First Uranium lowers value of operations (May 03, 2010)

VANCOUVER — First Uranium (FIU-T, FUM-J) has been forced to significantly drop the estimated value of its South African gold-uranium operations after cost escalations and permitting issues.

After releasing two technical report updates in late March, the company has lopped in half the net present value (NPV) of both its Ezulwini mine and its Mine Waste Solutions (MWS) tailings recovery operation.

At the operational Ezulwini mine, First Uranium has been hit with higher electrical power costs, lower productivity assumptions and a strengthened South African rand versus the American dollar. The company has slashed the NPV of the mine, at an 8% discount rate, from US$924 million in early 2009 to US$437 million. The internal rate of return (IRR) has been lowered from 398% to 524%. Both IRR and NPV were calculated using a long-term gold price of US$775 per oz., US$56 per lb. uranium and a U.S. dollar to rand exchange rate of seven.

The cost per tonne milled is now estimated at US$106.42, compared to US$64.90. The mine is now expected to produce an average of 781,000 lbs. uranium oxide each year, instead of 1.08 million lbs., and will churn out 283,000 oz. gold annually, instead of 341,000 oz. gold.

The mineral resource remains at 13.8 million measured and indicated tonnes grading 6.16 grams gold per tonne. Uranium has been downgraded to a byproduct, as it is only expected to produce 14% of the mine’s revenue.

Meanwhile, at the company’s MWS tailings recovery operation, First Uranium is still feeling the effects of the temporary withdrawal of the project’s environmental authorization by the South African government. The company has temporarily scaled back the project to a single gold plant from two after the financial blowback from the suspension. The second plant, along with the tailings storage facility, is expected to be back online by May 2011.

The updated valuation for MWS is now US$211 million, at an 8% discount rate, compared with US$419 million in March 2008. The IRR has gone from 75% to 34%.

The company estimates it will now cost US$427 to produce each ounce of gold at the MWS project, compared with US$347 per oz. in 2008.

First Uranium will reap some savings from smaller capital costs, which have shrunk from US$241 million to US$188 million.

The resource estimate at MWS has also changed, with a much greater resource in the proven category. In 2008, proven reserves were 99.4 million tonnes grading 0.3 gram gold and 0.08% uranium and probable reserves were 226 million tonnes grading 0.27 gram gold and 0.07% uranium. Today, proven reserves are 196 million tonnes grading 0.28 gram gold and 0.07% uranium, and probable reserves are 126.8 million tonnes grading 0.28 gram gold and 0.08% uranium.

The news comes shortly after the resignation of the company’s chief executive, Gordon Miller, and its chairman, Nigel Brunette. Miller has been replaced by Deon van der Mescht, who is a former CEO of Simmer and Jack Mines, a major shareholder of First Uranium. Robert Franklin, lead independent director at First Uranium, has been appointed interim chairman.

Since June 2009, when First Uranium reported a consolidated annual loss of US$16.3 million and increased cost estimates for MWS, the company’s stock price has made a steady decline from a high of $8 last May to a recent low of $1.07.

However, the board shakeup, the reinstated environmental permit and $110 million in proceeds from a private placement are expected to allow some recovery.

Bart Jaworski, an analyst at Raymond James, has put a target price of $2.40 on the company’s stock. In his most recent note, Jaworski wrote that while the latest news is moderately negative, he still sees value in the name, despite the slightly higher permitting risk.

First Uranium’s stock price dropped 29¢, or 18%, on four days of losses following the news to close at $1.30. The company has 166.8 million shares outstanding.