|
Exhibit
99.2
MANAGEMENT’S DISCUSSION & ANALYSIS
|
MANAGEMENT’S DISCUSSION & ANALYSIS
FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2018
TABLE OF CONTENTS
ABOUT
DENISON
This
Management’s Discussion and Analysis (‘MD&A’)
of Denison Mines Corp. and its subsidiary companies and joint
arrangements (collectively, ‘Denison’ or the
‘Company’) provides a detailed analysis of the
Company’s business and compares its financial results with
those of the previous year. This MD&A is dated as of November
9, 2018 and should be read in conjunction with the Company’s
unaudited interim consolidated financial statements and related
notes for the three and nine months ended September 30, 2018. The
unaudited interim consolidated financial statements are prepared in
accordance with International Financial Reporting Standards
(‘IFRS’) as issued by the International Accounting
Standards Board (‘IASB’). Readers are also encouraged
to consult the audited consolidated financial statements and
MD&A for the year ended December 31, 2017. All dollar amounts
in this MD&A are expressed in Canadian dollars, unless
otherwise noted. The audited consolidated financial statements and
MD&A for the year ended December 31, 2017 were expressed in US
dollars. See CHANGE IN SIGNIFICANT ACCOUNTING POLICIES
below.
Additional
information about Denison, including the Company’s press
releases, quarterly and annual reports, Annual Information Form and
Form 40-F is available through the Company’s filings with the
securities regulatory authorities in Canada at www.sedar.com
(‘SEDAR’) and the United States at
www.sec.gov/edgar.shtml (‘EDGAR’).
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MANAGEMENT’S DISCUSSION & ANALYSIS
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■
Wheeler River Pre-Feasibility Study (‘PFS’) returns
project level pre-tax NPV of $1.31 billion and IRR of
38.7%
On September 24,
2018, Denison released the results of the PFS for its flagship
Wheeler River uranium project (‘Wheeler River‘) in
northern Saskatchewan. The PFS has been completed in accordance
with National Instrument 43-101 and is highlighted by the selection
of the in-situ recovery (‘ISR’) mining method for the
development of the Phoenix deposit, with an estimated average
operating cost of $4.33 (USD$3.33) per pound U3O8. The project, on
a 100% basis, is estimated to have mine production of 109.4 million
pounds U3O8 over a 14-year
mine life, with a base case pre-tax Net Present Value
(‘NPV’) of $1.31 billion (8% discount rate), Internal
Rate of Return (‘IRR’) of 38.7%, and initial
pre-production capital expenditures of $322.5 million. The complete technical report, supporting the
disclosure of the PFS results on September 24, 2018, was made
available on Denison’s website as well as SEDAR and EDGAR on
October 30, 2018.
■
Acquisition of additional Wheeler River ownership
interest
On October 29,
2018, Denison announced that it completed a transaction with Cameco
Corporation (‘Cameco’) to increase its ownership
interest in the Wheeler River Joint Venture (‘WRJV’) to
90%. Denison acquired Cameco's approximately 24% interest in the
project in exchange for the issuance of 24,615,000 common shares of
Denison.
■
Discovery of unconformity uranium and base metals on the K West
trend at Wheeler River
Highlights from
the Company’s summer 2018 diamond drilling program at Wheeler
River include the discovery of unconformity hosted mineralization
on the K West trend, including 0.30% U3O8, 4.7% Co, 3.7% Ni
and 0.55% Cu from 651.1 to 652.1 metres in drill hole WR-733D1 and
1.2% Cu and 0.49% Ni from 636.6 to 642.6 metres in drill hole
WR-733D2. The K West trend is a priority target area located
approximately 500 metres west of the parallel K North trend, which
hosts the Gryphon deposit. The results are associated with
significant structure and alteration in the overlying sandstone, as
well as elevated uranium values (averaging 17 ppm uranium)
extending up to 100 metres above the unconformity. The results are
encouraging and further drill testing is warranted to the south,
where up to five kilometres of strike length remains untested along
the K West trend.
■
Exploration success at Waterbury Lake with the discovery of uranium
mineralization on the GB Trend
On September 17,
2018, Denison reported the discovery of uranium mineralization on
the Company’s 65.92% owned Waterbury Lake project.
Basement-hosted uranium mineralization was intersected in two drill
holes on the GB trend, approximately three kilometres northeast of
the project’s Huskie zone, including mineralized assay
intervals of 0.43% U3O8 over 1.0 metre
(including 0.73% U3O8 over 0.5 metre)
in drill hole WAT18-478 and 0.45% U3O8 over 0.5 metre,
as well as 0.31% U3O8 over 0.5 metre
and 0.20% U3O8 over 0.5 metre in
drill hole WAT18-479. The results validate the Company’s
geological concept that uranium mineralization occurs at the
intersection of the interpreted regional Midwest structure with
cross-cutting, graphite-bearing, structural corridors on the
Waterbury Lake project.
■
Maiden mineral resource estimate completed for the Huskie deposit
at Waterbury Lake
Denison completed
a maiden mineral resource estimate for the Huskie basement-hosted
uranium deposit in accordance with NI 43-101 and CIM Definitions
(2014), which was reviewed and audited by SRK Consulting (Canada)
Inc. (‘SRK’). Since its discovery in 2017, Denison has
completed 28 drill holes at Huskie at a spacing of approximately 50
metres x 50 metres to define the deposit over a strike length of approximately 210
metres and dip length of up to 215 metres. The deposit has been
interpreted to include three parallel, stacked lenses of
mineralization (Huskie 1, Huskie 2 and Huskie 3) which vary in true
thickness between approximately 1 and 7 metres. The result
of the 2017 and 2018 drilling campaigns at Huskie is an inferred
mineral resource estimate of 5.7 million pounds of U3O8 (above a cut-off
grade of 0.1% U3O8) based on 268
thousand tonnes of mineralization at an average grade of 0.96%
U3O8. The effective
date of the resource estimate is October 17, 2018.
ABOUT DENISON
Denison was
formed under the laws of Ontario and is a reporting issuer in all
Canadian provinces. Denison’s common shares are listed on the
Toronto Stock Exchange (the ‘TSX’) under the symbol
‘DML’ and on the NYSE American exchange (formerly
‘NYSE MKT’) under the symbol
‘DNN’.
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MANAGEMENT’S DISCUSSION & ANALYSIS
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Denison is a
uranium exploration and development company with interests focused
in the Athabasca Basin region of northern Saskatchewan, Canada. In
addition to its 90% owned Wheeler River project, which hosts the
high grade Phoenix and Gryphon uranium deposits, Denison's
exploration portfolio consists of numerous projects covering
approximately 320,000 hectares in the Athabasca Basin region.
Denison's interests in Saskatchewan also include a 22.5% ownership
interest in the McClean Lake joint venture (‘MLJV’),
which includes several uranium deposits and the McClean Lake
uranium mill, which is currently processing ore from the Cigar Lake
mine under a toll milling agreement, plus a 25.17% interest in the
Midwest deposit and a 65.92% interest in the J Zone and Huskie
deposits on the Waterbury Lake property. The Midwest, J Zone and
Huskie deposits are located within 20 kilometres of the McClean
Lake mill.
Denison is
engaged in mine decommissioning and environmental services through
its Denison Environmental Services (‘DES’) division,
which manages Denison’s Elliot Lake reclamation projects and
provides post-closure mine care and maintenance services as well as
environmental consulting services to a variety of industry and
government clients.
Denison is also
the manager of Uranium Participation Corporation
(‘UPC’), a publicly traded company listed on the TSX
under the symbol ‘U’, which invests in uranium oxide in
concentrates (‘U3O8’) and
uranium hexafluoride (‘UF6’).
CHANGE IN SIGNIFICANT ACCOUNTING POLICIES
Change in Presentation Currency
Effective January
1, 2018, Denison has changed its presentation currency to Canadian
dollars (‘CAD’) from US dollars (‘USD’).
This change in presentation currency was made to better reflect the
Company’s business activities, which, following the
divestiture of the Mongolian and African mining divisions in 2015
and 2016, are now solely focused in Canada, with the majority of
the Company’s entities, including all of its operating
entities, having CAD as their functional currency. As a result of
the change in presentation currency, all amounts in this MD&A
are expressed in CAD, unless otherwise noted.
See SIGNIFICANT
ACCOUNTING POLICIES and REVENUES below for further details relating
to the change in presentation currency, as well as the adoption of
IFRS 9, Financial
Instruments (‘IFRS 9’) and IFRS 15, Revenue from Contracts with Customers
(‘IFRS 15’).
SELECTED QUARTERLY FINANCIAL INFORMATION
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(in
thousands)
|
|
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As at
September 30,
2018
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As at
December 31,
2017
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Financial Position:
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|
|
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|
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Cash and cash
equivalents
|
|
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$
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21,470
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$
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3,636
|
||
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Investment in
debt instruments (GICs)
|
|
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$
|
-
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$
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37,807
|
||
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Cash, cash
equivalents and GICs
|
|
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$
|
21,470
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$
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41,443
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||
|
|
|
|
|
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||
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Working
capital
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$
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22,345
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$
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38,065
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||||
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Property, plant
and equipment
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$
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247,003
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$
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249,002
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||||
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Total
assets
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$
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302,269
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$
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326,300
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||||
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Total long-term
liabilities(1)
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$
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80,055
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$
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84,252
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(1)
Predominantly comprised of
the non-current portion of deferred revenue, non-current
reclamation obligations, and deferred income tax
liabilities.
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2018
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2018
|
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2018
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|
2017
|
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(in
thousands, except for per share amounts)
|
|
Q3
CAD
|
|
Q2
CAD
|
|
Q1
CAD
|
|
Q4
CAD
|
||
|
|
|
|
|
|
|
|
|
|
|
|
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Continuing Operations:
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|
|
|
|
|
|
|
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||
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Total
revenues
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$
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3,729
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$
|
4,104
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$
|
3,573
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$
|
4,536
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||
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Net
loss
|
$
|
(3,884)
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$
|
(5,583)
|
$
|
(6,968)
|
$
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(1,833)
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||
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Basic and diluted
loss per share
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$
|
(0.01)
|
$
|
(0.01)
|
$
|
(0.01)
|
$
|
-
|
||
|
|
|
|
|
|
|
|
|
|
||
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MANAGEMENT’S DISCUSSION & ANALYSIS
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2017
|
|
2017
|
|
2017
|
|
2016
|
|
(in
thousands, except for per share amounts)
|
|
Q3
CAD
|
|
Q2
CAD
|
|
Q1
CAD
|
|
Q4
USD
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations:
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|
|
|
|
|
|
|
|
||
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Total
revenues
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$
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3,753
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$
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4,043
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$
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3,735
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$
|
3,351
|
||
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Net
loss
|
$
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(7,627)
|
$
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(8,870)
|
$
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(1,124)
|
$
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(916)
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||
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Basic and diluted
loss per share
|
$
|
(0.01)
|
$
|
(0.02)
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$
|
-
|
$
|
-
|
||
|
|
|
|
|
|
|
|
|
|
||
As noted above,
effective January 1, 2018, the Company changed its presentation
currency from USD to CAD. The consolidated financial statements for
all periods starting on or after January 1, 2017 have been restated
in accordance with IAS 8, Accounting Policies, Changes in Accounting
Estimates and Errors. Financial results before January 1,
2017 have not been restated and are therefore presented in US
dollars, as originally disclosed.
Significant items causing variations in quarterly
results
●
The Company’s toll
milling revenues fluctuate due to the timing of uranium processing
at the McClean Lake mill as well as the impact of the toll milling
financing transaction in the first quarter of 2017.
●
Revenues from Denison
Environmental Services fluctuate due to the timing of projects,
which vary throughout the year in the normal course of
business.
●
Exploration expenses are
generally largest in the first quarter and third quarter, due to
the timing of the winter and summer exploration programs in
Saskatchewan.
●
The Company’s results
are also impacted, from time to time, by other non-recurring events
arising from its ongoing activities.
●
For the quarter presented in
US dollars above, the variability was generally due to the reasons
discussed above as well as the effect of fluctuations in the CAD to
USD exchange rate on results recorded in CAD and translated into
USD for financial reporting purposes.
REVENUES
McClean Lake Uranium Mill
McClean Lake is
located on the eastern edge of the Athabasca Basin in northern
Saskatchewan, approximately 750 kilometres north of Saskatoon.
Denison holds a 22.5% ownership interest in the MLJV and the
McClean Lake uranium mill, one of the world’s largest uranium
processing facilities, which is operated by Orano Canada Inc.
(‘Orano Canada’) and is currently processing ore from
the Cigar Lake mine under a toll milling agreement. The MLJV is a
joint venture between Orano Canada with a 70% interest, Denison
with a 22.5% interest and OURD (Canada) Co. Ltd. with a 7.5%
interest.
On February 13,
2017, Denison closed an arrangement with Anglo Pacific Group PLC
and one of its wholly owned subsidiaries (the ‘APG
Arrangement’) under which Denison received an upfront payment
of $43,500,000 in exchange for its right to receive future toll
milling cash receipts from the MLJV under the current toll milling
agreement with the Cigar Lake Joint Venture (‘CLJV’)
from July 1, 2016 onwards.
The APG
Arrangement consists of certain contractual obligations of Denison
to forward to APG the cash proceeds of future toll milling revenue
earned by the Company related to the processing of the specified
Cigar Lake ore through the McClean Lake mill, and as such the
upfront payment was accounted for as deferred revenue. The Company
reflected payments made to APG of $3,520,000, representing the
Cigar Lake toll milling cash receipts received by Denison in
respect of toll milling activity for the period from July 1, 2016
through January 31, 2017, as a reduction of the initial upfront
amount received and reduced the initial deferred revenue balance to
$39,980,000.
Effective January
1, 2018, upon adoption of IFRS 15, the accounting policy for the
toll milling deferred revenue arrangement has changed and the
comparative period has been restated to reflect this
change.
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MANAGEMENT’S DISCUSSION & ANALYSIS
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Under IFRS 15,
the arrangement with APG is deemed to contain a significant
financing component, as the cash consideration received upfront for
future toll milling cash receipts provides Denison with a financing
benefit. IFRS 15 requires that the amount of revenue recorded be
adjusted, such that the revenue recognized over the life of the APG
Arrangement will approximate the $39,980,000 net cash payment
received in advance plus an estimate of the interest expense to be
incurred over the life of the APG Arrangement, which reflects the
financing component of the arrangement. The discount rate to be
used to accrete the deferred revenue balance is based on the rate
that would be expected in a separate financing transaction between
the entity and its customer at contract inception, taking into
consideration the Company’s credit risk. Denison will record
accretion expense on the deferred revenue balance using an annual
interest rate of 8.5%.
IFRS 15 also
requires entities to allocate the total revenue to be recognized
over the life of the contract to each performance obligation in the
contract (in this case, the toll milling of the Cigar Lake
specified ore). The result being that the drawdown of deferred
revenue will be based on a weighted average toll milling rate
applied to actual processing activity at the mill. As the toll
milling arrangement with the CLJV is based on the processing of
specific ores, which are based on estimates, any change to the
resources estimated for the specific ores, or to the timing of the
processing of said ores, will impact the weighted average toll
milling rate to be used for the contract, and will result in a
cumulative catch up adjustment in the period that the change in
estimate occurs.
During the three
and nine months ended September 30, 2018, the McClean Lake mill
processed 2.9 and 13.1 million pounds U3O8 for the CLJV,
respectively (September 30, 2017 – 3.3 and 13.0 million
pounds U3O8). The Company
recorded toll milling revenue for the three and nine months ended
September 30, 2018 of $755,000 and $3,000,000, respectively
(September 30, 2017 – $921,000 and $3,657,000). The decrease
in toll milling revenue in the three months ended September 30,
2018, compared to the prior year is predominantly due to the
decrease in ore processed on behalf of the CLJV. The decrease in
toll milling revenue in the first nine months of 2018 is due to two
factors. The APG Arrangement was in place for the full nine month
period ending September 2018, compared to eight months in the same
period of 2017. Further, as a result of an update to the published
Cigar Lake mineral resource in early 2018, the Company recorded a
cumulative catch up in toll milling revenue, as required by IFRS
15, which resulted in a reduction in toll milling revenue in the
first quarter of 2018. See SIGNIFICANT ACCOUNTING POLICIES below
for further details.
During the three
and nine months ended September 30, 2018, the Company also recorded
an accretion expense of $829,000 and $2,486,000 on the toll milling
deferred revenue balance (September 30, 2017 – $849,000 and
$2,265,000). The decrease in accretion expense in the three months
ended September 30, 2018 compared to the prior year is due to the
drawdown of the deferred revenue liability. The increase in
accretion expense in the nine months ended September 30, 2018
compared to the same period in the prior year, is predominantly due
to the fact that the Company only recorded an accretion expense for
eight months in the prior period, following the completion of the
APG Arrangement in February 2017, compared to nine months of
accretion expense in 2018. The annual accretion expense will
decrease over the life of the contract as the deferred revenue
liability decreases over time.
Denison Environmental Services
Revenue from DES
during the three and nine months ended September 30, 2018 was
$2,365,000 and $6,883,000 respectively (September 30, 2017 -
$2,514,000 and $6,799,000). In the three months ended September 30,
2018, revenue at DES decreased as compared to the prior period due
to a decrease in activity at certain care and maintenance sites.
Despite the decreased activity during the third quarter of 2018,
year-to-date DES revenues increased compared to the prior period
due to an increase in activity at certain care and maintenance
sites in the first quarter of 2018 as well as an increase in
consulting revenues for the year.
Management Services Agreement with Uranium Participation
Corporation (‘UPC’)
Revenue from the
Company’s management contract with UPC was $609,000 and
$1,523,000, respectively, during the three and nine months ended
September 30, 2018 (September 30, 2017 – $318,000 and
$1,075,000). The increase in revenues for the three and nine months
ended September 30, 2018, compared to the prior period, was due to
an increase in management fees earned based on UPC’s monthly
net asset value (‘NAV’) as well as an increase in
commission-based fees. UPC’s balance sheet consists primarily
of uranium held either in the form of U3O8 or UF6, which is
accounted for at its fair value. The increase in NAV-based
management fees was due to the increase in the average fair value
of UPC’s uranium holdings during the three and nine months
ended September 30, 2018, compared to the prior period, as a result
of higher uranium spot prices, as well as increased uranium
holdings. The increase in commission-based fees during the three
and nine months ended September 30, 2018 was due to the 1%
commission that Denison earns on the gross value of UPC’s
uranium purchases and sales. The increase in revenues in the nine
months ended September 30, 2018 was also impacted by an increase in
discretionary management fees, due to a $50,000 discretionary fee
awarded to Denison during the second quarter of 2018.
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MANAGEMENT’S DISCUSSION & ANALYSIS
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OPERATING EXPENSES
Canada Mining
Operating
expenses of the Canadian mining segment include depreciation and
development expenses, and may also include certain adjustments to
the estimates of future reclamation liabilities at McClean Lake,
Midwest, and Elliot Lake.
Operating
expenses for the three and nine months ended September 30, 2018
were $2,141,000 and $5,572,000, respectively (September 30, 2017
– $995,000 and $3,598,000). During the three and nine months
ended September 30, 2018, operating expenses included
depreciation of the McClean Lake mill of $529,000 and $2,395,000
respectively (September 30, 2017 – $665,000 and $2,902,000).
In addition, during the three and nine months ended September 30,
2018, operating expenses include development and other operating
costs related to the MLJV of $1,610,000 and $3,176,000,
respectively (September 30, 2017 – $329,000 and $694,000). In
both years, these costs predominantly relate to the advancement of
the Surface Access Borehole Resource Extraction
(‘SABRE’) mining technology, as part of a multi-year
test mining program operated by Orano Canada within the MLJV.
During the current quarter, drilling and casing of four access
holes was successfully completed into the McClean North deposit.
The holes were drilled from surface to the top of the orebody and
will allow for mining of the orebody beneath the holes during the
latter stages of the test mining program. All holes were within the
specifications required in terms of deviation, size and
depth.
Environmental Services
Operating
expenses during the three and nine months ended September 30, 2018
totaled $2,051,000, and $5,971,000, respectively (September 30,
2017 – $2,258,000 and $6,079,000). The expenses relate
primarily to care and maintenance as well as environmental
consulting services provided to clients, and include labour and
other costs. The decrease in operating expenses for the three and
nine months ended September 30, 2018, as compared to the prior
period, are predominantly due to DES employees performing selected
environmental work related to the Wheeler River PFS with the costs
for these employees being allocated to the cost of the
PFS.
CANADIAN MINERAL PROPERTY EXPLORATION & EVALUATION
Denison’s
share of exploration and evaluation expenditures was $3,894 ,000
and $14,018,000, respectively, during the three and nine months
ended September 30, 2018 (September 30, 2017 – $5,447,000 and
$14,432,000). During the third quarter of 2018, the Company
decreased its exploration and evaluation expenditures as compared
to the prior year, primarily driven by decreased exploration
activity at the Wheeler River and Hook Carter projects. Exploration
spending in the Athabasca Basin is seasonal, with spending higher
during the winter exploration season (January to mid-April) and
summer exploration season (June to mid-October). The following
table summarizes the exploration activities for the period from
January 1, 2018 through to mid October 2018. All exploration and
evaluation expenditure information in this MD&A covers the
three and nine months ended September 30, 2018.
|
CANADIAN EXPLORATION & EVALUATION ACTIVITIES
|
|||||
|
Property
|
Denison’s ownership
|
Drilling in metres (m)
|
Other activities
|
||
|
Wheeler
River
|
90%(1)
|
39,555 (60
holes)
|
Completion of
PFS
|
|
|
|
Waterbury
Lake
|
65.92%(2)
|
13,110 (28
holes)
|
Geophysical
surveys
|
|
|
|
Hook-Carter
|
80%(3)
|
6,960 (9
holes)
|
-
|
|
|
|
South
Dufferin
|
100%
|
1,331 (9
holes)
|
-
|
|
|
|
Midwest
|
25.17%
|
4,709 (12
holes)
|
-
|
|
|
|
McClean
Lake
|
22.5%
|
Program
ongoing
|
SABRE pilot drill
holes
|
|
|
|
Total
|
|
65,665 (118 holes)
|
|
||
(1)
The Company’s ownership
effective October 26, 2018. Denison increased its ownership of the
Wheeler River project through the acquisition of 100% of
Cameco’s ownership in the property. See SUBSEQUENT EVENTS for
further details.
(2)
The Company’s ownership
effective October 31, 2018. Denison earned an additional 1.23%
interest in the Waterbury Lake property effective May 31, 2018, and
an additional 0.47% effective October 31, 2018. Refer to RELATED
PARTY TRANSACTIONS and SUBSEQUENT EVENTS for further details below
for further details.
(3)
The Company acquired an 80%
ownership in the Hook-Carter project in November 2016 from ALX
Uranium Corp. (‘ALX’) and has agreed to fund
ALX’s share of the first $12.0 million in expenditures on the
project.
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
The
Company’s land position in the Athabasca Basin, as at
September 30, 2018, is illustrated in the figure below. The
Company’s Athabasca land package decreased during the third
quarter of 2018, from 356,713 hectares (305 claims) to 320,166
hectares (292 claims), primarily due to Skyharbour Resources Ltd.
(‘Skyharbour’) completing its option to acquire 100% of
the Moore Lake project, which accounted for 35,705 hectares (12
claims).
Project Highlights:
●
PFS
results produce a pre-tax NPV of 2.75 times the 2016 preliminary
economic analysis (‘2016 PEA’)
On September 24,
2018, the Company announced the results of the PFS for Wheeler
River. The PFS was completed in accordance with NI 43-101 and is
highlighted by the selection of the ISR mining method for the
development of the Phoenix deposit, with an estimated average
operating cost of $4.33 (USD$3.33) per pound U3O8.
The PFS considers
the potential economic merit of co-developing the Phoenix and
Gryphon deposits. The high-grade Phoenix deposit is designed as an
ISR mining operation, with associated processing to a finished
product occurring at a plant to be built on site at Wheeler River.
The Gryphon deposit is designed as an underground mining operation,
utilizing a conventional long hole mining approach with processing
of mine production assumed at Denison’s 22.5% owned McClean
Lake mill. Taken together, the project is estimated to have mine
production of 109.4 million pounds U3O8 over a 14-year
mine life, with a base case pre-tax NPV of $1.31 billion (8%
discount rate), IRR of 38.7%, and initial pre-production capital
expenditures of $322.5 million.
The base-case
economic analysis assumes uranium sales are made at UxC Consulting
Company, LLC’s (‘UxC’) annual estimated spot
price (composite mid-point scenario in constant dollars) for mine
production from the Phoenix deposit (from ~USD$29/lb U3O8 to USD$45/lb
U3O8), and a fixed
price for mine production from the Gryphon deposit (USD$50/lb
U3O8).
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
Using the same
price assumed for the project’s 2016 PEA, a fixed uranium
price of USD$44/lb U3O8, the PFS produces
a combined pre-tax project NPV of $1.41 billion –
representing roughly 2.75 times the $513 million pre-tax project
NPV estimated in the 2016 PEA.
The PFS was
prepared on a project (100% ownership) and pre-tax basis. Denison
completed an indicative post-tax assessment based on a 90%
ownership interest, yielding a base case post-tax NPV of $755.9
million and post-tax IRR of 32.7%, with initial capital costs of
$290.3 million.
●
The
largest undeveloped uranium project in the eastern Athabasca
Basin
Upon completion
of the PFS and in accordance with NI 43-101 standards, the Company
has declared the following mineral reserves and
resources.
●
Probable Mineral Reserves of 109.4 million
pounds U3O8
(Phoenix 59.7 million pounds U3O8 from 141,000
tonnes at 19.1% U3O8; Gryphon 49.7
million pounds U3O8 from 1,257,000
tonnes at 1.8% U3O8);
●
Indicated Mineral Resources (inclusive of
reserves) of 132.1 million pounds U3O8
(1,809,000 tonnes at an average grade of 3.3% U3O8);
plus
●
Inferred Mineral Resources of 3.0 million
pounds U3O8 (82,000
tonnes at an average grade of 1.7% U3O8).
●
Potential
for resource growth
The Gryphon
deposit is a growing, high-grade uranium deposit that belongs to a
select group of large basement-hosted uranium deposits in the
eastern Athabasca Basin, which includes Cameco’s Eagle Point
mine and Millennium deposit, and Rio Tinto's Roughrider deposit.
The Gryphon deposit remains open in numerous areas with significant
potential for future resource growth. Priority target areas include
down plunge of the A and B series lenses, and within the currently
defined D series lenses, where additional high-grade shoots may
exist.
In addition, very
little regional exploration has taken place on the property in
recent years, with drilling efforts focussed on Phoenix and
Gryphon, which were discovered in 2008 and 2014 respectively. The
property is host to numerous uranium-bearing lithostructural
corridors which are under- or unexplored and have the potential for
additional large, high-grade unconformity or basement hosted
deposits. Exploration drilling is warranted along these corridors
to follow-up on previous mineralized drill results, or to test
geophysical targets identified from past surveys.
Further details
regarding the Wheeler River project, including the estimated
mineral reserves and resources and PFS, are provided in the NI
43-101 Technical Report for the Wheeler River project titled
‘Pre-feasibility Study Report for the Wheeler River Uranium
Project, Saskatchewan, Canada’ prepared by Mark Liskowich,
P.Geo. of SRK Consulting (Canada) Inc. with an effective date of
September 24, 2018 (‘PFS Technical Report’). A copy of
this report is available on Denison’s website and under its
profile on each of SEDAR and EDGAR.
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
A map of the
Wheeler River property location, with current and proposed
infrastructure, is provided below.
Evaluation Program
During the three
and nine months ended September 30, 2018, Denison’s share of
evaluation costs at Wheeler River amounted to $797,000 and
$2,606,000, respectively (September 30, 2017 – $536,000 and
$1,503,000), which related to the completion of the PFS and
continued environmental and sustainability activities.
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
PFS Activities
On September 24,
2018, Denison announced the results of the PFS for Wheeler River,
and subsequently filed the PFS Technical Report on October 30,
2018.
PFS Highlights
●
Phoenix delivers exceptional operating costs and manageable initial
capex with ISR
|
Mine
life
|
10 years (6.0 million lbs. U3O8
per year on
average)
|
|
Probable reserves(1)
|
59.7 million lbs.
U3O8 (141,000 tonnes
at 19.1% U3O8)
|
|
Average
cash operating costs
|
$4.33 (USD$3.33) per lb. U3O8
|
|
Initial
capital costs
|
$322.5
million
|
|
Base case pre-tax IRR(2)
|
43.3%
|
|
Base case pre-tax NPV8%(2)
|
$930.4
million
|
|
Base
case price assumption
|
UxC spot price(3)
(from ~USD$29 to USD$45/lb.
U3O8)
|
|
Operating profit margin(4)
|
89.0% at USD$29/lb. U3O8
|
|
All-in cost(5)
|
$11.57 (USD$8.90) per lb. U3O8
|
(1)
See the PFS
Technical Report for additional information regarding probable
reserves;
(2)
NPV and IRR
are calculated to the start of pre-production activities for the
Phoenix operation in 2021;
(3)
Spot price
forecast is based on “Composite Midpoint” scenario from
UxC’s Q3’2018 Uranium Market Outlook
(“UMO”) and is stated in constant (not-inflated)
dollars;
(4)
Operating
profit margin is calculated as uranium revenue less operating
costs, divided by uranium revenue. Operating costs exclude all
royalties, surcharges and income taxes;
(5)
All-in cost is estimated on a pre-tax basis and
includes all project operating costs and capital costs, divided by
the estimated number of pounds U3O8
to be produced.
●
Gryphon leverages existing infrastructure and provides additional
low-cost production
|
Mine
life
|
6.5 years (7.6 million lbs. U3O8
per year on
average)
|
|
Probable reserves(1)
|
49.7M lbs.
U3O8 (1,257,000 tonnes
at 1.8% U3O8)
|
|
Average
cash operating costs
|
$15.21 (USD$11.70) per lb. U3O8
|
|
Initial
capital costs
|
$623.1
million
|
|
Base case pre-tax IRR(2)
|
23.2%
|
|
Base case pre-tax NPV8%(2)
|
$560.6
million
|
|
Base
case price assumption
|
USD$50 per pound U3O8
|
|
Operating profit margin(3)
|
77.0% at USD$50/lb. U3O8
|
|
All-in cost(4)
|
$29.67 (USD$22.82) per lb. U3O8
|
(1)
See the PFS
Technical Report for additional information regarding probable
reserves;
(2)
NPV and IRR
are calculated to the start of pre-production activities for the
Gryphon operation in 2026;
(3)
Operating
profit margin is calculated as uranium revenue less operating
costs, divided by uranium revenue. Operating costs exclude all
royalties, surcharges and income taxes;
(4)
All-in cost is estimated on a pre-tax basis and
includes all project operating costs and capital costs, divided by
the estimated number of pounds U3O8
to be produced.
●
Denison indicative post-tax results for Wheeler River (Phoenix and
Gryphon) at 90% ownership
|
Initial
capital costs
|
$290.3
million
|
|
Base case pre-tax IRR(2)
|
32.7%
|
|
Base case pre-tax NPV8%(2)
|
$755.9
million
|
(1)
NPV and IRR
are calculated to the start of pre-production activities for the
Phoenix operation in 2021;
●
Selection of ISR mining method
for high-grade Phoenix deposit – Following the completion of the 2016 PEA,
the Company evaluated 32 alternate mining methods to replace the
high-cost Jet Bore Mining System assumed for the Phoenix deposit in
the 2016 PEA. The suitability of ISR mining for Phoenix has been
confirmed by significant work completed in the field and laboratory
– including drill hole injection, permeability, metallurgical
leach, agitation, and column tests. Results demonstrate high rates
of recovery in both extraction (greater than 90%) and processing
(98.5%) following a simplified flow sheet that precipitates uranium
directly from the uranium bearing solution without the added costs
associated with ion exchange or solvent extraction
circuits.
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
●
Novel application of
established mining technologies – Given the unique geological setting of the
Phoenix deposit, straddling the sub-Athabasca unconformity in
permeable ground, the project development team has combined the use
of existing and proven technologies from ISR mining, ground
freezing, and horizontal directional drilling to create an
innovative model for in situ uranium extraction in the Athabasca
Basin. While each of the technologies are well established, the
combination of technologies results in a novel mining approach
applicable only to deposits occurring in a similar geological
setting to Phoenix – which now represents the first deposit
identified for ISR mining in the Athabasca
Basin.
●
Environmental advantages of ISR
mining at Phoenix – The
Company’s evaluation of the ISR mining method for Phoenix has
also identified several significant environmental and permitting
advantages, namely the absence of tailings generation, the
potential for no water discharge to surface water bodies, and the
potential to use the existing Provincial power grid to operate on a
near zero carbon emissions basis. In addition, the use of a freeze
wall, to encapsulate the ore zone and contain the mining solution
used in an ISR operation, eliminates common environmental concerns
associated with ISR mining and facilitates a controlled reclamation
of the site. Taken together, the Phoenix operation has the
potential to be one of the most environmentally friendly mining
operations in the world. Owing largely to these benefits,
consultation with regulatory agencies and stakeholder communities,
to date, has been encouraging regarding the use of ISR
mining.
Environmental and Sustainability Activities
During the third
quarter of 2018, the Company continued with the community
consultation and engagement process – ensuring the continuous
engagement of stakeholders.
The Company also
continued environmental baseline data collection in key areas to
better characterize the existing environment in the project area.
This data will form the foundation of the environmental impact
assessment for the project. The information will also be used in
the design of various aspects of the project, including the
location and layout of site infrastructure, the location for
treated effluent discharge and fresh water intake, and the designs
of water treatment plants, waste storage facilities, and other
infrastructure interacting with the environment. Programs in
progress and/or completed during the quarter included:
●
Aquatic environment: assessment and data
collection of spring flow conditions (streamflow measurements,
oxygen dynamics, hydroacoustic imaging, and eDNA) in key areas,
including discharge location and downstream water
bodies;
●
Terrestrial environment: additional
surveys were completed during the summer to characterize the
terrestrial environment for vegetation and wildlife including
ungulates habitat and territory;
●
Waste rock geochemistry: ongoing
sampling of waste rock run-off continues; and
●
Atmospheric environment: collection of
air quality measurements continues in order to gather information
on pre-development atmospheric conditions.
Exploration Program
Denison’s
share of exploration costs for the three and nine months ended
September 30, 2018 at Wheeler River amounted to $2,058,000 and
$6,619,000 respectively (September 30, 2017 – $3,838,000 and
$8,042,000).
The summer 2018
diamond drilling program for Wheeler River commenced in early June
2018 and was completed in late August 2018. The program included
18,402 metres in 31 drill holes and was largely focused on testing
regional target areas (outside of the immediate Gryphon and Phoenix
deposit areas) across the Wheeler River property. Target areas,
drill hole locations and highlight results are provided in the
Figures below.
K West
The K West trend
is a priority target area located approximately 500 metres west of
the parallel K North trend which hosts the Gryphon deposit.
Previous drilling results have included significant structure and
alteration, and associated weak uranium mineralization, within the
basement rocks along the K West fault zone. The summer 2018
drilling program, which included 3,222 metres in 5 drill holes in
this area, was designed to test the K West fault zone at the
sub-Athabasca unconformity on the northern portion of the trend.
Highlight results include the intersection of uranium and
base-metal mineralization at the unconformity, as
follows:
●
0.30% U3O8, 4.7% Co, 3.7% Ni
and 0.55% Cu from 651.1 to 652.1 metres in drill hole
WR-733D1
●
1.2% Cu and 0.49% Ni from
636.6 to 642.6 m in drill hole WR-733D2
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
Drill holes
WR-733D1 and WR-733D2 were drilled steeply to the west-northwest
(azimuth of approximately 285° and dip of approximately
70°). The drill holes are located on the same drill fence with
a separation distance of approximately 20 metres at the
sub-Athabasca unconformity. The mineralization is currently
interpreted to be flat-lying and therefore true width of the
mineralization is expected to be approximately 75% of the
intersection lengths.
The results are
associated with significant structure and alteration in the
overlying sandstone, as well as elevated uranium values, averaging
17 ppm uranium (partial digest ICP-MS), extending up to 100 metres
above the unconformity. Further drilling is warranted to test this
target horizon to the south, where up to five kilometres of strike
length remains untested along the K West trend.
K North
Previous winter
2018 highlights at K North include 1.4% U3O8 over 5.5 metres
in drill hole WR-704, located 600 metres northeast of Gryphon, and
1.1% U3O8 over 3.0 metres
in drill hole WR-710D1, located 1 kilometre northeast of Gryphon.
The summer 2018 program, which included 3,003 metres in five drill
holes in this area, was designed to extend the unconformity
mineralization on section and along strike on 200 metre-spaced
drill fences. Mineralization was intersected 600 metres northeast
of Gryphon including 0.15% U3O8 over 1.0 metre in
drill hole WR-704D1. Further potential for mineralization exists,
both at the unconformity and within the basement, between the 200
metre-spaced drill fences.
Q Central, Q South, K South
Regional
exploration drilling was undertaken at Q Central (2,547 metres in
five drill holes), Q South (3,306 metres in six drill holes) and at
K South (2,370 metres in four drill holes) to test geological and
geophysical targets on a reconnaissance scale. Favourable geology,
structure, alteration and anomalous geochemistry was encountered in
all the target areas and follow-up will be planned based on a more
detailed assessment of geochemical, spectral clay and structural
data.
Gryphon Unconformity
A total of 3,954
metres of exploration drilling in six drill holes was completed to
test unconformity targets to the southwest and northeast of the
Gryphon deposit. To the southwest of Gryphon, five holes were
completed to test for unconformity mineralization along the Basal
Fault at the up plunge projection of the D series lenses. Results
included the intersection of mineralization, in drill hole WR-722D1
(0.13% U3O8 over 1.5 metres),
immediately below the unconformity. The continuity of significant
sandstone structure and strong hydrothermal alteration over the 500
metres of strike length tested suggests further potential for
unconformity mineralization associated with the Basal Fault. This
target horizon is wide-open to the southwest and a priority target
exists a further 400 metres to the southwest where previous
drilling returned weak basement mineralization along the Basal
Fault and 4.5% U3O8 over 4.5 metres
(drill hole WR-597) at the intersection of the unconformity with
the G-Fault.
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
|
HIGHLIGHTS OF ASSAY RESULTS FOR SUMMER 2018 DRILL
HOLES
|
||||||
|
Hole Number
|
From
(m)
|
To
(m)
|
Length4
(m)
|
Grade
(% U3O8)1,2,3
|
Target Area
|
|
|
WR-733D15
|
651.1
|
652.1
|
1.0
|
0.30
|
K
West
|
|
|
WR-704D1
|
573.5
|
574.5
|
1.0
|
0.15
|
K
North
|
|
|
WR-704D1
|
599.3
|
600.3
|
1.0
|
0.05
|
K
North
|
|
|
WR-740
|
603.0
|
604.0
|
1.0
|
0.07
|
K
North
|
|
|
WR-722D1
|
592.0
|
593.5
|
1.5
|
0.13
|
D
Lens
|
|
1.
U3O8 is the
chemical assay of mineralized split core
samples.
2.
Composited above a cut-off grade of 0.05% U3O8.
3.
Composites compiled using 1.0 metre minimum mineralization
thickness and 2.0 metres maximum waste.
4.
True thickness of the mineralization is not yet
determined.
5. The interval in WR-733D1
also contains 4.7% Co, 0.55% Cu 3.7% Ni and 9.9% As.
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
Exploration Pipeline Properties
During the 2018
summer season, Denison carried out exploration programs at
Waterbury Lake, Hook-Carter and South Dufferin. Results from the
Hook-Carter and South Dufferin drilling programs were reported with
the Company’s financial results for the second quarter of
2018.
The summer/fall
program at Waterbury Lake included a diamond drilling program and a
DCIP resistivity survey. In addition, a maiden mineral resource
estimate for the Huskie deposit, located on the Waterbury Lake
project, was completed with an effective date of October 17,
2018.
At McClean Lake,
a DCIP resistivity survey was completed by Orano Canada, and a
diamond drilling program commenced in early October
2018.
While spending on
exploration pipeline projects has been reduced from prior levels,
exploration activities continue to deliver encouraging results,
and, in many cases, continue to warrant follow-up exploration
work.
Waterbury Lake
Denison’s
65.92% owned Waterbury Lake project, which includes the J Zone and
Huskie uranium deposits, is located within 20 kilometres of the
McClean Lake mill, and is situated near the Roughrider, Midwest
Main and Midwest A deposits. The project partner, Korea Waterbury
Uranium Limited Partnership (‘KWULP’) (34.08%
interest), has elected not to fund the 2018 program and will dilute
their ownership interest. Total exploration costs incurred during
the three and nine months ended September 30, 2018 were $892,000
and $2,856,000, respectively (September 30, 2017 – $886,000
and $1,927,000). While the Company is funding 100% of the project
cost, it accounts for its ownership share (65.92% effective October
31, 2018) as exploration expense during the period, and will
ultimately account for the remainder of the expenditures as a
mineral property addition related to the dilution of KWULP’s
interest. Denison’s share of the exploration expenditures
during the three and nine months ended September 30, 2018 were
$583,000 and $1,845,000, respectively (September 30, 2017 –
$565,000 and $1,221,000).
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
Summer 2018 Exploration Program
The summer 2018
exploration program at Waterbury Lake commenced in late-July 2018
and included 3,316 metres of diamond drilling in seven completed
holes. The program was focused on drill testing regional
exploration targets related to the interpreted Midwest structure
and additional step-out drilling down-dip and up-dip of the Huskie
zone. A DCIP resistivity survey commenced in late September to map
the potential extension of the Midwest structure on to the
Waterbury Lake property to the southwest of the Midwest Main
deposit (25.17% Denison-owned).
Regional Exploration Drilling
A total of four
holes were completed during the summer 2018 program on regional
targets approximately 2.5 to 3.0 kilometres to the northeast of the
Huskie zone, where the regionally interpreted Midwest structure is
projected to intersect the geologically favourable GB and Oban
trends.
The regional
exploration drilling was highlighted by two drill holes along the
GB trend, completed approximately 100 metres apart on a north-south
fence, which both intersected basement-hosted uranium
mineralization. The mineralization occurred as
structurally-controlled disseminations of uraninite (pitchblende)
associated with massive clay replacement. Highlight intersections
included:
●
0.43% U3O8 over 1.0 metre
(including 0.73% U3O8 over 0.5 metre)
from 262.5 to 263.5 metres in drill hole WAT18-478;
and
●
0.20% U3O8 over 0.5 metre
from 372.0 to 372.5 metres, 0.45% U3O8 over 0.5 metre
from 410.5 to 411.0 metres and 0.31% U3O8 over 0.5 metre
from 420.0 to 420.5 metres in drill hole WAT18-479.
The
mineralization is contained within a 60 to 80 metre wide package of
highly structured and strongly altered graphitic basement rocks,
which remains open along strike to the northwest and southeast.
Drill hole WAT18-478 and WAT18-479 were drilled on an azimuth of 0
degrees with dips of -72 degrees and -74 degrees, respectively.
True thickness of the mineralization is estimated at approximately
70% of the intersection lengths. The sub-Athabasca unconformity was
intersected at approximately 200 metres vertically below surface in
both holes. The mineralization intersected is open along strike to
the northwest and southeast along the GB trend.
The two regional
holes designed to test the Oban trend as part of the summer 2018
program are interpreted to have tested outside of the intersection
of the Oban trend and the Midwest structural zone. A compelling
basement target still exists on the Oban trend approximately 800
metres to the south of drill holes WAT18-478 and
WAT18-479.
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
Huskie Zone Drilling
The Huskie zone
of high-grade basement-hosted uranium mineralization was discovered
by Denison during the summer of 2017 and is located approximately
1.5 kilometres to the northeast of the property's J Zone uranium
deposit. Highlight drill intersections include 9.1% U3O8 over 3.7 metres
(including 16.8% U3O8 over 2.0 metres)
in drill hole WAT17-446A and 4.5% U3O8 over 6.0 metres
(including 5.8% U3O8 over 4.5
metres) in drill hole
WAT18-452 (see Denison’s press releases dated October 11,
2017 and April 25, 2018 respectively).
A total of three
drill holes were completed as part of the summer 2018 program, with
targets located both up-dip and down-dip of the known
mineralization with a view to test for high-grade extensions
related to northeast striking cross-cutting faults. Drill hole
WAT18-475A, completed as a 50 metre step up-dip of the known
mineralization, intersected 0.12% eU3O8 over 1.0 metre
from 277.5 metres and 0.15% eU3O8 over 1.0 metre
from 285.5 metres. Due to core loss, the interval is reported as
radiometric equivalent U3O8
(“eU3O8”) derived
from a calibrated total gamma downhole probe. The two holes
designed to test for extensions down-dip of Huskie, WAT18-473 and
WAT18-474, intersected the targeted structure but no significant
mineralization was encountered.
Midwest Extension DCIP Resistivity Survey
Current
interpretation suggests the Midwest structure, which hosts the
Midwest Main and Midwest A deposits on the Midwest property (25.17%
Denison owned), may extend onto the Waterbury Lake property to the
southwest of the Midwest Main deposit. A 2D DCIP resistivity survey
comprising 28.8 kilometres (16 lines) has been designed to map the
possible extension of the Midwest structure on to the Waterbury
Lake property and to define possible drill targets for future
testing. The survey commenced in late September and is expected to
be completed in November.
Mineral Resource Estimate for the Huskie Deposit
Denison has
completed a maiden mineral resource estimate for the Huskie
basement-hosted uranium deposit, which was reviewed and audited by
SRK Consulting (Canada) Inc. (“SRK”) in accordance with
NI 43-101 and CIM Definitions (2014). Since its discovery in 2017,
Denison has completed 28 drill holes at Huskie at a spacing of
approximately 50 metres x 50 metres to define the deposit
over a strike length of
approximately 210 metres and dip length of up to 215 metres. The
deposit has been interpreted to include three parallel, stacked
lenses of mineralization (Huskie 1, Huskie 2 and Huskie 3) which
vary in true thickness between approximately 1 and 7 metres.
The result of the 2017 and 2018 drilling campaigns at Huskie is an
inferred mineral resource estimate of 5.7 million pounds of
U3O8 (above a cut-off
grade of 0.1% U3O8) based on 268
thousand tonnes of mineralization at an average grade of 0.96%
U3O8.
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
The maiden Huskie
mineral resource estimate, as audited by SRK, will be disclosed in
detail in a NI 43-101 technical report for the Waterbury Lake
project; a copy of which will be made available on Denison’s
website and under its profile on each of SEDAR and EDGAR within 45
days of this MD&A disclosure. The audited mineral resource
statement for the Huskie deposit, and the combined estimated
mineral resources for the Waterbury Lake project, with an effective
date of October 17, 2018, is provided in the tables
below.
|
AUDITED
MINERAL RESOURCE STATEMENT FOR THE HUSKE DEPOSIT
SUBZONES
DATED
OCTOBER 17, 2018
|
||||
|
Deposit
|
Zone
|
Tonnes
|
Grade(% U3O8)
|
lbs. U3O8
(100%
Basis)
|
|
Huskie
|
Huskie
1
|
81,455
|
0.34
|
612,417
|
|
Huskie
2
|
178,303
|
1.28
|
5,047,356
|
|
|
Huskie
3
|
8,294
|
0.15
|
27,136
|
|
|
|
Total Inferred
|
268,053
|
0.96
|
5,686,909
|
1.
Mineral resources are not mineral reserves and
have not demonstrated economic viability. Mineral resources
are reported at a cut-off grade of 0.1% U3O8 and using a
long-term uranium price of USD$45 per pound.
2.
Huskie 2: A capping grade of 9.0%
U3O8 was applied to
composited uranium assays.
3.
Huskie 1 and 3: No treatment
of high grades were considered.
4.
The Huskie Mineral Resource
estimate was completed by Denison and subsequently audited by SRK
Consulting in accordance with CIM Definition Standards (2014) and
NI 43-101.
|
COMBINED MINERAL RESOURCES FOR THE WATERBURY LAKE
PROJECT
DATED OCTOBER 17, 2018
|
||||||
|
Deposit
|
Category
|
Zone
|
Tonnes
|
Grade
(% U3O8)
|
lbs. U3O8
(100% Basis)
|
Denison Share
|
|
(lbs. U3O8)
|
||||||
|
J
Zone
|
Indicated
|
Unconformity
|
291,000
|
2.00
|
12,810,000
|
8,444,352
|
|
Huskie
|
Inferred
|
Basement
- Huskie 1
|
81,455
|
0.34
|
612,417
|
403,705
|
|
Basement
- Huskie 2
|
178,303
|
1.28
|
5,047,356
|
3,327,217
|
||
|
Basement
- Huskie 3
|
8,294
|
0.15
|
27,136
|
17,888
|
||
|
|
Total Indicated
|
291,000
|
2.00
|
12,810,000
|
8,444,352
|
|
|
|
Total Inferred
|
268,053
|
0.96
|
5,686,909
|
3,748,810
|
|
|
1. Mineral
resources are not mineral reserves and have not demonstrated
economic viability. Mineral resources are reported at a cut-off
grade of 0.1% U3O8 and at a
long-term uranium price of USD$45 per pound.
2. Denison’s
share of the Waterbury Lake project effective October 31, 2018 is
65.92%.
3. The
mineral resource estimate for the J Zone deposit is unchanged from
the September 6, 2013 estimate as detailed in the NI 43-101
technical report entitled “Mineral Resource Estimate on the J
Zone Uranium Deposit, Waterbury Lake Property, dated September 6,
2013, by Allan Armitage, Ph.D., P.Geo, and Alan Sexton, M.Sc.,
P.Geo of GeoVector Management Inc.”
|
||||||
Geology and Mineralization
The Huskie
deposit is entirely hosted within competent basement rocks below
the sub-Athabasca unconformity primarily within a faulted,
graphite-bearing pelitic gneiss (“graphitic gneiss”)
which forms part of an east-west striking, northerly dipping
package of metasedimentary rocks flanked to the north and south by
granitic gneisses. The Athabasca Group sandstones that
unconformably overlie the basement rocks are approximately 200
metres thick. The deposit comprises three stacked, parallel lenses
(Huskie 1, Huskie 2 and Huskie 3) which are conformable to the
dominant foliation and fault planes within the east-west striking
graphitic gneiss unit. The drilling to date suggests the grade,
thickness, and number of lenses present is controlled by the
presence of northeast striking faults which cross-cut the graphitic
gneiss unit. The northeast striking faults identified at the Huskie
deposit are interpreted to be part of the regional Midwest
structure. The deposit occurs over a strike length of approximately
210 metres, dip length of approximately 215 metres and has an
overall true thickness of approximately 30 metres (individual
lenses vary in true thickness of between 1 metre and 7 metres) (see
Figure below). The deposit occurs at vertical depths ranging
between 240 and 445 metres below surface and 40 to 245 metres below
the sub-Athabasca unconformity. The high-grade mineralization
within the lenses is comprised of massive to semi-massive uraninite
(pitchblende) and subordinate bright yellow secondary uranium
minerals occurring along fault or fracture planes, or as
replacement along foliation planes.
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
Disseminations of
lower grade mineralization occur within highly altered rocks
proximal to fault planes. The mineralization is intimately
associated with hematite, which both occur central to a broad and
pervasive alteration envelope of white clays, chlorite and
silicification.
Drilling, Sampling and Assay Procedures
A total of 28
diamond drill holes were completed at Huskie during 2017 and 2018,
with 13 of the drill holes intersecting basement-hosted
mineralization.. All drill hole collars were surveyed with a
Trimble differential GPS unit upon completion. A Reflex
EZ-single-shot probe was used to measure hole deviation immediately
below casing and subsequently every 50 metres during normal
drilling operations. All of the drill hole surveys have been
updated for variation in magnetic declination. All drill holes were surveyed
using a calibrated Mount Sopris Triple Gamma Probe
(2GHF‐1000) to
determine radiometric equivalent uranium (“eU3O8”).
Drill core with
anomalous total gamma radioactivity (>500 counts per second
using a RS-120 or RS-125 scintillometer) was sampled over 0.5 metre
intervals. Sampling is undertaken on site by splitting the core in
half, with one half submitted for analysis and the other half
retained in the core box for future reference. Uranium chemical
assays are performed by the Saskatchewan Research Council
(“SRC”) Geoanalytical Laboratories located in
Saskatoon, Saskatchewan. Sample preparation involves crushing and
pulverizing core samples to 90% passing -106 microns. Splits of the
resultant pulps are initially submitted for multi-element ICP-MS
analysis following partial (HNO3:HCl) and total (HF:HNO3:HClO4)
digestions. Samples with ≥ 1,000 ppm U (partial digest) are
re-assayed for U3O8 using an ISO/IEC
17025:2005 accredited method for the determination of U3O8 weight %. Pulp
splits are digested using aqua-regia and the solution analyzed for
U3O8 weight % using
ICP-OES. In addition to internal checks by SRC Geoanalytical
Laboratories, the Company has rigorous quality assurance and
quality control ("QAQC") procedures including the insertion of
standard reference materials, blanks and field duplicates. The
assay data is subject to verification procedures by qualified
persons employed by Denison prior to disclosure. For further
details on the assay, QAQC and data verification procedures please
see Denison's Annual Information Form dated March 27, 2018 filed
under the Company's profile on each of SEDAR and
EDGAR.
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
Core recovery at
Huskie is generally excellent. For mineral resource estimation
purposes, wherever core recovery was poor, the radiometric
equivalent uranium values (“eU3O8”) are
substituted for chemical assays where possible. For the Huskie 1,
Huskie 2 and Huskie 3 mineral resource estimates, reported herein,
28%, 8% and 17% of the assay intervals respectively, relied on
eU3O8
grades.
Mineral Resource Estimation Methodology
GEOVIA
GEMS™ software (version 6.8) was used to build
three-dimensional mineralized wireframes for the Huskie 1, Huskie 2
and Huskie 3 lenses based on lithological and structural data from
core logs and geochemical assay (or radiometric probe) data
collected from 28 holes totaling 12,273 completed by Denison since
2017. A lower cut-off of 0.05% U3O8 and a minimum
thickness of 1 metre was selected for the mineralized wireframe
model, consistent with similar basement-hosted uranium deposits in
the Athabasca Basin. Of the 13 mineralized drill holes, a total of
10 drill holes met the parameters for defining the mineralized
wireframes.
The mineral
resource model was constructed using GEOVIA GEMS™ software
(version 6.8), constrained by the mineralization wireframes. The
assay database (% U3O8 or %
eU3O8) used for
resource modelling consists of 201 assays from the 10 mineralized
boreholes, contained within the three mineralized lenses. The 0.5
metre interval assays were composited to 1.0 metre lengths. Capping
was considered, with only assay data from Huskie 2 being capped for
% U3O8. Density values
were assigned to the database based on a regression between
U3O8 and density data
pairs using the relationship determined for Denison’s Gryphon
deposit, which is also hosted within comparable basement rocks. The
validity of the Gryphon grade:density regression for the Huskie
deposit was confirmed by plotting 12 bulk dry density samples
collected by SRK from the Huskie deposit. Variograms were modelled
to determine appropriate search radii for grade
estimation.
An
accumulation-like approach was used, wherein U3O8*density and
density were estimated into a three-dimensional block model,
constrained by wireframes in two passes using inverse distance to a
power of 2 (ID2). A %U3O8 grade was then
calculated into each block by dividing the estimated U3O8*density by the
estimated density. A block size of 10 by 5 by 5 metres was
selected. Search radii were based primarily on visual observations
and variogram analyses. The estimation of U3O8*density and
density were based on two estimation passes. The block model was
validated using nearest neighbour estimation and by visual
inspection of the block grades relative to composites and swath
plots comparing the ID2 and nearest
neighbour model. All blocks were classified as
Inferred.
SRK Review, Audit and Qualified Persons
SRK was satisfied
that the mineral resources were estimated in conformity with the
widely accepted CIM Estimation of
Mineral Resource and Mineral Reserve Best Practices
Guidelines. The mineral resources may be affected by further
infill and exploration drilling that may result in increases or
decreases in subsequent mineral resource estimates. The mineral
resources may also be affected by subsequent assessments of mining,
environmental, processing, permitting, taxation, socio-economic,
and other factors. The audited Mineral Resource Statement for the
Huskie deposit in the Waterbury Lake Uranium Project presented
herein was prepared by Dr. Oy Leuangthong, PEng (PEO#90563867) and
Mr. Cliff Revering (APGS#9764) of SRK. Dr. Leuangthong and Mr.
Revering are independent qualified persons as this term is defined
in NI 43-101.
McClean Lake
At McClean Lake
(22.5% Denison owned), operated by Orano Canada, a DCIP resistivity
survey was completed during September. The survey, comprising six
lines (30 kilometres), was designed to define basement drill
targets primarily along the Tent-Seal Fault which is known to host
uranium mineralization. A diamond drilling program commenced in
early October as follow-up to the resistivity survey and is
expected to include approximately 2,650 metres in six to eight
holes.
GENERAL AND ADMINISTRATIVE EXPENSES
Total general and
administrative expenses during the three and nine months ended
September 30, 2018 were $1,657,000 and $5,378,000, respectively
(September 30, 2017 – $1,489,000 and $6,185,000). These costs
are mainly comprised of head office salaries and benefits, office
costs in multiple regions, audit and regulatory costs, legal fees,
investor relations expenses, project costs, and all other costs
related to operating a public company with listings in Canada and
the United States. The increase in general and administrative
expenses during the three months ended September 30, 2018 is
predominantly due to increases in costs relating to ongoing legal
disputes. The decrease in general and administrative expenses
during the first nine months of 2018 was predominantly the result
of $1,534,000 in non-recurring project costs associated with the
APG Arrangement that were incurred in the nine months ended
September 30, 2017. There were no similar significant project costs
incurred through the end of the third quarter in 2018.
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
IMPAIRMENT – MINERAL PROPERTIES
During the nine
months ended September 30, 2017, the Company recognized an
impairment recovery of $331,000 related to Moore Lake, based on an
update of the estimated recoverable amount remaining to be received
under an option agreement with Skyharbour.
OTHER INCOME AND EXPENSES
During the three
and nine months ended September 30, 2018, the Company recognized a
gain of $664,000 and a loss of $2,654,000, respectively, in other
income/expense (September 30, 2017 – loss of $1,137,000 and
gain of $112,000). The loss for the nine months ended September 30,
2018 is predominantly due to losses on investments carried at fair
value of $2,521,000 (September 30, 2017 – gains of $524,000).
Gains and losses on investments carried at fair value are driven by
the closing share price of the related investee at end of the
quarter. The loss recorded in the first nine months of 2018 was
mainly due to unfavourable mark-to-market adjustments on the
Company’s investments in common share purchase warrants of
GoviEx Uranium Inc. (‘GoviEx’), slightly offset by
favourable mark-to-market adjustment on the Company’s
investments in the common shares of Skyharbour (September 30, 2017
– favourable mark-to-market adjustments on the
Company’s investments in common shares of Skyharbour). The
gain for the three months ended September 30, 2018 is predominantly
due to gains on investments carried at fair value of $654,000 due
to favourable mark-to-market adjustments during the quarter on the
Company’s investments in the common shares of Skyharbour
(September 30, 2017 – loss of $565,000 due to unfavourable
mark-to-market adjustments on the Company’s investments in
common share purchase warrants of GoviEx and common shares of
Skyharbour).
In addition,
during the three and nine months ended September 30, 2017, the
Company incurred foreign exchange losses of $445,000 and $912,000,
respectively, due to unfavourable fluctuations in foreign exchange
rates impacting the revaluation of intercompany debt. The related
intercompany balances were impaired in 2017, and as a result, the
Company incurred negligible foreign exchange income in the three
and nine months ended September 2018.
During the first
quarter of 2017, the Company also recorded a gain of $899,000
related to the extinguishment of the off-market toll milling
contract liability related to the CLJV toll milling arrangement,
which was recognized in 2006 on the acquisition of Denison Mines
Inc. by Denison Mines Corp. (formerly International Uranium
Corporation). This liability was extinguished as a result of the
Company entering into the APG Arrangement, whereby all revenues
under the contract have been monetized. No similar transaction
occurred in the nine months ended September 30, 2018.
EQUITY SHARE OF INCOME FROM ASSOCIATES
During the three
and nine months ended September 30, 2018, the Company recognized
gains of $639,000 and $429,000, respectively, related to its equity
share of its associate, GoviEx (September 30, 2017 – gain of
$217,000 and loss of $1,361,000). The gain for the three months
ended September 30, 2018 is comprised of an equity gain of
$567,000, which is based on the Company’s share of
GoviEx’s net gain during the period as well as a dilution
gain of $72,000 as a result of other shareholders’ exercise
of GoviEx share warrants which reduced the Company’s position
in GoviEx from 16.84% at June 30, 2018, to approximately 16.49% at
September 30, 2018. The gain for the nine months ended
September 30, 2018, is comprised of a dilution gain of
$676,000 offset by an equity loss of $247,000. The Company records
its share of income from associates a quarter in arrears, based on
the most recent financial information available from
GoviEx.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash
equivalents were $21,470,000 at September 30, 2018 (December 31,
2017 – $3,636,000). At September 30, 2018, the Company held
no short term investments in GICs (December 31, 2017 –
$37,807,000), which were categorized as short term investments on
the balance sheet.
The increase in
cash and cash equivalents in the nine months ended September 30,
2018 of $17,834,000 was due to net cash provided by investing
activities of $36,582,000 offset by net cash used in operations of
$18,748,000.
Net cash used in
operating activities of $18,748,000 during the nine months ended
September 30, 2018 is comprised of the net loss for the period
adjusted for non-cash items and changes in working capital
items.
Net cash provided
by investing activities of $36,582,000 consisted primarily of the
sale of GICs for $37,500,000, offset by expenditures on property,
plant and equipment of $1,060,000.
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
As at September
30, 2018, the Company has spent $13,834,000 toward its obligation
to spend $14,499,790 on eligible Canadian exploration expenditures
as a result of the issuance of the Tranche A and Tranche B
flow-through shares in March 2017. The remaining balance of
$666,000 is expected to be spent by December 31, 2018.
Refer to 2018
OUTLOOK for details of the Company’s working capital
requirements for the remainder of the year.
Letters of Credit Facility
In January and
April 2018, the Company entered into amending agreements to the
letters of credit facility with BNS (the ‘2018
facility’). Under the respective amendments the maturity date
of the 2018 facility has been extended to January 31, 2019 and the
covenant to maintain a specified level of tangible net worth has
been changed to $131,000,000 (from USD$150,000,000) in conjunction
with the Company’s change in presentation currency. The 2018
facility continues to allow for credit to be extended to the
Company for up to $24,000,000 and use of the facility continues to
be restricted to non-financial letters of credit in support of
reclamation obligations. All other terms of the 2018 facility
(pledged assets, security for the facility and letter of credit
fees) remain unchanged from those of the 2017
facility.
TRANSACTIONS WITH RELATED PARTIES
Uranium Participation Corporation
The Company is a
party to a management services agreement with UPC. The current
management services agreement was entered into effective April 1,
2016 and has a term of three years. Under the agreement, Denison
receives the following fees from UPC: a) a base fee of $400,000 per
annum, payable in equal quarterly installments; b) a variable fee
equal to (i) 0.3% per annum of UPC’s total assets in excess
of $100 million and up to and including $500 million, and (ii) 0.2%
per annum of UPC’s total assets in excess of $500 million; c)
a fee, at the discretion of the Board, for on-going monitoring or
work associated with a transaction or arrangement (other than a
financing, or the acquisition of or sale of U3O8 or UF6); and d) a
commission of 1.0% of the gross value of any purchases or sales of
U3O8 or UF6 or gross interest
fees payable to UPC in connection with any uranium loan
arrangements.
The following
amounts were earned from UPC for the periods ended:
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||
|
|
|
September 30
|
|
September
30
|
|
September 30
|
|
September
30
|
|
(in
thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Management
fees:
|
|
|
|
|
|
|
|
|
|
Base and variable
fees
|
$
|
481
|
$
|
318
|
$
|
1,250
|
$
|
1,058
|
|
Discretionary
fees
|
|
-
|
|
-
|
|
50
|
|
-
|
|
Commission
fees
|
|
128
|
|
-
|
|
223
|
|
17
|
|
|
$
|
609
|
$
|
318
|
$
|
1,523
|
$
|
1,075
|
At September 30,
2018, accounts receivable includes $249,000 (December 31, 2017
– $481,000) due from UPC with respect to the fees discussed
above.
Korea Electric Power Corporation (‘KEPCO’) and Korea
Hydro & Nuclear Power (‘KHNP’)
As at September
30, 2018, KEPCO, through its subsidiaries, holds 58,284,000 shares
of Denison representing a share interest of approximately 10.42%.
KHNP Canada Energy Ltd., a subsidiary of KEPCO’s subsidiary
KHNP, is the holder of the majority of the Denison shares and is
also the majority member of KWULP. KWULP is a consortium of
investors that holds the non-Denison owned interests in Waterbury
Lake Uranium Corporation (‘WLUC’) and Waterbury Lake
Uranium Limited Partnership (‘WLULP’), entities whose
key asset is the Waterbury Lake property.
As agreed with
KWULP, Denison is funding the entire approved fiscal 2018 program
for Waterbury Lake, which has the impact of further diluting
KWULP’s interest in the WLULP. As a result of the funding by
provided to the WLULP in May 2018, Denison earned an additional
1.23% interest in the WLULP and increased its interest to 65.45%.
The additional interest was accounted for using an effective date
of May 31, 2018 and has resulted in Denison recording its increased
pro-rata share of the net assets of Waterbury Lake, the majority of
which relates to an addition to mineral property assets of
$818,000. See SUBSEQUENT EVENTS for details relating to the funding
provided to the WLULP effective October 31, 2018, which raised the
Company’s ownership interest in the WLULP to
65.92%.
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
Other
All services and
transactions with the related parties listed below were made on
terms equivalent to those that prevail with arm’s length
transactions:
●
During the three and nine
months ended September 30, 2018, the Company incurred investor
relations, administrative service fees and other expenses of $8,000
and $100,000, respectively (September 30, 2017 – $137,000 and
$170,000) with Namdo Management Services Ltd, which shares a common
director with Denison. These services were incurred in the normal
course of operating a public company. At September 30, 2018, an
amount of $nil (December 31, 2017: $nil) was due to this
company.
●
During the three and nine
months ended September 30, 2018, the Company incurred office and
other expenses of $7,000 and $34,000, respectively (September 30,
2017 – $8,000 and $53,000) with Lundin S.A , a company that
provided office and administration services to the former executive
chairman, other directors and management of Denison. The agreement
for these services was terminated effective September 30, 2018. As
at September 30, 2018, an amount of $nil (December 31, 2017: $nil)
was due to this company.
COMPENSATION OF KEY MANAGEMENT PERSONNEL
Key management
personnel are those persons having authority and responsibility for
planning, directing and controlling the activities of the Company,
directly or indirectly. Key management personnel include the
Company’s executive officers, vice-presidents and members of
its Board of Directors.
The following
compensation was awarded to key management personnel:
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
||||
|
|
|
September 30
|
|
September
30
|
|
September 30
|
|
September
30
|
|
(in
thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and
short-term employee benefits
|
$
|
(422)
|
$
|
(395)
|
$
|
(1,275)
|
$
|
(1,274)
|
|
Share-based
compensation
|
|
(385)
|
|
(310)
|
|
(1,107)
|
|
(794)
|
|
|
$
|
(807)
|
$
|
(705)
|
$
|
(2,382)
|
$
|
(2,068)
|
OFF-BALANCE SHEET ARRANGEMENTS
The Company does
not have any off-balance sheet arrangements.
SUBSEQUENT EVENTS
Acquisition of Cameco’s Minority Interest in the
WRJV
On October 26,
2018, Denison completed the previously announced acquisition of
Cameco’s WRJV minority interest in exchange for the issuance
of 24,615,000 shares of Denison. The agreement had been subject to
the certain rights of first refusal (‘ROFR’) in favour
of JCU. JCU waived its ROFR rights in respect of the purchase, and
as a result, Dension acquired Cameco’s entire WRJV minority
interst of 23.92% and increased the Company’s ownership
interest in the WRJV to 90%.
The acquisition
will be accounted for as an asset acquisition with share based
consideration. Using Denison’s closing share price on October
26, 2018 of $0.70 per share, the value of the Denison shares issued
to acquire the additional WRJV interest is approximately
$17,231,000.
Dilution of KWULP Interest in Waterbury Lake
On October 31,
2018, Denison funded a portion of the approved fiscal 2018 program
for Waterbury Lake which has the impact of further diluting
KWULP’s interest in the WLULP. As a result, Denison has
earned an additional 0.47% interest in the WLULP, increasing
Denison’s interest from 65.45% to 65.92%.
|
MANAGEMENT’S DISCUSSION & ANALYSIS
|
Private Placement of 4,950,495 Flow-Through Common
Shares
On November 2,
2018, the Company announced it had entered into an agreement with
Cantor Fitzgerald Canada Corporation, as a sole bookrunner and lead
underwriter, on behalf of a syndicate of underwriters (together,
the ‘Underwriters’), under which the Underwriters have
agreed to purchase, on a ‘bought deal’ private
placement basis, 4,950,495 common shares on a flow-through basis
(the ‘Flow-Through Shares’) at a price of $1.01 per
share for total gross proceeds of approximately $5,000,00. The
Company also granted the Underwriters an option to increase the
gross proceeds of the Offering by up to 10% (the
‘Underwriters’ Option’), exercisable in whole or
in part at any time up to two business days prior to the closing
date, which is expected to occur on or about November 23,
2018.
OUTSTANDING SHARE DATA
At November 9,
2018, there were 584,224,591 common shares issued and outstanding,
stock options outstanding for 13,897,193 Denison common shares,
3,400,432 share units, which will be converted to Denison common
shares when they vest, and 1,673,077 share purchase warrants
outstanding for a total of 603,195,293 common shares on a fully
diluted basis.
On March 8, 2018,
the Board approved the adoption of the fixed number share unit plan
(the ‘Share Unit Plan’), providing for the issuance
from treasury of up to 15,000,000 common shares on settlement of
share units issued thereunder, and the grant of an aggregate of
2,200,000 performance share units (‘PSUs’) and
1,299,432 restricted share units (‘RSUs’) under the
Share Unit Plan. Shareholder approval was obtained for the Share
Unit Plan as well as the initial grants thereunder at the Annual
General and Special Meeting of Shareholders held on May 3, 2018.
For accounting purposes, the share units were regarded as granted
upon receipt of shareholder approval.
Refer to the
Company’s annual MD&A for the year ended December 31,
2017, as well as the MD&A for the six months ended June 30,
2018 for a detailed discussion of the previously disclosed 2018
budget and 2018 outlook. During the current quarter, the Company
has decreased its 2018 outlook for development and operations
expense by $600,000, primarily because of a reduction in planned
MLJV expenditures related to the advancement of the SABRE mining
method. The Company also increased its 2018 outlook for management
services fees from UPC by $100,000, primarily due to an increase in
estimated NAV-based management fees in order to reflect increased
uranium spot prices.
|
(in
thousands)
|
|
PREVIOUS 2018 OUTLOOK (1)
|
CURRENT 2018 OUTLOOK
|
Actual to
September 30, 2018(3)
|
|
Canada
|
|
|
|
|
|
Development &
Operations
|
|
(5,230)
|
(4,630)
|
(3,756)
|
|
Mineral Property
Exploration & Evaluation
|
|
(16,200)
|
(16,200)
|
(15,013)
|
|
|
|
(21,430)
|
(20,830)
|
(18,769)
|
|
Other
|
|
|
|
|
|
UPC Management
Services
|
|
1,690
|
1,790
|
1,326
|
|
DES Environmental
Services
|
|
1,330
|
1,330
|
1,003
|
|
Corporate
Administration & Other
|
|
(4,410)
|
(4,410)
|
(3,434)
|
|
|
|
(1,390)
|
(1,290)
|
(1,105)
|
|
Total(2)
|
|
$ (22,820)
|
$ (22,120)
|
$ (19,874)
|
(1)
Previous Outlook is as
reported in the Company’s June 30, 2018
MD&A.
(2)
Only material operations
shown.
(3)
The Company budgets on a cash
basis and, as a result, actual amounts represent a non-GAAP
measure. Compared to segment loss as presented in the
Company’s unaudited interim consolidated financial statements
for the three and nine months ended September 30, 2018, actual
amounts reported above include $1,018,000 in capital additions and
exclude $862,000 net impact of non-cash items and other
adjustments.
|
MANAGEMENT’S DISCUSSION & ANALYSIS
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ADDITIONAL INFORMATION
SIGNIFICANT ACCOUNTING POLICIES
The Company has
changed its accounting policies from those disclosed in its audited
annual consolidated financial statements for the year ended
December 31, 2017 for ‘Foreign currency translation’,
‘Financial instruments’, ‘Impairment of financial
assets’, ‘Deferred revenue – toll milling’
and ‘Revenue recognition’ in light of the changes to
its presentation currency and the adoption of IFRS 9 and IFRS 15.
In addition, in the current year, the Company adopted a share unit
plan, under which it has issued both PSUs and RSUs. As a result,
the Company has updated its ‘stock-based compensation’
policy. The new accounting policies are as follows:
Foreign Currency Translation
i.
Functional and presentation
currency
Items included in
the financial statements of each entity in the DMC group are
measured using the currency of the primary economic environment in
which the entity operates (‘the functional currency’).
Primary and secondary indicators are used to determine the
functional currency. Primary indicators include the currency that
mainly influences sales prices, labour, material and other costs.
Secondary indicators include the currency in which funds from
financing activities are generated and in which receipts from
operating activities are usually retained. Typically, the local
currency has been determined to be the functional currency of
Denison’s entities. The consolidated financial statements are
presented in Canadian dollars, unless otherwise
stated.
The financial
statements of entities that have a functional currency different
from the presentation currency of DMC (‘foreign
operations’) are translated into Canadian dollars as follows:
assets and liabilities-at the closing rate at the date of the
statement of financial position, and income and expenses-at the
average rate of the period (as this is considered a reasonable
approximation to actual rates). All resulting changes are
recognized in other comprehensive income or loss as cumulative
foreign currency translation adjustments.
When the Company
disposes of its entire interest in a foreign operation, or loses
control, joint control, or significant influence over a foreign
operation, the foreign currency gains or losses accumulated in
other comprehensive income or loss related to the foreign operation
are recognized in the statement of income or loss as translational
foreign exchange gains or losses.
ii.
Transactions and
balances
Foreign currency
transactions are translated into an entity’s functional
currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the
settlement of foreign currency transactions and from the
translation at year-end exchange rates of monetary assets and
liabilities denominated in currencies other than an
operation’s functional currency are recognized in the
statement of income or loss as transactional foreign exchange gains
or losses.
Financial instruments
Financial assets
and financial liabilities are recognized when the Company becomes a
party to the contractual provisions of the financial instrument.
Financial assets are derecognized when the rights to receive cash
flows from the assets have expired or have been transferred and the
Company has transferred substantially all risks and rewards of
ownership. Financial liabilities are derecognized when the
obligations specified in the contract is discharged, cancelled or
expires.
At initial
recognition, the Company classifies its financial instruments in
the following categories:
i.
Financial assets and
liabilities at fair value through profit or loss
(‘FVTPL’)
A financial asset
is classified in this category if it is a derivative instrument, an
equity instrument for which the Company has not made the
irrevocable election to classify as fair value through other
comprehensive income (‘FVTOCI’), or a debt instrument
that is not held within a business model whose objective includes
holding the financial assets in order to collect contractual cash
flows that are solely payments of principal and interest.
Derivative financial liabilities and contingent consideration
liabilities related to business combinations are also classified in
this category. Financial instruments in this category are
recognized initially and subsequently at fair value. Transaction
costs are expensed in the statement of income or loss. Gains and
losses arising from changes in fair value are presented in the
statement of income or loss – within other income (expense) -
in the period in which they arise.
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MANAGEMENT’S DISCUSSION & ANALYSIS
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ii.
Financial assets at amortized
cost
A financial asset
is classified in this category if it is a debt instrument and/or
other similar asset that is held within a business model whose
objective is to hold the asset in order to collect the contractual
cash flows (i.e. principal and interest). Financial assets in this
category are initially recognized at fair value plus transaction
costs and subsequently measured at amortized cost using the
effective interest method less a provision for impairment. Interest
income is recorded in net income through finance
income.
iii.
Financial liabilities at
amortized cost
All financial
liabilities that are not recorded as FVTPL are classified in this
category and are initially recognized less a discount (when
material) to reduce the financial liabilities to fair value and
less any directly attributable transaction costs. Subsequently,
financial liabilities are measured at amortized cost using the
effective interest method. Interest expense is recorded in net
income through finance expense.
The Company has
designated its financial assets and liabilities as
follows:
●
‘Investments’ are
classified as FVTPL;
●
‘Cash and cash
equivalents’, ‘Trade and other receivables’ and
‘Restricted cash and investments’ are classified as
financial assets at amortized cost; and
●
‘Accounts payable and
accrued liabilities’ and ‘Debt obligations’ are
classified as financial liabilities at amortized cost.
Impairment of financial assets
At each reporting
date, the Company assesses the expected credit losses associated
with its financial assets that are not carried at FVTPL. Expected
credit losses are calculated based on the difference between the
contractual cash flows and the cash flows that the Company expects
to receive, discounted, where applicable, based on the assets
original effective interest rate.
For ‘Trade
and other receivables’, the Company calculates expected
credit losses based on historical credit loss experience, adjusted
for forward-looking factors specific to debtors and the economic
environment. In recording an impairment loss, the carrying amount
of the asset is reduced by this computed amount either directly or
indirectly through the use of an allowance account.
Revenue recognition
IFRS 15
supersedes IAS 18 Revenue
and IAS 11 Construction
Contracts, and applies to all revenue arising from contracts
with customers, unless those contracts are in the scope of other
standards.
(i)
Revenue from toll milling
services
Revenue from the
pre-sale of toll milling arrangement cash flows will be recognized
as the toll milling services are provided. At contract inception,
the Company will estimate the expected transaction price of the
toll milling services being sold based on available information and
calculate an average per unit transaction price that applies over
the life of the contract. This unit price will be used to draw-down
the deferred revenue balance as the toll milling services occur.
When changes occur to the timing, or volume of toll milling
services, the per unit transaction price will adjusted to reflect
the change (such review to be done annually, at a minimum), and a
cumulative catch up adjustment will be made to reflect the updated
rate. The upfront nature of the payments from toll milling pre-sale
arrangements represents a significant financing component. As such,
the Company will also recognize an accretion expense on the
deferred revenue balance which will be recorded in net income
through finance expense.
(ii)
Revenue from environmental
services (i.e. DES)
Environmental
service contracts represent a series of distinct performance
obligations that are substantially the same and have the same
pattern of transfer of control to the customer. The transaction
price is estimated at contract inception and, is recognized over
the life of the contract as control is transferred to the customer.
Variable consideration, where applicable, is estimated at contract
inception using either the expected value method or the most likely
amount method. If it is highly probably that a subsequent reversal
of revenue will not occur when the uncertainty has been resolved,
the Company will recognize as revenue the estimated transaction
price, including the estimate of the variable portion, upon
transfer of control to the customer. Where it is determined that it
is highly probable that a subsequent reversal of revenue will occur
upon the resolution of the uncertainty, the variable portion of the
transaction price will be constrained, and will not be recognized
as revenue until the uncertainty has been resolved.
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MANAGEMENT’S DISCUSSION & ANALYSIS
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(iii)
Revenue from management
services (i.e. UPC):
The management
services arrangement with UPC represents a series of distinct
performance obligations that are substantially the same and have
the same pattern of transfer of control to the customer. The
transaction price for the contract is estimated at contract
inception and is recognized over the life of the contract as
control is transferred to the customer as the services are
provided. The variable consideration related to the net asset value
(‘NAV’)-based management fee was estimated at contract
inception using the expected value method. It was determined that
it is highly probable that a subsequent reversal of revenue would
occur if the variable consideration was included in the transaction
price, and as such, the variable portion of the transaction price
will be measured and recognized when the uncertainty has been
resolved (i.e. when the actual NAV has been
calculated).
Commission
revenue earned on acquisition or sale of U3O8 and
UF6 on
behalf of UPC (or other parties where Denison acts as an agent) is
recognized when control of the related U3O8 or UF6 passes to the
customer, which is the date when title of the U3O8 and
UF6
passes.
Stock-based compensation
(i)
Stock Options
The Company uses
a fair value-based method of accounting for stock options to
employees and to non-employees. The fair value is determined using
the Black-Scholes option pricing model on the date of the grant.
The cost is recognized on a graded method basis, adjusted for
expected forfeitures, over the applicable vesting period as an
increase in stock-based compensation expense and the contributed
surplus account. When such stock options are exercised, the
proceeds received by the Company, together with the respective
amount from contributed surplus, are credited to share
capital.
(ii)
Share Units
The Company also
has a share unit plan which grants share units to employees –
the share units are equity-settled awards. The Company determines
the fair value of the awards on the date of grant. The cost is
recognized on a graded method basis, adjusted for expected
forfeitures, over the applicable vesting period as an increase in
stock-based compensation expense and the contributed surplus
account. When such share units are settled for common shares, the
applicable amounts of contributed surplus are credited to share
capital.
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The preparation
of consolidated financial statements in accordance with IFRS
requires the use of certain critical accounting estimates and
judgements that affect the amounts reported. It also requires
management to exercise judgement in applying the Company’s
accounting policies. These judgements and estimates are based on
management’s best knowledge of the relevant facts and
circumstances taking into account previous experience. Although the
Company regularly reviews the estimates and judgements made that
affect the financial statements, actual results may be materially
different. Management has made significant estimates and judgements
in the current period related to the following items that are in
addition to those included in the financial statements for the year
ended December 31, 2017:
Deferred Revenue – Toll Milling – Revenue
Recognition
In February 2017,
Denison closed the APG Arrangement and effectively monetized its
right to receive specified future toll milling cash receipts from
the MLJV related to the current toll milling agreement with the
CLJV. In exchange, Denison received a net up-front payment of
$39,980,000 which has been accounted for as a deferred revenue
liability as at the transaction close date.
Under IFRS 15,
the Company is required to recognize a revenue component and a
financing component as it draws down the deferred revenue
associated with the APG Arrangement over the life of the specified
toll milling production in the APG Arrangement. In estimating both
of these components, the Company is required to make assumptions
relating to the future toll milling production volume associated
with Cigar Lake Phase 1 and 2 ore reserves and resources (to end of
mine life) and estimates of the annual timing of that production.
Changes in these estimates affect the underlying production profile
which in turn affects the average toll milling drawdown rate used
to recognize revenue.
When the average
toll milling drawdown rate is changed, the impact is reflected on a
life-to-date production basis with a retroactive adjustment to
revenue recorded in the current period. Going forward, each time
the Company updates its estimates of the underlying production
profile for the APG Arrangement (typically, in the first quarter of
each year, in the absence of material publicly disclosed news
relating to Cigar Lake uranium production), retroactive adjustments
to revenue will be recorded in the period that the revised estimate
is determined – such adjustments could, and most likely will,
be material.
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MANAGEMENT’S DISCUSSION & ANALYSIS
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QUALIFIED PERSON
The disclosure
regarding the PEA, PFS, and environmental and sustainability
activities for Wheeler River was reviewed and approved by Peter
Longo, P. Eng, MBA, PMP, Denison’s Vice-President, and
Project Development, who is a Qualified Person in accordance with
the requirements of NI 43-101. The balance of the disclosure of
scientific and technical information regarding Denison’s
properties in the MD&A was prepared or approved by Dale Verran,
MSc, P. Geo, Pr.Sci.Nat., the Company’s Vice President,
Exploration, a Qualified Person in accordance with the requirements
of NI 43-101. For a description of Denison’s assay
procedures, downhole gamma probe procedures, and the quality
assurance program and quality control measures applied by Denison,
please see Denison’s Annual Information Form dated March 27,
2018 available under Denison's profile on SEDAR at www.sedar.com,
and its Form 40-F available on EDGAR at www.sec.gov/edgar.shtml.
Certain
information contained in this MD&A constitutes
‘forward-looking information’, within the meaning of
the applicable United States and Canadian legislation concerning
the business, operations and financial performance and condition of
Denison.
Generally, these
forward-looking statements can be identified by the use of
forward-looking terminology such as ‘plans’,
‘expects’, ‘budget’,
‘scheduled’, ‘estimates’,
‘forecasts’, ‘intends’,
‘anticipates’, or ‘believes’, or the
negatives and/or variations of such words and phrases, or state
that certain actions, events or results ‘may’,
‘could’, ‘would’, ‘might’ or
‘will be taken’, ‘occur’, ‘be
achieved’ or ‘has the potential to’.
In particular,
this MD&A contains forward-looking information pertaining to
the following: the benefits to be derived from corporate
transactions; the estimates of Denison's mineral reserves and
mineral resources, including the new mineral resource estimate for
the Huskie deposit; exploration, development and expansion plans
and objectives, including the results of the PFS, and statements
regarding anticipated budgets, fees and expenditures; expectations
regarding Denison’s joint venture ownership interests and the
continuity of its agreements with its partners; expectations
regarding adding to its mineral reserves and resources through
acquisitions or exploration; expectations regarding the toll
milling of Cigar Lake ores; expectations regarding revenues and
expenditures from operations at DES; expectations regarding
revenues from the UPC management contract; and the annual operating
budget and capital expenditure programs, estimated exploration and
development expenditures and reclamation costs and Denison's share
of same. Statements relating to ‘mineral reserves’ or
‘mineral resources’ are deemed to be forward-looking
information, as they involve the implied assessment, based on
certain estimates and assumptions that the mineral reserves and
mineral resources described can be profitably produced in the
future.
Forward looking
statements are based on the opinions and estimates of management as
of the date such statements are made, and they are subject to known
and unknown risks, uncertainties and other factors that may cause
the actual results, level of activity, performance or achievements
of Denison to be materially different from those expressed or
implied by such forward-looking statements. Denison believes that
the expectations reflected in this forward-looking information are
reasonable but no assurance can be given that these expectations
will prove to be accurate and results may differ materially from
those anticipated in this forward-looking information. For a
discussion in respect of risks and other factors that could
influence forward-looking events, please refer to the factors
discussed in Denison’s Annual Information Form dated March
27, 2018 under the heading ‘Risk Factors’. These
factors are not, and should not be construed as being
exhaustive.
Accordingly,
readers should not place undue reliance on forward-looking
statements. The forward-looking information contained in this
MD&A is expressly qualified by this cautionary statement. Any
forward-looking information and the assumptions made with respect
thereto speaks only as of the date of this MD&A. Denison does
not undertake any obligation to publicly update or revise any
forward-looking information after the date of this MD&A to
conform such information to actual results or to changes in
Denison's expectations except as otherwise required by applicable
legislation.
Cautionary Note to United States Investors
Concerning Estimates of Measured, Indicated and Inferred Mineral
Resources: This MD&A may use the terms
‘measured’, ‘indicated’ and
‘inferred’ mineral resources. United States investors
are advised that while such terms are recognized and required by
Canadian regulations, the United States Securities and Exchange
Commission does not recognize them. ‘Inferred mineral
resources’ have a great amount of uncertainty as to their
existence, and as to their economic and legal feasibility. It
cannot be assumed that all or any part of an inferred mineral
resource will ever be upgraded to a higher category. Under Canadian
rules, estimates of inferred mineral resources may not form the
basis of feasibility or other economic studies. United States investors are cautioned not to
assume that all or any part of measured or indicated mineral
resources will ever be converted into mineral reserves. United
States investors are also cautioned not to assume that all or any
part of an inferred mineral resource exists, or is economically or
legally mineable.
