Denison’s master plan: a better bottom line

When Denison Mines Chairman Stephen B. Roman stands up and tells a packed room of shareholders that he has no grand strategy for the company, one only has to look at the bottom line to see otherwise.

How else can one explain the company’s emergence from its toughest year ever with a tidy profit of $44.6 million, up from a huge loss of $154 million in 1985. Neither luck nor flying – by – the – seat – of – your – pants – management can produce results like these.

But productivity improvements and cash conservation can and herein li es the chairman’s strategy. Over the past year, the company has cut costs, curtailed capital expenditures, and sold off assets. In addition, it has cut out common share dividends except for the first quarter of last year.

Regarding these suspended dividends, Mr Roman says he is “hoping there will not be a year that will pass without payment of dividends.” The company would have to pay a dividend sometime this year to accomplish this.

Added up, these measures enabled the company to make a series of timely a dividend sometime this year to accomplish this.

Added up, these measures enabled the company to make a series of timely moves over the past year which will result in an infusion of $400 million into the company by the end of this year, says President John D. Fowler.

The first move came last February with an issue of additional class B shares and warrants for a total of $115 million. Later came the sale of its 54% interest in Lake Ontario Cement for $84 million (N.M., Oct 27/86).

Finally the company will realize a total of about $200 million on the sale of a share of its interest in oil properties, processing facilities and a pipeline in the Egyptian desert to the International Finance Corp. and to IEOC, a subsidiary of Agip, Italy’s state-owned oil company.

These measures, says Mr Fowler, have enabled Denison to reduce its over-all indebtedness to date by $175 million since the beginning of 1986. Total recourse debt now stands at less than $250 million.

Looking at operations, Mr Fowler points out that Quintette Coal, in which Denison holds a 50% equity interest, reached a significant milestone during the second quarter when it produced clean coal at its full annual design rate of 6.3 million tonnes a year. (See separate story on Quintette Coal.) Bullish on uranium

The company’s uranium activities saw a continuing emphasis on a steady improvement in productivity and efficiency.

As measured by tons of ore broken, production at the Elliot Lake uranium operations improved by nearly 7% to 3.7 million tons, up from 3.5 million in 1985. Uranium oxide production, however, was lower at 5.2 million lb compared with 5.4 million lb in 1985. The lower production level reflects lower contract requirements. However, the annual report notes that nearly 140 million lb remain to be delivered under firm contracts through the year 2012.

Mr Fowler says nuclear power capacity has tripled during the past decade and, as uranium inventories decline, contracting by utilities for new supplies can be expected to increase in the 1990s. This will provide opportunities for Denison to develop additional sources.

A corollary to this sees Denison completing negotiations with Canuc Resources to acquire the right to mine their 1,500-acre uranium property which is contiguous to Denison’s existing mine. Mining of this property will start in mid-1988, says Mr Fowler. The new plant that recovers yttrium oxide as a byproduct of uranium operations began production in the fourth quarter of 1986. A joint venture of Denison, Unocal Canada and Molycorp Inc., Shin- Etsu Chemical and Mitsui & Co., the plant is designed to produce 150 tonnes per year, enough to supply 35% of the western world’s requirements of yttrium. Potash project

With the installation of the mine backfill system, Denison’s 60%- owned potash project near Sussex, N.B., was completed last year. The remaining 40% of the partnership is held by Potash Co. of Canada (Potacan) which acts as the agent for marketing the product.

With potash tonnage increasing steadily during the year the $350- million project reached commercial production status on Dec 31.

The project has a designed capacity of 1.3 million tonnes annually. Denison’s share of production last year amounted to 392,000 tonnes.

Mr Fowler says that net realizable potash prices were lower than expected last year. Although they appear poised for a modest recovery, it is doubtful they will rise to satisfactory levels in the short-term, he adds. But what those satisfactory levels are, Mr Fowler would not say. Oil, gas and gold

As a result of last year’s unprecedented decline in oil and gas prices, Denison has written down the carrying value of its oil and gas properties by $50.9 million, says Mr Fowler.

With oil prices rising since the end of the year and with marketing signals indicating that the existing price of about $18(US) per bbl will likely stabilize over the short term with further recovery expected over the long run, Mr Fowler notes that oil and gas remain the company’s fastest growing division. With oil and gas interests in Greece, Spain, Egypt and Italy, the company plans to aggressively explore for conventional oil reserves in Canada this year, particularly in Alberta, he says.

The company is also on the prowl for gold. With partner Sikaman Gold Resources, Denison is investigating the feasibility of developing a 58-sq-mi prospect called the Bogosu Concession in the Republic of Ghana, West Africa. Future sell-offs

Mr Roman says his only regret last year was selling its highly profitable subsidiary, Lake Ontario Cement. However, Denison still holds a 44.4% interest in Standard Trustco Ltd., a financial services organization which netted a $9.1 million in 1986, up from $6.7 million a year earlier. Denison also has a 15.2% interest in Roman Corp., which in turn owns 29.3% of the participating shares in Denison. In addition, Denison also has a 50% interest in Reiss Lime, a supplier of industrial lime and limestone as well as a 24% interest in Zemex Corp., formerly Pacific Tin.

Asked whether any of these assets might be on the selling block, Mr Fowler told The Northern Miner that nothing is up for sale, but if someone came along with an offer, it would be reviewed.

And in the event that Denison should one day find itself as a target for takeover (although no indication of this was given at the meeting), Mr Roman did assure non-voting shareholders that they would be protected “from anything like we have seen in the last few weeks at Canadian Tire.”

(Canadian Tire is in the middle of a hotly contested struggle for control.)

A provision in the Denison by-laws for Class B, non-voting shares says the Class B shareholder is permitted to convert all or part of his Class B non-voting shares into an equivalent number of Class A shares, for the purposes of any offer which is made in Canada to the holders of the Class A shares generally to purchase their shares.

Denison: A 5- year review (in million $)

1986 1985 1984 1983 1982 1981 Revenue $412.3 $553.5 $555.0 $552.1 $542.8 $310.9 Net earnings $44.6 ($157.9) $63.6 $93.2 $47.9 $61.6

Per share 28 cents ($4.55) $1.20 $2.35 $1.31 $1.69 Debt

(long-term) $342.1 $312.5 $393.9 $412.7 $569.5 $413.5 Equity

pref. sh. $321.8 $324.6 $150.6 $150.6 — —

participating sh. $272.8 $158.9 $388.7 $380.6 $249.1 $237.7 004

Denison’s share of production in 000s Uranium lb 5,239 5,490 5,840 5,976 6,132 4,743 Potash tonnes 392 83 — — — — Coal tonnes 2,622 2,738 1,761 — — — Crude oil bbl 9,088 8,919 9,180 9,290 7,211 2,249