First Uranium nails US$125m and $61.5m in two deals

First Uranium (FIU-T, FUM-J) has announced a bought deal private placement financing of $61.5 million, anticipated to close on February 11. The deal consists of 20.5 million units at $3. Each unit has one share and half a warrant. A warrant entitles the holder to buy a share at $4.15 for 24 months after closing. The deal is handled by a syndicate of underwriters led by Macquarie Capital Markets Canada, Scotia Capital and National Bank Financial.

First Uranium has also secured a US$125 million payment from Gold Wheaton Gold (GLW-V), of which US$50 million has already been advanced. Once the remaining US$75 million is paid, which is expected by March 12, the money is anticipated to meet all the remaining capital expenditures First Uranium will incur in bringing its two uranium-gold projects in South Africa to production.

“What we have are large long-life operations,” says Gordon Miller, First Uranium’s president and CEO. “We are setting them up to be low-cost, high-margin businesses. We are getting through the lion’s share of our capital spend. We have started commissioning and ramping up production from our gold plants (late) last year, and we are in the process of commissioning our uranium plants.”

And the fast pace will continue. “Within the next two quarters we’ll be commissioning three new uranium plants at the two sites, and then we’ll be ramping up production of uranium effectively in the very near future,” he says.

There are substantial differences between the company’s two operations. “We have two very different projects,” Miller says. “One is an underground mine which was a historic producer of gold and uranium. The other is a surface tailings reprocessing operation where we have managed to consolidate tailings in the Klerksdorp region from mines that have operated there for the last 50 years.”

The US$125 million transaction allows Gold Wheaton to buy an estimated 525,000 oz. in future gold production at a price of US$400 per oz., compared to a spot price of about US$900 per oz. at presstime — a discount of US$500 per oz. Assuming a constant gold price of US$900, the discount is worth US$263 million. (However, since the discount reflects future cash flows, the net present value, or NPV, is lower.)

The deal does not specify a fixed 525,000 oz. in production. Instead, Gold Wheaton will receive the discounted price on 25% of First Uranium’s gold production from Mine Waste Solutions (MWS), a subsidiary of First Uranium which reprocesses mine tailings in the Klerksdorp area of South Africa’s North West province, 160 km west of Johannesburg. The tailings were left by the past-producing Stilfontein, Hartebeesfontein, Buffelsfontein and Elaton gold mines.

At a cutoff grade of 0.28 gram gold per tonne, the tailings consist of proven and probable reserves of 325 million tonnes grading 0.28 gram gold per tonne and 0.008% uranium oxide, equivalent to 2.9 million oz. gold and 55 million lbs. uranium oxide. First Uranium estimates that it would be able to recover 2.1 million oz. gold of the contained 2.9 million oz., and the estimated 525,000 oz. is 25% of the anticipated 2.1 million oz. in future gold production.

In addition to the reserves, the tailings also contain 230,000 oz. gold and 5.6 million lbs. uranium oxide in measured, indicated and inferred resources. The deal stipulates that First Uranium will sell Gold Wheaton at least 20,000 oz. in discounted gold this year.

First uranium anticipates a 68% gold recovery, for an average annual production of 142,000 oz. gold over 15 years of mine life. Despite low gold grades, cash costs are low, forecast at US$279 per oz., due to the low-cost nature of the operation. The tailings are at surface, and are mined using a high-pressure water cannon, turning them into slurry which is fed to the gold recovery plant.

MWS is not producing uranium yet. First Uranium anticipates that two uranium circuits would be operational in the third quarter, and a third next year. The company plans an average annual production of 1.4 million lbs. uranium oxide over a mine life of 14 years, for a total production of 19.4 million lbs., based on a 34% uranium recovery. Projected cash costs are US$21 per lb.

The uranium plants would use flotation to produce a concentrate, and leach uranium using sulphuric acid. Uranium plant tailings would be fed to the gold plants. Atmospheric leaching would be used in the beginning, and upgraded later to pressure leaching to enhance performance.

Based on gold and uranium prices in November, combined gold and uranium revenues are projected at US$8.91 per tonne of throughput, while processing costs, including capital expenditures, are forecast at US$4.30 per tonne, for a gross profit of US$4.61 per tonne of throughput. At a discount rate of 8%, the project’s NPV is US$641 million. However, since these gross profit and NPV numbers were calculated prior to the Gold Wheaton transaction, it is likely that both figures will decrease, somewhat diminishing shareholder returns.

Currently there is one gold plant in operation, with a throughput of 21,000 tonnes per day, or 630,000 tonnes per month. A second plant is scheduled to start operating later this year, and a third next year, raising throughput to 63,000 tonnes per day by March 2010. At full production, MWS is projected to produce 200,000 oz. gold and 2 million lbs. uranium oxide per year, but these high production numbers would be met for only a few years, while the highest-grade tailings are mined.

There are currently 800 workers on site, of which 650 work on construction and 150 in production. As construction winds down, a permanent work force of 250 workers would remain.

Ezulwini

First Uranium’s second operation is Ezulwini, a past-producing mine, formerly named Western Areas gold mine, which the company is bringing back to production. The mine closed in 2001. It is near the town of Westonaria in Gauteng province, 40 km from Johannesburg. Ezulwini is an underground operation. To bring the mine to production, First Uranium is refurbishing a shaft, developing the mine, and constructing gold and uranium plants.

The mine has two mineralized zones, the upper Elsburg and the middle Elsburg. The upper Elsburg is mineralized primarily with gold and has been mined extensively since the 1960’s. The middle Elsburg is mineralized with gold and uranium, and not mined much.

The company intends to mine both zones. In the upper Elsburg, some of the remaining mineralization can be mined now that the neighbouring South Deep gold mine (not owned by First Uranium) has installed water plugs between the two mines. However most of the resources are in the middle Elsburg.

First Uranium gives resource figures for the project, but no reserves are reported. Measured and indicated resources are 14 million tonnes grading 6.1 grams gold per tonne, equivalent to 2.8 million oz. gold. Inferred resources stand at 194 million tonnes of 4.7 grams gold, or 29 million oz. gold. Cutoff grades of 3-4 grams gold were used. (A January technical report gives lower inferred resources of 159 million tonnes grading 5 grams gold per tonne. The company says that the resource figure is lower since resources in the Zuurbekom zone are excluded.)

Of the measured and indicated resources above, 4.4 million tonnes grade 0.074% uranium oxide, for 7 million lbs. uranium oxide. Of the inferred resources above, 113 million tonnes grade 0.076% uranium oxide, for 204 million lbs. uranium oxide.

Costs at Ezulwini are estimated at US$69 per tonne, while revenues are projected at US$147 per tonne, for a gross profit of US$78 per tonne. This gives the project an internal rate of return (IRR) of 400%, and an NPV of US$924 million at an 8% discount rate.

Mine life is projected at 17 years, and it is anticipated to produce 5.8 million oz. gold and 18.4 million lbs. uranium oxide. Average production is projected at 341-352,000 oz. gold and 1.1-1.2 million lbs. of uranium oxide per year. Estimated cash costs are US$340 per oz. gold, and US$25 per lb. of uranium oxide. The mine would reach a throughput of 2 million tonnes per year, and would have a maximum throughput of 2.6 million tonnes per year. A 96% gold recovery is forecast, while uranium recovery is projected at 80%.

Miller reports that refurbishing of the shaft and steelwork is almost complete. Following completion, the shaft pillar would be destressed.

Destressing is not a new technique. After installing a hanging tower to convey the skips through many levels of the mine, it is important to move the vertical stress of the mine away from the section of the shaft where the new tower has been installed. This can be done by mining out an annulus around the shaft, which has the effect of creating a detour around the section of the shaft where the hanging tower is, thereby destressing the shaft.

The technique of using a hanging tower and destressing the shaft for a safer shaft that requires less maintenance has been carried out on other projects in Africa, including the adjacent South Deep mine at a much deeper level.

Miller says that all the infrastructure is in working order, including the hoist, winders, pumps, diesel generators etc.

As soon as shaft refurbishment is complete, workers employed in that activity will switch to mine development. Hoist capacity is 250,000 tonnes per month, but Miller estimates that the mine will take about three years to ramp up to a 200,000 per month throughput. Two mills, each with a capacity of 50,000 tonnes per month, have been commissioned, and two more will be added as mine throughput increases.

A 200,000 tonne per month gold plant has been commissioned late last year, and is projected to produce 6,900 oz. gold in the first quarter. The plant would ramp up production along with mine throughput. Ezulwini is in the process of commissioning a 100,000 tonne per month uranium plant. The company hopes to ship uranium oxide already in the first quarter.

There are currently 2,000 workers on site, of which 500 work on construction. As construction winds down, production would ramp up and more miners and plant employees would be recruited. Miller anticipates a labour force of 4,000 people at full production.

In the year to March 2010, First Uranium projects a combined production of 270,000 oz. gold and 1.2 million lbs. uranium for both MWS and Ezulwini.

First Uranium says that the Ezulwini project has the potential for more discoveries. For example, the company believes that the middle Elsburg zone may extend into the neighbouring Zuurbekom property for as much as 15 km of strike length. The company intends to explore Zuurbekom in future to test this theory.

In view of serious disruptions to electricity supply in South Africa last year, First Uranium has diesel generators on its projects to ensure availability.
Sulphuric acid availability in the country is good, but prices spiked in the past. Should acid prices surge again, the company may decide to build a sulphuric acid plant, making use of a pyrite flotation plant that it owns.

The largest shareholder in First Uranium is Simmer and Jack Mines (SIIF-J), which owns a 62.5% stake. First Uranium is in compliance with Black Economic Empowerment (BEE) law, since black-owned companies hold at least 26% of the two subsidiaries that operate MWS and Ezulwini. The largest black-owned investors are Vulisango Holdings and Waterpan Mining Consortium, both of which are represented on the boards of the two subsidiaries.

Should Gold Wheaton not advance the second payment of US$75 million, it will be entitled to a discounted price on only 10% of MWS’ gold production, instead of 25%.

On September 30, prior to receiving the US$50 million from Gold Wheaton, the company had working capital of US$26 million. Long-term liabilities were US$103 million in senior convertible debentures, plus US$30 million in other long-term liabilities. The company has signed a term sheet and mandate for debt financing of up to 900 million South African rands (about US$89 million.)

First Uranium has 131.1 million shares outstanding, and 134.3 million shares fully diluted. Once the private placement closes, it will have 151.6 million shares outstanding, and 165.1 million shares fully diluted. On the day the private placement was announced, the shares jumped 49¢, or 15%, to close at $3.65. The shares have been trading in a 12 month window of $1.02-11.22.