Denison Mines (TSX: DML) – If I’m smaller and if I’m different just a little less (Transcript)

Interview with David Cates, President and CEO of Uranium developer, Denison Mines (TSX: DML).

CLICK HERE to watch.

Uranium has become something of a stale commodity in recent years, but uranium of this grade is certain to attract attention.

Denison Mines is a uranium exploration/development company. It has a 90% ownership interest in the Wheeler River project, the ‘largest undeveloped high-grade uranium project in the eastern portion of the Athabasca Basin.’

Denison Mines’ Athabasca exploration portfolio covers c. 310,000ha, including a 22.5% ownership interest in the McClean Lake joint venture (which is currently processing ore from the Cigar Lake mine under a toll milling agreement), a 25.17% interest in the Midwest & Midwest A deposits, and a 65.92% interest in the J Zone & Huskie deposits and Huskie discovery on the Waterbury Lake property. Each project is located within 20km of the McClean Lake mill.

The Wheeler River project features two high-grade uranium deposits: Phoenix and Gryphon. Phoenix’s high-grade core is estimated to contain 62,900t at 43.2% U3O8 for 59.9Mlbs U3O8. Denison Mines states probable mineral reserves of 109.4Mlbs U3O8 (Phoenix 59.7Mlbs U3O8 from 141,000t at 19.1% U3O8; Gryphon 49.7Mlbs U3O8 from 1,257,000t at 1.8% U3O8). A PFS conducted in 2018 puts the operating cost of Phoenix at US$3.33/lb U3O8. Not the biggest, but it is what Denison Mines does with this resource that counts. The team needs to squeeze every ounce of potential out of it.

Denison originally optioned the Wheeler River Project from Cameco. The team has delineated a uranium resources and expanded it, however, from here, the story is quite familiar. Has Denison Mines got what it takes to last until the widely-anticipated bull cycle and go into production?

After technically the ISR vs Conventional Mining debate, and explaining that Denison Mines has a conventional mine at Gryphon and an ISR project at Phoenix, Cates speaks about the permitting situation. He admits it can be more difficult to obtain permits when utilising technology in countries and provinces that are unfamiliar with it, but he maintains the lack of waste (no long-term tailings dump and minimal surface impact) generated by ISR is an advantage cannot be ignored. After all, Cates states that permitting is largely an environmental impact story.

Denison Mines has spent CAD$100M on exploration at Wheeler. It has repeatedly raised big capital, but Cates is clear: big projects cost big bucks. Denison Mines has defined its capital expenditure programme for 2020 to further develop existing projects and delineate additional ISR-amenable resource. As of September 2019 Denison Mines had CAD$10M cash on the books, and the company raised an additional CAD$4.7M in December 2019 and had a burn rate of around CAD$1M per month in 2019. We try to do the math.

There is a side to the business model that we like. Denison Mines appears more concerned in smartly positioning itself to get in to production early rather than continuing to build a pound in the ground portfolio. It will look to get into production before both NexGen and Fission. The development CAPEX will also be significantly lower at closer to CAD$350M than the +CAD$1Bn of its peers. The rationale being, that once in production, Denison Mines can have contract conversations with utility companies and secure long-term financial certainty. Utility companies are interested in companies in production as it gives them certainty, so Denison Mines is positioning itself very astutely. The only real concern is the permitting situation, because despite Cates’ claims, this is purely at the discretion of the Canadian and Provincial government, and we, nor Cates, truly knows what sort of timescale we’re truly looking at.

Interview Highlights:

1:57 – Company Overview
2:47 – Wheeler River Project: How Did They Get it and What are They Planning?
5:51 – ISR vs Conventional Mining
9:45 – Permitting the Unknown: How Easy Will it be?
13:45 – Eliminating Concerns and Moving Forward: How Will They do it and in What Time?
21:54, 52:37 – The Numbers: Money Raised, Cash Position at Present, Burn Rate and Going Back to Market
30:31 – McClean Lake and Mill Project: How is it Set Up and What do They Gain from it? 35:02 – Possibilities to Monetise Rare Earth Bi-products
35:40 – The Uranium Space and Market: What Price do They Need?
43:33 – Take-Out Target or Future Producer: Possibilities for Denison Mines
45:11 – Remuneration Principles
48:48, 56:11 – 2020 Goals and Deliverables: Raising the Fallen Share Price

Company Website:

Hello, David. How are you, Sir?

David Cates: Matt, I’m doing well. Thanks very much.

Matthew Gordon: Hey, thanks for coming on the show. You one of the big names in the space and you know, we’ve been following this story. It’s a very interesting time at the moment and there are some snippets of information coming out last week from the DOE; it’s getting a little bit exciting. So maybe a timely conversation. So why don’t we kick off – give us that one-minute summary for people new to the story, and then we’ll kind of get into it.

David Cates: Yeah, no doubt. And thanks very much for having us. Denison is a Uranium development company and we’re focused on the Athabasca basin in Northern Saskatchewan, Canada. And our flagship asset is a 90% interest in the Wheeler River Project. And this is the largest undeveloped Uranium project in the Eastern portion of the Athabasca basin. And really, our story is focused on building on a Pre-Feasibility Study that we put out for the project about a year and a half ago. And that’s all about developing the super high-grade Phoenix deposit as a very low cost ISR operation. It will be the first ISR operation in the Athabasca basin, and really, the potential to compete with the lowest cost producers in the world, like in Kazakhstan.

Matthew Gordon: Yes. Fantastic. Thanks. Thanks for that summary. Well, why don’t we get into that Wheeler project first of all, because obviously, you are in the Athabasca basin, world famous for being, high-grade Uranium deposits. So can you tell us a little bit about Wheeler, how you got into it, what the plans are?

David Cates: Well, Wheeler’s been in the Denison family for a long time. Project was options from Cameco, back in the day. And at the time, the project had no known Uranium deposits. And really, our team over the last 10-years has found two high-grade Uranium deposits. The first was Phoenix, in around 2008. Phoenix became really well known in the last Uranium cycle because of its super high grades. And we’ve been able to delineate and increase the size of that resource to the point where we now have over 70Mlbs of U308, at an average grade of over 19%. So that does make Phoenix the highest grade, undeveloped Uranium deposit in the world. In 2014 we found a second deposit about three kms away from Phoenix – the Griffin deposit. Also high grade; grades are around 2%, and you’re in the range there of 65Mlbs- 70Mlbs as well.

That those two deposits were taken forward for a PEA, or Preliminary Economic Assessment, almost four years ago now. And that was really designed to sort of stress test the project, and then say like, hey, can we, do we have enough pounds? Can we make money on this as a co-development scenario? We did and we used sort of a typical mining methods. Nothing fancy about that. We used a jet boring at, you know, Phoenix, the same as they’re using it cigar Lake. And we used underground mining at Griffin.

Where our story, and really, this history is important for Wheeler because we could’ve left it there. Right? You know, the project was generating a 20% pre-tax IRR at USD$44 Uranium. And you know from interviewing many other companies, that that’s something that most people haven’t done; and what I mean is, run a price-deck at USD$44, right? But we looked at it and said, you know, the Phoenix deposit was actually coming out as being lower margin than Griffin at the time using that jet-boor mining method. And we really rejected the validity of that because we had a 19% average grade; highest undeveloped, highest grade undeveloped Uranium deposit in the world. How could it be that this was a lower margin than a 2% basement hosted Griffin deposit. And that’s where we got to the PFS. We have increased the level of confidence here: we have gone from a PEA to a PFS, and we switched mining methods at Phoenix, selecting in situ recovery, and that’s got us now positioned, potentially as the lowest cost in the business.

Matthew Gordon: But again, we want to kind of keep it simple because there’s going to be guys watching this who are Uranium buffs -they know everything that there is to know. And then there is going to be a bunch of other guys – Generalists who are coming into this Uranium space when they see this market pick up. So can you just kind of break down what ISR is versus conventional mining?

David Cates: All right; so I mean certainly there’s a selection of mining methods in the Uranium space, right? Historically you’ve seen open pit mines used for shallow high-grade deposits in the Athabaska basin. You can look at her own McLean Lake deposits, which have been mined on that basis. Griffin fits really well as an underground mine. It is in a competent basement rock. So this is dry rock in the Athabaska basin. You have a very large geologic formation. It’s literally a basin, or a bath tub. Above the basin you’ve got sandstone and you’ve got a tub of water in that sandstone. Below the tub, you’ve got those basement rocks, competent things, the kind of thing you’d want to tunnel in. So Griffin fits really well as the basement hosted deposit, fits really well with underground mining. It would be very similar to Cameco’s Eagle Point operation. It’s great. It’s a dry mine, and actually the grades of Griffin are high, but not too high. So we can use very low cost underground mining methods and we don’t have to worry about the sort of radiation exposure associated with high-grade deposits where you’re using man-access mining type of things. So Griffin is a good story that way. You can move to Phoenix, and Phoenix is hosted actually in the Athabaska sandstone. So it’s not hosted in that basement rock. It’s actually in that permeable porous sandstone. And that’s what allows us to look at using ISR mining. So over half of the world’s Uranium production today is coming from ISR mining. And those are all sandstone hosted deposits. And it’s really all about; can you move fluid or solution through that host rock to be able to actually use ISR mining. And I guess if I could just back up one step on that, in ISR mining, it’s in-situ recovery. It’s a mining method that’s mining the target mineral while it sits in the host rock without extracting that rock. That’s what an in situ really means. And to do it, you’re using a series of wells that drill into the ore body and around it, and you inject the mining solution and you pump it through a series of pump wells and it comes out of a recovery well, where you’re pulling a solution out. And as it moves from an injection, while the recovery, while you’re actually leaching the Uranium in-ground, and pulling up really only what you want and not pulling up the waste product, right? You’ve left the stuff that you didn’t want in the ground. And so on surface you don’t have a big processing plant with a, you know, crushing grinding, or you don’t even have a leaching circuit. You’ve done your leaching in-ground. On surface, you really just have a plant that takes that Uranium rich solution, drops out the Uranium, and then re-fortifies your mining solution and sends it back in-ground. So totally a total spectrum of mining methods in the space and the project that Wheeler has exposure to has two of those different methods; being underground at Griffin and ISR with Phoenix.

Matthew Gordon: Right. So I think, I guess conventional underground mining people understand that because you know, it’s used the world over, but you are saying ISR is used in, what would you say? 50% of the world’s Uranium production?

David Cates: Over half the world today is ISR mining.

Matthew Gordon: Correct. So it’s fairly conventional in that sense; it’s a well understood technology, there is nothing new about it. And in Canada, is it well understood? Is it used by other companies?

David Cates: Well, in Canada, this would be the first ISR Uranium mine. But what I would say is that, you know, in the United States, in Australia, Kazakhstan, ISR mining is happening all day, every day. So people in Canada who are familiar with the Uranium space are certainly familiar with ISR mining.

Matthew Gordon: Right. So it’s well understood technically. Okay. And I guess you’ve got people on the team who’ve been there and done it before. How does that work in terms of getting permissions, permits, licenses for using ISR technology in a country like Canada? Who hasn’t seen that before. I mean, where are you in that process and what does it involve in fact? And if you can help us, have you had any pushback in terms of this lack of understanding, or if there is lack of understanding and how do you manage that?

David Cates: No, look, that’s a really relevant question. You know, to be able to do something for the first time anywhere, and no doubt people want to understand if there are any sort of unique hurdles to that. And permitting is an important hurdle. It’s actually the critical path for the project. So maybe I’ll respond with a bit of a story on this; you know, we really looked at this on our own before we selected the mining method. And when we spent that two and a half, three years going from the PEA to the PFS, one of the questions we had was, well, are we going to be able to use ISR mining in the Athabasca basin? And it’s not just us and about the regulators, it’s also about the indigenous communities. You know, will we get pushback from stakeholders or rights and treaty rights holders  that we have in our part of the Athabasca basin. And we did two things: a little bit risky, but we socialized the mining methods selection because we had more than one that we were looking at for the PFS.

Matthew Gordon: But what do you mean, socialise? What does that mean?

David Cates: Well, socialise means that we’ve talked to the regulators and the indigenous communities in advance of selecting it. And it was a bit of a risk for us because honestly, it was quite tough secret; the mining methods selection, but what we said was, look, we certainly don’t want to pick a mining method where the very first thing that the regulators are going to say is, well I don’t know about that. Or secondly, and frankly more importantly; that the local indigenous communities would say, you’re definitely not doing that in our backyard. And so we actually held workshops with the community, we showed them different mining methods and we allowed them to give us input on which mining method we should select. And the thing that connected typically on ISR mining, with the communities and the regulators is the lack of waste. And the fact that we have minimal surface impact, the fact that we are not going to have lasting tails. We will not have a tailings dump in the same way you would at McLean Lake or at Key Lake. And these communities are familiar with those and they realise that these things are there for a long time. They love the idea that ISR mining simply doesn’t have that type of impact.

So you know, we really wanted to test it before it would be a problem to make sure that it wasn’t a problem. And the story itself for permitting is largely an environmental impact story. And so we launched that process almost a year ago with the submission of a project description that the CNSC, the Canadian Nuclear regulator and the Ministry of Environment in Saskatchewan will co-regulate this process. Right now we’re in the process of preparing the next level of study to ultimately submit an environmental impact statement. And really this process is about understanding the impacts of your project on the environment. And when I look at ISR mining, we’ve got a great slide in our slide deck on this, in our January slide deck, and it talks just about how ISR mining at Phoenix is different.

But when you really go down the list of what are the impacts associated with this mining method, they’re really minimal. And so when I look at our path forward, I really focus on what is the scope of the environmental impact associated with the project because that’s really what this process is about;  it is understanding the impacts, the way you’re going to mitigate them and the way you’re going to monitor them. And our process with Phoenix and the ISR is really quite forward, and we feel like it actually charts a simpler path forward when I’m actually going through the environmental test.

Matthew Gordon: How do you get a better sense of how long this process is going to take, and what the potential hurdles are down the line? Because in your deck, you talk about starting production in 2024. I’m assuming, given funding is in place, etc. And we can come back to that, but it’s the permitting licensing objections, which as you say, are the long pole in the tent here. You’ve just started the process. Do you have any sense of how long that takes?

David Cates: Well, yes. I mean, look, the processes is certainly uncertain in terms of how long it will take. Our duty, right? And what we can control is submitting that environmental impact statement. Then the ball does go into the other court. The important thing is while we’re working on that EIS, we’re not doing it in a vacuum. And you can see from the story around how we assess the mining methods, we are not doing anything in a vacuum. We’re bringing the communities and the regulators along with us because it is a learning curve. What I would say though, on eliminating, you know, some of those typical concerns around ISR, is it is really technically driven; a typical ISR operation will, well look – the greatest concern, and I’ll be blunt about it, the greatest concern with an ISR operation is that you’re injecting a mining solution. Now, look, it could be an alkaline solution. It could be an acidic solution. We have an acidic solution. That’s how the chemistry works. When you inject that into the ground, people ask, well, where will it go? Now, we will have done all sorts of work to model a hydro-geology of that deposit so we can follow the flow. But in a typical ISR operation, I mean in Kazakhstan or in the United States, the way that they will control the flow of the mining solution, is by putting a ring around the mining horizon of additional recovery wells. And what they’ll do is, they’ll make sure that they always suck solution into that. Always recover a positive amount so that whatever they’re putting into the middle isn’t evacuating that ring, okay?

That’s how every ISR operation in the world will operate. What we’re talking about has that approach as a redundancy. Okay. We’re putting a 10m thick ice wall over top and around our deposit and connecting it to those competent basement rocks. That’s our containment. It’ll be the first fixed containment, or chamber of mining that you’ve ever seen in ISR. Now, we can do it because our deposit is so high-grade and so small. If you are dealing with typical ISR grades: 0.05%, you’d have to freeze or create a cap over square kilometres of ground. We don’t have that issue. We can create this very tight dome over top of our deposits. Our primary containment is a 10 metre thick underground ice wall.

Matthew Gordon: So tell us a bit about that, because that seems like an engineering feat in itself, right? So that’s expensive, no doubt. But again, how’s it being done elsewhere? Have you guys done it before?

Avid Cates: Well look, it’s actually not that expensive. And it’s actually not a technical feat. Other than that, we would be combining the ground freezing technology with ISR mining; that’s a first. But ground freezing in the Athabasca basin happens every day of the year right now at McArthur River and Cigar Lake. You know, and I’m happy to go into how that works but I think that really a point that has to be hammered home is that environmentally, we will have that perimeter of extra wells. It’ll be outside the freeze dome which means that when we go through that regulatory process, we can explain to the regulators and any party that’s interested, that our redundancy, our redundancy is the industry norm. That means we’re already achieving a higher standard. Right. And that can put people at ease; even though we are using an acidic solution, we really have the means to control this and eliminate those common environmental concerns.

Matthew Gordon: It’s interesting; you keep using a phrase there – you said you’d be the first to do it. You will be the first to do it. And if, you know, if I’m sitting judging this, even with my banking hat on or otherwise, the first to do things worries me because it’s not been done before. It’s not proven before. So, you know, when you’re doing your EIS, and indeed apply for a year EIA and stuff, you know, that must be a phrase which worries the regulators too, no?

David Cates: No, well, I mean, it’s important for me to be clear about that. The thing that’s first is the combination of things that have already been done and exist and our tried tested and true. Nothing that we’re actually doing is earth-shattering other than combining these things. So let’s look at ground freezing: every day of the year we’ve got freeze holes drilled into Athabasca sandstone, at McArthur and Cigar, a freeze brine that’s being pumped through it. And it’s freezing the water that’s in the host rock. We have the same kind of host rock. So freezing happens all day, every day at two different operations in the Athabasca basin.

 ISR mining; we’re not doing anything special there, other than that we’ve got very high grades, right? But injection wells, recovery wells in sandstone. So there’s nothing really new about that. What we’ve done is just put those two things together in a way that unlocks potential that nobody’s ever seen before. And I actually think that referring to being the first is something that’s very exciting for us because when you look at what investors can get exposure to, value creation can come from. This is true value creation; taking things that have been tested, that work, putting them together in a way that takes a project that was good to medium, middle of the pack, and actually make it now the lowest cost mining method, highest grade deposit, potentially the lowest cost Uranium producing assets in the world. I actually think that quite exciting.

Matthew Gordon: The numbers look good. The numbers look good. So let’s get back to that question: how long does this process take? Are you going to have to guess at that, or do you know something? Is it two years, is it ten years?

David Cates: Nobody knows how long the regulators will take.

Matthew Gordon: But is it nearer two, or is it nearer ten? Where are you hoping?

David Cates: So from our model, we modelled it; it’s a one to two year process once we’ve handed the EIS over. It’s definitely, look that’s going to be our job; to ensure that it’s on that type of timeline. But these processes can take longer and I think the key is, the less you have in terms of environmental impact, the fewer impacts you have, the lower your risk is that you’re going to encounter a delay. If you have a very long list of things that the regulators of the environment or the communities need to consider, any one of those sets a one or two year delay. The shorter your list, the lower your risk.

Matthew Gordon: Okay. And what, what are the things that you’re spending most of your time and money on in terms of as a percentage that concerns you the most about getting this thing done in that two-year timeframe?

David Cates: Right, so the critical path for us to complete that environmental impact study is finishing our environmental assessments. So that’ll be a priority in 2020. And along with that, you’re going to have metallurgy, right? Metal. This is a geologically driven deposit where metallurgy is very important because we are, of course, leaching the Uranium in-ground. So we are running a barrage of metallurgical tests to take our work from the PFS standard up to a feasibility standard so that we can get that data into our environmental assessment process and ultimately have that inform this environmental impact statement. Those are our priorities.

Matthew Gordon: Okay. And so it’s all about Phoenix; that’s the first asset, project you want to get into production, and Griffin comes along. I think you’re indicating in a five, five or so, six years later? That’s the way the economics run, okay. Can we talk about numbers? Money? So how much money have you raised over the period that you have been getting Phoenix up and running?

David Cates: Well, if we look at Wheeler, historical costs that we have spent as a JV, we have spent USD$100M + on finding those deposits and moving them forward.

Matthew Gordon: Okay. Right. And you have raised money consistently each year. You are dipping into the market. You did another raise in pre-December was it? December, I think.

David Cates: Yes. And look, the money we have spent matches the project, right? So we have raised big bucks for exploration when we have had a deposit to delineate. We are raising a smaller rate for exploration now because we are actually focussing more on discovery of new ISR amenable deposits. So we are not going as deep into the exploration side of things, because really, the value creation is going to come out of developing Phoenix. And we don’t really want to be diluting shareholders with big exploration budgets right now, but we do want to keep our mind and our team focused on finding additional ISR mineral deposits, because we do think we have an advantage on that front and can add a lot of value.

Matthew Gordon: Right, there’s an exploration happening as well. That’s good. Is part of that USD$100M, is there a USD$24M credit facility in there as well? By Nova Scotia bank? Or is that separate?

David Cates: Yes, the USD$100M is a historical spend on Wheeler. When you look at that USD$24 million credit facility, so that’s a letters of credit facility, and we issue letters of credit off of that facility to secure our reclamation obligations at McClean lake where we have historical mines that have been mined out. And of course we have the McClean lake mill, which is licensed and operating and processing all of that ore for Cigar Lake.

Matthew Gordon: Fantastic. And part of that deal was you need to keep USD$9M in cash on deposit at all times, and you’re not having any issues with that, that USD$9M is there.

David Cates: Yes. It’s restricted. It’s held by Nova Scotia on our behalf, and that covers part of that credit facility. You got it.

Matthew Gordon: Right. Okay. What is the cash position today outside of that $9M?

David Cates: Yes. So we reported Q3; cash just around USD$10 million. That will be the uncovered cash.

Matthew Gordon: Right. And then the burn rate, I mean, when does that…what I’m getting to is, are you going to come back into market anytime soon? And what sort of quantum are you looking to raise at that point?

David Cates: Yes, so we raised CAD$4.7M Canadian in the fourth quarter. That would be on top of that  $10M. At the end of the day, we’re a development company, so while we do have sources of cashflow from Uranium Participation Corps and from our environmental business in Northern Ontario, we’ve got a contract with BHP up there. We take care of their closed Uranium mines. But while we do generate some cashflow from that, we’re going to need more money. It’s a development company.

The key with us is that we are very fiscally prudent. We really do plan our activities out, and we really do have a path to finding the right window to capital. You know, it’s an interesting thing when you have a shareholder like Lucas Lending, you manage your dilution carefully because at the end of the day, Lucas Lending, and frankly myself, money that I’ve put in the company we’re not going to make a return, the type of return we want to make if we’re swamping our shareholders out with big equity raises that are poorly timed. That said, there’s always a tension between moving the project forward and the value of bringing that production forward and being on time. Because every year that your start date moves, you’re effecting today’s NPV. Right? So we’ll always be juggling that. We certainly don’t love equity at these values. We’d look at other asset disposals, I would look at other ways to raise money that aren’t linked to the share price.

Matthew Gordon: Alright. Okay. So let’s look at that; he had about USD$10M in your September statement. You’re burning, you burned about USD$1M a month prior to that. Is that right? Basically, I’m trying to work at what you burned between then, that statement of USD$10M, and today. It seems to be, you know, to me, USD$3M to USD$4M would have, you know, it’s being spent on the development activity. And again, I’m trying to get us into where you’re at today, and I know there is probably a December statement coming out soon, but where are you at with cash?

David Cates: Yes. So we’d say that our year-end statements are coming out. But look, at the end of the day when you look at the spend, we disclose our plans for the year, they are crystal clear, in our MD. And we’re really one of the only developers to do that. But you have to understand that year to year plans change. And so the scope of spending really is variable to a certain extent, and adjustable to the cost of capital. So I would caution against using say, 2019 and the monthly burn as a proxy for 2020 in the monthly burn. What I can say is that our sort of GNA overhead costs are in the range of CAD$5M and we generate somewhere in the range of CAD$2M to CAD$3M in cashflow from renting Uranium Participation Corps, and from our environmental business.

Matthew Gordon: Tell us about that. Because you know, I was focusing on the spend, but you do have some incomes from a couple of sources. Can you just tell people about those?

David Cates: Yes, so we’ve been the manager of Uranium Participation Corps; this is publicly traded company on the TSX under the symbol ‘U’ since its inception. It is a company that holds physical Uranium at about 18M lbs U308 equivalent in inventory. And we are the administrative and commercial agent, or manager for that company, and so independent board of directors, they’ve hired us. We have a five year contract with UPC and we get paid a base fee plus a variable fee that changes based on the net asset value of UPC. So the higher the Uranium price and the higher the value of UPC, the more money Denison’s going to make managing that.

Matthew Gordon: What do you already get from them? How much do you get from that?

David Cates: We’ll earn about CAD$2M a year managing Uranium Participation Corps. And really that’s all about leveraging our experience in the space and our reputation, because when UPC was formed you know, over a decade ago, it wasn’t that easy to go set up storage accounts to mine, physical Uranium. And so that was really the marriage. They were saying that Denison is a known player in this space; it has these commercial relationships with the converters and the enrichers. And we could actually go and set up those accounts for UPC, and use our commercial knowledge in the Uranium space to actually manage UPC’s inventory. So that’s UPC. If we go the environmental side, we have a closed Uranium mine in Elliot Lake, Ontario. It’s a very famous in Canadian Uranium mining. That district would have been the Athabasca basin before there was an Athabasca basin historically. And we’ve closed and fully reclaimed that mine, which is a quite an accomplishment and actually, the mine is used by the CMSC to tour people from Canada and internationally. They show them what a closed and fully reclaimed mine can look like as a success story. So with that, we have a team of people up in Northern Ontario that take care of our site, but we also have a contract with BHP and they’ve acquired a company along the way that had a number of closed Uranium mines in Northern Ontario, right around our mine, and so we offer them a care maintenance service. Like what we’re doing at our sites, but for their sites, and we’ll earn somewhere in that range of USD$1M to USD$2M from that business segment, not just from BHP, but from that business segment.

Matthew Gordon: So that’s USD$3M to USD4M potentially, both of those. And you talked about USD$5M is your development budget, so that’s not bad.

David Cates: Yes, so that USD$5M is a G&A overhead budget.

Matthew Gordon: Okay. All right. That’s the G&A component, so there’s a development budget on top of that, is there?

David Cates: Yes, so funding for the environmental assessment or any technical work is on top of that. Exploration as well, right: USD$5M is the keeping the lights on costs.

Matthew Gordon: Keeping the lights on costs. Okay. Okay. I get a sense the numbers now. And can you just very quickly, the last sort of component here of the McClean Lake Uranium mill, what does that mean for you? Because you’ve got a 22.5% share of that. So you’re not operating that. You’ve just got a share in it, is that the setup?

David Cates: Yes, so the mill is operated by Orano, formerly Areva, Uranium nuclear giant out of France, and we have a 22.5% interest. We will argue that it is a strategic interest because there are very few people that actually own an interest in an operating, well, operating or licensed Uranium mill. If you’re looking at operating Uranium mills in the Athabasca basin, McClean lakes is the only one that’s actually operating. If you look at licensed mills, you are restricted now down to McClean Lake, cue Lake and Rabbit. Those assets are closely held; basically owned by Cameco and Orano. So Dennison really is the other party in that mix with a tangible, physical asset, they’re right in the middle,

Matthew Gordon: Right. What does that get you? You got an eighth of this asset. They’re processing 12% of the world’s global Uranium currently. What does that allow you to do? When you start producing, you get into your pro rata portion to be processed through that mill, at whatever rates? I mean, how do you negotiate your terms on something like that?

David Cates: Yes, that’s a good question. Anything that goes through the McLean mill that isn’t from the McLean project is going to require a toll milling agreement. Toll milling agreements generally are going to require two out of the three parties in that joint venture to vote for it. So having that 22.5% is an important thing because it means that we’re not another party knocking on the door of the McClean Lake mill to say, we’d like to develop our mine and send our product to you. We actually do get a vote on that toll milling agreement. It’s important to be clear though; Phoenix for example, does not require the McLean mill. For Phoenix, we will be building our own processing plant on site at Wheeler, but Griffin is really an officiary of the McLean mill because you know, the capex of building an underground mine and the front end of a mill is not insignificant.

And with Griffin, we’ve been able to really squeeze the economics on that deposit because we’re not building a USD$1Bn mill, right? McLean Lake, like I joke with people, but then I could show you receipts. We basically could show you receipts for about a billion dollars of costs that have gone into the McLean Lake mill. So even with the 22.5% interest you use from that, something in the range of over USD$200M in historical costs, or even replacement value, probably a little higher today for that asset. And you know, for us it’s important for Griffin, but it’s also important for life after Cigar Lake. So right now, the mill is operating under a toll milling agreement for the Cigar Lake joint venture and all of those pounds that are coming from the Cigar Lake mine are being processed at McLean, We already used that stream of income to bring in USD$43.5M a few years ago, where we sold that stream to Anglo Pacific. So that’s an example of where we’ve already made good use of it because we didn’t have to issue equity. Most of what we’ve been spending outside of exploration dollars has come from that financing that came out of the McLean mill. And for us, that was 8% money, and it de-risked what would have been a critical cashflow for us, right?

What’s left is that there’s still a mill. And there’s still a licensed mill. Even after Cigar Lake produces and mines out. And today, there’s a 6Mlbs mill, essentially, sitting there idle. Because McLean is licensed for 24M lbs, and it is only running 18Mlbs from Cigar Lake in any year. So you have got 6Mlbs sitting there idle, licensed capacity.

Matthew Gordon: Right, so you have, given that Griffin is not going to be in production any time soon, that that’s a revenue stream, potentially, for you. When does the Anglo Pacific stream run out?

David Cates: It is mapped to the Cigar Lake mine, so it any pounds that come from the current, defined resources at Cigar; the ringfenced areas, that will be optioned by that –

Matthew Gordon:  When is that? I don’t know enough about it.

David Cates: It has the potential to go another 20 years, but it really depends on what happens between Phase 1 and Phase 2, and whether Cameco is able to make a decision.

Matthew Gordon: There was also talk in the PFS about rare earths. Is that a strong reality of being a by-product credit or not?

David Cates: That’s something we want to do a little more work on. It’s not something that we have got any sort of economics at this stage, nor will we need it but it’s something that we would definitely want to look at.

Matthew Gordon: Right. But you are not going to get distracted by it anytime soon? It’s not a big focus?

David Cates: We don’t need to.

Matthew Gordon: We did you need to talk about it in the EFS then?

David Cates: Well, I think it is an interesting area to pursue from an optimisation standpoint, but it is certainly not core to the project.

Matthew Gordon: Right, okay. So, it has been an interesting 2 to 3 years in the Uranium space, how are you faring up? How are you?

David Cates: Yes, I guess that is a delicate way to put it.

Matthew Gordon: It’s been tough, right?

David Cates: Yes. Look, it’s been tough. I would say that we are blessed with the project because if I had to wake up every morning and had to look at a project that needed USD$65 Uranium to be able to move forward, I think it would be a pretty depressing place. You know, USD$65 Uranium is going to be here; it is a question of when, and at what trajectory. So I think that actually, we have been really blessed and I’m actually quite excited about our story despite the market uncertainty, and despite the fact that we keep seeing record-low prices. Because even today, we could make a very good return at Phoenix, and that’s what gives us so much energy about advancing the project now, even if the cost of capital is high, because we have to look at how we will make money in this cycle. And the way that you will truly generate a return for your investors is by producing the pounds, right? Or at least having visibility of those pounds coming out of the ground. We are not looking for the rising tide of the next exploration company, or this company for a proper rerate from producer to developer, and we believe that positioning ourselves that way right now, will give the investor maximum torque to whatever happens with the commodity price. But if there is this beautiful insurance policy that says if the commodity price doesn’t go to USD$60, the project still goes ahead and still gets built and you still get the developer rerate.

Matthew Gordon: But let me ask a question: what do you need to see the price get to, to incentivise you? Because you don’t want to get into production to break even; no one wants to do that. Whatever that number actually turns out to be. What’s the number that you are looking at from the market?

David Cates: Well, we break even at USD$9.

Matthew Gordon: Sure. But what do you need to get going here? I mean, what are you telling me? I would get into production tomorrow if I get the finance, is that what you are saying?

David Cates: Yes. You’d argue that that’s a possibility. I think for us, the biggest question will be the cost of capital for the build, you know, are we comfortable with the Uranium price that’s built into our equity value, or the cost of debt that is available and how costly is that? And will it be cheaper if the Uranium price is higher? I don’t really see the Uranium price driving the overall decision on the asset so much as it does inform the cost of the capital. I think it can go up, and I think it can have a good return and the share holders will do well. The question is, how well with the cost of capital?

Matthew Gordon: Okay. So remind me about your capex cost based on your PFS?

David Cates: For Phoenix, to get the mill started, it’s around CAD$325M.

Matthew Gordon: Right.

David Cates: And when we look at that, there’s a slide that sort of gives you that cascade of production.

Matthew Gordon: Yes. I’ve got it.

David Cates: We have not gone and maximised our NPV, right? We’ve actually gone and put together something that is commercially reasonable. You know, if we wanted the NPV to be as big as it can be, we would have Griffin and Phoenix start and happen at the same time. We’d spend USD$1Bn in capex up front and we’d have 15Mlbs of production. What we’re trying to do is make it realistic. And we have done is, we have said, look, this makes money today, this does not require a higher Uranium price. Capex is low: CAD$325M.  Let’s build Phoenix. Let’s move that cashflow to fund Griffin as a second stage, and let’s use the production from Phoenix which doesn’t need contract cover like money. Let’s use that production to incentivise the utilities to sign long-term contracts for the Griffin operation. The utility looks at it and says, how do I sign a contract for an asset that doesn’t exist? I need my Uranium. The best way to sell to them is to have Uranium production before you sell them the contract. And that’s really what we’re trying to do with this, right? And that’s why the plan has been put together this way commercially reasonably, and that’s way the important thing: we think that raising USD$300M is a totally different task than raising USD$1Bn, USD$1.5Bn. And that USD$300M; we believe is available in a moderate, to almost today’s Uranium market. We don’t believe it requires USD$50, USD$60 Uranium to be able to access that kind of capital.

Matthew Gordon: Can we segue off that, just quickly; there’s a lot of talk in the market about mergers at the moment, and you were talking there about raising USD$1Bn, USD$1.2Bn, USD$1.5Bn, and there’s a few names that spring to mind there, obviously, which I think is bringing on this talk of mergers. Do you see some of the other players in the Athabasca basin needing to come together to kind of get the funding in place? Or should they be smarter like you and say, hey, let’s bring that capex down to something more manageable: get into production, proof of concept, proof of route to market and get going? Do you think their plans are too big?

David Cates: Well, look, there’s a lot in that question. We made a purposeful decision to design the project this way. Part of it is that if we had brought all of that Griffin production forward, and maxed out our MPV, it would lead us into a path where we would have disappointment, potentially, ahead because it is difficult to realise on that MPV, right? You have to be spending USD$1Bn, raising that money, building that shaft and running an ISR operation at the same time; it’s not realistic in our eyes. And it’s too high risk, right? So let’s take a more measured and sensible path. That’s what we’ve done on that capex. We do think a lower capex is a relevant thing right now. In terms of M&A, if I were to take a step back; I mean, I’d look at Cameco, right? And Orano. These are the big boys in the Athabasca basin. They both have declining production profiles. Cameco has a great stable of assets between McArthur and Cigar; these are high-grade and large. But at the end of the day, even they will admit, and I watch a lot of their investor presentations and attend many of them, but even they will admit that the time is actually now, or yesterday, to be advancing the next stage of mines in the Athabasca. Now, they can’t justify it when they have producing assets that they are curtailing, but even they will admit that today is actually the time to be moving these assets forward, if we want to have that new production fill the gap that is emerging in our space, in that 2024 or 2025 horizon.

So, ultimately, I think that when you look at M&A, it’s Cameco and Orano that have to look at how they will replace production, how will they grow to meet market needs. They don’t have other assets that are queued up. And McArthur is a great asset. It will come back online, and that’s a reality but they need pounds even beyond that, and they admit it. And so I think there is reason to understand that there will be an M&A slant for many of the players in the space. I don’t see it happening now because you have got McArthur shit down temporarily. It would be a very difficult thing, in my mind, for Cameco to go out and acquire assets when they have truly the world’s largest and highest-grade Uranium mine parked for the time being.

Matthew Gordon: Okay. Do you see yourself as a take-out target? Are you gearing yourself for that or do you genuinely want to get into production?

David Cates: Look, I don’t see a take-out anytime soon so I think it would be a bit risky for us to advance or develop ourselves as a take-out story. We really are laser-focussed on building the project and we have built the team to be able to do that.

Matthew Gordon: Are there any other projects in the Athabasca basin, excluding your own, which projects in the Athabasca basin do you think you would like to work on?

David Cates: Well, I mean look, Nextgem has been hugely successful; they have a very large, high-grade Uranium deposit that no doubt will be a mine at some point so it’s hard to answer that question without talking about Arrow. It’s a great deposit and they are a good company. We wish them the best, and I certainly wished that I was involved in that company before they found Arrow, because then I’d have a lot more money in my jeans than I do now.

Matthew Gordon: They have done well. Well, talking about money in your jeans right now; I’m looking at your MDNA and it has been a tough few years. I like your business model, I always like talking about business models, and this is an interesting one, and it’s going to be a lot easier to raise USD$325M than perhaps USD$1.325Bn. You know, all things being equal. But you guys have, we talk about how remunerate themselves and you guys have a sort of one-line item in there: you talk about management based on variable fees. I assume that is just a salary, right? So you pay yourself a salary. You don’t pay yourself through a management firm or through a consultancy which bills the company, it’s just the salary? You are an employee, right?

David Cates: Yes, absolutely. And you know, the best place to look for all that stuff is the management information circular. It is really clear. Our salaries are pretty reasonable. They are not aggressive. We do take a lot of our comp in equity, and actually, what you’ll see if you sort of look through some of those footnotes there; it shows the last several years. We have a structured bonus plan. It is our executive investor bonus plan. In the last few years, the management team has taken almost all of their payments out of that plan in stock or productions, keeping the cash in the company and building our personal leverage to the company success, right? So we try to be very reasonable about that and recognise that it is better that we align ourselves with our investors rather than enrich ourselves right now.

And the comment I was making about cash in my jeans; I didn’t mean that personally because you have to understand that, you know, I’ve been with this company 12 years. I’ve seen them go up and down in the Uranium space. I’ve been the CEO for the last 5 years. But this is a mature company, and so the stock that I have built up, it’s by buying it in the market or earning it through those bonus payments or things like that. None of this is penny stock. All of this is market stock. So I am under water; like many other investors right now, on almost everything I’ve got. Well, definitely; on every share I’ve bought, I’m under water right now. And I think that’s an important part of our story; because our team is hungry, right? We’ve got a bunch of people on this team at the VP level that they have stock, and they are vested, but they are not going to get a payday unless this project gets built and we have this proper rerate. No-one on our team has had this, you know, millions of dollars on Denison at this point.

Matthew Gordon: So just so I understand it; how many of the management are on that base and variable fee cost? Because months ending September 2019, you are looking at CAD$1.4M, I guess, so maybe that comes up to about USD$1.8M, USD$1.9M for the year, how many people are sitting, taking out of that?

David Cates: Sorry, are you looking at Denison or Uranium Participation Corps?

Matthew Gordon: I’m looking at Denison at the moment.

David Cates: Yes, so we don’t…I’m just pinging you on that because we don’t disclose that base and variable on Denison.

Matthew Gordon: Okay.

David Cates: We do disclose the key management but what you’ll see is that all of the VPs are on a structured system where there is a mix between base salary, a long-term incentive plan which is equity grants, RSUs or stock options and then the short-term incentive plan which is that bonus payment that I’m talking about. So the entire VP team is on that. That’s myself, our CFO, our VP Commercial, our VP Controller, our VP Operations, our VP Exploration, and our Council. So that’s the team that is all being compensated on that basic scheme.

Matthew Gordon: If you don’t mind, can you tell us a little about what this year holds for you? 2020 – it’s got to be a big year. We are reading about US and Canada finalising the Joint Action Plan on critical minerals, and then you’ve got the DOE announcement from last week. And you know, some positive noises from the likes of Cameco etc. It feels like things are starting, starting, I don’t know how many false dawns you’ve had in this industry but it’s starting to turn. What, in terms of your business plan, are you starting to do today, and what are the things that if you think the market does move, you know, in the second half, like a lot of people in this industry hope it does, that you can quickly implement to get things moving? I imagine, obviously permitting is a bit of an issue because you are not quite sure of the timeline there, are you having conversations around the financing of this USD$325M for instance? Have you already got something in the bag waiting? Or is that just dependent on permits coming through before you can even start these conversations?

David Cates: Yes. I mean, look, on the market, I’m actually quite optimistic about 2020. We really are starting to see road signs, if you will, that are pointing us to an improving market; anything that takes some of the uncertainty that we have seen over the last 2 years from the Section 232, failed Section 232 partition in the nuclear fuel working group in the United States, anything that takes uncertainty out of the market is a positive. We are seeing utilities participating in the market more. Just starting: I mean, I’m talking in the last month, right? These are really important signs that we actually might see this market start to move fundamentally in the right direction, rather than move, sort of by the traders and on momentum. So, I am optimistic about 2020 for the market. We talked about it; our story is less reliant on the market because of the profile of Phoenix, so our focus will be the critical path for moving Phoenix forward; so that really is the environmental assessment process. So you will see us again working on environmental assessments, metallurgy – moving that process towards the completion of the environmental impact statement. That will be our priority in 2020. We sort of have three streams on the project: so permitting and environment are 1, technical studies and feasibility work – that’s stream 2. That’s more variable for us; we can choose and time that as we want, based on that cost of capital. And then you have stream 3, which is actually lining up the financing. So our CFO will certainly have that mandate of advancing this on a sort of soft, granular basis now, so that when we do go to raise the money for the project, it is an arrest job, right? We’ll be lining that up.

I guess you could add a sort of a fourth stream which is exploration; look, we raised that CAD$4.7M, we’re going to spend it in 2020 and our focus is actually on adding pounds at Phoenix within the existing confines of that freeze dome. And when we run the economics on that, it’s a trade-off, right? You know, like spending the money now to add pounds that you’ll mine towards the end of your mine life. Do you get a return on spending that money now for delineation? We looked at it. We did that analysis and we said that that NPV today, of finding more pounds under the freeze dome is quite positive. And because we don’t have to change the extent of that freeze dome, we’re looking for those pounds to be really incremental. So we are going to be working on adding pounds within the freeze dome at Phoenix as well.

Matthew Gordon: Okay, so that’s a big one. Can I just come back to the financing with the CFO, obviously, like you say; permitting is a big bit of that. You’ve done a PFS. No-one is going to give you money off the back of a PFS, there’s going to have to be a Feasibility Study done at some point and eventually a DFS and you know, these things take time. Have you any idea, can you give us any idea of when you think those things start kicking in, when you’re going to be in a position to move to the Feasibility Study first of all?

David Cates: Great question. For us, we’re not rushing the Feasibility Study. Okay, it costs money to do it, the cost of money is high. For us, what we’re trying to do; line up the environmental assessment and that Feasibility Study to come together at the same time. It’s an iterative process as you go through the environmental assessment. And so you are designing it, your plans are going to change at the same time. Why mark your Feasibility Study now, only to have to redo it. Or, basically moving them together, have them converge. That allows us to make our cost of capital along the way, right? Because we are not doing anything we don’t need to do on the Feasibility Study until we have to do italong that prepared time.

Matthew Gordon: Okay. So the CFO has got a pass for now; he has got a while before he needs to start having those soft conversations, right? I’m sure he’s busy with other things.

David Cates: You know what? It’s not a pass because at the end of the day, we need to know what elements have the Feasibility Study need to be where, for us to access that capital. We’re looking at bank debt for this, right? We have such a high operating margin that we are looking at this as being appropriate for bank debt. We need to know. The technical guys at Scotia Bank will already lend to us. How do we get them over that hurdle so that they are comfortable with what’s in the Feasibility study. So he’s not off the hook yet, the CFO,  I give him a hard time because I was the company CFO. He already has a difficult role being the CFO for the guy who used to be the CFO. But look, he’s a pro at this and he has been with us for the last 5 years so he knows what we are trying to do. And it’s really about getting the lenders on side before we complete the Feasibility Study, so that when we are done with the Feasibility Study, now it’s a question of pressing the button to say; yes, we are going to lend you that money.

Matthew Gordon: Okay, but you know what I mean; it’s a case of polishing the data that you’ve got and getting new data in before he’s able to firm up on that one. Your focus is EIA, let’s get that thing over the line, get people to buy into that. Can you answer the question which I think you didn’t pick up on because you didn’t answer it, which is; you are going to need to go to market soon because you are a development company; of course you are, when are you going to do that and how much do you think you are you going to raise this time?

David Cates: Well look, I think anyone who gives you a simple answer on that is a little bit risky. Look, we manage our business in a dynamic industry, right? In a dynamic time. So for us, it’s really about assessing the cost of capital against the value of the work ahead, right. So there is no bright line or specific quantity about this. It’s about managing those two. If the cost of capital becomes very cheap, and the Uranium price is very high, and we like the value, then we might raise more money so we can move all of those four streams forward very aggressively. If it isn’t, then we will be selective about what we do to maintain our schedule generally while accessing a minimal amount of capital to manage our dilutions. So there is no black and white answer to that question.

Matthew Gordon:  And obviously, share price has been sliding down since August last year, you’re in two exchanges aren’t you, first of all: you are in the TSX and the NYSE. Do you think that’s just going to be a factor of whatever is happening in the market, or what do you think the things that you are going to say or do that are going to change people’s sentiment towards your stock?

David Cates: Well look, you’re right; share prices in the sector are down. I will say for the record; we have outperformed our peers each of the last 2 years. 2018, against our peer group, we were down 6%, the peer group was down 26%. 2019 – we were done 16%. Nobody’s proud of that, but our peer group was down 36%. So we have been a good story and it’s driven by what we are doing with the project, and investors are paying for that. You know, like yes, I guess whenever we talk about equity values, it gets me a bit frustrated because I always see us as being undervalued. But, you know, the sector is undervalued. What can we do about it? Well we buy stock. I’ve been buying stock. I participated in that USD$4.7M offering. I picked up almost half of my salary in stock. I saw that USD$0.68c flow-through unit as a bargain, I bought it. I bought more stock in January, just over [inaudible 57:41] this is all I publicly filed. So you can do that. And ultimately, I think our story is actually really well-positioned for the market to rebound because we do have news flow ahead. 

You know, most developers struggle. People go through permitting, firms that go through permitting, they often struggle with that part of the mining lifecycle where the story is a bit boring and people look at, well, what happens? I mean the project is already great so all that can happen is that your permitting can get delayed, or now you’re going to have to start spending your money. For us, we have already come through that sort of negativity. Now it’s about building on the story of actually building the project. And we actually have meaningful news because your points on ISR mining, not everyone believes, and we are carrying out a series of test programmes that can de-risk that. So de-risking this process actually unlocks value.  We do have things like metallurgy, we have the permeability results from our 2019 field programmes. These are things where we have made some releases along the way but the rest is to come. All of that does give us our stock actual real catalysts that can de-risk the project and can actually add value and drive the share price higher.

Matthew Gordon: Brilliant. David, I appreciate you spending your time today with us. Do stay in touch. I think you have got yourself something good going on there. I’d love to keep sharing this with the viewers and subscribers to our channel. Thank you very much.

David Cates: My pleasure. Thanks very much for the interest and for all your subscribers and their interest. We value their interest and the opportunity to tell the story, so thanks again.

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