URANIUM

First Uranium: 1850 Job Losses on the Cards

The uranium and gold miner said it is currently seeking approval from labour organisations to adopt a scaled down mine plan in a bid to stem ongoing operating losses at its Ezulwini mine

Author: Christy Filen
Posted: Monday , 19 Dec 2011

JOHANNESBURG - 

First Uranium is to seek approval from labour organisations to adopt a downscaled mine plan for its Ezulwini mine which may result in a halving of the workforce of 3 745 people.

First Uranium President and CEO, Deon van der Mescht said "This is a necessary step if we are to safeguard the considerable investment made to date in this operation and the future sustainability of the mine."

The new operating plan for Ezulwini will focus on the mining of more profitable areas and the reduction of fixed costs in line with the scale of the operation the company said.

"For the past nine months, the Ezulwini Mine has been the subject of an intensive turn-around process. We have devoted significant resources to position this operation to achieve the production levels necessary for it to be profitable. The extremely unfortunate fatal accidents in the latter half of the calendar year have had a significant impact on employee morale and productivity, and as such the expected improvement in production has not been forthcoming" van der Mescht said.

The junior gold and uranium miner has two operations in South Africa - the Ezulwini mine and its tailings recovery operation Mine Waste Solutions (MWS) - with combined sales of just over 40 000oz of gold in its last quarter at the end of September.

The Ezulwini Mine sold 25 968oz of gold which it produced at a cash cost of $2,191/oz for the first half of its financial year ending 30 September 2011. 31,407 pounds of uranium were also sold, generating US$1.9m in proceeds.

The financial position of the group is precarious with the unaudited balance sheet at the end of September 2011 showing that capital raised of US$475m has almost been wiped out by accumulated losses of US$439m. Total liabilities stand at US$810m with cash in the bank of US$15m. The cash outflow for the six months was US$33m.

The group's consolidated pre-tax loss for the six months stood at US$91.5m, most of which, (US$86m) was due to its "Gold Stream" deal.

In 2008 and 2009, the miner signed agreements with Franco-Nevada, a gold focused royalty and stream company, whereby Franco-Nevada acquired the right to receive 7% of the life-of-mine gold production from the Ezulwini Mine and 25% percent of the life-of-mine gold production from its tailings recovery operation, Mine Waste Solutions (MWS). First Uranium was also obliged to deliver a guaranteed minimum amount of ounces in 2010 and 2011.

Franco-Nevada paid $175 million upfront for these rights. In addition, Franco-Nevada was to make an ongoing payment equal to the lesser of $400 per ounce (subject to an annual inflation adjustment of 1 percent, starting in the fourth year following receipt of the first payment) and the prevailing spot price at the time of such payment, for each ounce of gold delivered under the contract.

Even at lower gold spot prices of US$1600/oz today, this deal is deeply out of the money. The gold price for 2008 and 2009 fluctuated between approximately US$700 and US$1200/oz during the period.

This has resulted in First Uranium having to deliver between 30% and 40% of its Ezulwini mine's ounces at US$400/oz in order to meet the guaranteed deliveries to Franco-Nevada. This is expected to drop to the contractual 7% level after calendar year end.

"While the Company continues to believe in the inherent value and potential of the Ezulwini Mine, decisive action is required in order to stem ongoing operating losses. Although it is the holiday season and the timing is unfortunate, management has determined that action must be taken now to mitigate the effects of the Christmas shut down and provide employees with an opportunity to increase productivity levels while reaching a consensus around the nature and scope of changes necessary to implement the new operating plan" the miner said.

The company said its operation at the MWS tailings reprocessing project is not involved in the process being undertaken at the Ezulwini Mine.

MWS is in the process of contesting the withdrawal of its mining right in September by the Department of Mineral Resources as well as an appeal by a local environmental group to have its water use licence set aside.

The First Uranium share price jumped 3.33% on the news. This was off its year low of R1.50 to close on R1.55 per share.