated. See "Permitting". Mining activities have commenced at the Sunday
Mine Complex and as of the filing date the Registrant has not been notified of
any additional permitting requirements.
GEOLOGICAL MINERAL DEPOSITS
The geological mineral deposits of the Sunday Mine Complex, calculated by the
Registrant, are 845,400 tons grading approximately 0.21% U(3)O(8) and
approximately 1.40% V(2)O(5) resulting in 3,493,700 pounds of U(3)O(8) and
23,612,300 pounds of V(2)O(5).
Prior to the acquisition of the Energy Fuels assets, the Registrant asked S2MS
to evaluate the Sunday Mine Complex ore reserve estimates. Due to time
constraints, an assessment of the reserve by S2MS focused on the West Sunday
area and new areas immediately available to new development from the West Sunday
workings. These are the Le May zone, Leonard Clark zone and West Sunday zone
itself. In addition, S2MS spent some time attempting to verify the mineral
deposit estimate for the Sunday and Carnation zones but found that there was not
sufficient data to verify all these mineral deposits, in the time available.
The final probable mineral deposits for the Sunday Mine Complex zones calculated
by S2MS, including approximately 50,000 tons from the Carnation zone, were
318,190 tons grading approximately 0.25% U(3)O(8) and approximately 1.69%
V(2)O(5) resulting in 1,594,690 pounds of U(3)O(8) and 10,682,050 pounds of
V(2)O(5).
The overall total for the Le May, Leonard Clark and West Sunday zones compares
with 235,000 tons grading 0.24% U(3)O(8) quoted for the same areas by Energy
Fuels which makes the S2MS estimate 14% higher in tons and 19% higher in
contained pounds of U(3)O(8). As a result, S2MS has concluded that the estimates
made by Energy Fuels for these areas were slightly conservative and are
realistic numbers for planning future mining operations.
SUNDAY MINE COMPLEX - MINING
MINEABLE RESERVES
The Registrant's ore reserve for the Sunday Mine Complex includes a total of
845,400 tons at 1.40% V(2)O(5) and 0.21% U(3)O(8). As discussed above, only a
portion of the reserve areas addressed in that statement were independently
verified by S2MS and included in the S2MS Report. Based on the mineral deposits
that S2MS was able to verify with the available data, mineable ore reserves as
calculated by S2MS were 221,579 tons grading approximately 0.24% U(3)O(8) and
approximately 1.67% V(2)O(5), resulting in 1,070,124 pounds of U(3)O(8) and
7,393,822 pounds of V(2)O(5).
24
<PAGE> 25
MINE DEVELOPMENT
The Sunday Mine Complex is accessed by a number of declines from surface. The
declines grade at approximately minus 12% and are collared in the valley wall
and generally follow the ore zones down, which dip at about 11 degrees. The
valley rises up steeply over the ore zones such that at the top of the valley
wall the ore is some 800 feet below surface.
Originally each of the mines in the Sunday Mine Complex were developed as
separate stand alone mines, but now they have been joined together by drifts
such that they can be considered as one extensive mine.
The Sunday Mine Complex is an operating mine and as such has all the necessary
facilities required for operations. Adjacent to the West Sunday portal is a
building containing a single bay maintenance shop, change room, office and small
warehouse. A second building houses a compressor. Water, electricity, and other
services are all installed. At the Sunday portal one building houses a four bay
maintenance shop and a second building provides a change room and offices. There
are several other utility buildings as well at this site. As the Sunday Mine was
operated as a separate mine it is set up as a stand-alone facility with all the
required services installed.
An additional building housing a compressor is located on the hill above the
West Sunday. A number of ventilation fans remain installed on the collar of
ventilation raises.
Additional access and ventilation development is required for mining of certain
ore zones. A 2,400-foot long drift from the Topaz to the Le May zone is being
driven and a new 700-foot long vertical borehole to surface would be bored to
supply ventilation to the zone. To further develop the West Sunday ore, 600 feet
of additional drifting is required to connect the upper and lower West Sunday
ore zones.
MINING METHODS
The mining method is random room and pillar in which no set pillar pattern is
established but rather both the sizes of the rooms and the pillars is left up to
the operators on a day to day basis. Whenever possible, pillars would be left in
waste or low-grade areas. A typical room is about 20 feet wide with pillars as
small as 12 feet square in highly mined areas.
Because of the limited height of the ore, mining must necessarily be quite
selective in order to maintain a satisfactory production grade. This is done by
following the ore zones closely and by the technique of "split shooting" wherein
the ore and waste are blasted separately in a two-stage operation.
Miners are generally organized into small production teams, each operating in a
different area of the mine. Drilling is carried out by hand held jacklegs. Each
drill crew is assigned a vehicle equipped with a full set of gear for drilling
so that location changes can be made quickly and efficiently. Mucking is
accomplished by one or two cubic yard scooptrams loading ore or waste into 8 or
10 ton trucks for haulage to surface. Ore is dumped in a stockpile near the
portal collar.
The surface truck haulage contractor is responsible for loading his own trucks
as well as hauling the ore to the Mill near Blanding, Utah.
PRODUCTION FORECAST AND SCHEDULE
Based on 200 tons per day for a five-day week and 250 working days per year, an
annual production rate of 50,000 tons or 230,000 pounds of recoverable uranium
and 1.3 million pounds of recoverable vanadium is considered by the Registrant
to be reasonable.
The Registrant began actual ore production from the Sunday Mine Complex in
November of 1997 after several months of mine dewatering and general
refurbishment. The Registrant also began refurbishment of the old Topaz decling,
and driving new decline toward the LeMay orebody. As of the end of April 1998,
the Registrant had produced 16,084 tons of ore.
25
<PAGE> 26
OPERATING COSTS
The Registrant based on experience and expected vanadium prices estimates that
its total mining and milling costs will be in the range of $9.00 to $12.50 per
lb. of uranium produced from the Sunday Mine Complex.
The Registrant is evaluating options to contract out a portion of the east end
of the Sunday Mine Complex (the GMG area) to an independent contractor. The
approach would be an all-inclusive one in which the contractor would be
responsible for all mining activities and support services. The contractor would
pay for power, fuel, maintenance of all equipment and buildings, roads, as well
as direct mining costs. The Registrant would compensate the contractor by paying
the contractor for tons of ore delivered at the White Mesa Mill. To encourage
good grade control, the mining contract would be set up to pay a premium for
increasing ore grade relative to the reserve grade. The payment basis would be
recalculated monthly based on the current market prices of uranium and vanadium.
The contractor would assume all risk for profit and loss based on his ability to
maintain profitable quantities and grades of ore from a mostly depleted reserve
area.
PURCHASED ORE
In order to supplement its own mining operations and production, the Registrant
has entered into agreements with other independent miners in the Colorado
Plateau region to purchase their ore based on a schedule which takes into
account the U(3)O(8) and V(2)O(5) content of the ore, current market prices, and
appropriate discounts for milling costs and profits. It is anticipated that
these purchase prices will compare favorably with the company's own mining costs
for similar ore.
RIM MINE
OVERVIEW
The Rim Mine is located in the Colorado Plateau District of Utah approximately
60 miles by road from the White Mesa Mill. Access is by state highway and county
roads.
The Rim Mine is comprised of the Rim, Cressler, Columbus, and Humbug claims,
which are contiguous or near contiguous partially worked mines and virgin
exploration areas.
The Rim Mine is held by the Registrant under a large number of 1,500 feet x 600
feet rectangular standard load mining claims, some of which are owned outright
and some of which are leased and are subject to various royalty agreements.
The Rim Mine is one of several mining areas owned by the Registrant in the
Colorado Plateau District. See "Colorado Plateau District ".
PERMITTING
The Rim Mine is permitted for mining by the State of Utah Division of Oil, Gas
and Mining. The Mine has a current Utah NPDES (National Pollution Discharge
Elimination System) Permit allowing for treatment and discharge of excess mine
water.
GEOLOGICAL MINERAL DEPOSITS
The mineral deposits of the Rim Mine, calculated by the Registrant, are 108,000
tons grading approximately 0.18% U(3)O(8) and approximately 1.72% V(2)O(5)
resulting in approximately 394,800 pounds of U(3)O(8) and approximately
3,712,400 pounds of V(2)O(5). The Registrant projects an additional 40,000 tons
of probable ore reserves based on geologic favorability and nearness to the
known orebody at the Rim Mine. These probable reserves contain 152,000 pounds of
U(3)O(8) and 1,528,000 pounds of V(2)O(5) at grades of 0.19% U(3)O(8) and 1.91%
V(2)O(5).
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MINEABLE RESERVES
The Registrant's ore reserve for the Rim Mine includes a total of 100,000 tons
at 0.182% U(3)O(8) and 1.73% V(2)O(5) resulting in 364,000 pounds of U(3)O(8)
and 3,460,000 pounds of V(2)O(5).
MINE DEVELOPMENT
The Rim Mine is accessed by a single vertical shaft, 500 feet in depth, and a
decline from the adjacent canyon wall. The decline grades at approximately minus
6%, and is collared in the valley wall and generally follows the ore zones down.
The Rim Mine was an operating mine when it was shut down in 1990. The Registrant
re-commenced mining activities in early 1998. Adjacent to the shaft is a small
building containing a single bay maintenance shop, change room, office and small
warehouse. A second building houses a compressor. Water, electricity, and other
services are all installed. At the Rim portal only basic surface facilities are
in place. The mine plan calls for ventilation and mine dewatering to be
facilitated through the vertical shaft and for all mine waste and ore removal to
take place through the decline. The mine was allowed to flood after it was shut
down in 1990, and consequently required a significant amount of cleanout and
repair prior to mining.
MINING METHODS
The mining method is random room and pillar in which no set pillar pattern is
established but rather both the sizes of the rooms and the pillars are left up
to the operators on a day by day basis. Whenever possible, pillars are left in
waste or low-grade areas. A typical room is about 20 feet wide with pillars as
small as 12 feet square in highly mined areas.
Because of the limited height of the ore, mining must necessarily be quite
selective in order to maintain a satisfactory production grade. This is done by
following the ore zones closely and by the technique of "split shooting" wherein
the ore and waste are blasted separately in a two-stage operation.
The Rim mine is being operated as a contract mine. The contractor is responsible
for all mining activities and support services. The contractor is operating the
mine and pays for power, fuel, maintenance of all equipment and buildings,
roads, as well as direct mining costs. The Registrant compensates the contractor
by paying the contractor for tons of ore delivered at the White Mesa Mill. To
encourage good grade control, the mining contract has been set up to pay a
premium for increasing ore grade relative to the reserve grade. The payment
basis is recalculated monthly based on the current market prices of uranium and
vanadium. The contractor has assumed all risk for profit and loss based on his
ability to maintain profitable quantities and grades of ore from the current
reserve area. The contractor is responsible for haulage of the ore to the Mill
near Blanding, Utah, as part of the per ton contract rate. Based on the current
payment schedule and current market prices, the Registrant is estimating a
production cost similar to that of the Registrant's own mining operations.
PRODUCTION FORECAST AND SCHEDULE
Based on 75-100 tons per day for a five-day week and 250 working days per year,
an annual production rate of 18,750-25,000 tons or 65,500-87,300 pounds of
recoverable uranium and 506,000-675,000 pounds of recoverable vanadium is
considered by the Registrant to be reasonable.
The Registrant began actual ore production from the Rim Mine in January of 1998
after three months of mine dewatering and general refurbishment. As of the end
of April 1998, the contractor had produced 990 tons of ore, primarily from
cleanup and development work.
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<PAGE> 28
ARIZONA STRIP
OVERVIEW
The Arizona Strip is an area bounded on the north by the Arizona/Utah state
line; on the east by the Colorado River and Marble Canyon; on the West by the
Grand Wash cliffs; and on the south by a mid-point between the city of Flagstaff
and the Grand Canyon. The area encompasses approximately 13,000 square miles.
The Arizona Strip is separate and distinct from the Colorado Plateau District.
The two mining districts are located approximately 200 air miles (310 road
miles) apart and have been historically administered as two separate mining
camps.
The Registrant owns a number of permitted mines on standby, partially developed
mines, known deposits and well developed prospects in the Arizona Strip.
Since 1980, when mine development first began at Hack Canyon II, the Arizona
Strip has produced in excess of 19 million pounds of uranium, averaging 0.65%
U(3)O(8) from seven mines, each of which was owned and operated by Energy Fuels.
Of these mines, Hack Canyon I, II, and III and Pigeon are mined out and have
been reclaimed; Hermit is partially reclaimed; Pinenut, Kanab North, Canyon and
Arizona 1 have remaining reserves and have been placed on a standby basis.
The following table summarizes Energy Fuels' mining history from the Arizona
Strip:
<TABLE>
- ---------------------------------------------------------------------------------------------------------------
MINE NAME PRODUCTION PERIOD TONS MINED GRADE TOTAL
(% U(3)O(8)) (lbs U(3)O(8))
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Hack Canyon I 1981 - 1987 133,822 0.530 1,419,623
- ---------------------------------------------------------------------------------------------------------------
Hack Canyon II 1980 - 1987 497,099 0.704 7,000,273
- ---------------------------------------------------------------------------------------------------------------
Hack Canyon III 1981 - 1987 111,263 0.504 1,121,748
- ---------------------------------------------------------------------------------------------------------------
Pigeon 1985 - 1990 406,794 0.643 5,651,862
- ---------------------------------------------------------------------------------------------------------------
Kanab North(1) 1988 - 1991 260,818 0.531 2,767,570
- ---------------------------------------------------------------------------------------------------------------
Pinenut(1) 1988 25,807 1.020 526,350
- ---------------------------------------------------------------------------------------------------------------
Hermit 1989 - 1990 36,339 0.760 552,449
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
TOTAL 1,471,942 0.647 19,039,875
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) These deposits have remaining ore reserves
Currently the Registrant has four mines in the Arizona Strip district, all of
which are permitted and have identified mineral reserves remaining. These are
the Kanab North, Pinenut, Arizona 1, and the Canyon. Due to time constraint only
two mines; the Arizona 1 and Canyon, are parts of the S2MS Report.
There are a central office, maintenance shop, and equipment storage facility at
Fredonia, Arizona to service the Arizona Strip mines. Fredonia is located north
of the Grand Canyon and approximately 45 miles from the Arizona 1 Mine. The
Canyon Mine is approximately 80 miles directly south of the Fredonia facility
but due to the Grand Canyon, the mine is over 200 road miles away, accessed via
highway 180.
Ore from both mines can be hauled by truck from the mine site to the White Mesa
Mill. The Arizona 1 Mine is 307 road miles and the Canyon Mine is 316 road miles
from the Mill.
DEVELOPMENT SEQUENCE IN THE ARIZONA STRIP
The ore zones occur in collapsed breccia pipes and range from 1,000 to 1,800
feet below surface with a vertical extent of up to 600 feet thick. Each of the
mines in the Arizona Strip consists of one breccia pipe. The pipes typically are
200 to 400 feet in diameter. Within this envelope the ore can be at times
massive but often is irregular and discontinuous. Some ore has also been mined
in "ring fractures" just outside the limits of the pipes.
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<PAGE> 29
Definition of the ore reserve for these breccia pipe uranium ore bodies is, by
necessity a two stage process. Drilling from the surface provides the initial
data of depth, thickness and grade of ore intercepts determined by downhole
natural gamma logging. Depending on the diameter of the pipe, which ranges from
200 to 400 feet, as many as 40 surface holes, controlled to minimize drift, are
completed, logged and drift surveyed.
From this surface drill data, computed proven, probable and possible reserves
are utilized for the decision as to whether or not the sinking of a shaft is
feasible.
A 1,000 to 1,600 foot deep shaft is generally required to access the deposits.
In the case of the Hack Canyon I, II, and III mines, access was obtained through
declines driven from nearby canyons. The average cost for sinking a shaft is
approximately $1,900 per foot.
Once the shaft sinking commences and stations are cut, the second phase of
reserve definition commences. Arrays of long holes and diamond core holes are
completed from the stations cut as the shaft sinking continues to total depth.
From natural gamma logs of the long holes and core holes, integrated and
correlated with the surface drill data, a final proven reserve is computed and
is regarded as the final feasibility study reserve.
In the case of the Arizona 1 Mine where the shaft is completed, the requisite
long hole and core drilling, ore definition is complete. The generated ore
reserve for Arizona 1 is therefore regarded as proven.
The Canyon Mine shaft is not complete, necessitating ore definition from surface
drilling only, yielding reserves characterized as proven, probable and possible.
Based on past experience, Energy Fuels projected that a significant amount of
further reserves would be delineated once underground drilling is completed.
An Energy Fuels feasibility study dated January 15, 1996 for Canyon Mine
attributed a feasibility reserve of 3,094,000 pounds U(3)O(8) contained in
182,000 ore tons at 0.850% (e)U(3)O(8). S2MS supports only about 2/3 of this in
its current reserve assessment. However, in the S2MS Report, S2MS notes that a
portion of the Canyon Mine breccia pipe has not been evaluated/drilled from the
surface and underground drilling has not been conducted. S2MS also notes that
Energy Fuels stated that it is realistic to expect that "fracture/ring ore" will
be discovered and that the calculated reserve will be extended to the 3 million
pound reserve used in the above cited Energy Fuels feasibility study.
Typically, the life cycle of an Arizona Strip mine is approximately eight years.
The permitting process takes approximately one to two years. The average mine
development and mining phase takes approximately five years, and the average
decommissioning reclamation period is less than one year.
HISTORIC MINING METHODS
The ore zones are quite irregular in shape and can vary from large areas several
hundreds of feet high and wide to small lenses and discontinuous pods. As a
consequence, combinations of mining methods are used to mine the breccia pipe
ore.
Blasthole or slot mining is used to mine the larger zones. The smaller irregular
pods are mined with conventional methods, which include random room and pillar,
shrinkage, and open stoping. Following mining, all the stopes are left open with
no backfilling.
To develop a mine, four or five shaft stations spaced 200 feet apart are
excavated and drifts driven from them to establish the main production levels.
Raises are driven between the levels for ventilation and ore/waste transfer. A
ventilation supply incline is driven around the ore body as a slusher ramp.
Sublevels are driven from the incline at vertical spacings to provide access for
initial stope/slot development and conventional mining.
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<PAGE> 30
BACKGROUND GEOLOGY
Breccia pipes are collapse features engendered by cavern dissolution in the
Redwall Limestone, some 3,000 feet below present day surface. Overlying
sediments fracture as the cavern size increases and ultimately collapse forming
a pipe-like structure, which is filled with the rubble of the sediments. Uranium
mineralization occurs in this brecciated rock, forming deposits 200 to 400 feet
in diameter, some 600 feet thick at depths up to 1,800 feet.
Uranium ore is hosted by the breccia in a sand, silt, and clay matrix. The
principal uranium mineral, pitchblende, occurs primarily in the matrix, filling
voids between sand grains and replacing rock fragments. Pyrite is the principal
gangue mineral. Calcite and gypsum are common cementing minerals. Copper, lead
and zinc minerals may also be present.
Nearly always, the pipe is haloed by alteration or a zone of bleaching resulting
from the partial removal of red iron minerals from formations surrounding the
pipe. "Ring fractures" are often seen at the pipe margins. These fractures may
also be an important host for associated mineralization and ore reserves.
EXPLORATION POTENTIAL
Since 1980, Energy Fuels developed nine mine projects from which seven mines
produced a total of 19 million pounds of uranium, or approximately 2.7 million
pounds of uranium per mine.
Energy Fuels conducted an extensive exploration program in the Arizona Strip.
Since 1980, Energy Fuels identified in excess of 1,300 breccia pipe targets. Of
these, Energy Fuels drilled at least one hole on 140 breccia pipe targets, of
which 62 were verified to be breccia pipes, and identified mineralization in 42
of these. Subsequently all of these 42 breccia pipes were acquired by the
Registrant.
Energy Fuels targeted 32 mineralized breccia pipes for further exploration, and
based on past experience believed that these pipes could have a potential
reserve of 40 million pounds of uranium.
S2MS concluded that several up-side elements exist for the identification of
additional reserves in the Arizona Strip. They were:
1. Energy Fuels' observation that portions of the Canyon Mine pipe was not
explored by the surface drilling. These untested areas must be accorded
potential for hosting additional reserves. That potential could not be
quantified by S2MS.
2. The shaft into Arizona 1 was stopped 400 feet short of design depth. Thus,
planned underground delineation drilling stations designed to test that
lower portion of the pipe were not available. That portion of Arizona 1
must also be accorded potential for hosting additional ore. This potential
could not be quantified by S2MS.
3. Energy Fuels' forecast that potentially in excess of 40 million pounds
U(3)O(8) could exist in several undeveloped deposits in the area. S2MS did
not review this potential.
S2MS concluded that no specific discernible downside elements were obvious other
than the risks that are a normal part of underground mining ventures.
ARIZONA 1 MINE
LOCATION AND ACCESS
The Arizona 1 Mine is located approximately 45 miles south of Fredonia, Arizona.
Access is by state highway connecting to a well-maintained gravel road. The
project area encompasses 14.7 acres.
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<PAGE> 31
MINEABLE RESERVES
The geological mineral deposits are 119,500 tons at a grade of 0.545% U(3)O(8).
The mineable reserves accepted by S2MS are lower in tons than the mineral
deposits, as certain zones below the incremental cutoff grade have been excluded
from the mining plan.
Estimated mineable diluted recoverable ore reserves for Arizona 1 are shown by
S2MS as 80,085 tons grading approximately 0.651% U(3)O(8) resulting in 1,043,149
pounds of U(3)O(8).
PERMITTING
The Arizona 1 Mine is fully permitted for mining.
EXISTING MINE FACILITIES
Site construction for the Arizona 1 Mine began in March 1990. Work was suspended
and the project put on standby status in March 1992. The site is fully developed
to support the resumption of production except for minor repairs.
The shaft has been sunk to a depth of 1,254 feet. The shaft was 400 feet from
the ultimate planned depth when sinking was curtailed.
PRODUCTION FORECAST
Based on 150 tons per day for a five-day week and 250 working days per year, an
annual production rate of 37,500 tons or 449,190 pounds of recoverable uranium
should be achieved.
MINING SCHEDULE
The Registrant has developed a preliminary schedule for development of the
Arizona 1 Mine. Under this schedule, production commences 8.5 months following
the commencement of mobilization. Production continues for 28 months followed by
6 months of demobilization and reclamation.
CAPITAL COSTS
The total remaining pre-production capital costs for the Arizona 1 Mine have
been estimated by the Registrant to be approximately $2,100,000.
OPERATING COSTS
The Registrant estimates that its total mining and milling costs will be in the
range of $9.00 - $12.00 per lb. of U(3)O(8) produced.
CANYON MINE
LOCATION AND ACCESS
The Canyon Mine is located 13 miles south of the Grand Canyon, two miles off
highway 180.
MINEABLE RESERVES
The mineral deposits are 129,000 tons in the proven and probable category at a
grade of 0.801% U(3)O(8). All reserves are estimated from 24 near vertical holes
drilled from the surface.
Mineable, diluted, recoverable ore reserves were estimated by S2MS as 108,168
tons grading approximately 0.902% U(3)O(8) resulting in 1,950,948 pounds of
U(3)O(8).
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<PAGE> 32
PERMITTING
The Canyon Mine is permitted to commence mining activities, although an Aquifer
Protection Permit is in the process of being obtained. See "Permitting".
EXISTING MINE FACILITIES
The project site encompasses 17.4 acres with the perimeter impounded by an
earthen berm with riprap stone placed along potential erosion locations. The
site is fully developed with full surface facilities for shaft sinking and
mining. The shaft was collared to a depth 53 feet. All the facilities required
to resume shaft sinking are in place. Completion of equipping of the headframe
is still required along with modifying or "debugging" the hoist electrics as
they are outdated. The hoist has to be tested and commissioned under load.
PRODUCTION FORECAST
Based on 275 tons per day for a five-day week and 250 working days per year, an
annual production rate of 68,750 tons or 1,190,000 pounds of recoverable uranium
should be achieved.
MINING SCHEDULE
The Registrant has developed a preliminary schedule for development of the
Canyon Mine. Under this schedule, shaft sinking would resume after a three-month
mobilization and equipping period. Shaft sinking would continue for eight months
followed by another 10 months of underground development. Production would then
commence and continue for at least 19 months followed by six months of
demobilization and reclamation.
CAPITAL COSTS
The remaining pre-production costs estimated by the Registrant to bring the mine
into production are approximately $9,450,000.
OPERATING COSTS
The Registrant estimates that its total mining and milling costs will be in the
range of $9.00-$12.00 per lb. Of U(3)O(8) produced.
PINENUT MINE
LOCATION AND ACCESS
The Pinenut Mine is located approximately 58 miles from Fredonia, Arizona and
approximately 13 road miles from the Arizona 1 Mine. Access is by state highway
and well-maintained gravel road. The mine is 317 miles from the White Mesa Mill.
The shaft is complete to 1,380 feet and 25,807 tons at 1.02% uranium have
already been mined and 526,350 pounds of uranium produced. Pinenut is permitted.
The current reserve according to the Registrant is:
PINENUT POTENTIAL MINERAL DEPOSITS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
CATEGORY MINERAL GRADE TOTAL lbs.
DEPOSIT %U(3)O(8) U(3)O(8)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Low grade: 109,990 tons 0.416 913,900
- ---------------------------------------------------------------------------------------------
High grade: 58,700 tons 0.463 543,200
- ---------------------------------------------------------------------------------------------
</TABLE>
Based on the high-grade scenario, the Registrant estimates that its total mining
and milling costs will be in the range of $15.00-$18.00 per lb. of U(3)O(8)
produced from this mine.
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<PAGE> 33
PERMITTING
The Pinenut Mine is permitted to commence mining activities, although an Aquifer
Protection Permit is in the process of being obtained. See "Permitting".
BULLFROG PROPERTY
LOCATION
The Bullfrog property is located in eastern Garfield County, Utah, 20 miles
north of Bullfrog Basin Marina on Lake Powell, about 40 air miles south of
Hanksville, Utah, and 150 miles from the White Mesa Mill.
HISTORY OF THE PROPERTY
Exxon Minerals conducted reconnaissance in the area in 1974 and 1975 and staked
their first "Bullfrog" claims in 1975 and 1976. A first phase drilling program
in 1977 resulted in the discovery of what is now called the Southwest Deposit.
Additional claims were subsequently staked, and both Exxon's exploration and
pre-development groups continued drilling. Several ore pods were discovered in
the Southwest and Copper bench areas, and ore grade mineralization was also
discovered in the Indian Bench area. Because of declining uranium market trends,
Exxon decided not to proceed with development of the Bullfrog property. The
property was sold to Atlas in July 1982. Between July 1982 and July 1983, Atlas
completed 112 drill holes and delineated the Southwest and Copper Bench deposits
on approximately 100-foot centers. Between July 1983 and March 1984, Atlas
completed an additional 40 hole core drilling program on the Bullfrog property
as well as a 133 rotary drill hole program to delineate the Indian Bench deposit
on approximately 200-foot centers. Atlas was unable to sell the property, and in
1991 returned the claims to Exxon. Thereafter, Energy Fuels purchased the claims
in 1992.
More than 2,200 rotary drill holes have been completed on the Bullfrog property.
Based on this drilling, independent consultants have estimated a mineral
inventory of some 2.6 million tons at an average grade of 0.385% U(3)O(8)
containing 20.1 million pounds U(3)O(8) and 60 million pounds V(2)O(5). Not the
entire prospect has been thoroughly explored, and excellent potential exists to
identify additional reserves.
SUMMARY GEOLOGY AND MINERALIZATION
Geologically, the Bullfrog property is situated on the southeastern flank of the
Henry Basin syncline, which is surrounded by the Monument Uplift to the
southeast, Circle Cliffs Uplift to the southwest and the San Rafael Swell to the
north. Exposed rocks in the Bullfrog area are Jurassic and Cretaceous in age.
Host rocks for the Bullfrog uranium/vanadium deposits are Upper Jurassic
Sandstones of the Salt Wash Member of the Morrison formation. The host
sandstones range from 30 to 40 feet in thickness and are reasonably well
cemented.
The Bullfrog deposits, together with the smaller cluster of deposits discovered
by adjacent claim owners, comprise mineral deposits of over 30 million pounds
U(3)O(8) and represent the largest close-spaced cluster of Salt Wash uranium
deposits discovered on the Colorado Plateau.
MINERAL DEPOSIT MODELS
In 1993, Energy Fuels personnel calculated an in-place mineral deposit of
1,937,065 tons at a grade of 0.334% U(3)O(8) containing 12,923,468 pounds of
U(3)O(8). A higher-grade portion of the deposit contains 1,300,000 tons at a
grade of 0.417% U(3)O(8) or 11 million pounds of U(3)O(8).
UNITED STATES IN SITU LEACH PROPERTIES
GENERAL
The Reno Creek Property in Wyoming is amenable to the in-situ leaching ("ISL")
method of mining uranium. The Registrant believes that its Dewey Burdock
Property in South Dakota is also amenable to ISL, however, no pilot plant
testing has been conducted.
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<PAGE> 34
THE ISL MINING PROCESS
The ISL mining process, a form of solution mining, differs significantly from
conventional mining techniques.
The ISL process was first tested for the production of uranium in the mid-1960's
and was first applied to a commercial scale project in 1975 in South Texas. The
ISL process had become well established in the South Texas uranium district by
the late 1970's where it was employed in connection with approximately twenty
commercial projects. ISL production has expanded considerably, and major
production centers now exist in Wyoming and Nebraska, as well as in Texas.
In the ISL process, groundwater fortified with oxygen and other solubilizing
agents is pumped into a permeable ore body causing the uranium contained in the
ore to dissolve. The resulting solution is pumped to the surface where the
uranium is removed from the solution and processed to a dried form of uranium,
which is shipped to conversion facilities for sale to public utilities.
The uranium recovery process consists of a lixiviant circuit, an
elution/precipitation circuit and a drying and packaging process. The lixiviant
circuit flows from the ore body, where the uranium is extracted from the
lixiviant by absorption onto ion exchange resin. The lixiviant is then
refortified and reinjected into the ore body. When the ion exchange column's
resin beads are loaded with uranium, the resin is removed and placed into the
elution circuit where the uranium is flushed with a salt-water solution, which
precipitates the uranium from the beads. This leaves the uranium in slurry,
which is then dried and packaged for shipment as yellowcake.
At the conclusion of mining, the mine site is decommissioned and decontaminated
and the wellfield is restored and reclaimed. Wellfield restoration involves
returning the aquifer to a condition consistent with its pre-mining use and
removing evidences of surface disturbance. The restoration of the wellfield can
be accomplished by flushing the ore zone for a time with native ground water
and/or using reverse osmosis to remove ions, minerals, and salts to provide
clean water for reinjection to flush the ore zone. Decommissioning and
decontamination entail decontamination, dismantling, and removal for disposal or
reuse of the structures, equipment, and materials used at the site during the
mining or restoration activities.
COMPARISON OF RESERVES
Most ISL properties have relatively low grades of uranium. The ISL process was
designed to mine low-grade ores out of permeable sands in a cost-effective way.
Given the nature of these ores and of the ISL process, the thickness of the ore
deposits is very important in determining the value of the ore deposit. As a
result, the grade multiplied by the thickness, or "GT", is commonly used to
compare ore deposits that are amenable to the ISL process. Generally ISL
projects in the United States have average GT's of between 1 and 2 (ft%
U(3)O(8)).
RENO CREEK PROPERTY
DESCRIPTION, LOCATION AND ACCESS
The Reno Creek Property is a proposed uranium ISL mine project located in the
Powder River Basin of northeastern Wyoming, 47 miles south of Gillette. Access
to the property is by state highway, which cuts through the property.
A 3,613 acre mine permit area currently embraces 5 mining units, 4 of which
would be mined under current plans. The units to be mined are designated mine
units I-IV. Reno South, the fifth mining unit, is a uranium ore body 2 to 4
miles south of the permit area and is included in the ore reserve attributed to
the project but is not yet in the current permit application.
The permit area includes 4 mine units, together with the planned processing
facility and ancillary installations.
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<PAGE> 35
EXPLORATION HISTORY
Since the inception of definition drilling at Reno Creek in the 1960's, the
properties have seen a transition of ownership by Union Pacific Railroad
subsidiaries and a joint venture. The majority of drilling was in the 1970's
with little done in the 1980's. Energy Fuels acquired the property in 1992 and
performed development drilling and commercial permitting work.
REGIONAL GEOLOGIC SETTING
Structurally, Reno Creek is on the east flank, near the synclinal axis, of the
Powder River Basin. The Black Hills bound this structural basin on the east and
it is bounded to the south by the Laramie Range and Hartville uplift and the
west by the Big Horn Mountains and Casper Arch.
Stratigraphy of the Powder River Basin is a sedimentary sequence approaching
15,000 feet in thickness along the synclinal axis. Fluvial and lacustrine
Tertiary sandstones, siltstones and shale's with interbedded coal and lignite
seams, compose the upper portions of the column. Downward, Cenozoic, Mesozoic,
and Paleozoic sediments extend to Precambrian basement igneous and metamorphic
rocks.
RESERVES
Uranium at Reno Creek occurs in locally designated ore sand at depths from 300
to 420 feet below surface. The roll fronts in the area are typically low grade
(average less than 0.15% U(3)O(8)) and thick (average up to 17 feet). About
4,000 drill holes are completed and logged on the property. These holes are
generally on lines normal to the roll front, spaced approximately 200 feet apart
with hole spacing thereon 100 feet or greater.
The Registrant attributes a total reserve to the project of 5,100,000 pounds
U(3)O(8) with average thickness ranging from 14 to 17 feet. Average grades are
from 0.066 to 0.081% U(3)O(8). The Registrant applies a 75% recovery factor,
resulting in 3.8 million pounds recoverable. Average GT values at Reno Creek
range from 1.0 to 1.4.
POTENTIAL FOR ADDITIONAL RESERVES
Reno Creek displays significant potential for definition of additional reserves
both within the project area and from properties adjacent or near the project.
Within the project area, potential reserve increases fall into two categories:
1. A 1988 study prepared by Union Pacific Resources quoted reserves
attributable to the project of 10.1 million pounds (e)U(3)O(8). This 1988
reserve utilized a minimum of 20 feet of hydrologic head above the ore.
The 10.1 million pound 1988 reserve quotation is 5 million pounds
(e)U(3)O(8) greater than the proven and probable reserve now assigned the
project.
2. Further reserve additions may come from delineation drilling about and
between identified reserve blocks. Also, wide spaced drilling has
identified ore grade intercepts in isolated holes. Additional drilling is
necessary to explore this potential.
Outside the project area, properties adjacent and nearby host drilled uranium
mineralization and, consequently, the potential for acquisition of additional
reserves also exists. For example, the Registrant attributes about 3.2 million
pounds (e)U(3)O(8) to a nearby property.
ISL PILOT PLANT
In the 1980's, a field pilot plant was operated on the property. Using
information from the pilot plant, a feasibility study for building and operating
a 4,000 gallon-per-minute ISL capable of producing about 900,000 pounds of
yellowcake per year for about eleven years was completed in 1987. In 1995-96,
the mine plan and costs were updated. The current plan is a 3,200
gallon-per-minute facility capable of producing 800,000 pounds of yellowcake
35
<PAGE> 36
per year for about six years. This plan is for the extraction of only a portion
of the reserve used in the 1989 study. The recent study shows more attractive
economics by selectively mining the highest quality areas of the deposit.
The pilot plant demonstrated that an ISL process could mine uranium and that the
ground water can be restored after mining.
RENO CREEK YELLOWCAKE CALCINING AND PACKING AT WHITE MESA
The Registrant proposes to transport yellowcake slurry by truck to the White
Mesa Mill, where it would be calcined and packaged, so long as it remains cost
effective.
OPERATING AND CAPITAL COSTS
S2MS prepared a prefeasibility cost estimate of $14.68 per pound based on a
recovery of 3,315,000 pounds of uranium with a 65% recovery factor. Capital
development and wellfield costs of $22.5 million are included in the cost
estimates. Management of the Registrant estimates that the costs would be in the
range of $11.00-$14.00 per pound based on a recovery factor of 75%, resulting in
the recovery of 3,825,000 lbs. of uranium.
The capital costs are estimated to be $7 million and include plant, buildings,
restoration equipment, mobile equipment, and permit and license costs. The
purchase of the restoration facilities can be delayed until restoration
activities begin. Total project wellfield and development costs are estimated to
be $15.5 million. However, only the first wellfield needs to be installed for
the project to begin, but replacement wellfields need to be installed before the
first well field is depleted.
Unless altered during the permit review process, a $3 million initial bond will
be required for the project. The amount of the bond increases annually as mining
progresses, then it begins to decrease later in the mine life as restoration and
reclamation are completed. This cost is not in the operating cost estimates
because the bond is returned at the end of the project when the project site has
been successfully reclaimed. The project operating cost estimate includes
reclamation and restoration following mining operations.
PERMIT LICENSE STATUS
The Reno Creek Property is currently in the permitting process. See
"Permitting".
DEWEY BURDOCK PROPERTY
LOCATION AND PHYSICAL FEATURES
The project area is located near the Edgemont Mining District in southwest South
Dakota near the Wyoming-South Dakota border. The nearest larger centers with air
connections are Rapid City, South Dakota about 100 miles by road and Casper,
Wyoming, about 175 miles by road. Access to the project area is by an
all-weather gravel road following the course of the railway from Edgemont for
about 30 miles to Burdock and another 10 miles to Dewey.
GEOLOGY
The uranium mineralization at Dewey/Burdock occurs in early Cretaceous sediments
of the Inyan Kara Group which dips to the southwest off the uplifted Precambrian
granitic dome of the Black Hills. The Inyan Kara Group consists of sandstones,
siltstones and mudstones and is divided into the Lakota Formation and overlying
Fall River Formation. The sediments were deposited in a coastal plain
environment with the sandstones following channels so that stratigraphic levels
of the sandstones often change with sands passing into clays.
The deposits are of the typical roll front type with uranium precipitated along
a redox front from solutions percolating through the sandstones. As a result,
the outline of the mineralization follows long, narrow, sinuous courses along
the fronts between the oxidizing and reducing environments.
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MINING AND EXPLORATION HISTORY
Uranium mineralization was first discovered in the Edgemont Mining District in
1952, and small quantities of uranium ore were mined in the early 1950's and
shipped to Grand Junction, Colorado for processing. In 1956 a small mill was
established in Edgemont and produced uranium and vanadium from a number of small
operations in the district, mainly open pits, but some production came from
underground workings accessed by adits. When mining finally ceased in the early
1970's a total of 2.4 million pounds of U(3)O(8) had been produced from ores
averaging 0.14% U(3)O(8).
There was considerable exploration activity for uranium in the district during
the 1970's with the major participants being Wyoming Mineral Corporation and the
Tennessee Valley Authority ("TVA"), though a number of other companies including
Union Carbide, Homestake Mining Company, Federal Resources and Kerr McGee, were
also involved. By 1983 TVA was the sole operator through its contractor, Silver
King Mines, and it continued its exploration efforts in the Dewey and Burdock
areas until 1986 when it relinquished all its land holdings.
In 1981, TVA completed a feasibility study on the Dewey and Burdock areas based
on an underground operation producing 750 tons per day from five shafts (three
at Burdock and two at Dewey). A total mining mineral deposit of five million
pounds U(3)O(8) at an average grade of 0.20% U(3)O(8) with a minimum six foot
mining width was estimated.
In 1991, R.B. Smith & Associates, Inc. of Austin, Texas undertook a review and
compilation of all data. This involved an independent mineral deposit
computation in addition to a hydrogeological study. This work identified the
potential favorability of these deposits for ISL. On the basis of this work
Energy Fuels secured property rights covering the Dewey and Burdock projects.
LAND CONTROL
Land control is in the form of a combination of leases with the ranchers in the
area, and unpatented mining claims held by the Registrant.
Any future production of uranium from most of the project area is subject to a
2% yellowcake royalty to the surface rights owner and a 3% yellowcake royalty to
the mineral rights owners.
MINERAL DEPOSIT ESTIMATE
DATA BASE
The total project mineral deposit is 6.66 million pounds U(3)O(8) with an
average GT grade-thickness of 1.28 (ft.% U(3)O(8)). Additional geologic
potential in excess of 1 million pounds of U(3)O(8) is projected on known trends
within the leased properties, but these trends have not been adequately
evaluated by drilling.
The Dewey/Burdock deposit is being considered as a candidate for ISL mining.
Although the mineral deposit computation has been confined to sands below the
water table, little is known concerning the permeability and flow rates of the
host sandstones. Comprehensive tests will have to be conducted before the
mineral deposit can be conclusively determined to be amenable to ISL. Test wells
will need to be drilled to depths of 300 to 550 feet in the Burdock area and 550
to 750 feet in the Dewey area.
MONGOLIA PROPERTY
The Registrant owns a 70% interest and is the managing partner in the
Gurvan-Saihan Joint Venture, which holds significant uranium exploration and
mineral deposit properties in Mongolia.
THE REPUBLIC OF MONGOLIA
The Republic of Mongolia, known from 1924 to 1991 as the Mongolian People's
Republic, is a nation in Central Asia, bounded on the north by Russia and on the
east, south, and west by China. The country has a total area of 1,565,000 square
kilometers (604,250 square miles). The capital and largest city of Mongolia is
Ulaanbaatar.
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TOPOGRAPHY, CLIMATE AND RESOURCES
The topography of Mongolia consists mainly of a plateau between about 914 and
1,524 meters (about 3,000 and 5,000 feet) in elevation broken by mountain ranges
in the north and west. The Altai Mountains in the southwest rise to heights
above 4,267 meters (14,000 feet). The Gobi Desert covers a wide arid tract in
the central and southeastern areas. The most important rivers are the Selenge
Moron and its tributary, the Orhon Gol, in the north.
Mongolia's climate is harsh, with temperatures ranging between -15(degree) and
- -45(degree) C (-5(degree) and -50(degree) F) in winter and 10(degree) and
27(degree) C (50(degree) and 80(degree) F) in summer. Winters are dry, and
summer rainfall seldom exceeds 380 millimeters in the mountains and 125
millimeters in the desert.
Mongolia contains forests of larch, pine, and cedar in the mountains, but these
are of little economic importance. Fur bearing animals, especially marmot and
squirrel, are abundant, and the country has a well-developed fur industry. Rich
prairie land in the northeast and northwest supports large herds of cattle,
sheep, and goats. Mineral resources such as coal, iron, copper, fluorspar, gold,
uranium, and silver have not been fully exploited.
POPULATION
The population of the Republic of Mongolia (1993 estimate) was 2.2 million,
yielding an overall population density of about 1.4 people per square kilometer.
The ethnic composition of Mongolia is fairly homogeneous. Khalkha Mongols
constitute more than 75 percent of the population. Other groups are Buryat
Mongols and Kazakhs. The society is about 58 percent urban.
POLITICAL DIVISIONS AND PRINCIPAL CITIES
Mongolia is divided into 18 provinces and 3 independent cities. The independent
cities are Ulaanbaatar, the capital (population, 1992 estimate, 600,900); Darhan
(1991 estimate, 90,000); and Erdenet (1991 estimate, 58,200), a mining center
that developed rapidly in the 1970s.
RELIGION AND LANGUAGE
The traditional faith in Mongolia was Buddhist Lamaism, which was suppressed
beginning in 1929. Only one small monastery remains, at Ulaanbaatar. Buddhism is
enjoying a revival since the end of communism in the late 1980's. The Mongolian
language is one of the Altaic languages.
EDUCATION
Education in Mongolia is compulsory between the ages of 6 and 16. In the late
1980s some 443,000 pupils annually attended about 710 elementary and secondary
schools staffed by approximately 18,400 teachers. Some 22,200 students were
enrolled in vocational and teacher-training schools. About 22,600 students
attended institutions of higher education; some 4,000 of these were enrolled in
the Mongolian State University (1942), in Ulaanbaatar. Other institutions of
higher learning included schools of medicine, agriculture, and military affairs.
While Soviet influence predominated in Mongolia, Russian was taught in all
schools, and several thousand students each year were sent to study in the Union
of Soviet Socialist Republics ("USSR") and eastern European countries.
ECONOMY
The basis of the economy of Mongolia is crop farming and livestock breeding.
Manufacturing is devoted largely to the processing of agricultural and livestock
products. After the collapse of the socialist system and disintegration of the
former Soviet Union, Mongolia endured a severe decline in GDP from 1989 to 1993.
The economy has rebounded since 1994 with GDP growth of 6.3% in 1995, 2.6% in
1996, and 3.3% in 1997. The slower economic growth reflects a decline of world
market prices for copper and cashmere, Mongolia's two largest exports.
The freeing of fuel and energy prices pushed inflation in 1996 to 59% and
dampened overall consumption. In 1997, a relatively stable exchange rate was
realized, and inflation was held below 18%. Economic trends point toward a
sustainable economic growth rate of 5-6% per annum, with inflation falling into
single digits by 1999.
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Total foreign trade turnover in 1997 was $861.4 million; exports equaled $418
million, and imports totaled $443.4 million. Copper and molybdenum concentrates,
fluorspor, goat wool, and cashmere accounted for 66% of exports.
AGRICULTURE
Agricultural production in Mongolia is focused on animal husbandry and crop
farming (wheat, barley, oats, and vegetables). The national livestock herd is
31.3 million animals, comprised of 14.2 million sheep, 10.3 million goats, 3.6
million cattle, 2.9 million horses, and over 355,000 camels. Mongolia accounts
for more than 25% of world cashmere output and also exports skins, hides, wool,
meat and other animal products.
Crop farming is relatively new in the country and was developed through large
state farms. The most important crop is wheat, and the maximum arable area is
1,332,000 hectares. The government has drafted plans to privatize all state
farms and croplands by the end of 1998.
MINERAL DEPOSITS
Mongolia has substantial deposits of copper, molybdenum, gold, uranium, lead,
zinc, zeolites, rare earths, ferrous metals, fluorspor, phosphate, and precious
and semi-precious stones. Several mining operations were developed before 1989
with assistance of the Soviet Union and Eastern European countries, and in
recent years a number of private mining operations have begun. Due to isolation
from international trading systems and lack of infrastructure, many mining
prospects remain undeveloped. In recent years, gold production has emerged as
one of the most dynamic sectors of the Mongolian economy. Gold production has
grown seven-fold since 1990 and reached 8 metric tons (257,000 oz.) in 1997.
The Mongolian and Russian joint venture Erdenet has been operating since 1981
with an annual capacity of 20 million tons of copper ore; this capacity is being
expanded to 24 million tons of ore per year. Recoverable metal is estimated to
be 7,556,000 tons of copper and 43,600 tons of molybdenum in ore averaging 0.53%
copper and 0.018% molybdenum.
Mongolia has substantial proven reserves of coal. Coal is the major source of
energy production and is likely to remain so. Mongolia's coal reserves are
estimated at about 100 billion tons, 20% in hard coal deposits, and 80% in
lignite deposits. In 1997, domestic coal production totaled about 5 million
metric tons, the majority of which was consumed for domestic needs.
Mongolia has one operable oil field in the Gobi region, and initial results of
petroleum exploration in eastern and western Mongolia, carried out by companies
from the U.S., Europe, China, and Russia, appear to be promising.
ENERGY
The Central Energy System of Mongolia has four coal-fired power plants (two in
Ulaanbaatar, one in Darkhan, one in Erdenet) with a total capacity of 690MW. At
peak demand times, additional power is imported from Russia. Power for small
towns in outlying areas is provided primarily by diesel generators or small
coal-fired plants.
CURRENCY AND FOREIGN TRADE
The currency of Mongolia is the tughrik (togrog), which consists of 100 mongo
(820 tughriks equal US$1.00; 1998).
Most of Mongolia's trade is with the countries that made up the former USSR and
other former Soviet-bloc countries. Since the early 1990s, Mongolia has made
efforts to expand trade with other countries. Principal exports in the late
1980s were minerals, cattle, meat products, wool, and consumer items. Imports
consisted mainly of machinery and transport equipment, consumer goods, and
industrial raw materials.
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TRANSPORTATION AND COMMUNICATIONS
Mongolia is served by the Trans-Mongolian Railway, which connects Ulaanbaatar
with Russia and China. Truck services operate throughout the country. Steamer
services operate on the Selenge River and a tug and barge service on Lake
Hovsgol. Air service connects Ulaanbaatar with Moscow, Beijing, Seoul, and
cities in Central Asia. Domestic services are provided by Mongolian Civil Air
Transport.
In the late 1980s, Mongolia was served by about 55,000 telephones, 212,000 radio
receivers, and 111,000 television sets. The country has nine national
newspapers. Unen, a daily newspaper published in Ulaanbaatar, is the most widely
read, with a daily circulation of about 170,000.
GOVERNMENT AND JUDICIARY
Under Mongolia's 1960 constitution, the supreme organ of state power was the
People's Great Hural ("Khural"), a 430-member assembly that usually met twice a
year. The Mongolian People's Revolutionary (Communist) party ("MPRP") was the
sole legal party until 1990, when the constitution was amended to allow
opposition parties, to institute a presidential system of government, and to add
a 53-member standing legislature, the Small Hural. In January 1992, a new
constitution was adopted. By this constitution, the legislative power of the
republic resides in the 76-member Great Hural; the delegates of the Great Hural
are chosen for 4-year terms through free elections. The president is head of
state, and is also elected to a four-year term.
Mongolia is divided into 18 provinces, or aimags, which are subdivided into
districts, or somons. Local centers of power are hurals, or assemblies, of
working people's deputies. Ulaanbaatar, Darhan, and Erdenet are separate
administrative units, governed by city hurals.
In Mongolia, the Supreme Court, the city court of Ulaanbaatar, 18 provincial
courts, and local district courts administer justice. The assemblies at each
political level elect members of the courts.
HISTORY
Modern history of Mongolia begins with the rise of the great Mongol Empire at
the beginning of the 13th Century under Genghis (Chinggis) Khan. By 1280 the
Mongol's ruled from Peking to the Adriatic and from Siberia to Persia and the
northern border of India. Kublai Khan, grandson of Genghis, founded the Yuan
dynasty in China in 1271. The Manchu Empire subjugated Mongolia in 1691. The
period of Manchur colonialism, which lasted for 220 years, was a grim time in
Mongolian history.
After the Chinese revolution of 1911, Mongolia declared its independence from
China, but the Living Buddha continued to rule. In 1920 a military force
supplied and financed by Japan and led by a Russian anti-Bolshevik general,
Baron Roman Nikolaus von Ungern-Sternberg, took the capital, Urga, and set up a
puppet government. In 1921 the Mongolian People's Revolutionary Party, formed by
Soviet-trained Mongols, established an independent Provisional People's
Government and, with aid from the USSR, defeated Ungern-Sternberg and his
supporters. The theocratic monarchy, its powers limited, was retained by the
provisional government until 1924, when the last Living Buddha died. At that
time, the Mongolian People's Republic, modeled on Soviet lines, was founded, but
China did not recognize its independence until 1946. After the Communists won
power in China in 1949, trade and cultural relations were established between
the two nations, but the Sino-Soviet split in the late 1950s curtailed these
relations. A Sino-Mongolian border treaty was signed in 1962, but Mongolia
maintained its closest ties with the USSR, which in 1961 sponsored its
membership in the United Nations. The two countries signed a treaty of
friendship, trade, and mutual assistance in 1966, renewed in 1986. In the 1980s,
the USSR was Mongolia's leading trade partner and aid donor; about 65,000 Soviet
troops were stationed in Mongolia.
In March 1990, Punsalmaagiyn Ochirbat, former foreign trade minister, became
president, inaugurating a period of political and economic liberalization. After
the new constitution was adopted in January 1992, the reconstituted Mongolian
People's Revolutionary Party swept the parliamentary elections in June of that
year. In January 1993, President Ochirbat and the Russian President Boris
Yeltsin signed another treaty of friendship and cooperation, to replace the
treaty of 1986. In June 1993, President Ochirbat was re-elected. In 1996, the
Social Democratic Party won a majority of seats in the Mongolian Parliament. In
1997, N. Bagabondi defeated President Ochirbat.
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FOREIGN INVESTMENT POLICY
Mongolia has publicly, via various international symposia, presented the
official position of the government to invite and encourage "foreign direct
investment" in Mongolia. Since the collapse of the Soviet Union, Mongolia has
been in a situation where it must develop foreign investment and trade to attain
economic independence and sustainability.
Mongolia enacted a Foreign Investment Law in July 1993. This law is currently
undergoing revision with the purpose to further enhance foreign direct
investment. Mongolia has passed the following laws to create a stable investment
environment:
<TABLE>
<S> <C>
Companies and Partnership Law 1995
Bankruptcy Law 1991
Consumer Protection Law 1991
Accounting Law 1993
Business Income Tax Law 1993
Copyright Law 1993
Patent Law 1993
Foreign Investment Law 1993
Securities Law 1995
</TABLE>
In 1991, the governments of the United States and Mongolia entered into an
agreement on trade relations to clarify some of the conditions for international
business between the two nations.
Energy Fuels was one of the first firms to establish an international joint
venture in the minerals sector in Mongolia. A Joint Venture Founding Agreement
was created between the parties in the venture, and a Mineral Agreement was
entered into between the Joint Venture and the government of Mongolia. This
Mineral Agreement serves as the definitive grant and authorization for the Joint
Venture to conduct uranium exploration development, and mining in Mongolia.
No restrictions are known to exist on foreign investment of the nature being
conducted by the Registrant. The Mineral Agreement with the government of
Mongolia specifically addresses and allows the export and marketing of uranium
and the import and export of all necessary equipment and materials needed to
explore, mine, process, store, and transport uranium.
The Mineral Agreement also specifically addresses taxation stability for the
Joint Venture, including the tax holiday provided to the Joint Venture. Foreign
exchange controls and restrictions on repatriation of profits are not addressed
in the Mineral Agreement, but no limitations currently exist on repatriation of
profits.
Mongolia previously maintained an import duty of 15%, plus fees of 1.5%, on all
imports. This duty has been entirely removed, and the only remaining tax
required on all goods and equipment brought into or purchased directly in
Mongolia is a 10% sales tax.
Because of the limited history of the current Mongolian government, the existing
laws governing foreign investment may change in the future and such changes may
adversely affect the Registrant's investment in Mongolia.
ENVIRONMENTAL REGULATIONS
In July 1997, Mongolia enacted the Mineral Law of Mongolia. This Law has
specific language regarding environmental protection for mining operations.
While the Joint Venture is exempt from certain provisions of the Minerals Law
due to the pre-existing Mineral Agreement, the Registrant, as the operator of
the Joint Venture, is in compliance and intends to continue to comply with
appropriate rules and laws of Mongolia regarding environmental protection.
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The environmental protection provisions of the Mineral Law require notification
and consultation with local administrative bodies and the filing and approval of
environmental plans. Prior to receiving a mining license, an environmental
impact assessment and an environmental protection plan must be filed and
approved. The assessment and the plan are intended to identify possible adverse
environmental impacts and to provide measures to ensure that mining operations
are conducted in the least damaging way to the environment. Environmental
protection measures must be specified for handling of toxic materials,
utilization and protection of surface and ground water, tailings management (if
appropriate), and other protective measures associated with mining operations.
Compliance with the environmental plan is through inspections, reporting and
determination of reclamation/closure surety. If a license holder fails to comply
with the provisions of the approved environmental plan, local administrative
authorities can use the deposited funds to bring the project into compliance.
Mining Licenses can be revoked for the following reasons:
1. License holder loses its eligibility to hold a License;
2. Failure to pay specified fees (note the Joint Venture is exempt from
Exploration License fees by virtue of the pre-existing Mineral
Agreement);
3. Licensed area is designated as a special needs and the license holder
has been fully compensated.
Nothing in the Mineral Law specifically allows revocation of a License for
failure to comply with environmental plans or regulations. The Registrant is in
compliance with all notification, reporting, and inspection provisions and has
received no adverse comments or reports.
To demonstrate its commitment to responsible environmental management, the Joint
Venture voluntarily had an independent environmental review conducted of its
field work in 1996. The report of this review was voluntarily provided to the
government of Mongolia.
MONGOLIA PROPERTY
OWNERSHIP AND SUMMARY OF JOINT VENTURE TERMS
The joint venture company, Gurvan-Saihan BBHK, was formed in Mongolia in January
1994 by Energy Fuels, Geologorazvedka ("GRZ"), a unit of the Russian Ministry of
Geology, and URAN, a state enterprise under the Ministry of Energy, Geology and
Mining of Mongolia. The purpose of the joint venture is to explore, develop and
mine uranium deposits, if commercially viable.
The contributions of each member to the Joint Venture are described below. GRZ
contributed the historical data and records from past uranium exploration work
in Mongolia. URAN contributed the grant of mineral rights and the necessary
licenses and permits. Energy Fuels contributed $4 million in cash which was used
for exploration operations. GRZ and URAN were each granted a 15% interest in the
joint venture and Energy Fuels was granted a 70% interest.
The Joint Venture participants and the government of Mongolia entered into a
Mineral Agreement which serves as the grant by the government of Mongolia of the
right to explore, develop and mine uranium deposits on the properties described
below. The Mineral Agreement also serves as the grant by the government of
Mongolia to issue licenses and permits to conduct exploration and mining and to
store, transport, market, process and export uranium and import and export all
necessary equipment and materials without the need for additional licenses or
permits, and free of any duties, taxes, or levies. The term of the Mineral
Agreement is until January 14, 2009, or as long thereafter that exploration,
development, mining or reclamation is being conducted.
The Joint Venture is exempt from taxes on profits from production for five years
following start of commercial production. For the next five years, the tax rate
is 50% of the rate that would normally apply, and after ten years of production,
the Joint Venture will pay the then applicable taxes, subject to a maximum rate
of 40% of net profits. The government of Mongolia was also granted a 4% royalty
on production.
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The Registrant acquired Energy Fuels interest in the Joint Venture via its asset
purchase and has assumed all of Energy Fuels' rights and obligations as per the
agreements. Even though the Registrant has a 70% ownership interest in the Joint
Venture, it is currently funding 100% of the JV's activities. The JV Agreement
provides that the
Registrant will receive preference distributions on future production and
profits until the Registrant has recovered, from net profits of the venture,
150% of its contributions on behalf of the non-funding members.
LOCATION AND PHYSICAL FEATURES
The Mongolian joint venture is comprised of five separate concession blocks, in
the original grant by the Mongolian government that cover a total area of 12,100
square kilometers in central eastern Mongolia. Based on encouraging exploration
results in the 1996 and 1997 field seasons, the joint venture added 4365 square
kilometers in eight additional parcels in early 1998.
The East Gobi region of Mongolia is a plateau at 3,000 to 3,500 feet above sea
level characterized by low hills and gently rolling topography. The climate is
harsh with typical extremes of an intercontinental climate similar to the
southern prairies of Canada and northern plains of the United States. The region
is semi-arid with numerous dry lake beds and salt marshes and no permanent
rivers.
The Choir concession, where most of the work has been undertaken prior to 1997,
is on the Trans-Mongolian Railway about 250 kilometers southeast of Ulaanbaatar
and about 1,100 kilometers from Beijing. A network of numerous unpaved trails
connects most centers, and truck or 4x4 vehicles following tracks or driving
cross-country can reach the various concession areas. In 1997, the Joint venture
focused the majority of its effort's on the Hairhan area as the result of
encouraging initial exploration in 1996.
EXPLORATION HISTORY
Uranium prospecting was started by the Russians in 1955 and resulted in the
discovery of several showings in the Choir Depression. Detailed work, which
began in 1970 with an airborne gamma-ray spectrometer survey and ground follow
up, resulted in the identification of the Haraat deposit in the Choir
Depression.
In 1988 and 1989, a major drilling program was undertaken in the Choir
Depression with a series of drill hole fences across the full 10 to 20
kilometers width of the depression. Fence spacings ranged from 8 to 12
kilometers with hole spacings at 100 to 800 meters. A total of 47,000 meters of
drilling was completed in over 1,000 holes ranging in depth from 20 to 400
meters. The vast majority of the drilling was shallow down to 40 metres, testing
the shallow mineralization in the Upper Cretaceous with efforts concentrated on
defining the mineralization at Haraat. A few deeper holes were drilled to test
the potential of the basin at depth.
Extensive drilling resumed in 1994 with the formation of the Gurvan-Saihan Joint
Venture, and delineation drilling was undertaken at Haraat on a 200 metres x 100
metres grid with some closer spacing at 100 metres x 50 metres. Preliminary
field ISL studies were also conducted at Haraat in 1994.
In 1995, modern probing equipment using digital recording was sent to Mongolia
from the United States and has been used on probing of all holes since then.
This allows for a more efficient use of data, and also allows for discrimination
of individual lithologic units.
In 1996, the Joint Venture focused its efforts on the Choir Depression and in
the Haraat area in particular. An ISL Pilot test using acid solution was run on
ore horizons both above and below the water table (leaching above the water
table is a promising technology that requires further refinement). The 1996
pilot testing demonstrated that the deposits at Haraat, both above and below the
water table, are suitable for ISL. Additional testing and research is needed to
refine the leach chemistry.
The total exploration-drilling program in 1996 was in excess of 33,000 meters,
with the majority of the work in the Choir Depression. Based on detailed
radiometric surveys, initial reconnaissance drilling was conducted in 1996 in
both the Hairhan and the Gurvan Saihan Depressions. Ore-grade discoveries were
made in both basins, and the discovery hole at Hairhan was the thickest,
highest-grade hole drilled to date in the Mongolia venture.
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The 1996 results led to a major expansion of exploration drilling in 1997,
directed primarily to the discovery area at Hairhan. Over 34,000 meters were
drilled at Hairhan in 1997, and mineral deposits in excess of 10-million lbs.
uranium have been identified. The remainder of the 1997 drilling was conducted
in the Choir Depression to expand the mineral deposits below the water table in
the region of the Haraat deposit. Initial reconnaissance drilling was also
conducted in the Ulziit Depression in 1997, and this area also appears to be
highly prospective for uranium deposits.
GEOLOGY
Uranium exploration is focused on large depression areas filled with Cretaceous
sediments and flanked by Proterozoic schists, gneisses and limestones as well as
Permian acid volcanics, Palaeozoic granites and Mesozoic leucogranites and
volcanics. The Lower Cretaceous, which is up to 1,500 metres thick, is comprised
of two facies: (1) low-sorted gravels, conglomerates and sandstones, and (2)
lake sediments (clays, argillaceous sandstones) and brown coals. The Upper
Cretaceous is five to 40 metres thick, consists largely of sand and gravel
formations cemented by limonite-goethite, and is confined to small areas near
the centres and margins of the major depressions. The dips are flat, but may
steepen to 5(degree) to 10(degree) near margins. There is some block faulting,
and dips may increase to 70(degree) to 80(degree) against faults, but there is
generally little structural disturbance.
The uranium mineralization is found in paleo channels and alluvial/fluvial
systems and is thought to have been deposited from solutions percolating through
the porous sandstones and precipitating uranium at reducing interfaces with
organic detritus. The Russian geologists consider the granites as the most
likely sources, and consequently rate the areas of the depressions flanked by
granitic rocks as the most prospective. The main uranium minerals in the
reducing environment below the water table are uraninite and coffinite. Above
the water table, a number of different secondary minerals have been identified
and include autunite, torbernite, bergenite and phosphuranylite. Geochemical
studies show that small amounts of RE, rhenium and selenium accompany the
uranium mineralization.
THE HARAAT DEPOSIT
Two concentrations of mineralization have been identified at Haraat, referred to
as the N1 and N2 ore bodies.
Mineral deposit estimates were prepared by the Russian geological team for the
areas of expanded drilling in 1997 in the Haraat area. The estimation
methodology, utilizing a 0.01% U cutoff, is basically a block or polygonal
technique wherein ore-being coefficient and average thickness and grade values
are determined for each mineralized area. The mineral deposits in the most
heavily investigated areas, the N-1 and N-2 deposits, were calculated by a joint
American-Russian team in early 1997; the combined current proven, probable and
possible mineral deposits total for the Haraat area deposits is presented in the
following table:
BELOW WATER TABLE
<TABLE>
<CAPTION>
AREA GRADE (%U(3)O(8)) POUNDS U(3)O(8) THICKNESS(ft)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Haraat N-1 & N-2 0.046 2,786,700 26.7
Shar Oortsog 0.018 2,146,000 9.9
Haraat West 0.025 1,089,700 9.2
Haraat East 0.030 374,900 4.7
----- --------- ----
Subtotal 0.027 6,397,300 13.8
ABOVE WATER TABLE
Haraat N-1 & N-2 0.025 16,084,100 19.8
Shar Oortsog 0.025 6,983,100 7.1
Haraat West 0.018 1,640,600 10.2
Haraat East 0.026 9,600,200 10.6
----- ---------- ----
Subtotal 0.024 34,308,000 13.8
</TABLE>
Total Proven, Probable and Possible Mineral Deposits = 40,705,300 Pounds
U(3)O(8)
44
<PAGE> 45
THE HAIRHAN DEPOSIT
By the end of 1996 exploration season, a 23km anomalous trend, based on
radiometric surveys, was delineated in the Hairhan depression. A major
exploration and delineation program in 1997 followed the initial reconnaissance
drilling which led to the Hairhan uranium discovery. A 6.5km mineralized trend
was discovered with drilling on sections 800 and 1600 meters apart. The richest
portion of the deposit is an area about 1600m by 1500m and has not yet been
fully investigated by drilling.
A total of 495 holes and test wells have been drilled at Hairhan through the end
of the 1997 field season. The majority of the holes are in the main block (1000m
by 1500m); which has been drilled on 100mx50m spacing to support calculation of
probable mineral deposits.
The Hairhan deposit is hosted in sandy sediments deposited in a fault graben,
which focused the deposition of a sequence of alternating sands, siltstones,
clays, and carbonaceous layers. The graben aligns with a structural valley in
the nearby granitic highlands. Erosion, weathering, and leaching of the granites
and the derived sediments formed uranium deposits in multiple layers. The ore
deposition is related to reduction-oxidation interfaces. The ore ranges from 10m
to at least 100 m deep, with as many as four stacked horizons in some locations.
In addition to mineral deposit delineation drilling in 1997, core holes were
drilled to obtain rock samples for testing, and hydrogeological test wells were
installed to evaluate aquifer properties. The water table is shallow at Hairhan,
and all mineralization of interest is below the water table. The Hairhan deposit
exhibits favorable characteristics for ISL.
Proven and probable mineral deposits have been calculated at 0.024% U(3)O(8)
cutoff for the area of detail drilling at Hairhan.
<TABLE>
<CAPTION>
AVERAGE GT
----------
ZONE THICKNESS (ft) GRADE (%U(3)O(8)) (ft. %) POUNDS U(3)O(8)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
f2 16.1 0.073 1.17 1,077,000
f5 24.2 0.076 1.85 3,523,000
f7.5 25.9 0.081 2.10 3,512,000
f8.5 13.9 0.111 1.53 830,000
f12 32.7 0.061 2.01 1,388,000
f18 14.9 0.199 2.97 493,000
----- ---- ----- ---- ----------
Total 23.7 0.079 1.87 10,823,000
</TABLE>
TOTAL = 10,823,000 Pounds U(3)O(8)
AVG THICKNESS 23.7 Feet
AVG GRADE= .079 %U(3)O(8)
GURVAN-SAIHAN JOINT VENTURE PROJECT - IN-SITU MINING CONSIDERATIONS
In Situ Leach is viewed as the most viable technique for exploitation of the
uranium deposits in Mongolia. Not only does ISL enjoy the benefits of lower
capital and front-end development expenditures than conventional open pit or
underground operations, it also often has more attractive operating costs.
Another major appeal of ISL is the minimal surface and related environmental
impacts incurred in comparison with conventional mining and milling operations.
The deposits at Haraat and at Hairhan are suitable for ISL. Pilot tests have
been run at Haraat, and testing is planned to begin in 1998 at Hairhan.
Preliminary field data from core samples and hydrogeological tests indicate that
the ore is amenable to acid leach and that the hydrology is acceptable.
The substantially richer deposit at Hairhan, coupled with the fact that the ore
is below the water table, has elevated Hairhan ahead of Haraat as a potential
commercial project. Although laboratory and field data are encouraging for ISL,
full scale testing must be successfully conducted to confirm the operating
parameters and costs for an ISL mine in Mongolia. Other Areas
45
<PAGE> 46
Work in other concession areas at the present stage has only been of a
reconnaissance nature involving prospecting and some car-borne scintillometer
surveys, with initial exploratory drilling at Gurvan-Saihan and Hairhan in 1996
and in the Ulziit Depression in 1997. A total of seven widely spaced fences over
an 18 km long trend were drilled at Gurvan-Saihan with mineralization
intersected in six of the seven fences. The best results was 0.102% U over 1.3
meters. Examples of other intersections are 0.062% U over 1.2 meters, 0.06% U
over 1.6 meters, 0.04% U over 1.9 meters, 0.036% U over 4.8 meters, 0.024% U
over 1.1 meters, and 0.018% U over 4.0 meters.
In the Ulziit Depression, reconnaissance work between 1958 to 1963 located five
uranium occurrences and 10 radiometric anomalies. The Russian geologists
consider that this depression is similar to the Choir Depression and has
excellent potential. Initial exploration drilling was conducted in 1997 in the
Ulziit area; based on encouraging geologic results, an expanded exploration
drilling program is planned for 1998.
OTHER ASSETS OF REGISTRANT
EMPLOYEES
The Registrant currently employs a total of 156 people, of which 19 are located
at the head office in Denver, 96 are located at the White Mesa Mill, 37 are
located at the Colorado Plateau offices and the Sunday Mine, 2 are located at
the Fredonia, Arizona field office for the Arizona Strip, and 2 are located at
the field office in Gillette, Wyoming.
ADMINISTRATIVE OFFICES
The Registrant has a head office in Denver, Colorado, as well as field offices
in Fredonia, Arizona, Dove Creek, Colorado and Gillette, Wyoming.
EQUIPMENT
The Registrant has extensive mining and milling equipment capable of sustaining
operations at the four mines that the Registrant has included in its business
plan, with only a few additions.
SUPPLY CONTRACTS
The Registrant currently has entered into uranium supply contracts with certain
U.S. and foreign customers under which the Registrant has the obligation to
supply to those utilities a total of approximately 2,870,000 pounds of uranium
during the next 5 years at prices in excess of the Registrants current estimated
mining costs.
TOLL MILLING AND PURCHASED ORE
The White Mesa Mill is a fully permitted uranium Mill in the United States with
a vanadium and other co-products recovery circuit that is strategically located
in southeast Utah near the Colorado Plateau District and the Arizona Strip.
It is unlikely that new Mills will be constructed at current prices of uranium.
The White Mesa Mill cost $40 million to construct in 1980. With inflation, more
stringent permitting requirements, and the lack of suitable sites, the cost of
constructing a facility such as the White Mesa Mill, if possible, would be
considerably more than that amount.
The Registrant has instituted a Purchase Ore Program to supplement the feed to
the White Mesa Mill from its mines in the Colorado Plateau District and Arizona
Strip. The Registrant had been contacted by a number of large corporate holders
of mines and reserves in the Colorado Plateau and Arizona Strip areas to discuss
arrangements for tolling their ore through the White Mesa Mill. The Registrant
intends to pursue these negotiations and seek out additional toll milling
opportunities in the area. In addition, the Registrant believes that significant
tons of ore could be purchased at a profit from independent mines in the
Colorado Plateau area. The amount of tolled and purchased ore that will be
available will vary with the prices of uranium and vanadium.
46
<PAGE> 47
ALTERNATE FEEDS
In addition to processing conventional ores as explained above, the Mill also
has the capability to process Alternate Feeds and recover uranium at costs below
the costs of producing uranium by either conventional or in situ methods. These
Alternate Feeds can generally be thought of as ores or residues from other
processing facilities that contain uranium in quantities that are either
uneconomic to recover or cannot be recovered at these other facilities. As such,
they become a costly disposal issue for the owner, not to mention a wasted
resource. However, the Registrant has demonstrated the capability to "recycle"
these Alternate Feeds through the Mill, recover whatever uranium is present, and
dispose of the remaining waste in the Registrant's tailings cells. The mill's
co-product recovery circuit also allows the Registrant to recover other valuable
materials such as tantalum, niobium, scandium, and zirconium that might be
present in these alternate feeds.
The Registrant has entered into and processed material under four separate
alternate feed agreements to date and is currently negotiating other alternate
feed arrangements at this time.
ENVIRONMENTAL
An environmental overview of selected mine sites in Colorado, Utah and Arizona
and the White Mesa Mill was initially conducted by Simons Environmental Group
("Simons") of Vancouver, BC Canada, in March 1996. Simons is an environmental
consulting organization.
The Simons review of the properties resulted in a report which found only minor
environmental liabilities associated with the properties and concluded that the
Registrant appears environmentally well managed. In particular, Simons reported
that the mine sites are unlikely to represent a major immediate environmental
liability. Simons mentioned that the Colorado Plateau mine sites may require
some minor erosion control, housekeeping and storm water management. Simons
reported that the Arizona Strip mine sites appear environmentally well managed.
Simons found that the Mill at Blanding, Utah appears to be in current regulatory
compliance. Simons noted that extensive monitoring at the mill by the operator
has shown no significant soil or groundwater contamination and noted that the
polyethylene liner on the newest tailings pond was leaking, but that it was not
planned to be used for tailings disposal without repairs. Registrant has noted
these repairs above.
See "White Mesa Mill."
Simons reported that based on the review, the Registrant appeared to be
environmentally well managed. However, Simons noted that Energy Fuels was, at
the time of their review, named as a Potentially Responsible Party ("PRP") on a
CERCLA (Superfund) site for approximately $250,000. This was the result of
Energy Fuels having shipped certain ores to a Colorado School of Mines site in
1979 for a processing study. In late 1995, Energy Fuels entered into a
settlement agreement with the EPA, pursuant to which Energy Fuels agreed to pay
approximately $250,000 to the EPA in return for a full and complete release from
any further liability at the site. The Registrant did not assume this settlement
agreement or the obligation to make payment of the $250,000 to the EPA in
connection with its purchase of assets from Energy Fuels. The liquidating
trustee of the Energy Fuels bankruptcy remains obligated to pay the $250,000 to
the EPA and the EPA has not asserted any claim against the Registrant for this
amount.
In January 1997, the Registrant engaged Simons to update its prior environmental
review of the Energy Fuels Assets, and in particular to complete Phase I
Environmental Site Assessments, according to ASTM standards, on the Sunday Mine
Complex, the Deer Creek Mine Complex, the White Mesa Mill, the Arizona 1 Mine,
the Pinenut Mine, the Kanab North Mine, the Canyon Mine and the Reno Creek
Property. These assessments involved a review of Federal and State records,
interviews with site personnel, a review of relevant files, site reconnaissance,
and interviews with local regulators. In its Phase I Environmental Site
Assessments on these properties, Simons concluded that no recognized
environmental conditions existed on any of those properties.
PERMITTING
The permitting status of the various mines is set out below.
ARIZONA 1 MINE
The Arizona 1 Mine is fully permitted for mining.
47
<PAGE> 48
SUNDAY MINE COMPLEX
The Sunday Mine Complex is fully permitted for its mining activities. Recent
changes in the laws of Colorado could give rise to additional future permitting
requirements.
In recent years, the State of Colorado passed a law that provides that the
Colorado Division of Minerals and Geology ("DMG") can determine that a mine is a
Designated Mining Operation (a "DMO") if it is a mining operation at which
"toxic or acidic chemicals used in extractive metallurgical processing are
present on site or acid- or toxic-forming materials will be exposed or disturbed
as a result of mining operations". If a mine is determined to be a DMO, the most
significant result is the requirement that it submit an Environmental Protection
Plan (an "EPP"). The EPP must identify the methods the operator will utilize for
the protection of human health, wildlife, property and the environment from the
potential toxic-or acid-forming material or acid mine drainage associated with
the operations. The EPP must be submitted to the DMG for review, and after a
public hearing, a decision must be made within 120 days of the submission of a
complete application, unless the application is considered to be complicated,
which would extend the deadline to 180 days.
In 1995, DMG notified Energy Fuels that they believed that the Sunday Mine
Complex was a DMO, because of the potential that storm water could come in
contact with the low grade waste rock on site. Energy Fuels disputed this
assertion. Testing was performed on the waste rock. In November 1996, the DMG
advised Energy Fuels that the test results of the average uranium content of the
waste dumps at the mine sites satisfied the DMG that the Sunday Mine Complex is
not a DMO. However, the DMG also advised that its determination could change if
site conditions or circumstances change. Therefore, if mining activities are
re-initiated at these mines, the DMG reserved the right to submit a new notice
of determination, which may require additional environmental review. As of this
filing date, the Registrant has not been notified of any additional permitting
requirements relating to its current mining activities at the Sunday Mine
Complex.
CANYON MINE
The Canyon Mine is the first mine to be permitted in the portion of the Arizona
Strip that is south of the Grand Canyon. The Canyon Mine is located on federal
lands administered by the United States Forest Service and is near the southern
rim of the Grand Canyon. The plan of operations submitted by Energy Fuels in
1984 for development and operation of the mine generated significant public
comment resulting in the invitation of an environmental impact statement process
by the United States Forest Service. The United States Forest Service for the
State of Arizona approved the plan of Energy Fuels and issued all necessary
federal and state permits and approvals. The Havasupai Indian Tribe and others
filed appeals. The United States Forest Service for the State of Arizona and
Energy Fuels prevailed on all appeals. During the permitting process, Energy
Fuels constructed all the necessary service facilities at the mine site. Energy
Fuels agreed with the United States Forest Service not to implement underground
development during the environmental impact statement process. Energy Fuels did
not resume underground development at the mine site when the appeals were
determined due to the decrease in uranium prices at that time.
In 1992, the State of Arizona updated its laws relating to groundwater issues,
requiring that an Aquifer Protection Permit be obtained. It is not expected that
there will be any problems of any significance in obtaining this permit, and the
Registrant is currently permitted to commence mining at the Canyon Mine during
submittal, review and update to the Aquifer Protection Permit.
PINENUT AND KANAB NORTH MINES
As with the Canyon Mine, these mines both require that an Aquifer Protection
Permit be obtained. Energy Fuels did not expect that there will be any problems
of any significance in obtaining this permit and is currently permitted to
commence mining at each of these mines during submittal, review and update to
these Aquifer Protection Permits.
48
<PAGE> 49
RENO CREEK PROPERTY
Energy Fuels filed applications for commercial operating licenses and permits to
mine the Reno Creek by ISL methods. In January 1995, the Wyoming Department of
Environmental Quality declared the Reno Creek Mine Permit application complete,
and the applications are now in the technical review phase.
The Registrant re-initiated commercial permitting late in 1997. Applications are
under review for a Mine Permit, Class I Waste Disposal Well, Wastewater Disposal
System, NPDES Discharge Permit, and related subsidiary permits from the State of
Wyoming. In additional the U.S. Nuclear Regulatory Commission is processing the
Registrant's application for a Source Material License.
RECLAMATION
The Registrant is responsible for the environmental and reclamation obligations
relating to all of its existing mines and assets, as well as for all reclamation
and environmental obligations associated with all mined out, inactive, reclaimed
or partially reclaimed mines and properties acquired from Energy Fuels on the
Acquisition.
The total amount of the estimated reclamation liability is approximately
$13,265,000 with cash of approximately $8 million securing the liability. All of
the Registrant's mines and the White Mesa Mill were permitted through either
state or federal authorities. As a part of permit requirements, reclamation and
decommissioning bonds are in place to cover the estimated cost of final project
closures. The major cost is for closure of the White Mesa Mill and tailings
cells which is estimated at $11.5 million. The Registrant has posted a
reclamation's bond to the NRC for this amount.
SWISS ROYALTY INTEREST
As consideration for funding a large part of the cost of construction of the
White Mesa Mill, the Swiss Utilities acquired a 40% limited partnership interest
in all of Energy Fuels' properties in the United States. This limited
partnership interest did not apply to the Mongolia Property.
In 1995, after commencement of the bankruptcy proceedings against Energy Fuels,
the Swiss Utilities agreed to fund the milling of approximately 200,000 tons of
stockpiled ore, the proceeds of which were used to repay this funding provided
by the Swiss Utilities, and to provide working capital to the bankrupt estates.
As part of this financing and Mill run, Energy Fuels and the Swiss Utilities
agreed to convert the Swiss Utilities' 40% limited partnership interest in the
United States properties, into a royalty (the "Swiss Royalty") of 9% of all
uranium and 5% of vanadium and all other minerals produced from the United
States properties owned by Energy Fuels at the time that the royalty was
granted. The Swiss Royalty will apply to all production from the Colorado
Plateau District properties and Arizona Strip properties acquired on the
Acquisition, as well as the Reno Creek Property, a portion of the Dewey Burdock
Property and the Bull Frog Property. The Swiss Royalty Interest does not apply
to the Mongolia Property, nor to any tolled ore, or purchased ore from third
parties, or Alternate Feeds that are processed in the White Mesa Mill, nor to
any properties acquired by Energy Fuels after the date that the Swiss Royalty
Interest was granted.
Subsequent to the Acquisition, the Registrant has amended the Swiss Royalty
amount to 4.5% of all uranium and 2.5% of vanadium for the period from January
1, 1998 to December 31, 2000. The Registrant will make an advance royalty
payment of $250,000 per year, which is fully recoupable annually against any
royalties for the applicable calendar year. Subsequent to December 31, 2000, the
royalty reverts to its original terms.
INTERCOMPANY ROYALTY INTEREST
The Registrant has purchased production royalties from International Uranium
Holdings Corporation and its 100% owned subsidiaries for a total purchase price
of approximately $25 million. This amount will be repaid from future production.
49
<PAGE> 50
THE URANIUM INDUSTRY
OVERVIEW
The only significant commercial use for uranium is to fuel nuclear power plants
for the generation of electricity. According to the Energy Information
Administration of the United States Department of Energy (the "EIA"), nuclear
plants generated approximately 17% of the world's electricity beginning 1997.
According to the EIA, nuclear electric generating capacity is expected to grow
modestly between now and the year 2000, at a rate somewhat below that for the
total market for electricity, primarily as a result of new reactor construction
outside the United States.
The major stages in the production of nuclear fuel are exploration, mining and
milling, including in situ leach, conversion, enrichment for light water
reactors, and fuel fabrication. Once a uranium deposit is discovered and
reserves delineated, uranium ore is mined and partially refined at a nearby Mill
to produce uranium concentrates. These uranium concentrates are generally in the
form of U(3)O(8), or "Yellowcake" as it is referred to in the industry. Mining
companies usually sell uranium to utilities around the world in the form of
U(3)O(8) contained in uranium concentrates. Market participants, such as
utilities, then contract with converters, enrichers, and fuel fabricators to
produce the required reactor fuel.
URANIUM SUPPLY AND DEMAND
The installed Western World nuclear electric generating capacity is projected to
increase from 351.0 net GWe in 1997 to 390.5 GWe by 2010 representing an 11%
increase. The forecasts for installed Western World electric generating capacity
for 2000 and 2010 are based on many factors, including the utilities' announced
plans for nuclear capacity up to the year 2010 as well as government
announcements from countries operating, building or contemplating building
nuclear generators. In addition, the EIA made many country specific assumptions
about whether the utilities in each country would follow current schedules for
start-ups or shut-downs of generators and whether government pronouncements were
credible and would be carried through to fruition. No assurances can be given
that such assumptions are correct or that the schedules for expected start-ups
and shut-downs of nuclear generators will not be changed at any time by
utilities. As a result, the EIA's forecasts are subject to many risks and
uncertainties and, therefore, no assurances can be given that actual results
will not differ materially from such forecasts.
At the end of 1996, the United States led the world in nuclear capacity (100.7
GWe), followed by France (59.9 GWe), Japan (42.4 GWe), Germany (22.3 GWe),
Russia (19.8 GWe), Canada (14.9 GWe), Ukraine (13.8 GWe), and the United Kingdom
(12.9 GWe). Combined, these eight countries accounted for 82 percent of the
world's capacity for generating electricity. The Far East, with 33 scheduled
units totaling more than 30.9 Gwe, lead world nuclear construction programs. A
total of 18 countries have been identified as having nuclear units in the
construction pipeline.
The demand for U(3)O(8) is directly linked to the level of electricity generated
by nuclear power plants. According to the Uranium Institute ("UI"), annual
Western World uranium fuel consumption has increased from approximately 56
million pounds U(3)O(8) in 1980 to about 144 million pounds U(3)O(8) in 1997.
The UI estimates that annual uranium fuel consumption in the Western World will
reach 153 million pounds U(3)O(8) in 2001. Demand could be increased by trends
toward increased plant operating capacities or reduced by premature closing of
nuclear power plants.
Because of historically high prices for uranium concentrates and overly
optimistic expectations for new nuclear reactor construction, Western World
uranium production exceeded consumption in the late 1970s and early 1980s. This
led to a large build-up in inventories, which was exacerbated by new reactor
construction delays or cancellations. The resulting large inventory surplus
acted to depress the market and prices; and resulted in a dramatic restructuring
of the uranium production industry. There have been significant reductions in
mine production levels as higher cost producers have closed operations on
completion of high-priced sales contracts. For example, mine production in the
United States was reported by the UI to have declined from 43.7 million pounds
U(3)O(8) in 1980 to about 5.6 million pounds in 1997.
50
<PAGE> 51
Consequently, Western World uranium consumption has exceeded Western World
uranium production since 1985. For example, at the start of 1997, the Uranium
Institute estimated that consumption exceeded production by approximately 63
million pounds U(3)O(8) or 81% of Western World production of 77 million pounds
U(3)O(8). The Registrant believes that for the last several years this
production shortfall has been filled by, in order of magnitude, (i) the drawdown
of excess inventories held by utilities and governments (ii) supplies from
certain CIS republics primarily Russia, Uzbekistan and Kazakhstan , and (iii) to
a lesser extent, supplies from Eastern Europe and mainland China.
NUEXCO TRADING CORPORATION BANKRUPTCY
On February 23, 1995 Nuexco, an affiliate of Energy Fuels, and Energy Fuels
filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy
Code. See "Energy Fuels - Bankruptcy of Oren Benton and Nuexco". The total
liabilities owed creditors of Nuexco are reported to be in excess of $500
million. Although Nuexco continued to operate after its bankruptcy filing,
short-term defaults on some deliveries occurred, and several utilities entered
the spot market in 1995 to cover these defaults. The Registrant believes that
the resulting shortfall contributed to the increases in spot prices during 1995
and 1996.
CIS URANIUM SUPPLY
During the period 1991 to 1994, the CIS republics aggressively sold substantial
quantities of uranium into the Western World market. United States and European
government responses to these sales have limited the access of CIS producers to
these markets. In the United States, an ad hoc group of the Uranium Producers of
America ("UPA") and others filed an anti-dumping suit ("CIS Anti-dumping Suit")
against some republics of the former Soviet Union. The resulting settlement was
effected by suspension agreements (each, a "Suspension Agreement") signed with
six CIS republics (Russia, Kazakhstan, Uzbekistan, Kyrgyzstan Ukraine and
Tajikistan) in October 1992, which applied price related quotas to CIS uranium
permitted to be imported into the United States. If the United States market
price for U(3)O(8), as determined by the United States Department of Commerce
(the "DOC") was below $13.00 per pound, CIS uranium deliveries into the United
States were to be limited to those existing under certain long term contracts
entered into before March 5, 1992. At a price between $13.00 and $21.00 per
pound, the amount that could be imported into the United States was based upon a
sliding scale and at $21.00 per pound and above, there were no limits on the
amount that could be sold into the United States.
The fact that the DOC price failed to reach $13.00 in 1993 caused the DOC and
the Russian Ministry of Atomic Energy to sign an amendment to the Russian
Suspension Agreement in March 1994. The amendment allows for up to 43 million
pounds of Russian U(3)O(8) to be imported into the United States over the 10
years beginning March 1994, but only if it is matched with an equal volume of
new United States production. In total, the matched volumes could, based on
current consumption rates, account for up to 20% of the supply to the United
States market.
In March and October of 1995, the DOC and the Republics of Kazakhstan and
Uzbekistan concluded negotiations resulting in amendments to their respective
Suspension Agreements. Both amendments are effective for 10 years and provide
that uranium mined in those republics and enriched in another country (known as
"by-pass" arrangements) will no longer be considered to have undergone
substantial transformation, and will therefore count against their import
quotas. However, the initial price range under the Kazakhstan Suspension
Agreement has been reduced to $12.00 - $12.99 from $13.00 - $13.99. The
publishing of the DOC semi-annual price of $12.06 allowed up to 500,000 pounds
U(3)O(8) to be imported into the United States from Kazakhstan during the period
between April and September 1995. More recently, the publication of the DOC
semi-annual price of $15.78 on October 1, 1996, allowed Kazakhstan to export up
to 700,000 pounds of U(3)O(8) into the United States between October 1996 and
March 31, 1997. The latest determination resulted in a price of $11.76 which is
below the floor precluding deliveries from Kazakhstan between April and October
31, 1998. Uzbekistan would have been entitled to a sales quota of 940,000 pounds
U(3)O(8) in each of the next two years provided the DOC calculated price would
have remained at or above $12.00 per pound. For the remaining eight years the
sales quota is tied to United States production levels: 600,000 pounds U(3)O(8)
when United States production is between 3 and 3.5 million pounds U(3)O(8),
rising to 1 million pounds when United States production is between 8.5 and 9
million pounds and unlimited when United States production exceeds 9 million
pounds.
51
<PAGE> 52
These amendments to the Suspension Agreements may increase the supply of uranium
to the United States market and provide increased predictability concerning CIS
imports into the United States. Due to declining production levels in the CIS
republics, uranium from these sources has recently been difficult to obtain.
Consequently, the Registrant believes that the market impact of CIS supplies is
diminishing.
In Europe, the Euratom Supply Agency, which has approval authority over all
uranium-related contracts entered into in the European Community ("EC"), has an
informal policy limiting CIS sales into the EC to about 20% of annual individual
utility requirements. The United States and EC restrictions have no effect on
the sales of CIS uranium to other countries although, due to political disputes
between Russia and Japan, there has been a general reluctance by Japanese
utilities to purchase Russian sourced uranium.
HIGHLY ENRICHED URANIUM SUPPLY
In January 1994, the United States and Russia entered into an agreement (the
"Russian HEU Agreement") to convert highly enriched uranium ("HEU"), derived
from dismantling nuclear weapons, into low enriched uranium ("LEU") suitable for
use in nuclear power plants. The first shipment of Russian HEU to the United
States took place in the June 1995 with total deliveries in 1995 of about 5
million pounds (e)U(3)O(8). None of this was sold in the United States market
due to a prohibition contained in the Russian Suspension Agreement. To overcome
this impediment and concerns of United States producers, the United States
Enrichment Corporation ("USEC") and others in the industry, the United States
government provided a vehicle, via the USEC Privatization Act, for the sale of
Russian uranium acquired pursuant to the Russian HEU Agreement in the United
States commercial uranium market.
In November 1996, USEC and Techsnabexport, the Russian Executive Agent, amended
the original Russian HEU Agreement to provide for prices and quantities over a
5-year period. As a result, the Russians would blend down (i) 18 metric tons in
1997, (ii) 24 metric tons in 1998, and (iii) 30 metric tons in 1999 through
2001.
Through December 31, 1996, the quantity of LEU purchased from the Russian
Executive Agent was less than 18 metric tons of blended HEU (14 million pounds
U(3)O(8)), rather than the 30 metric tons that had been specified in the
original HEU Agreement. The 14 million pounds of uranium purchased by USEC was
subsequently transferred to DOE to be sold by the following means: (1) at any
time for end use outside the United States, (2) to the Russian Executive Agent
for use in matched sales pursuant to the Russian Suspension Agreement, or (3) in
calendar year 2001 for consumption by end users in the United States not prior
to January 1, 2002 in volumes not to exceed 3 million pounds (e)U(3)O(8) per
year.
The USEC Privatization Act authorizes the DOE to transfer to USEC up to 7,000
metric tons of surplus natural uranium and LEU, equivalent to about 18 million
pounds U(3)O(8) and 50 metric tons of HEU from United States stockpiles. In
addition to these transfers, the DOE was also authorized by the USEC
Privatization Act to sell its remaining surplus natural uranium and LEU. The
Secretary of Energy, however, must determine that the sales of surplus uranium,
which is about 21 million pounds (e)U(3)O(8), will not have an adverse material
impact on the domestic mining, conversion, and enrichment industries, and that
the price paid for the uranium is not less than fair market value.
URANIUM PRICES
Most of the countries that use nuclear-generated electricity do not have a
sufficient domestic uranium supply to fuel their nuclear power reactors, and
their electric utilities secure a substantial part of their required uranium
supply by entering into medium-term and long-term contracts with foreign uranium
producers. These contracts usually provide for deliveries to begin one to three
years after they are signed and to continue for several years thereafter. In
awarding medium-term and long-term contracts, electric utilities consider, in
addition to the commercial terms offered, the producer's uranium reserves,
record of performance and cost competitiveness, all of which are important to
the producer's ability to fulfill long-term supply commitments. Under
medium-term and long-term contracts, prices are established by a number of
methods, including base prices adjusted by inflation indices, reference prices
(generally spot price indicators but also long-term reference prices) and annual
price negotiations. Many contracts also contain floor prices, ceiling prices,
and other negotiated provisions which affect the amount paid by the buyer to the
seller. Prices under these contracts are usually confidential.
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<PAGE> 53
Electric utilities procure their remaining requirements through spot and
near-term purchases from uranium producers and traders. Traders source their
uranium from organizations holding excess inventory, including utilities,
producers and governments. With the bankruptcy of Nuexco, and the closure of
by-pass arrangements resulting from the amendments to the Suspension Agreements
with the respective CIS republics, spot market activity increased to 42 million
pounds U(3)O(8) in 1997, a volume estimated by the UI to be equivalent to about
30% of Western World reactor requirements.
Spot prices reflect the price at which uranium may be purchased for delivery
within one year. Historically, spot prices have been more volatile than
long-term contract prices, increasing from $6.00 per pound U(3)O(8) in 1973 to
$43.00 in 1978, then declining from $40.00 in 1980 to a low of $7.25 in October
of 1991. More recently, prices have receded from a 1997 year-end spike of $12.75
to a relative market low just below $11.00.
Trade restrictions limiting the free flow of uranium from the CIS republics into
the Western World markets, including the negotiation by the DOC of amendments to
the Suspension Agreements with Kazakhstan and Uzbekistan resulting in the
elimination of European enrichment for uranium from these republics as a vehicle
to by-pass United States import restrictions, the Nuexco bankruptcy under
Chapter 11 of the United States Bankruptcy Code and related defaults on
deliveries (see "Bankruptcy of Oren Benton and Nuexco") and the reluctance of
uranium producers and inventory holders to sell at low spot price levels,
contributed to the increase in spot prices between 1995 and 1997. Since that
time, these factors have had a diminishing impact on the uranium market causing
prices to over correct in a downward trend. Particularly, in the case of NUEXCO
bankruptcy.
Future uranium prices will depend largely on the amount of incremental supply
made available to the spot market from the remaining excess inventories, primary
production in Russia and other CIS republics, as well as supplies from Russian
HEU and its other stockpiles, from excess United States HEU and increased
production from unutilized capacity of other uranium producers. Analysts
believe, however, that prices will continue to stabilize throughout 1998 and
begin to push higher over the next couple of years.
COMPETITION
The Registrant markets uranium to utilities in direct competition with supplies
available from various sources worldwide. The Registrant competes primarily on
the basis of price. Although the Registrant expects to be a significant United
States producer of uranium, its total production will be a small percentage of
total Western World production.
The uranium production according to the industry international in scope and is
characterized by a relatively small number of companies operating in only a few
nations. In 1996, six companies, Cameco, Compagnie Generales des Matieres
Nucleaires ("Cogema"), Energy Resources of Australia Ltd. ("ERA"), The RTZ
Corporation PLC ("RTZ"), Uranerzbergbau-GmbH ("Uranerz") and WMC Limited,
produced over 60% of total world output. Most of Western World production was
from only eight nations: Canada, Niger, Australia, Namibia, South Africa, United
States, France, and Gabon. In 1988, the former Soviet Union, now known as the
CIS, and Mainland China began to supply significant quantities of uranium
annually into Western World markets.
The Canadian uranium industry has in recent years been the leading world
supplier, producing 29.5 million pounds U(3)O(8) in 1996, or about 48% of total
Western World production.
THE VANADIUM MARKET
As a co-product of the production of uranium from the Colorado Plateau District
ores, the Registrant will produce and sell vanadium. These deposits have been
mined for over 100 years, and significant reserves remain.
Vanadium is an essential alloying element for steels and titanium, and its
chemical compounds are indispensable for many industrial and domestic products
and processes. The principal uses for vanadium are: (i) carbon steels used for
reinforcing bars; (ii) high strength, low alloy steels used in construction and
pipelines; (iii) full alloy steels used in castings; (iv) tool steels used for
high speed tools and wear resistant parts; (v) titanium alloys used for jet
engine parts and air frames; and (vi) various chemicals used as catalysts.
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<PAGE> 54
Principal sources of vanadium are (i) titaniferous magnetites found in Russia,
China and South Africa; (ii) sludges and fly ash from the refining and burning
of the U.S., Caribbean and Middle Eastern oils; and (iii) uranium co-product
production from the Colorado Plateau. While produced and sold in a variety of
ways, vanadium production figures and prices are typically reported in pounds of
an intermediate product, vanadium pentoxide, or V(2)O(5). The White Mesa Mill is
capable of producing two products, ammonium metavanadate ("AMV"), an
intermediate product, and vanadium pentoxide ("flake", "black flake", "tech
flake" or "V(2)O(5)"). The majority of sales are as V(2)O(5), with AMV being
produced and sold on a request basis only.
Vanadium is generally produced as a by- or co-product of other metal production.
In the United States, the most significant source of production has been as a
by-product of uranium production from ores in the Colorado Plateau District,
accounting for over half of historic U.S. production. Vanadium in these deposits
occurs at an average ratio of seven pounds of vanadium for every pound of
uranium, and the financial benefit derived from the by-product sales have helped
to make the mines in this area profitable. However, low prices for both uranium
and vanadium in recent years have forced all producers in the Colorado Plateau
District to place their facilities on standby.
The market for vanadium has fluctuated greatly over the last 15 years. Over
capacity in the mid 1970's was caused by reduced demand for vanadium during the
recession that plagued the steel industry. By the end of the decade, steel
production had climbed to record levels and prices for V(2)O(5) firmed at around
$2.75 per pound. During the early 1980's, quoted prices were in the range of
$3.00 per pound, but increased exports from China and Australia, coupled with
the continued economic recession of the 1980's drove prices to as low as $1.30
per pound. Prices stabilized in the $2.00 - $2.45 per pound range until
perceived supply problems in 1988 caused by cancellation of contracts by China
and rumors of South African production problems resulted in a price run-up of
unprecedented magnitude, culminating in an all time high of nearly $12.00 per
pound in February of 1989. This enticed new producers to construct additional
capacity and over-supply problems again depressed the price in the early 1990's
to $2.00 per pound and below. Late in 1994, a reduction in supplies from Russia
and China, coupled with concerns about the political climate in South Africa and
a stronger steel market caused the price to climb to $4.50 per pound early in
1995. In the beginning of 1998, prices had climbed to a nine-year high of $7.00
caused by a supply deficit unable to keep pace with record demand from steel and
aerospace industries. Increased market demand and consumption, is expected to
remain strong sustaining prices at these near record highs for the next two
years.
Vanadium supply and demand estimates for the near future show yearly consumption
to increase at a rate of 5% from its current level of 130 million pounds
V(2)O(5). World wide production capacity is expected to increase from its
current level of 120 million pounds beginning in the year 2000, notwithstanding
the Registrant's anticipated start up in 1998. Recent comments in trade journals
have indicated that the major South African producers have augmented their
production by the integration of their ferro-vanadium production. The net effect
of reduction in the flow of V(2)O(5) from South Africa to converters in Europe
and Japan, and lagging increases in production have caused consumers to scramble
for feedstocks. This, coupled with projected worldwide yearly steel consumption
of over 100 million tons in 1997 and 1998, and the apparent inability of Russia
and China to produce enough vanadium for even their internal needs, point to
sustained prices in the range of $5.00 - $6.00 per pound.
Historically, vanadium has been largely producer priced, but during the 1980's,
this came under pressure due to the emergence of new sources. As a result,
merchant or trader activity gained more and more importance. While a very large
portion of the supply continues to come from a few major producers in South
Africa, the prices for the products that will be produced by the Registrant will
be based on weekly quotations of the LME. Historically, vanadium production from
the White Mesa Mill has been sold into the world-wide market both through
traders, who take a 2% to 3% commission for their efforts and, to a lesser
extent, through direct contacts with domestic converters and consumers. While
priced in U.S. dollars per pound of V(2)O(5), the product is typically sold by
the container, which contains nominally 40,000 pounds of product packed in 55
gallon drums, each containing 550 pounds of product. Typical contracts will call
for the delivery of one to two containers per month over a year or two to a
customer with several contracts in place at the same time. Pricing is usually
based on the LME price and may include floor and ceiling price protection for
both the producer and seller. Spot sales are also made based on the current LME
quote.
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ITEM 3 - LEGAL PROCEEDINGS
On July 23, 1998, the Nuclear Regulatory Commission (the "NRC") issued an
amendment to the Registrant's mill license allowing the receipt and processing
of certain alternate feed material (the "Ashland 2 Materials") from a Formerly
Utilized Sites Remedial Action Program ("FUSRAP") site at the White Mesa Mill.
On July 22, 1998, Envirocare of Utah, Inc., a company licensed by the NRC to
dispose of uranium bearing byproduct materials at its facility in Tooele County,
Utah, filed a request for a hearing with the NRC for the purpose of challenging
the issuance of the Registrant's license amendment. On August 19, 1998, the NRC
Presiding Officer assigned to the matter dismissed Envirocare's petition for
lack of standing. Envirocare appealed its decision to the Commission on August
31, 1998. The Registrant and the NRC Staff both filed oppositions to
Envirocare's appeal on September 15, 1998. On November 14, 1998, the NRC denied
Envirocare's appeal. On September 23, 1998, Envirocare filed a Petition for
Review in the United States Court of Appeals for the District of Columbia
Circuit, appealing the decision in a prior case (In the Matter of Quivira Mining
Company) upon which the dismissal of Envirocare's claim against the Registrant
was based. On October 22, 1998, the Registrant was added as an intervener in the
Quivera appeal. This appeal is pending.
On July 23, 1998, the State of Utah also filed a petition requesting a hearing
on the Registrant's aforementioned license amendment relating to the Ashland 2
Materials. By Order dated September 1, 1998, Utah's Petition was granted. Utah's
Petition articulates two substantive concerns: 1) that hazardous wastes, as
defined by the Resource Conservation and Recovery Act (42 U.S.C. ss. 690 et
seq.) contained in the alternate feed material to be processed at the site would
be disposed of at the site, and 2) that the Registrant was not in fact
processing the alternate feed material primarily for its uranium source material
content, in alleged contravention of NRC regulations and State law. Utah alleges
that the NRC Staff misinterpreted NRC Guidance on this matter. The first of
these two issues has been amicably resolved between the parties (Utah has
indicated to the Registrant that its concerns that the alternate feed material
might contain hazardous wastes has been resolved by additional analytical and
other data which have been forwarded to Utah by the Registrant). However, Utah
has informed the Registrant and the NRC Presiding Officer that resolution of the
second issue is unlikely short of an administrative adjudication. On November
13, 1998, Pack Creek Ranch Company filed a request for a hearing and leave to
intervene in the Ashland 2 Materials matter. On December 17, 1998, the NRC
Presiding Officer dismissed this request.
All submissions to the NRC Presiding Officer on the Ashland 2 litigation must be
submitted by January 30, 1999, and the Presiding Officer will make his decision
based on the filed submissions. While the Registrant believes that the NRC Staff
interpretation of NRC Guidance is legally correct, there can be no assurance
that this will be upheld in these adjudication proceedings.
On October 15, 1998, the Registrant submitted a request to the NRC to amend the
Registrant's Mill license to allow for the receipt and processing of additional
FUSRAP alternate feed materials (the "Ashland 1 Materials"). This request is
currently before the NRC and no license amendment relating to the Ashland 1
Materials has been issued at this time.
Anticipating that the license amendment for the Ashland 1 Materials would be
granted, on December 2, 1998, the State of Utah filed a petition requesting a
hearing on the requested Ashland 1 license amendment, on essentially the same
grounds as for the Ashland 2 amendment. On December 18, the Registrant responded
by not contesting the State's request for a hearing.
In addition to the State of Utah, Envirocare, Pack Creek Ranch Company, a group
called the Concerned Citizens of Utah and the Navajo Utah Commission filed
petitions requesting a hearing on the Ashland 1 license amendment. The
Registrant has filed submissions with the NRC Presiding Officer assigned to the
Ashland 1 license amendment opposing standing with respect to each of these
additional submissions. No hearing schedule has yet been set for the Ashland 1
license amendment.
The Registrant is vigorously defending its positions and the validity of the
license amendment or proposed license amendment in all of the foregoing
described actions. If the Registrant does not ultimately prevail in such actions
and any appeals therefrom, the Registrant's ability to process alternate feeds
containing lower levels of uranium, in certain circumstances, may be adversely
effected since NRC license amendments are required for each alternate feed
transaction.
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<PAGE> 56
ITEM 4 - CONTROL OF THE REGISTRANT
(a) As far as it is known to the Registrant, the Registrant is not directly
or indirectly owned or controlled by another corporation(s) or any
foreign government.
(b) Information is set forth below with respect to persons known to the
Registrant to be the owner of more than ten percent of the Registrant's
voting securities as at March 31, 1998, and the total amount of these
securities owned by the officers and directors as a group.
<TABLE>
<CAPTION>
------------------------------------------------ ------------------------------------------- ---------------
IDENTITY OF PERSON OR GROUP NUMBER OF COMMON SHARES OWNED PERCENTAGE
<S> <C> <C>
------------------------------------------------ ------------------------------------------- ---------------
Adolf H. Lundin 22,500,000(1) 34.2%
------------------------------------------------ ------------------------------------------- ---------------
Directors and Officers as a group (7 persons) 24,550,926 37.3%
------------------------------------------------ ------------------------------------------- ---------------
GEE & CO - CIBC 9,763,600 14.9%
------------------------------------------------ ------------------------------------------- ---------------
</TABLE>
(1) These shares are held in escrow pursuant to the terms of an Escrow
Agreement among the Registrant, Adolf H. Lundin, Lukas H. Lundin and The
Montreal Trust Company of Canada. Pursuant to the terms of the
agreement, one-fifth of the shares have been released from escrow one
year following the date of listing of the Registrant's common shares on
The Toronto Stock Exchange, i.e. on May 16, 1998. The balance of the
shares will be released as to one-fifth on each of the following
anniversary dates so that all of the shares will be released by May 16,
2002.
ITEM 5 - NATURE OF THE TRADING MARKET
The Ontario Business Corporations Act, the Securities Act of the Province of
Ontario and the rules and policies of the Toronto Stock Exchange govern issuance
and trading of the Registrant's common stock.
As at March 31, 1998, approximately 6,031,200 of the Registrant's outstanding
common stock were registered in the names of residents of the United States. The
Registrant's common stock is issued in registered form and the percentage of
shares reported to be held by U.S. shareholders of record is taken from the
records of The Montreal Trust Company of Canada, the registrar and transfer
agent for the Common Stock.
The common shares of the Registrant are currently listed on The Toronto Stock
Exchange in Canada. The Registrant's common shares commenced trading on The
Toronto Stock Exchange on May 16, 1997. The following table sets forth the high
and low market prices and the volume of the common shares traded on The Toronto
Stock Exchange during the periods indicated:
<TABLE>
<CAPTION>
- ----------------------------------------- -------------------------- ------------------------- ---------------------
HIGH LOW VOLUME
THE TORONTO STOCK EXCHANGE ($Cdn) ($Cdn)
- ----------------------------------------- -------------------------- ------------------------- ---------------------
<S> <C> <C> <C>
May-June 1997 1.50 1.00 16,785,754
-------------------------- ------------------------- ---------------------
July-September 1997 1.32 0.96 10,353,679
-------------------------- ------------------------- ---------------------
October-December 1997 1.45 0.84 7,910,042
-------------------------- ------------------------- ---------------------
January - March 1998 1.40 0.92 4,192,792
-------------------------- ------------------------- ---------------------
April - June 1998 1.08 0.50 19,140,463
-------------------------- ------------------------- ---------------------
July - September 1998 .57 .38 8,669,927
- ----------------------------------------- -------------------------- ------------------------- ---------------------
</TABLE>
The closing price of the common shares on The Toronto Stock Exchange on December
15, 1998, was Cdn$0.54
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<PAGE> 57
ITEM 6 - EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
Canada has no system of exchange controls. There are no foreign exchange
restrictions on the export or import of capital or on the remittance of
dividends, interest, or other payments to non-resident holders of the Company's
securities.
The Registrant is subject to the Investment Canada Act. Under the Investment
Canada Act, the acquisition of "control" of certain "businesses" by
"non-Canadians" is subject to either notification or review requirements by
Investment Canada , a governmental agency, and will not be allowed unless they
are found likely to be of net benefit to Canada. The term "control" is defined
as any one or more non-Canadian persons acquiring all or substantially all of
the assets used in the Canadian business, or acquisition of the voting shares of
a Canadian corporation carrying on the Canadian business or the acquisition of
the voting interests of an entity controlling the Canadian corporation. The
acquisition of the majority of the outstanding shares or the acquisition of less
than a majority but 1/3 or more of the voting shares unless it can be shown in
fact that the purchaser will not control the Canadian company shall be deemed to
be "control".
An acquisition will be reviewable by Investment Canada only if the value of the
assets of the Canadian business being acquired is Cdn$5 million or more in the
case of a "direct" acquisition (or where the Canadian asset acquired constitute
more that 50% of the value of all entities acquired), or Cdn$50 million or more
in the case of an "indirect" acquisition.
These thresholds have been increased for the purpose of acquisition of Canadian
businesses by investors from members of the World Trade Organization ("WTO"),
including Americans, or WTO member-controlled companies. A direct acquisition by
a WTO investor is reviewable only if it involves the direct acquisition of a
Canadian business with assets of Cdn$179 million or more (this figure is
adjusted annually to reflect inflation). Indirect acquisitions by WTO investors
are not reviewable, regardless of the size of the Canadian business acquired,
unless the Canadian, assets acquired constitute more than 50% of the value of
all entities acquired, in which case the Cdn$179 million threshold applies.
These increased thresholds do not apply to acquisitions of Canadian businesses
engaged in certain sensitive areas such as uranium production, financial
services, transportation or cultural heritage or national identity. If the
forgoing thresholds are not met, the acquisition of a Canadian business will not
be subject to review unless it relates to Canada's cultural heritage or national
identity.
If an investment is reviewable, an application for review in the form prescribed
by regulation is normally required to be filed with the Agency (established by
the Act) prior to the investment taking place and the investment may not be
consummated until the review has been completed. There are, however, certain
exceptions. Applications concerning indirect acquisitions may be filed up to 30
days after the investment is consummated; applications concerning reviewable
investments in culture-sensitive sectors are required upon receipt of a notice
for review.
There is, moreover, provision for the Minister (a person designated as such
under the Act) to permit an investment to be consummated prior to completion of
review if he is satisfied that delay would cause undue hardship to the acquirer
or jeopardize the operation of the Canadian business that is being acquired. The
Agency will submit the application to the Minister, together with any other
information or written undertakings given by the acquirer and any representation
submitted to the Agency by a province that is likely to be significantly
affected by the investment.
The Minister will then determine whether the investment is likely to be of net
benefit to Canada, taking into account the information provided and having
regard to factors of assessment where they are relevant. Some of the factors to
be considered are the effect of the investment on the level and nature of
economic activity in Canada, including the effect on employment, on resource
processing on the utilization of parts, components and services produced in
Canada, and on exports from Canada. Additional factors of assessment include (i)
the degree and significance of participation by Canadians in the Canadian
business and in any industry in Canada of which it forms a part; (ii) the effect
of the investment on productivity, industrial efficiency, technological
development, product innovation and product variety in Canada; (iii) the effect
of the investment on competition within any industry or industries in Canada;
(iv) the compatibility of the investment with national industrial, economic and
cultural policies taking into
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consideration industrial, economic and cultural policy objectives enunciated by
the government or legislature of any province likely to be significantly
affected by the investment; and (v) the contribution of the investment to
Canada's ability to compete in world markets.
If an acquisition of control of a Canadian business by a non-Canadian is not
reviewable, the non-Canadian must still give notice to Investment Canada of the
acquisition of a Canadian business within 30 days after its completion.
There are no limitations under Canadian law on the right of nonresident or
foreign owners to hold or vote the common stock of the Registrant.
ITEM 7 - TAXATION
The following paragraphs set forth United States and Canadian income tax
considerations about the ownership of common shares of the Registrant. There may
be relevant state, provincial or local income tax considerations, which are not
discussed.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of possible United States federal income tax
consequences, under current law, applicable to a U.S. Holder (as defined below)
of common shares of the Registrant. This discussion does not address
consequences peculiar to persons subject to special provisions of federal income
tax law, such as those described below as excluded from the definition of a U.S.
Holder. In addition, this discussion does not cover any state, local or foreign
tax consequences. (See "Taxation - Certain Canadian Federal Tax Considerations"
below.)
The following discussion is based upon the sections of the Internal Revenue Code
of 1986, as amended (the "Code"), Internal Revenue Service ("IRS") rulings,
published administrative positions of the IRS and court decisions that are
currently applicable, any or all of which could be materially and adversely
changed, possibly on a retroactive basis, at any time. This discussion does not
consider the potential effects, both adverse and beneficial, of any recently
proposed legislation which, if enacted, could be applied, possibly on a
retroactive basis, at any time. Accordingly, holders and prospective holders of
common shares of the Registrant are urged to consult their own tax advisors
about the state, and local tax consequences of purchasing, owning and disposing
of common shares of the Registrant.
U.S. HOLDERS
As used herein, a "U.S. Holder means a holder of common shares of the Registrant
who is a citizen or individual resident of the United States, a corporation or
partnership created or organized in or under the laws of the United States or of
any political subdivision thereof or a trust whose income is taxable in the
United States irrespective of source. This summary does not address the tax
consequences to, and U.S. Holder does not include persons subject to specific
provisions of federal income tax law, such as tax-exempt organizations,
qualified retirement plans, individual retirement accounts and other
tax-deferred accounts, financial institutions, insurance companies, real estate
investment trusts, regulated investment companies, broker-dealers, non-resident
alien individuals, persons or entities that have a "functional currency" other
than the U.S. dollar, shareholders who hold common shares as part of a straddle,
hedging or a conversion transaction, and shareholders who acquired their stock
through the exercise of employee stock options or otherwise as compensation for
services. This summary is limited to U.S. Holders who own common shares as
capital assets. This summary does not address the consequences to a person or
entity holding an interest in a shareholder or the consequences to a person of
the ownership exercise or disposition of any options, warrants or other rights
to acquire common shares.
DISTRIBUTIONS ON COMMON SHARES OF THE REGISTRANT
U.S. Holders receiving dividend distributions (including constructive dividends)
with respect to common shares of the Registrant are required to include in gross
income for United States federal income tax purposes the gross amount of such
distributions equal to the U.S. dollar value of such dividends on the date of
receipt (based on the exchange rate on such date) to the extent that the
Registrant has current or accumulated earnings and profits, without reduction
for any Canadian income tax withheld from such distributions. Such Canadian tax
withheld may be
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<PAGE> 59
credited, subject to certain limitations, against the U.S. Holder's United
States federal income tax liability or, alternatively, may be deducted in
computing the U.S. Holder's United States federal taxable income by those who
itemize deductions. (See discussion that is more detailed at "Foreign Tax
Credit" below.) To the extent that distributions exceed current or accumulated
earnings and profits of the Registrant, they will be treated first as a return
of capital up to the US. Holders' adjusted basis in the common shares and
thereafter as gain from the sale or exchange of the common shares. Preferential
tax rates for long-term capital gains are applicable to a U.S. Holder which is
an individual, estate or trust. There are currently no preferential tax rates
for long- term capital gains for a U S. Holder, which is a corporation.
In the case of foreign currency received as a dividend that is not converted by
the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have
a tax basis in the foreign currency equal to its U.S. dollar value on the date
of receipt. Any gain or loss recognized upon a subsequent sale or other
disposition of the foreign currency, including an exchange for U.S. dollars,
will be ordinary income or loss.
Dividends paid on the common shares of the Registrant will not generally be
eligible for the dividends received deduction provided to corporations receiving
dividends from certain United States corporations. A U.S. Holder which is a
corporation may, under certain circumstances, be entitled to a 70% deduction of
the United States source portion of dividends received from the Registrant
(unless the Registrant qualifies as a "foreign personal holding Registrant" or a
"passive foreign investment company," as defined below) if such U.S. Holder owns
shares representing at least 10% of the voting power and value of the
Registrant. The availability of this deduction is subject to several complex
limitations, which are beyond the scope of this discussion.
FOREIGN TAX CREDIT
A U.S. Holder who pays (or has withheld from distributions) Canadian income tax
with respect to the ownership of common shares of the Registrant may be
entitled, at the option of the U.S. Holder, to either a deduction or a tax
credit for such foreign tax paid or withheld. Generally, it will be more
advantageous to claim a credit because a credit reduces United States federal
income taxes on a dollar-for-dollar basis, while a deduction merely reduces the
taxpayer's income subject to tax. This election is made on a year-by-year basis
and applies to all foreign taxes paid by (or withheld from) the U.S. Holder
during that year. There are significant and complex limitations which apply to
the credit, among which is the general limitation that the credit cannot exceed
the proportionate share of the U.S. Holder's United States income tax liability
that the U.S. Holder's foreign source income bears to his or its worldwide
taxable income. In the determination of the application of this limitation, the
various items of income and deduction must be classified into foreign and
domestic sources. Complex rules govern this classification process. In addition,
this limitation is calculated separately with respect to specific classes of
income such as "passive income", "high withholding tax interest", "financial
services income", "shipping income", and certain other classifications of
income. Dividends distributed by the Registrant will generally constitute
"passive income" or, in the case of certain U.S. Holders, "financial services
income" for these purposes. The availability of the foreign tax credit and the
application of the limitations on the credit are fact specific, and holders and
prospective holders of common shares of the Registrant should consult their own
tax advisors regarding their individual circumstances.
DISPOSITION OF COMMON SHARES OF THE REGISTRANT
A U.S. Holder will recognize gain or loss upon the sale of common shares of the
Registrant equal to the difference, if any, between (i) the amount of cash plus
the fair market value of any property received, and (ii) the shareholder's tax
basis in the common shares of the Registrant. This gain or loss will be capital
gain or loss if the common shares are a capital asset in the hands of the U.S.
Holder, which will be a short-term or long-term capital gain or loss depending
upon the holding period of the U.S. Holder. Gains and losses are netted and
combined according to special rules in arriving at the overall capital gain or
loss for a particular tax year. Deductions for net capital losses are subject to
significant limitations. For U.S. Holders who are individuals, any unused
portion of such net capital loss may be carried over to be used in later tax
years until such net capital loss is thereby exhausted. For U.S. Holders that
are corporations (other than corporations subject to Subchapter S of the Code),
an unused net capital loss may be carried back three years from the loss year
and carried forward five years from the loss year to be offset against capital
gains until such net capital loss is thereby exhausted.
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<PAGE> 60
OTHER CONSIDERATIONS
In the following circumstances, the above sections of this discussion may not
describe the United States federal income tax consequences resulting from the
holding and disposition of common shares:
FOREIGN PERSONAL HOLDING REGISTRANT
If at any time during a taxable year more than 50% of the total combined voting
power or the total value of the Registrant's outstanding shares is owned,
directly or indirectly, by five or fewer individuals who are citizens or
residents of the United States and 60% or more of the Registrant's gross income
for such year was derived from certain passive sources (e.g., from dividends
received from its subsidiaries), the Registrant may be treated as a "foreign
personal holding Registrant". In that event, U.S. Holders that hold common
shares would be required to include in gross income for such year their
allocable portions of such passive income to the extent the Registrant does not
actually distribute such income.
FOREIGN INVESTMENT REGISTRANT
If 50% or more of the combined voting power or total value of the Registrant's
outstanding shares are held, directly or indirectly, by citizens or residents of
the United States, United States domestic partnerships or corporations, or
estates or trusts other than foreign estates or trusts (as defined by the Code
Section 7701 (a)(31)), and the Registrant is found to be engaged primarily in
the business of investing, reinvesting, or trading in securities, commodities,
or any interest therein, it is possible that the Registrant may be treated as a
"foreign investment company" as defined in Section 1246 of the Code, causing all
or part of any gain realized by a U.S. Holder selling or exchanging common
shares to be treated as ordinary income rather than capital gain.
PASSIVE FOREIGN INVESTMENT REGISTRANT
As a foreign corporation with U.S. Holders, the Registrant could potentially be
treated as a passive foreign investment company ("PFIC"), as defined in section
1296 of the Code, depending upon the percentage of the Registrant's income which
is passive, or the percentage of the Registrant's assets which is producing
passive income. U.S. Holders owning common shares of a PFIC are subject to an
additional tax and to an interest charge based on the value of deferral of tax
for the period during which the common shares of the PFIC are owned, in addition
to treatment of gain realized on the disposition of common shares of the PFIC as
ordinary income rather than capital gain. However, if the U.S. Holder makes a
timely election to treat a PFIC as a qualified electing fund ("QEF") with
respect to such shareholders interest therein, the above-described rules
generally will not apply. Instead, the electing U.S. Holder would include
annually in his gross income his pro rata share of the PFIC's ordinary earnings
and net capital gain regardless of whether such income or gain was actually
distributed. A U.S. Holder of a QEF can, however, elect to defer the payment of
United States federal income tax on such income inclusions. Special rules apply
to U.S. Holders who own their interests in a PFIC through intermediate entities
or persons.
The Registrant believes that it was not a PFIC for its fiscal year ended
September 30, 1997, and quarters ended December 31, 1997 and March 31, 1998. If
in a subsequent year the Registrant concludes that it is a PFIC, it intends to
make information available to enable an U.S. Holder to make a QEF election in
that year. There can be no assurance that the Registrant's determination
concerning its PFIC status will not be challenged by the IRS, or that it will be
able to satisfy record keeping requirements which will be imposed on QEF's.
CONTROLLED FOREIGN CORPORATION
If more than 50% of the voting power of all classes of stock or the total value
of the stock of the Registrant is owned, directly or indirectly, by citizens or
residents of the United States, United States domestic partnerships and
corporations or estates or trusts other than foreign estates or trusts, each of
whom own 10% or more of the total combined voting power of all classes of stock
of the Registrant ("United States shareholder"), the Registrant could be treated
as a "controlled foreign corporation" under Subpart F of the Code. This
classification would effect many complex results including the required
inclusion by such United States shareholders in income of their pro rata shares
of "Subpart F income" (as specially defined by the Code) of the Registrant. In
addition, under Section 1248 of the Code, gain from the sale or exchange of
stock by a holder of common shares of the Registrant who is or was a
60
<PAGE> 61
United States shareholder at any time during the five year period ending with
the sale or exchange is treated as ordinary dividend income to the extent of
earnings and profits of the Registrant attributable to the stock sold or
exchanged. Because of the complexity of subpart F and because it is not clear
that Subpart F would apply to the holders of common shares of the Registrant, a
more detailed review of these rules is outside of the scope of this discussion.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The summary below is restricted to the case of a holder (a "Holder") of one or
more common shares who for the purposes of the Income Tax Act (Canada) (the
"Act") is a non-resident of Canada, holds his common shares as capital property
and deals at arm's length with the Registrant.
DIVIDENDS
A Holder will be subject to Canadian withholding tax ("Part XIII Tax") equal to
25%, or such lower rate as may be available under an applicable tax treaty, of
the gross amount of any dividend paid or deemed to be paid on his common shares.
Under the 1995 Protocol amending the Canada-U.S. Income Tax Convention (1980)
(the "Treaty") the rate of Part XIII Tax applicable to a dividend on common
shares paid to a Holder who is a resident of the United States is, if the Holder
is a company that beneficially owns at least 10% of the voting stock of the
Registrant, 6% (1996) and 5% (after 1996) in any other case, 15% of the gross
amount of the dividend. The Registrant will be required to withhold the
applicable amount of Part XIII Tax from each dividend so paid and remit the
withheld amount directly to the Receiver General for Canada for the account of
the Holder.
DISPOSITION OF COMMON SHARES
A Holder who disposes of a common share, including by deemed disposition on
death, will not be subject to Canadian tax on any capital gain (or capital loss)
thereby realized unless the common share constituted "taxable Canadian property"
as defined by the Act. Generally, a common share will not constitute taxable
Canadian property of a Holder unless he held the common share as capital
property used by him carrying on a business (other than an insurance business)
in Canada, or he or persons with whom he did not deal at arm's length alone or
together held or held options to acquire, at any time within the five years
preceding the disposition, 25% or more of the shares of any class of the capital
stock of the Registrant.
A Holder who is a resident of the United States and realizes a capital gain on
disposition of a common share that was taxable Canadian property will
nevertheless, by virtue of the Treaty, generally be exempt from Canadian tax
thereon unless (a) more than 50% of the value of the common share is derived
from, or for an interest in, Canadian real estate, including Canadian mineral
resource properties, (b) the common share formed part of the business property
of a permanent establishment that the Holder has or had in Canada within the 12
months preceding disposition, or (c) the Holder (i) was a resident of Canada at
any time within the ten years immediately, and for a total of 120 months during
the 20 years, preceding the disposition, and (ii) owned the common share when he
ceased to be resident in Canada.
A Holder who is subject to Canadian tax in respect of a capital gain realized on
disposition of a common share must include three quarters of the capital gain
(taxable capital gain) in computing his taxable income earned in Canada. The
Holder may, subject to certain limitations, deduct three quarters of any capital
loss (allowable capital loss) arising on disposition of taxable Canadian
property from taxable capital gains realized in the year of disposition in
respect to taxable Canadian property and, to the extent not so deductible, from
such taxable capital gains of any of the three preceding years or any subsequent
year.
ITEM 8 - SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Registrant for the year ended September 30, 1997, and was prepared in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP"). The
table also summarizes certain corresponding information prepared in accordance
with United States generally accepted accounting principles ("U.S. GAAP"). This
selected consolidated financial data include the accounts of the Registrant and
its subsidiaries. All amounts stated are in United States dollars.
61
<PAGE> 62
<TABLE>
<CAPTION>
-------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30TH 1997
-------------------------------------------------------
<S> <C>
Revenues $ 1,305,812
------------------------------ ------------------------
Net Income (loss)
- Canadian GAAP $ 18,694
- US GAAP $ 31,421
------------------------------ ------------------------
Net Income (loss) per equity
share
- Canadian GAAP
- US GAAP $ --
$ --
------------------------------ ------------------------
Total assets
- Canadian GAAP $57,200,339
- US GAAP $56,597,096
------------------------------ ------------------------
Total long-term debt,
Including reclamation
obligations $13,285,662
------------------------------ ------------------------
Cash Dividends $ --
------------------------------ ------------------------
</TABLE>
ITEM 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Registrant for the fiscal year September 30, 1997, and the six month period
ending, March 31, 1998, should be read in conjunction with the consolidated
financial statements of the Registrant and related notes therein. THIS
DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS - SEE "SPECIAL NOTE REGARDING
FORWARD LOOKING STATEMENTS." The Registrant's consolidated financial statements
are prepared in accordance with Canadian generally accepted accounting
principles.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1997.
RESULTS OF OPERATIONS
For the period from inception through May 9, 1997, the Registrant's activities
were focused on the acquisition and financing of the Energy Fuels assets;
therefore, costs and expenses relating to these activities were either
capitalized and included in the costs of the assets acquired or applied against
the financing proceeds received, as appropriate, in accordance with generally
accepted accounting principles in Canada.
For the period from May 10, 1997 through September 30, 1997 (year-end), the
Registrant received $523,000 of processing fees from alternate feed contracts
and received interest income of $782,000 on available cash balances and interest
related to collections of notes receivable. Total expenses were $1,287,000, of
which $238,000 was attributed to direct costs of operations and $1,008,000 to
selling, general and administrative costs. Depreciation and amortization for the
period totalled $41,000 resulting in net income from operations for the period
of $18,000.
Direct operating costs relating to uranium produced from the Registrant's
alternate feed contracts were included in inventory costs. Uranium production
totalled 185,840 pounds as of September 30, 1997, which were produced for a cost
of $1,275,000 ($6.86 per pound).
Costs relating to the restoration and start-up development of the Sunday Mine
totaling $463,000 were also capitalized and included in mining properties at
year-end. These costs will be depleted as ore is produced from the property.
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<PAGE> 63
FINANCIAL POSITION
The two most significant events which affected the Registrant's financial
position were the completion of a special warrant financing and the acquisition
of the Energy Fuels assets.
The Registrant has placed $7,945,000 on deposit in short-term marketable
investments in favor of its bonding company to secure certain reclamation bonds.
Investment income will be released from these investments, and additional
deposits will be reserved, in accordance with the Registrant's bonding
requirements, as its estimated reclamation obligations are revised over time.
The Registrant increased its capital investment in machinery and equipment by
approximately $1,949,000 in order to improve its milling, mining and exploration
activities. Additionally, approximately $729,000 was expended on mine
development and property costs during the period. This was in addition to the
approximate $1,192,000 increase in exploration cost for the period from May
through September relating to the Mongolian Joint Venture. In total,
approximately $3,870,000 of funds were expended for mining properties, plant,
equipment and exploration. Plant and equipment costs will be depreciated over
their estimated useful lives, while mine development and exploration costs will
be amortized using the units-of-production method. If an exploration project is
unsuccessful, all remaining capitalized expenditures will be written off.
The Registrant will amortize $1,270,270 of its basis in favorable uranium sales
contracts upon delivery of material in December of 1998 and its remaining basis
of $729,730 upon delivery in December of 1999. This will have the effect of
decreasing the Registrant's net asset values and increasing costs of uranium
sold, but will not adversely affect cash or working capital. Based on the sales
price reflected in these contracts, and the Registrant's estimated acquisition
costs, it is anticipated that these sales will generate profits even after
recognition of the amortization of the contract values mentioned above.
CAPITAL RESOURCES AND LIQUIDITY
The Registrant's working capital at September 30, 1997 was $24,283,000 of which
$13,953,000 consisted of cash. The Registrant expects its revenues from uranium
sales, and from alternate feed processing to provide net income and additional
working capital in the fiscal year ending September 30, 1998. The Registrant
anticipates selling approximately 1,300,000 pounds of uranium during the coming
year from its current contracts in place and estimated future sales.
Approximately 300,000 pounds will be sourced from the Registrant's alternate
feed production activities and the remaining material will be purchased
utilizing purchase contracts the Registrant currently has in place. Based on the
terms of its sales and purchase contracts, the Registrant is anticipating that
these transactions will provide profits and working capital to the Registrant.
The Registrant is also budgeting capital improvements for the Mill and other
operations of approximately $1,625,000 in fiscal year 1998. Approximately
$460,000 of these improvements are for refurbishing the vanadium circuit,
$100,000 are for modifications to allow operations at reduced tonnage, and the
remaining $1,065,000 of costs relate to alternate feed processing modifications
reimbursed by our customers and general capitalized maintenance. The Registrant
anticipates expending a similar amount in fiscal year 1999, primarily due to the
$1,500,000 projected expenditures relating to relining a tailings cell.
Exploration, mine development and property holding expenditures are anticipated
to be approximately $6,700,000, of which approximately $3,950,000 will be
expended for exploration in Mongolia.
The Registrant is anticipating funding these above outlays from current
operations and working capital (which is sufficient to cover these planned
expenditures). Nonetheless, the Company is considering the possibility of
negotiating and having available a short-term revolving credit facility during
the coming fiscal year to assist and supplement inventory and project financing,
in addition to providing short-term cash flexibility if necessary.
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<PAGE> 64
1998 FISCAL YEAR OUTLOOK
THE FOLLOWING ARE FORWARD LOOKING STATEMENTS - SEE "SPECIAL NOTE REGARDING
FORWARD LOOKING STATEMENTS."
The Registrant anticipates achieving full production at its Sunday Mine Complex
during the year along with the commencement of production at its Rim Mine. This
ore will be stockpiled at the Mill and is expected to be supplemented with ore
purchased from other independent mines in the Colorado Plateau District.
It is anticipated that the Mill will commence processing these conventional ores
in the spring of calendar year 1999. In addition to uranium, these ores contain
significant grades of vanadium, which will also be processed at the Mill and
sold to customers. Prior to the conventional ore run, the Registrant will
continue and, if possible, expand upon its current alternate feed processing
program. To supplement its own production, the Registrant is under contract to
purchase uranium concentrates during the next year at prices approximating the
market value at the time of delivery.
The Registrant anticipates that it will continue to be active in the spot and
long-term uranium sales market, based on production and inventory levels as
discussed above and additionally due to the Registrant's forecasted production
costs being below current market prices. The Registrant will also be an active
participant in the vanadium market as such material is produced from the
Colorado Plateau District ores.
The Registrant, while producing from its Sunday and Rim Mines, will be expanding
its exploration and development work in the United States and Mongolia, and
evaluating the feasibility of bringing additional mining properties into
production.
RISKS AND UNCERTAINTIES
Risk factors that affect the Registrant's results include volatility and
sensitivity to market prices for uranium and vanadium, competition,
environmental regulations, the impact of changes in foreign currencies' exchange
rates, political risk arising from operating in Mongolia, changes in government
regulation and policies including trade laws and policies, demand for nuclear
power, dependence on a limited number of customers, replacement of reserves and
production, receipt of permits and approvals from governmental authorities and
other operating and development risks.
As a result of the foregoing and other factors, no assurance can be given as to
the future results, levels of activity and achievement.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1998
The Registrant's net income for the first six months of fiscal 1998 was
$1,555,003, or approximately $0.02 per share. Details on the Registrant's
financial performance are discussed below.
During the period, the Registrant continued mining uranium and vanadium bearing
ores from its mines in the Colorado Plateau District of western Colorado and
eastern Utah. Stable uranium prices coupled with a strong vanadium market have
encouraged increased mining operations in this district. In that respect, the
Registrant continues to be pleased with mining operations at its Sunday Mine
Complex. Additionally, the Registrant commenced mining operations at its Rim
Mine this past February. Production from the Registrant's mines increased from
1659 tons in the first quarter to over 11,000 tons in the second quarter, with
unit production costs below budget. The Registrant anticipates that these two
mines will ultimately reach a combined production rate of approximately 8000
tons per month sometime this summer. This equates to approximately 35,000 pounds
of uranium and 265,000 pounds of vanadium mined per month. To supplement its own
production, the Registrant continued its ore purchase program, buying ore from
other independent miners in the district. Ore from the Registrant's mines and
purchased ore is being delivered and stockpiled at the Registrant's White Mesa
Mill where it will be processed upon completion of the current Alternate Feed
run. In light of the prospects for an improving uranium market combined with a
strong vanadium market, the Registrant continues to evaluate initiating mining
operations at other Registrant mines currently on standby.
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<PAGE> 65
The White Mesa Mill remained fully staffed as the Registrant continued
processing alternate feed containing uranium, tantalum, and niobium. This run of
alternate feed required modifying the process circuit at the Mill. While the
modifications were not overly complex, due to unforeseen variability in the
characteristics of the ore, the process for recovering the tantalum and niobium
is requiring more design and engineering work than was originally contemplated.
As such, operations at the Mill were suspended in late April while the
Registrant and its partners in this deal continue with development work. These
changes will also require modifications in the commercial terms between the
parties in this transaction. At the present time, the Registrant believes that
the development work and commercial negotiations will be successful and
anticipates resuming operations during the latter half of June. This extended
alternate feed run will result in delaying the processing of the Registrant's
conventional ore until late this year.
The Registrant also continued negotiating with several other companies and
government agencies for the processing of additional uranium bearing alternate
feeds. Despite the delay in the tantalum processing run, the Registrant remains
convinced that production of uranium from materials that are essentially a waste
product will continue to be a growing and profitable business for the future.
Processing these materials could cause different procedures for each type of
material depending on its composition. Therefore, future processing could
encounter future delays and interruptions in the Registrant's operations which
could cause adverse effects on its financial position, results of operation, and
liquidity depending on the complexity of the procedure and timing of any
modification that would be necessary. Additionally, processing future alternate
feeds is dependent upon obtaining amendments to the Mill license from the NRC
that will allow the Registrant to process the specific future material. Should
the Registrant be unable to acquire the necessary amendments, the Registrant
would be unable to process the material and thus, would suffer adverse effects
to its financial position, results of operations, and liquidity due to loss of
future revenues.
The Gurvan Saihan Joint Venture, the Registrant's Mongolian exploration
enterprise, completed the planning and preparation for the 1998 drilling and
leach test program. Actual drilling operations began in April and will continue
through the fall of this year. The Joint Venture will also complete a field test
to establish leach amenability parameters in anticipation of a full-scale pilot
production operation, which is scheduled for the 1999 season.
The Registrant also submitted its license application to the U.S. Nuclear
Regulatory Commission for a Source Materials License for its Reno Creek in-situ
project, located in the Powder River Basin of Wyoming. The Registrant is
anticipating completion of the license review process by the end of this year or
early 1999. Based on this schedule, the Registrant could be in production at
Reno Creek by 2000 at a rate of 750,000 pounds per year, depending upon market
conditions at that time.
The uranium market was extremely quiet during the past six months. As
anticipated, spot uranium prices remained soft, dipping to $10.75 per pound on
very little demand. Analysts are expecting this situation to continue until at
least the fall of this year. Taking advantage of this market lull, the
Registrant did purchase some uranium at prices under $11.00 per pound in
anticipation of deliveries scheduled for later this year under contracts at
significantly higher prices.
FINANCIAL REVIEW
For the first six months period ending March 31, 1998, the Registrant had net
income of $1,555,003. This was derived from total U(3)O(8) sales revenue of
$14,542,800 and process milling fees of $8,613,961 resulting in year to date
total revenue of $23,156,761. U(3)O(8) costs of sales were $13,663,566 while
process milling expenditures were $6,421,768 including depreciation of $111,814.
This resulted in year to date gross profits from U(3)O(8) sales of $879,234 and
from process milling of $2,192,193 for a total gross profit of $3,071,427.
Selling, general and administrative expenses were $1,712,358 for the six-month
period (including depreciation and amortization of $71,204). Net interest and
other income total $686,990. Therefore, net income for the period before the
provision for income taxes was $2,046,059. The year to date income tax provision
totaled $491,056, therefore resulting in net income for the six months ending
March 31, 1998 of $1,555,003. Year-to-date results are less than anticipated due
to delays and difficulties incurred in the current alternate feed run. It is
anticipated that normal operations will resume in the next quarter. Based on the
Registrant's current estimate of costs and revenues to
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<PAGE> 66
complete the current alternate feed run and based on future planned operations
(which are subject to change), it is expected that the Mill will operate without
significant adverse effects on the Registrant's financial position, results of
operations and liquidity.
Year-to-date, the Registrant has invested $2,040,100 in its properties, plant
and equipment, and $1,157,311 in its exploration properties in Mongolia. As of
March 31, 1998, the Registrant had net working capital of $23,407,669, of which
$13,212,684 was made up of cash and cash equivalents. The Registrant anticipates
that it will proceed with its mining, development and exploration activities as
it continues to stockpile ore inventories in anticipation of its conventional
mill run. These increases in inventories, development expenditures, and
exploration activities, along with company overheads will be funded via
operating profits from alternate feed revenue, uranium sales proceeds, and
current working capital.
ITEM 10 - DIRECTORS AND OFFICERS OF THE REGISTRANT
The names, municipalities of residence, positions with the Registrant, and
principal occupations of the directors and executive officers of the Registrant
as at May 15, 1998, are as follows:
<TABLE>
<CAPTION>
==============================================================================================================================
NAME AND MUNICIPALITY OFFICE HELD PRINCIPAL OCCUPATION
OF RESIDENCE
<S> <C> <C>
==============================================================================================================================
LUNDIN, LUKAS H. Chairman of the Board and Director President, International Curator Resources
Vancouver, Canada Ltd.; Director of a number of publicly traded
resource based companies
- ------------------------------------------------------------------------------------------------------------------------------
HOELLEN, EARL E. President, Chief Executive Officer President of the Registrant
Denver, USA and Director
- ------------------------------------------------------------------------------------------------------------------------------
FRYDENLUND, DAVID C. Vice President, General Counsel, Vice President, General Counsel and Corporate
Denver, USA Corporate Secretary and Director Secretary of the Registrant
- ------------------------------------------------------------------------------------------------------------------------------
CRAIG, JOHN H. Director Lawyer, partner, Cassels Brock & Blackwell,
Toronto, Canada Barristers and Solicitors
- ------------------------------------------------------------------------------------------------------------------------------
HARROP, CHRISTOPHER J. F. Director Chairman of Northern Securities, Inc.
Toronto, Canada
- ------------------------------------------------------------------------------------------------------------------------------
RAND, WILLIAM A. Director Self-employed business executive
Vancouver, Canada
- ------------------------------------------------------------------------------------------------------------------------------
LUNDIN, ADOLF H. Director Chairman of the Board of Lundin Oil, AG and
Geneva, Switzerland Tenke Mining Corp.; Director of a number of
publicly-traded natural mineral resource
companies
- ------------------------------------------------------------------------------------------------------------------------------
ROBERTS, HAROLD R. Vice President Vice President of the Registrant
Denver, USA
- ------------------------------------------------------------------------------------------------------------------------------
MEYER, THAD L. Vice President, Treasurer and Vice President Finance, Chief Financial Officer
Denver, USA Chief Financial Officer of the Registrant
==============================================================================================================================
</TABLE>
Before the formation of the Registrant the principal occupations of the officers
and directors were as follows:
o Earl E. Hoellen - President, Chief Executive Officer
Prior to August 1995, Mr. Hoellen was President of Nuexco Trading Corporation.
From August 1995 to May 1997, Mr. Hoellen was a consultant to the Nuclear Fuel
Industry, including directing the formation of International Uranium Corporation
from December 1995 until May 1997 at which time he assumed his current position.
o Harold R. Roberts - Executive Vice President
Mr. Roberts was the President of Energy Fuels, which position he held since
1994. From 1986 through 1993, Mr. Roberts was President of Landmark Reclamation,
Inc., a subsidiary of Energy Fuels.
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o David C. Frydenlund - Vice President, General Counsel
Before July 1996, Mr. Frydenlund was a lawyer and partner with the firm Ladner
Downs. Thereafter, Mr. Frydenlund was Vice President of Namdo Management
Services, LTD., a firm which provides management services to publicly traded
resource companies.
o Thad L. Meyer - Vice President, Chief Financial Officer
Mr. Meyer is a CPA who prior to October 1997 was a financial consultant. Prior
to August 1995, Mr. Meyer was Vice President of NUEXCO Trading Corporation and
manager of Trading Operations.
o Lukas H. Lundin - Director
For the five years prior to formation of the Registrant, Mr. Lundin's occupation
has been as shown above.
o Adolf H. Lundin - Director
For the five years prior to formation of the Registrant, Mr. Lundin's occupation
has been as shown above.
o William A. Rand - Director
Before October 1992, Mr. Rand was a lawyer and partner with the firm Rand Edgar
& Sedun.
o John H. Craig - Director
Before August 1994, Mr. Craig was a lawyer and partner with the firm Holden Day
Wilson.
o Christopher J. F. Harrop - Chairman
Prior to June 1995, Mr. Harrop was Senior Vice President and Director, Canaccord
Capital Corporation. Prior to November 1994, Mr. Harrop was a financial analyst
with Sprott Securities Ltd.
Directors are elected annually to one year terms at the annual meeting of
shareholders and serve until the next annual meeting or until their successor is
duly elected. Executive Officers are appointed by the directors and serve until
replaced by the directors or their resignation.
ITEM 11 - COMPENSATION OF DIRECTORS AND OFFICERS
DIRECTOR COMPENSATION
No remuneration has been paid to directors of the Registrant in their capacities
as directors since the date of incorporation. The directors are reimbursed for
their expenses incurred to attend meetings of the Registrant.
AGGREGATE COMPENSATION FOR ALL OFFICERS AND DIRECTORS
An aggregate amount of $283,628 as compensation, was paid by the Registrant
during its fiscal year ended September 30, 1997, to all directors and officers
as a group.
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SUMMARY COMPENSATION (1)
The following table summarizes the compensation of each of the named executive
officers of the Registrant for the period from May 9, 1997, the date of the
Amalgamation with Thornbury Capital, to September 30, 1997.
<TABLE>
<CAPTION>
- ----------------------- -------------- ------------------------------------- --------------------------------------- ---------------
Annual Compensation Long Term Compensation
------------------------------------- ---------------------------------------
Awards Payouts
---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Restricted LTIP
Under Shares or Payouts
Name and Period Ended Salary Bonus Other Annual Ootions/ Restricted (US$) All Other
Principal Position Sept. 30, 1997 (US$) (US$) Compensation SAR's Share Units Compensation
(2) (US$) Granted (US$) (US$)
(#)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ----------------------- -------------- ---------- ---------- --------------- -------------------------- ------------ ---------------
Earl E. Hoellen (6)
President & CFO 1997 71,014 NIL NIL 1,000,000 NIL NIL NIL
- ----------------------- -------------- ---------- ---------- --------------- ------------ ------------- ------------ ---------------
David C. Frydenlund
Vice President, (6)
General Counsel and 1997 (3) 37,397 NIL 78,559(5) 500,000 NIL NIL NIL
Corporate Secretary
- ----------------------- -------------- ---------- ---------- --------------- ------------ ------------- ------------ ---------------
Harold R. Roberts
Vice President, 1997 55,233 NIL NIL 250,000 NIL NIL NIL
Operations
- ----------------------- -------------- ---------- ---------- --------------- ------------ ------------- ------------ ---------------
Rick L. Townley
Controller of
International 1997 41,425 NIL NIL 100,000 NIL NIL NIL
Uranium (USA)
Corporation (4)
- ----------------------- -------------- ---------- ---------- --------------- ------------ ------------- ------------ ---------------
</TABLE>
NOTES TO SUMMARY COMPENSATION TABLE
(1) The Registrant's currency for disclosure purposes is US dollars, which is
the functional currency of the Registrant's operations.
(2) Unless indicated otherwise, compensation figures represent the amounts
earned for the period commencing on May 9, 1997, the date of amalgamation of the
Registrant, and ending on September 30, 1997.
(3) Mr. Frydenlund commenced employment with the Registrant on July 1, 1997.
Compensation figures for Mr. Frydenlund represent the amounts earned in the
months of July, August, and September 1997.
(4) International Uranium (USA) Corporation is the Registrant's operating
subsidiary in the United States.
(5) Other annual compensation consists of $78,559, comprised of $14,013, being
the dollar value of imputed interest benefits from loans provided to the named
executive officer by the Registrant, $20,400, being amounts reimbursed for the
payment of taxes incurred by the named executive office in connection with
relocation expenses, and the remainder being relocation expenses paid by the
Registrant on behalf of the named executive officer.
(6) Each of Mr. Hoellen and Mr. Frydenlund has contracts of employment with the
Registrant's subsidiary, International Uranium (USA) Corporation. There is no
compensatory plan or arrangement provided in such contracts in respect of
resignation, retirement, termination, change in control of the Corporation or
responsibilities. The expiry date of the employment contracts is January 31,
2000 for Mr. Hoellen and June 30, 1999 for Mr.
Frydenlund.
68
<PAGE> 69
PENSION PLANS
The Registrant has a 401(k) Plan for its employees. For the calendar year ending
December 31, 1998, the Registrant matches 25% of an employee's contribution to
the plan. The Registrant has no other pension or retirement benefit plans and
none are proposed at this time. For the calendar year ended December 31, 1997,
the Registrant contributed $110,980 to the plan, which was made up entirely of
employee elected deferrals of their wages.
EMPLOYEE STOCK PURCHASE PLAN
The Registrant has an Employee Stock Purchase Plan for its employees that
enables qualified employees to purchase shares of the Registrant's stock via
payroll deduction without incurring broker commissions and/or at a discount from
current market values. The Registrant intends that this plan qualify as an
"employee stock purchase plan" under Section 423 of the U.S. Internal Revenue
Code.
ITEM 12 - OPTIONS TO PURCHASE SECURITIES FROM THE REGISTRANT
STOCK OPTION PLAN
The shareholders of the Registrant adopted an employee stock option plan (the
"Stock Option Plan"), under which the board of directors, or a committee
appointed for such purposes, may from time to time grant to directors, officers,
eligible employees of, or consultants to, the Registrant or its subsidiaries, or
to employees of management companies providing services to the Registrant
(collectively, the "Eligible Personnel") options to acquire Common Shares in
such numbers, for such terms and at such exercise prices as may be determined by
the board or such committee. The purpose of the Stock Option Plan is to advance
the interests of the Registrant by providing Eligible Personnel with a financial
incentive for the continued improvement of the Registrant's performance and
encouragement to stay with the Registrant.
The maximum number of Common Shares that may be reserved for issuance for all
purposes under the Stock Option Plan is 6,700,000 Common Shares and the maximum
number of Common Shares which may be reserved for issuance to any one insider
pursuant to share options and under any other share compensation arrangement may
not exceed 5% of the Common Shares outstanding at the time of grant (on a
non-diluted basis). Any Common Shares subject to a share option which for any
reason is cancelled or terminated without having been exercised will again be
available for grant under the Stock Option Plan.
The maximum number of Common Shares that may be reserved for issuance to
insiders of the Registrant under the Stock Option Plan and under any other share
compensation arrangement is limited to 10% of the Common Shares outstanding at
the time of grant (on a non-diluted basis).
The board of directors of the Registrant has the authority under the Stock
Option Plan to establish the option price at the time each share option is
granted. The option price may not be lower than the market price of the Common
Shares at the time of grant.
Options granted under the Stock Option Plan must be exercised no later than 10
years after the date of grant and options are not transferable other than by
will or the laws of dissent and distribution. If an optionee ceases to be an
Eligible Person for any reason whatsoever other than death, each option held by
such optionee will cease to be exercisable 30 days following the termination
date (being the date on which such optionee ceases to be an Eligible Person). If
an optionee dies, the legal representative of the optionee may exercise the
optionee's options within one year after the date of the optionee's death but
only up to and including the original option expiry date.
All options granted under the Plan to-date, are exercisable at a price of
Cdn$1.25 and will expire three years from the date of grant. Options granted to
executive officers of the Registrant and its subsidiaries and to certain high
level employees vest as to one-third on the date of grant, as to another
one-third one year after the date of grant and as to the remainder two years
after the date of grant. All other options vest as to one-half on the date of
grant and as to the remainder one year after the date of grant.
69
<PAGE> 70
The following table sets out information with respect to the options to purchase
common shares of the Registrant outstanding as at September 30, 1997:
<TABLE>
<CAPTION>
=========================== ===================== ==================== ================== =====================
CLASS OF NUMBER OF DATE OF GRANT OPTION PRICE OPTION
OPTIONEES COMMON SHARES ($cdn) EXPIRY DATE
UNDER OPTION
--------------------------- --------------------- -------------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
Executive officers and 1,725,000 May 9, 1997 1.25 May 8, 2000
directors as a group 250,000 July 1, 1997 1.25 June 30, 2000
--------------------------- --------------------- -------------------- ------------------ ---------------------
All option holders as a
group (including 2,389,000 May 9, 1997 1.25 May 8, 2000
executive officers and 250,000 July 1, 1997 1.25 May 8, 2000
directors)
=========================== ===================== ==================== ================== =====================
</TABLE>
The following table summarizes individual grants of options to purchase or
acquire securities of the Registrant or any of its subsidiaries (whether or not
in tandem with SAR's) and freestanding SAR's made during the most recently
completed financial year, September 30, 1997, to each of the named executive
officers:
OPTION/SAR GRANTS DURING THE MOST RECENTLY COMPLETED
FINANCIAL YEAR
<TABLE>
<CAPTION>
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Market Value
% of Total Exercise Of Securities
Securities Under Options/SAR's Or Underlying
Name Options/SAR's Granted to Base Price Options'SAR's Expiration Date
Granted Employees in (Cdn$/ On the Date of
(#) Financial Year Security) Grant (Cdn$/
Security
(a) (b) (c) (d) (e) (f)
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Earl E. Hoellen 1,000,000 (1) 38% 1.25 1.25 May 8/2000
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
David C. Frydenlund 250,000 (1) 19% 1.25 1.25 May 8/2000
250,000 (1) 1.25 1.25 June 30/2000
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Harold R. Roberts 250,000 (1) 9.5% 1.25 1.25 May 8/2000
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Rick L. Townley 100,000 (1) 3.8% 1.25 1.25 May 8/2000
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
</TABLE>
(1) These options contain vesting provisions which provide that the options
shall vest as to one-third of the optioned shares on the date of grant, as to a
further one-third of the optioned shares one year following the date of grant,
and as to the remaining one-third of the optioned shares, two years after the
date of grant.
Aggregated Options/SAR Exercises during the most recently completed Financial
Year and financial year-end Option/SAR Values:
<TABLE>
<CAPTION>
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Unexercised Value of Unexercised-
Securities Acquired Aggregate Value Options/SARs at In the-money
Name On Exercise Realized (Cdn$) Fiscal Year End Options/SARs at
(#) Fiscal Year End (1)
Exercisable/ Exercisable/
Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Earl E. Hoellen NIL NIL 333,333/ 20,000/
666,667 40,000
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
David C. Frydenlund NIL NIL 166,666/ 10,000/
333,334 20,000
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Harold R. Roberts NIL NIL 83,333/ 5,000/
166,667 10,000
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Rick L. Townley NIL NIL 33,333/ 2,000/
66,667 4000
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
</TABLE>
70
<PAGE> 71
(1) Based on the closing price of the Common Shares of the Registrant on The
Toronto Stock Exchange on September 30, 1997 of Cdn$1.31.
There were no Options/SAR's exercised during the most recently completed
financial year nor were there any Options or SAR's re-priced during the year.
SPECIAL WARRANT FINANCING
Pursuant to an agency agreement dated as of March 14, 1997 (the "Agency
Agreement") entered into between the Registrant and Salman Partners Inc., CIBC
Wood Gundy Securities Inc., Griffiths McBurney & Partners, Newcrest Capital Inc.
and First Marathon Securities Limited (collectively, the "Agents"), the Agents
sold an aggregate of 37,800,00 Special Warrants on behalf of the Registrant at a
price of Cdn.$1.25 per Special Warrant for net proceeds of $31,784,288. The
transaction closed on March 26, 1997. Each Special Warrant entitled the holder
thereof to acquire one common share of the Registrant without further payment.
All of the Special Warrants were exercised immediately prior to the completion
of the Amalgamation.
The Registrant used approximately $21,300,000 of the net proceeds from the
Special Warrant placement to complete the acquisition of the Energy Fuels
Assets. The remainder of the proceeds, approximately $10,490,000 were added to
working capital and will be used by the Registrant to carry out mine
development, Mill refurbishment, mining and additional exploration activities on
its properties and for general corporate purposes.
ITEM 13 - INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Lukas H. Lundin, John H. Craig, Christopher J.F. Harrop, Adolf H. Lundin, and
William A. Rand are also directors and officers of other natural resource
companies and, consequently, there exists the possibility for such directors and
officers to be in a position of conflict relating to any future transactions or
relationships between the company or common third parties. However, the
Registrant is unaware of any such pending or existing conflicts between these
parties. Any decision made by any of such directors and officers involving the
Registrant are made in accordance with their duties and obligations to deal
fairly and in good faith with the Registrant and such other companies. In
addition, each of the directors of the Registrant, discloses and refrains from
voting on, any matter in which such director may have a conflict of interest.
None of the present directors, senior officers or principal shareholders of the
Registrant and no associate or affiliate of any of them has any material
interest in any transaction of the Registrant or in any proposed transaction
which has materially affected or will materially affect the Registrant except as
described herein. During the period ended September 30, 1997 the Registrant
incurred legal fees of $188,692 to Cassels Brock & Blackwell, a law firm of
which John H. Craig is a partner.
For all periods through September 30, 1997, the Registrant paid management and
administrative service fees of $343,641 to a company owned by the Chairman of
the Registrant which provides office premises, secretarial and other services in
Vancouver. These fees include costs incurred throughout 1996 in pursuing the
acquisition of the Energy Fuels Assets. The Registrant continues to pay monthly
fees of Cdn.$12,840 to this service company.
During the period ended September 30, 1997 the Registrant incurred interest of
$147,315 on a letter of credit and other loan facilities provided by Adolf H.
Lundin, a director of the Registrant, as part of the acquisition of the Energy
Fuels assets. This amount has subsequently been paid and the underlying
facilities have been paid off and terminated.
71
<PAGE> 72
The aggregate indebtedness to the Registrant or any of its subsidiaries of all
officers, directors, employees and former officers, directors and employees of
the Registrant and its subsidiaries as of May 15, 1998 is $200,000.
TABLE OF INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS
<TABLE>
<CAPTION>
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Largest Amount Amount Outstanding
Outstanding As at May 15,
Name and Principal Involvement of During Fiscal Year 1998
Position Registrant or Ended (US$)
Subsidiary September 30, 1997
(US$)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
David C. Frydenlund, Relocation loan
Vice President, General Made by the
Counsel and Corporate Registrant's 850,000 (1) 200,000 (2)
Secretary Subsidiary,
International Uranium
(USA) Corporation
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>
(1) Unsecured, non interested bearing, full recourse loan granted in connection
with the named executive officer's relocation made on June 24, 1997,
$650,000 of which was payable in full on or before September 30, 1997, and
was repaid to the registrant in full on September 30, 1997, leaving
$200,000 outstanding.
(2) Unsecured, non interest bearing, full recourse loan granted in connection
with the named executive's relocation made on June 24, 1997, and repayable
in full on or before June 30, 1999.
PART II
ITEM 14 - DESCRIPTION OF SECURITIES TO BE REGISTERED
The common shares of the Registrant are being registered pursuant to this
Registration Statement.
The authorized capital of the Registrant consists of an unlimited number of
Common Shares of which 65,743,066 common shares are issued and outstanding as at
September 30, 1997.
The following is a summary of the principal attributes of the Common Shares of
the Registrant:
VOTING RIGHTS
The holders of the Common Shares are entitled to receive notice of, attend, and
vote at any meeting of the shareholders of the Corporation. The Common Shares
carry one vote per share.
DIVIDENDS
The holders of Common Shares are entitled to receive on a pro-rata basis such
dividends as may be declared by the board of directors of the Registrant, out of
funds legally available therefor.
RIGHTS ON DISSOLUTION
In the event of the liquidation, dissolution or winding up of the Registrant,
the holders of the Common Shares will be entitled to receive on a pro-rata basis
all of the assets of the Registrant remaining after payment of all the
Registrant's liabilities.
PRE-EMPTIVE AND CONVERSION RIGHTS
No pre-emptive or conversion rights are attached to the Common Shares and the
Common Shares, when fully paid, will not be liable to further call or
assessment. No other class of voting shares may be created without the approval
of the holders of the Common Shares.
72
<PAGE> 73
PART III
ITEM 15 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 16 - CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
Not applicable.
PART IV
ITEM 17 - FINANCIAL STATEMENTS
See Financial Statements attached.
ITEM 18 - FINANCIAL STATEMENTS
Not applicable.
ITEM 19 - FINANCIAL STATEMENTS AND EXHIBITS
(a) The following documents are filed as a part of this Report:
1. Audited Financial Statements:
Consolidated Balance Sheet as at September 30, 1997.
Consolidated Statement of Earnings and Retained Earnings for period
from incorporation on October 2, 1996 to September 30, 1997.
Consolidated Statements of Cash Flows for the period from
Incorporation on October 2, 1996 to September 30, 1997.
Notes to Consolidated Financial Statements.
2. Unaudited Interim Financial Statements:
Consolidated Balance Sheet as at March 31, 1998 and September 30, 1997
Consolidated Statements of Operations for 6 months ended March 31,
1998, and 1997
Consolidated Statements of Cash Flows for 6 months ended March 31,
1998 and 1997.
3. Financial Statement Schedules:
All schedules have been omitted since they are either not required,
are not applicable, or the required information is shown in the
financial statements or related notes.
(b) Exhibits
1(a) Articles of Amalgamation certified by the Director, Ontario Corporations
Act, dated May 9, 1997;
1(b) By-Law No. 1
3(a) Amalgamation Agreement dated May 5, 1997 between the Registrant and
Thornbury Capital Corporation;
73
<PAGE> 74
3(b) Agency Agreement dated March 14, 1997 among Salman Partners Inc., CIBC
Wood Gundy Securities Inc., Griffiths McBurney & Partners, Newcrest
Capital Inc. and First Marathon Securities Limited and the Registrant
3(c) Special Warrant Indenture dated March 14, 1997 between the Registrant and
Montreal Trust Company of Canada under which the Special Warrants were
created and issued.
3(d) Escrow Agreement dated May 1997, among the Registrant, Adolf H. Lundin,
Lukas H. Lundin, and The Montreal Trust Company of Canada
3(e) Incentive Stock Option Plan as adopted by the Registrant on May 9, 1997.
3(f) Form of Incentive Stock Option Agreement entered into between the
Registrant and individuals granted options under the Plan - 2 year plan.
3(g) Form of Incentive Stock Option Agreement entered into between the
Registrant and individuals granted options under the Plan - 3 year plan.
3(h) Acquisition Agreement dated as of December 19, 1996 among International
Uranium Holdings Corporation, ("IUH"), a subsidiary of the Registrant,
Energy Fuels Exploration Company, Energy Fuels Nuclear, Inc. and Energy
Fuels Ltd., pursuant to which IUH agreed to acquire the Energy Fuels
Assets.
3(i) 1998 Employee Stock Purchase Plan
23-1 Consent of Independent Accountants
23-2 Consent of Saskatoon Mining and Minerals Service Ltd.
74
<PAGE> 75
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL URANIUM CORPORATION
By: /s/ Earl E. Hoellen
------------------------------------------------------
Earl E. Hoellen, President and Chief Executive Officer
Dated: February 26, 1999
------------------------------------------
75
<PAGE> 76
Auditors' Report
To the Directors of International Uranium Corporation
We have audited the consolidated balance sheet of International Uranium
Corporation as at September 30, 1997 and the consolidated statements of earnings
and retained earnings and cash flows for the period from incorporation through
September 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at September 30,
1997, and the results of its operations and the changes in its financial
position for the period then ended in accordance with generally accepted
accounting principles in Canada.
Price Waterhouse
Chartered Accountants
Vancouver, Canada
December 22, 1997
76
<PAGE> 77
INTERNATIONAL URANIUM CORPORATION
CONSOLIDATED BALANCE SHEET
(UNITED STATES DOLLARS)
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $13,953,355
Marketable securities 39,978
Accounts receivable 63,198
Inventories (Note 4) 10,113,853
Notes receivable (Note 5) 4,791,513
Favorable uranium sales contracts (Note 6) 1,270,270
Other 433,497
-----------
30,665,664
Properties, plant and equipment, net (Note 7) 10,858,679
Exploration properties (Note 8) 6,191,525
Notes receivable (Note 13) 206,142
Restricted short term investments (Note 9) 7,945,356
Favorable uranium sales contracts, net of current portion (Note 6) 729,730
Goodwill 603,243
-----------
$57,200,339
===========
LIABILITIES
Current liabilities:
Inventory purchases $5,050,000
Other accounts payable and accrued liabilities 961,865
Due to related parties (Note 13) 150,399
Notes payable 9,537
Deferred revenue 210,185
-----------
6,381,986
Long term liabilities:
Notes payable, net of current portion 19,962
Reclamation obligations (Note 11) 13,265,700
-----------
19,667,648
SHAREHOLDERS' EQUITY
Share capital (Note 12)
Issued and outstanding 37,513,997
Retained earnings 18,694
-----------
37,532,691
-----------
$57,200,339
===========
</TABLE>
77
<PAGE> 78
INTERNATIONAL URANIUM CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS
(UNITED STATES DOLLARS)
PERIOD FROM INCORPORATION ON OCTOBER 3, 1996 THROUGH SEPTEMBER 30, 1997
<TABLE>
<S> <C>
Revenue:
Process milling fees $ 523,865
Interest 781,947
-----------
1,305,812
Expenses:
Operations 237,719
Depreciation, depletion and amortization 41,387
Selling, general and administration 1,007,832
Foreign exchange 180
-----------
1,287,118
-----------
Net earnings for the period and retained earnings at end of period $ 18,694
===========
Net earnings per share $ --
===========
</TABLE>
78
<PAGE> 79
INTERNATIONAL URANIUM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNITED STATES DOLLARS)
PERIOD FROM INCORPORATION ON OCTOBER 3, 1996 THROUGH SEPTEMBER 30, 1997
<TABLE>
<S> <C>
CASH PROVIDED BY (USED IN):
Operating activities:
Net earnings for the period $ 18,694
Items not affecting cash
Depreciation, depletion and amortization 41,387
Gain on sale of equipment (2,500)
-------------
57,581
Changes in non-cash working capital items
Decrease in marketable securities 17,334
Increase in accounts receivable (63,198)
Increase in inventories (9,113,859)
Increase in other current assets (433,497)
Increase in liability for inventory purchased 5,050,000
Increase in other accounts payable and accrued liabilities 961,865
Increase in due to related parties 150,399
Increase in deferred revenue 210,185
-------------
NET CASH USED BY OPERATIONS $(3,163,190)
Financing activities:
Common shares issued for cash, net 36,690,454
Common shares issued on acquisition 823,543
Payment of notes payable (1,057)
-------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 37,512,940
Investing activities:
Acquisition of Energy Fuels, net of cash received (10,081,071)
Acquisition of Thornbury Capital Corp, net of cash received (673,282)
Restricted short term investments (7,945,356)
Properties, plant and equipment (2,679,149)
Proceeds from sale of equipment 2,500
Exploration properties (1,191,525)
Notes receivable (856,892)
Collection of notes receivable 3,028,380
-------------
NET CASH USED IN INVESTING ACTIVITIES (20,396,395)
-------------
Increase in cash and cash equivalents 13,953,355
Cash and cash equivalents, beginning of period
--
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,953,355
=============
</TABLE>
79
<PAGE> 80
INTERNATIONAL URANIUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNITED STATES DOLLARS)
1. ORGANIZATION AND NATURE OF OPERATIONS
International Uranium Corporation (the "Company") was originally
incorporated as a private company on October 3, 1996 under the laws of
the province of Ontario. Headquartered in Denver, Colorado, the Company
is engaged in the business of producing uranium concentrates and the
selling and trading of these concentrates in the international nuclear
fuel market. In addition, the Company also produces and sells vanadium,
as well as other minerals that can be produced as a co-product with
uranium.
The Company has commenced ore production at its Sunday Mine Complex in
Colorado. The Company also has several partially developed mines and
numerous targeted mines and exploration properties within the states of
Colorado, Utah, Arizona, Wyoming and South Dakota, as well as a 70%
interest in an exploration project in central eastern Mongolia.
Additionally, the Company owns the 2,000 ton per day White Mesa Mill
(the "Mill") near Blanding, Utah. The Mill is used to process the
Company's mined ore along with ore purchased or toll milled from other
independent mines. The Mill is also used to process alternate feeds,
which generally are ores or residues from other processing facilities
that contain uranium in quantities or forms that are either uneconomic
to recover or cannot be recovered at these other facilities, but can be
economically recovered in conjunction with other co-products at the
Mill.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada.
Differences with respect to accounting principles generally accepted in
the United States are disclosed in Note 16.
a) Use of estimates
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires the Company's management to make estimates and
assumptions that affect the amounts reported in these
financial statements and notes thereto. Actual results could
differ from those estimated.
b) Basis of consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, International
Uranium Holdings Corporation, International Uranium U.S.
Finance LLC, International Uranium (Bermuda) Ltd., Energy
Fuels Exploration Company Ltd., and International Uranium
(USA) Corporation.
c) Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit and
highly liquid short-term interest bearing securities with
maturities at the date of purchase of three months or less.
d) Marketable securities and restricted short-term investments
Marketable securities and restricted short term investments
are valued at the lower of cost or market value.
80
<PAGE> 81
e) Inventories
Inventories of ore stockpiles, uranium concentrates and
refined and converted products are valued at the lower of cost
or net realizable value. Consumable supplies and spares are
valued at the lower of weighted average cost or replacement
value.
f) Properties, plant and equipment
Mine property, plant and equipment are recorded at cost. Mine
property is depleted by the units-of- production method based
on ore reserves. Plant and equipment are depreciated on a
straight line basis over their estimated useful lives from
three to fifteen years.
g) Exploration properties
The Company defers the property acquisition costs and ongoing
exploration expenditures on properties still in the
exploration stage and carries these as assets until the
results of the exploration projects are known. If a project is
successful, the cost of the property and the related
exploration and development expenditures will be amortized
over the life of the property utilizing the units-of-
production method. If a project is unsuccessful, the mining
property and the related exploration expenditure are written
off.
h) Environmental protection and reclamation costs
The estimated costs for decommissioning and reclaiming
producing resource properties acquired from Energy Fuels have
been fully accrued on an undiscounted basis.
Estimated costs of decommissioning and reclamation associated
with newly acquired or developed resource properties, as well
as revised regulatory requirements are accrued through
periodic charges to earnings, on the units-of-production basis
in the case of mine costs or on the straight line basis in the
case of mill costs. Actual costs of decommissioning and
reclamation incurred at the time of closure of the producing
resource properties are deducted against this accrual.
Environmental costs not associated with the decommissioning or
reclamation of producing resource properties are capitalized
as property, plant and equipment costs where they result in
the betterment of an asset, or expensed as incurred in all
other circumstances.
i) Foreign currency translation
These consolidated financial statements are denominated in
United States dollars, the Company's functional currency.
Substantially all of the Company's assets and operations are
located in the United States, with the exception of the
Mongolian Gurvan-Saihan Joint Venture (Note 8). The majority
of its costs are denominated in United States dollars and all
of its products for sale are priced in United States dollars.
Amounts denominated in foreign currencies are translated into
United States dollars as follows:
a) Monetary assets and liabilities at the rates of
exchange in effect at balance sheet dates;
b) Non-monetary assets at historical rates;
c) Revenue and expense items at the average rates for
the period.
81
<PAGE> 82
The net effect of the foreign currency translation is included
in the statement of earnings subsequent to the acquisition.
j) Net earnings per share
Net earnings per common share is determined using the weighted
average number of shares outstanding during the year, which
for the period ending September 30, 1997 was 42,067,497
shares.
k) Goodwill
Goodwill is amortized on a straight-line basis over twenty
years.
l) Revenue Recognition
In accordance with normal industry practices, the Company
contracts for future delivery of uranium produced. Sales
revenue is recorded in the period that title passes to the
customer.
Process milling fees are recognized as the applicable material
is processed, in accordance with the specifics of the
applicable processing agreement.
Deferred revenues represent processing proceeds received in
advance of the required processing activity.
3. ACQUISITION OF ENERGY FUELS ASSETS AND THE AMALGAMATION
In May 1997, the Company completed the acquisition of substantially all
of the uranium producing assets and assumed certain obligations of
Energy Fuels Ltd., Energy Fuels Exploration Company and Energy Fuels
Nuclear, Inc. (collectively "Energy Fuels") for an approximate total
consideration of $35 million. Energy Fuels was in Chapter 11 Bankruptcy
proceedings in the United States. The acquisition price was settled as
follows:
<TABLE>
<S> <C>
Cash payment to vendors $19,354,336
Direct acquisition costs 1,937,631
Reclamation obligations assumed 13,265,700
Notes payable assumed 30,556
-----------
$34,588,223
===========
The acquisition was accounted for by the purchase method. The
allocation of the purchase price is summarized as follows:
Cash and certificates of deposit $11,210,896
Favorable uranium sales contracts 2,000,000
Notes receivable 7,169,143
Parts and supplies inventory 999,994
Properties, plant and equipment 8,208,190
Exploration properties 5,000,000
-----------
$34,588,223
===========
</TABLE>
The Energy Fuels assets included several developed mines on standby,
several partially developed mines, as well as numerous targeted mines
and exploration properties, within the states of Colorado, Utah,
Arizona, Wyoming and South Dakota, as well as a 70% interest in a joint
venture with the government of Mongolia and a Russian geological
concern to develop and produce uranium reserves in Mongolia.
Assets purchased also included the 2,000 ton per day White Mesa Mill
near Blanding, Utah. The Mill also has a vanadium recovery circuit.
82
<PAGE> 83
Concurrent with the acquisition of Energy Fuels, in May 1997, the
Company completed an amalgamation with Thornbury Capital Corporation
("Thornbury"). Each of the shareholders of Thornbury received one
common share in the amalgamated company for every five common shares
held prior to the amalgamation and the shareholders of the Company
received one common share for every one common share held prior to the
amalgamation. As a result of this transaction, the shareholders of the
Company acquired control of Thornbury, and accordingly, the transaction
has been accounted for as an acquisition by the Company of Thornbury.
The acquisition is summarized as follows:
<TABLE>
<S> <C>
Purchase consideration
1,443,066 common shares issued $ 823,543
Net assets acquired at book value (150,261)
-----------
Excess purchase consideration $ 673,282
===========
Attributed to
Marketable securities $ 57,312
Goodwill 615,970
-----------
$ 673,282
===========
</TABLE>
The purpose of the amalgamation was to facilitate the financing of the
Energy Fuels purchase and to achieve public company status.
4. INVENTORIES
<TABLE>
<S> <C>
Uranium
Concentrates $ 8,935,544
In process 181,797
Parts and supplies 996,512
-----------
$10,113,853
===========
</TABLE>
5. NOTES RECEIVABLE
As at September 30, 1997, Union Carbide Corporation has an outstanding
promissory note to the company in the amount of $4,791,513 which bears
interest at the U.S. prime rate. The note plus accrued interest is
payable in monthly installments with the balance due and payable in May
1998.
6. FAVORABLE URANIUM SALES CONTRACTS
As part of the Energy Fuels assets, the Company acquired uranium supply
contracts with certain utilities. At the time of the Energy Fuels
purchase, the value of these contracts was determined to be $2,000,000
based on the excess of the sales price over the market value of the
uranium to be delivered. Of this value, $1,270,270 relates to the
deliveries to be made in the first quarter of the year ending September
30, 1998, and $729,730 relates to the deliveries in the subsequent
year.
7. PROPERTIES, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Accumulated September 30, 1997
Cost Depreciation/Depletion Net
----------- ---------------------- ------------------
<S> <C> <C> <C>
Mill $ 2,765,728 $ 58,330 2,707,398
Machinery & equipment 2,824,675 144,783 2,679,892
Vehicles 68,195 6,083 62,112
Computer equipment 93,071 11,767 81,304
Furniture & fixtures 187,879 15,934 171,945
Mining properties 5,156,028 -- 5,156,028
----------- -------- -----------
$11,095,576 $236,897 $10,858,679
=========== ======== ===========
</TABLE>
83
<PAGE> 84
Depreciation and depletion totaled $236,897 for the period ending
September 30, 1997 of which $208,237 is included in inventory and
mining properties at year-end.
8. EXPLORATION PROPERTIES
Exploration properties are made up of the Company's 70% interest in the
Gurvan-Saihan Joint Venture (the "Venture") which holds five uranium
exploration blocks covering 12,100 square kilometers in central eastern
Mongolia. The other parties are the Mongolian government as to 15% and
Geologorazvedka a Russian geological concern as to 15%. A royalty in
the amount of 4% is payable to the Mongolian government. The Company
has proportionately consolidated its 70% interest in the Venture, which
is substantially represented by exploration properties. To date the
Company has funded all expenditures and expects to do so for the
foreseeable future.
9. RESTRICTED SHORT-TERM INVESTMENTS
As at September 30, 1997, the Company has placed $7,945,356 on deposit
in favor of a bonding company to secure the reclamation bond (Note 11).
10. SEGMENTED INFORMATION
Geographic segments
<TABLE>
<CAPTION>
Canada United States Mongolia Total
<S> <C> <C> <C> <C>
Net income $(13,310) $ 47,534 $ (15,530) $ 18,694
Identifiable assets $999,979 $49,380,108 $6,820,252 $57,200,339
</TABLE>
11. PROVISION FOR RECLAMATION
As part of the acquisition of Energy Fuels, the Company is responsible
for the environmental and reclamation obligations of Energy Fuels
relating to all existing mines, the Mill, and other assets, as well as
for all reclamation and environmental obligations associated with all
mined out, inactive, reclaimed or partially reclaimed mines and
properties, that were so acquired.
The total amount of the reclamation liability has been estimated by the
Company at $13,265,700. The Company has posted bonds in favor of the
United States Nuclear Regulatory Commission and the applicable state
regulatory agencies securing these liabilities and has placed
$7,945,356 on account of the obligation (Note 9).
Elements of uncertainty in estimating reclamation and decommissioning
costs include potential changes in regulatory requirements,
decommissioning and reclamation alternatives. Actual costs will differ
from those estimated and this may be material.
12. SHARE CAPITAL
a) Authorized B unlimited number of common shares.
b) Issued and outstanding:
<TABLE>
<CAPTION>
Shares Amount
---------- -----------
Issued :
<S> <C> <C>
For cash (CDN $0.25 per share) 26,500,000 $ 4,906,166
On conversion of special warrants 37,800,000 31,784,288
Amalgamation 1,443,066 823,543
---------- -----------
Balance, September 30, 1997 65,743,066 $37,513,997
========== ===========
</TABLE>
84
<PAGE> 85
In May 1997, the Company completed a private placement
financing of 37,800,000 common shares pursuant to the exercise
of special warrants that had been issued in March 1997 at a
price of Cdn$1.25 ($0.90) per special warrant for net proceeds
of Cdn$44,217,190 ($31,784,288), after deducting share issue
costs and agents fees of Cdn$3,032,802 ($2,186,137).
c) Stock options
The Company has adopted an Employee Stock Option Plan under
which the Board of Directors may from time to time grant to
directors, officers, eligible employees of, or consultants to,
the Company or its subsidiaries, or to employees of management
companies providing services to the Company, options to
acquire common shares in such numbers for such terms and at
such exercise prices as may be determined by the Board. The
purpose of the Stock Option Plan is to advance the interests
of the Company by providing eligible personnel with a
financial incentive for the continued improvement of the
Company's performance and encouragement to stay with the
Company.
Options granted to executive officers and certain employees of
the Company vest as to one-third on the date of grant, as to
another one-third one year after the date of grant and the
remainder two years after the date of grant. All other options
vest as to one-half on the date of grant and as to the
remainder one year after the date of grant.
As at September 30, 1997, options were outstanding to
directors, officers and employees to purchase 2,639,000 common
shares at a price of CDN $1.25 per share with 2,389,000
expiring May 8, 2000 and 250,000 expiring on July 8, 2000.
13. RELATED PARTY TRANSACTIONS
During the period ended September 30, 1997 the Company:
a) incurred legal fees of $188,692 with a law firm of which a
partner is a director of the Company. Amounts due to this firm
were $3,084 as at September 30, 1997.
b) incurred management and administrative service fees of
$343,641 with a company owned by the Chairman of the Company
which provides office premises, secretarial and other services
in Vancouver. These fees include costs incurred throughout
1996 in pursuing the acquisition of Energy Fuels assets.
c) loaned $850,000 to an officer of the Company in order to
facilitate relocation to the Company headquarters. Of this
amount, $650,000 was repaid prior to year end leaving $200,000
outstanding at September 30, 1997. This loan is non-interest
bearing and is payable on the earlier of termination of
employment or June 30, 1999.
d) incurred interest of $147,315 on a letter of credit and other
loan facilities provided by a director of the Company as part
of the acquisition of Energy Fuels. This amount was paid
subsequent to year end. The underlying facilities were paid
off and terminated prior to year end.
14. COMMITMENTS
Certain Swiss utilities hold a royalty (the "Swiss Royalty") of 9% of
all uranium and 5% of vanadium and all other minerals produced from
certain of the United States properties. The Swiss Royalty does not
apply to the Mongolia properties, nor to any tolled or purchased ore of
or from third parties that is processed in the Mill, nor to any
properties acquired after the date that the Swiss royalty was granted.
The Company has entered into negotiations with the Swiss utilities
toward amending certain terms of the royalty agreement.
85
<PAGE> 86
15. FINANCIAL INSTRUMENTS
As at September 30, 1997, the fair value of the Company's financial
instruments approximates their carrying values because of the
short-term nature of these instruments and, where applicable, because
interest rates approximate market rates.
16. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES
AND PRACTICES
The consolidated financial statements have been prepared in accordance
with accounting principles and practices generally accepted in Canada
(Canadian basis) which differ in certain respects from those principles
and practices that the Company would have followed had its consolidated
financial statements been prepared in accordance with accounting
principles and practices generally accepted in the United States.
o Under Canadian GAAP, the amalgamation of the Company with
Thornbury has been accounted for as an acquisition of Thornbury
resulting in the recording of goodwill. Under U.S. GAAP. The
transaction has been accounted for as a recapitalization whereby
the net monetary assets of Thornbury would be recorded at fair
value, except that no goodwill or other intangibles would be
recorded. The goodwill recorded under Canadian GAAP has been
applied to reduce the share capital of the Company under U.S.
GAAP.
o Under Canadian GAAP, certain non-cash transactions are included in
the consolidated statement of cash flows. Under U.S. GAAP,
non-cash transactions are excluded from the consolidated
statements of cash flows.
These would have been reported in the consolidated balance sheet,
consolidated statement of earnings an retained earnings, and the
consolidated statement of cash flows as follows:
CONSOLIDATED BALANCE SHEET
<TABLE>
<S> <C> <C>
CANADIAN U.S.
BASIS BASIS
-------------- --------------
Share Capital $ 37,513,997 $ 36,898,027
-------------- --------------
Goodwill $ 603,243 $ --
-------------- --------------
CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS
Net earnings and retained earnings under Canadian GAAP $ 18,694
Amortization of goodwill 12,727
--------------
Net earnings and retained earnings under U.S. GAAP 31,421
--------------
Basic/diluted earnings per share, U.S. GAAP $ --
--------------
CONSOLIDATED STATEMENT OF CASH FLOWS
Cash provided by financing activities under Canadian GAAP $ 37,512,940
Common shares issued on acquisition of Thornbury (823,543)
--------------
Cash provided by financing activities under U.S. GAAP $ 36,689,397
Cash used in investing activities under Canadian GAAP $ (20,396,395)
Acquisition of Thornbury 823,543
--------------
Cash used in investing activities under U.S. GAAP $ (19,572,852)
--------------
</TABLE>
86
<PAGE> 87
FINANCIAL STATEMENT FOR THE PERIOD ENDED MARCH 31, 1998
INTERNATIONAL URANIUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNITED STATES DOLLARS) (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31 SEPTEMBER 30
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,212,684 $ 13,953,355
Marketable securities 32,402 39,978
Trade receivables 1,160,032 63,198
Inventories 8,797,716 10,113,853
Notes receivable 1,184,952 4,791,513
Favorable uranium sales contracts 729,730 1,270,270
Other 630,271 433,497
------------ ------------
25,747,787 30,665,664
Properties, plant and equipment, net 12,596,195 10,858,679
Exploration properties 7,413,419 6,191,525
Notes receivable 204,588 206,142
Restricted short-term cash investments 8,157,409 7,945,356
Favorable uranium sales contracts, net of current portion -- 729,730
Goodwill 587,841 603,243
------------ ------------
$ 54,707,239 $ 57,200,339
============ ============
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities $ 2,331,578 $ 961,865
Inventory purchases -- 5,050,000
Notes payable 8,540 9,537
Due to related parties -- 150,399
Deferred revenue -- 210,185
------------ ------------
2,340,118 6,381,986
Notes payable, net of current portion 13,727 19,962
Reclamation obligations 13,265,700 13,265,700
------------ ------------
15,619,545 19,667,648
------------ ------------
SHAREHOLDERS' EQUITY
Share capital 37,513,997 37,513,997
Retained earnings 1,573,697 18,694
------------ ------------
39,087,694 37,532,691
------------ ------------
$ 54,707,239 $ 57,200,339
============ ============
</TABLE>
87
<PAGE> 88
INTERNATIONAL URANIUM CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
US DOLLARS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS PERIOD FROM
ENDED INCORPORATION
MARCH 31 ON OCTOBER 3,
1998 1996 TO MARCH
31, 1997
-------------- --------------
<S> <C> <C>
Revenues
U(3)O(8) sales revenue $ 14,542,800 $ --
Process milling fees 8,613,961 --
-------------- --------------
Total revenue 23,156,761 --
-------------- --------------
Cost of sales
U(3)O(8) cost of sales 13,663,566 --
Process milling expenditures 6,309,954 --
Depreciation 111,814 --
-------------- --------------
Total cost of sales 20,085,334 --
-------------- --------------
Gross profit 3,071,427 --
-------------- --------------
Operating and administrative expenses
Selling, general and administrative 1,641,154 18,552
Depreciation and amortization 71,204 --
-------------- --------------
1,712,358 18,552
-------------- --------------
Operating income 1,359,069 (18,552)
Net interest and other income 686,990 --
-------------- --------------
Net income before taxes 2,046,059 (18,552)
Provision for income taxes 491,056 --
-------------- --------------
NET INCOME FOR THE PERIOD 1,555,003 (18,552)
Retained earnings, beginning of period 18,694 --
-------------- --------------
RETAINED EARNINGS, END OF PERIOD $ 1,573,697 $ (18,552)
============== ==============
Net income per common share 0.02 0.00
============== ==============
</TABLE>
88
<PAGE> 89
INTERNATIONAL URANIUM CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNITED STATES DOLLARS) (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS PERIOD FROM
ENDED INCORPORATION
MARCH 31 ON OCTOBER 3 TO
1998 MARCH 31 1997
-------------- --------------
<S> <C> <C>
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net income for the period $ 1,555,003 $ (18,552)
Items not affecting cash
Depreciation and amortization 183,018 --
Amortization of uranium sales contract purchase cost 1,270,270 --
-------------- --------------
3,008,291 (18,552)
Changes in non-cash working capital items
Decrease in marketable securities 7,576 --
Increase in trade receivables (1,096,834) (41,843)
Decrease (Increase) in inventories 1,386,522 (2,610,000)
Increase in other current assets (196,774) (10,221)
Decrease in liability for inventory purchase (5,050,000) --
Increase in other accounts payable and accrued liabilities 1,369,713 198,668
Decrease in due to related parties (150,399) --
Decrease in deferred revenue (210,185) --
-------------- --------------
NET CASH USED BY OPERATIONS (932,090) (2,481,948)
-------------- --------------
EXPLORATION, DEVELOPMENT
AND INVESTMENT ACTIVITIES
Properties, plant and equipment (2,040,100) (1,279,478)
Exploration properties (1,157,311) --
Collection of notes receivable 3,608,115 --
Increase in restricted cash investments (212,053) --
-------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTMENT ACTIVITIES 198,651 (1,279,478)
-------------- --------------
FINANCING ACTIVITIES
Issuance of common stock -- 4,906,166
Stock issue costs -- (195,115)
Payment of notes payable (7,232) --
-------------- --------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (7,232) 4,711,051
-------------- --------------
(Decrease) Increase in cash and cash equivalents (740,671) 949,625
Cash and cash equivalents, beginning of period 13,953,355 --
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,212,684 $ 949,625
============== ==============
</TABLE>
89
