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FUM
FIU
FUM - First Uranium Corporation - Management`s discussion and analysis of the
financial results for the three months ended June 30, 2010
First Uranium Corporation
(Continued under the laws of British Columbia, Canada)
(Registration number C0777384)
(South African registration number 2007/009016/10)
Share code: FUM
ISIN: CA33744R1029
MANAGEMENT`S DISCUSSION AND ANALYSIS OF THE FINANCIAL RESULTS FOR THE THREE
MONTHS ENDED JUNE 30, 2010
Management`s discussion and analysis of the unaudited consolidated financial
condition and results of operations for the three months ended June 30, 2010
This Management`s Discussion and Analysis ("MD&A") of the consolidated
financial position and results of operations reviews the activities, unaudited
consolidated results of operations and financial condition of First Uranium
Corporation and its subsidiaries ("First Uranium" or the "Corporation") as at
and for the three months ended June 30, 2010, together with certain trends and
factors that are expected to have an impact in the future. The following
abbreviations are used to describe the periods under review throughout this
MD&A:
Abbrevia Period Abbrevia Period
tion tion
Q1 2010 April 1, 2009 - June 30, Q1 2011 April 1, 2010 - June
2009 30, 2010
Q2 2010 July 1, 2009 - September
30, 2009
Q3 2010 October 1, 2009 - FY 2010 April 1, 2009 - March
December 31, 2009 31, 2010
Q4 2010 January 1, 2010 - March FY 2011 April 1, 2010 - March
31, 2010 31, 2011
This MD&A is intended to supplement and complement the unaudited consolidated
financial statements for the three months ended June 30, 2010 and the notes
thereto (collectively the "Financial Statements") which have been prepared in
accordance with Canadian generally accepted accounting principles ("Canadian
GAAP"). Information contained in this MD&A is current as at August 5, 2010,
unless otherwise indicated.
The reporting currency for the Corporation is the US dollar, and all amounts
in the following discussion are in US dollars ("$"), except where otherwise
indicated.
This MD&A includes certain forward-looking statements. Please read the
cautionary note at the end of this document.
Business Overview
First Uranium Corporation has been focused on becoming a significant, low-cost
producer of gold and uranium. Both the Ezulwini Mine and MWS are located in
South Africa.
On April 26, 2010, the Corporation concluded a private placement offering (the
"Offering") of Cdn$150 million in secured convertible notes due March 31, 2013
(the "Notes"). The Notes consist of Cdn$40 million in South African Rand
("ZAR") denominated Notes issued by MWS (the "Rand Notes") and Cdn$110 million
in Canadian dollar ("Cdn$") denominated Notes issued by First Uranium (the
"Canadian Notes").
In connection with the Offering and in addition to the Cdn$150 million Notes
issued, Simmer and Jack Mines, Limited ("Simmer & Jack") exchanged the $22.6
million outstanding facility with Simmer & Jack (including accrued and unpaid
interest) for an equivalent value of Rand Notes (see Related Party
Transactions section in this MD&A).
Also in connection with the Offering, the Corporation settled the completion
penalty obligation to GW pursuant to the MWS Gold Stream Transaction with the
issuance of 14 million common shares in First Uranium valued at $18.2 million
to GW and a commitment by the Corporation to complete construction of the
third gold plant module at MWS and satisfaction of the technical completion
tests prior to September 1, 2011 (see Commitments and Contingencies section in
this MD&A).
Changes to management and the board of directors were conditions of the
Offering. These changes included the appointment of Deon van der Mescht,
formerly CEO of Simmer & Jack, as Interim President and Chief Executive
Officer ("CEO") on March 16, 2010. The board was restructured on closing of
the Offering with the resignation of three incumbent directors and the
appointment of three nominees of Simmer & Jack and one nominee from GW.
The Corporation`s common shares and 4.25% senior unsecured convertible
debentures (the "Debentures") are listed on the Toronto Stock Exchange (the
"TSX"). In addition, the common shares are listed on the Johannesburg Stock
Exchange (the "JSE"). The Corporation has applied to list the Canadian Notes
on the TSX after the expiry of a four-month hold period dating from the
closing in escrow of the Notes on April 8, 2010. No assurance can be given
that the TSX will accept the Canadian Notes for listing on the exchange.
Summary of Quarterly Results
The table below sets out selected financial data for the periods indicated (as
derived from First Uranium`s consolidated financial statements)
Fiscal Quarters Basic &
Ended (Loss) diluted
(thousands of income (loss) Long-
dollars, except per Revenue for the earnings Total term
share amounts) three per share assets liabilit
months ies
June 30, 2010 39,661 (12,025) (0.07) 783,847 (429,531
)
March 31, 2010 28,561 (26,041) (0.14) 684,643 (287,785
)
December 31, 2009 31,979 (14,432) (0.09) 695,581 (264,446
)
September 30, 2009 19,025 (18,441) (0.11) 658,989 (252,591
)
June 30, 2009 12,895 (33,264) (0.22) 640,672 (245,800
)
March 31, 2009 13,787 (10,722) (0.08) 566,472 (239,162
)
December 31, 2008 16,458 1,281 0.01 439,721 (159,396
)
September 30, 2008 10,546 (1,106) (0.01) 395,188 (132,817
)
Market Overview
Gold
Gold price volatility remained high in Q1 2011, with the price ranging between
$1,124 - $1,261 per ounce during the quarter. The average market price per
ounce for Q1 2011 was $1,196.74 compared to $1,109 for Q4 2010. The gold spot
price per ounce was $1,244 at the end of Q1 2011 and $1,192.5 at August 5,
2010.
Uranium
According to an industry source, the Ux Consulting Company, LLC ("UxC"), the
spot price per pound for uranium ranged between $40.75 and $41.50 during Q1
2010 and the term price, that at which most supply contracts are completed,
started Q1 2011 at $58 per pound and ended the quarter at $58 per pound. As of
August 5, 2010, the uranium spot price per pound was $46 and the term price
was $60. The Corporation currently does not have any medium to long-term
uranium contracts in place and therefore sells uranium at the spot price per
pound on date of delivery.
Currency exchange rates
During Q1 2011, in US dollar terms the ZAR traded in a range of $0.13 - $0.14
per ZAR, averaging $0.13 and closed at $0.13. Relative to the US dollar, the
Cdn$ traded in a range of Cdn$0.93 - Cdn$1.00, averaging Cdn$0.97 and closed
weaker at Cdn$0.95. In Cdn$ terms the ZAR traded in a range of Cdn$0.13 -
Cdn$0.14, averaging Cdn$0.14 and maintained its position at the end of Q1
2011.
At June 30, 2010, First Uranium held 72% of its cash in Cdn$, 25% in ZAR and
the balance in US dollars. The funds are primarily held in cash and bank-
sponsored guaranteed investment certificates with Canadian and South African
banks. As a substantial portion of the cash will be utilized in ZAR to fund
the outstanding commitments relating to the capital program at MWS, the
movement in the relative values of the currencies continues to have a
significant impact on the funding available to finance capital projects and
operations.
In Q1 2011, the impact of the US dollar value on the ZAR and Cdn$ denominated
costs and on assets and liabilities reported in US dollar terms resulted in a
foreign exchange gain on translation, primarily unrealized. The foreign
exchange gain on translation in Q1 2011 reflects the significant strengthening
of the US dollar against both the Cdn$ and the ZAR over the last two months of
the quarter.
Inflation
The Corporation`s operations are subject to inflation. The South Africa
inflation rate (Consumer Price Index) declined from 5.1% at the beginning of
Q1 2011 to 4.2% at the end of Q1 2011.
Operations Overview
Mine Waste Solutions
The 69% increased tonnage throughput for Q1 2011 compared to Q1 2010 is
primarily attributable to the additional production from the second gold plant
module. The 84% increased gold production for Q1 2011 compared to Q1 2010 is
attributable to the additional production from the second gold plant module
along with the improvement in grade and percentage of gold recovered out of
the tailings produced from the Buffelsfontein No.2 and No.4 tailings dams.
During Q1 2011, MWS showed a 65% improvement in gold production compared to
the updated technical report released on March 19, 2010, which was based upon
the assumption that MWS continued as a one-stream operation due to deposition
constraints. The MWS No. 5 tailings dam maintained its structural integrity
during Q1 2011, enabling MWS to continue to run as a two-stream operation but
at a reduced tonnage profile of 975 ktpm. Even at the reduced tonnage profile,
MWS increased gold production by 3% compared to the 19,693 ounces of gold
produced in Q4 2010 as a result of improved recovery and grades.
The ongoing improvement in the structural integrity of the MWS No. 5 tailings
dam combined with the Department of Water Affair`s ("DWA") awarding of the
Water User License ("WUL") to MWS enables further improvement on the
production outlook as MWS will increase its production profile from the
previously communicated 975 ktpm to 1,200 ktpm, at the start of October 2010.
The increased production profile is expected to remain in effect until the
commissioning of the TSF and the third module of the gold plant, at which
point production will increase from 1,200 ktpm to 1,800 ktpm.
It is anticipated that the remaining capital program comprising the third gold
plant module and the new Tailings Storage Facility ("TSF") at MWS plus
adjoining infrastructure, will be concluded by May 2011.
Ezulwini Mine
Q1 2010 was the first quarter during which the mine was 100% focused on
underground mine development to accelerate the amount of ore being fed to the
gold and uranium plants as the mine only completed its capital intensive
projects towards the end of Q4 2009. The mine continued its focus on
development, opening-up and equipping throughout FY 2010 to make available
additional panels for stoping which allowed production to ramp-up gradually
from Q1 2010 to date. During this period the mining crews were more productive
and efficient.
The 44% increased tonnes milled for Q1 2011 compared to Q1 2010 indicates the
mine`s gradual ramp-up from Q1 2010 to Q1 2011. The significant improvement in
ounces produced in Q1 2011 compared to Q1 2010 reflects the increase in tonnes
milled, along with the 154% increase in grade as production crews became more
productive and new mining areas with better grades were opened up.
While the mine achieved the planned stoping volumes during Q1 2011, the stope-
width was undercut by 13cm. This resulted in less tonnes being blasted than
planned. Of the tonnes blasted, 17,871 tonnes were not hoisted during the
quarter.
The decision to mine better quality gold ore was put into effect by applying a
4.5 g/t cut-off grade in the Upper Elsburg gold-only section and a 3.0 g/t cut-
off grade in the Middle Elsburg gold and uranium section. This change, along
with the 3% increase in tonnes milled, has resulted in an overall improvement
of 44% in recovered grades and an 88% improvement in gold bullion quantity
produced in Q1 2011 compared to Q4 2010.
The average recovered grade of 3.30 g/t compares to a planned average recovery
grade of 3.36 g/t planned for during Q4 2010. Similarly, blasted grades were
0.07 g/t lower than expected. These results suggest that while recoveries are
not yet at an optimal level, factors affecting the mine call factor are now
better understood and can be addressed going forward.
The uranium plant was idle during April 2010 due to failure of the rubber
liners on the uranium leach tank and the CCD thickeners, at the end of the Q4
2010, which had to be repaired during April 2010 and resulted in the 12%
decrease in production of yellowcake in Q1 2011 compared to the 22,488 pounds
of yellowcake produced in Q4 2010. The uranium plant resumed production at the
beginning of May 2010, resulting in the production of yellowcake during Q1
2011. The uranium plant was only commissioned in Q2 2010, therefore no
yellowcake was produced during Q1 2010. No yellowcake was calcined during
either Q1 2011 or Q1 2010.
Financial Review
At MWS, the overall increase in revenues and cost of sales for Q1 2011
compared to Q1 2010 was mainly attributable to additional production through
the second gold plant module that was commissioned in Q1 2010 along with an
improvement in gold grades and recovery.
The Q1 2011 ounces of gold sold increased compared to Q1 2010, however, the
ounces delivered to GW in Q1 2011 were lower compared to Q1 2010 due to MWS
having to settle 2,460 ounces of gold under delivered in relation to the Q4
2009 guaranteed ounces along with the Q1 2010 ounces during Q1 2010. For Q1
2011, the revenue related to ounces delivered into the MWS Gold Stream
Transaction comprised of revenue from the ounces delivered at $400 per ounce
plus deferred revenue amortized for the quarter. For Q1 2010, MWS delivered
the required ounces to settle the 2009 Guaranteed Ounces, which was reflected
as settlement of the Derivative Liability at the gold spot price at the time
of delivery (see Note 11 to the Financial Statements). The difference in
revenue recognition over the comparative periods resulted in lower gold
revenue for Q1 2011 compared to Q1 2010 and was also the reason for the
average gold selling price per ounce of gold in Q1 2011 being much lower than
the average gold spot price per ounce over the comparative period. The average
cash received per ounce of gold was $1,017 for Q1 2011 (Q1 2010: $565).
MWS started amortizing the capital costs relating to the second gold plant
module at the start of Q4 2010 resulting in higher amortization for Q1 2011
compared to Q1 2010. Although the costs and amortization in Q1 2011 more than
offset the increased revenues, the operating margin at MWS still increased by
101% compared to Q1 2010.
At the Ezulwini Mine, gold sales for Q1 2011 increased by 307% compared to Q1
2010 reflecting the increase in production on the mine as well as the
improvement in mining efficiencies quarter over quarter. Although the cost of
production remains high, it did not increase in direct correlation to revenue
for Q1 2011 compared to Q1 2010 due to the mine`s fixed operating costs being
spread over higher production compared to Q1 2010 and also resulting in the
51% reduction in losses at the mine for Q1 2011 compared to Q1 2010.
The ounces delivered by the Ezulwini Mine to settle the 2010 Guaranteed Ounces
during Q1 2011 were reflected as settlement of the Derivative Liability at the
gold spot price at the time of delivery (see Note 11 to the Financial
Statements). The average cash received per ounce of gold was $930 per ounce
for Q1 2011.
The additional profits generated by MWS from the second gold plant module
along with the much lower losses resulting from the activities at the Ezulwini
Mine for Q1 2011 compared to Q1 2010 resulted in a consolidated gross profit
from operations in Q1 2011 compared to the consolidated loss from operations
in Q1 2010.
Consolidated Operational and Financial Results
Production Summary Q1 2011 Q1 2010 %Change
MWS
Tonnes reclaimed (000s) 3,105 1,835 69%
Average gold recovery grade (grams/tonne) 0.20 0.18 11%
Percentage gold recovered 56% 44% 27%
Ounces of gold produced 20,215 11,007 84%
Ounces of gold sold (total) 21,008 10,676 97%
Ounces of gold delivered into MWS Gold 4,770 7,460 (36%)
Stream Transaction
Average gold selling price per ounce ($) 1,064 905 18%
Average Cash Cost per ounce of gold sold (449) (338) (33%)
($)(a)
Average cost per ounce sold ($) (515) (367) (40%)
Ezulwini Mine
Tonnes milled 132,963 92,468 44%
Average gold recovery grade (grams/tonne) 3.3 1.3 154%
Ounces of gold produced 14,120 3,794 272%
Ounces of gold sold (total) 13,753 3,378 307%
Ounces of gold delivered into Ezulwini Gold 5,666 - -
Stream Transaction
Average gold selling price per ounce ($) 1,197 957 25%
Average Cash Cost per ounce of gold sold (1,430) (3,545) 60%
($)(a)
Average cost per ounce sold ($) (1,545) (3,818) 60%
Pounds of ammonium diuranate ("yellowcake") 19,764 - -
produced
Pounds of uranium sold 20,500 - -
Average uranium selling price per pound ($) 41 - -
Revenue 39,661 12,895 208%
MWS 22,357 9,662 131%
Ezulwini Mine 17,304 3,233 435%
Cost of sales (excluding amortization) (29,946) (15,584) 92%
MWS (9,434) (3,610) (161%)
Ezulwini Mine (20,512) (11,974) (71%)
Amortization (2,962) (1,236) 140%
MWS (1,391) (312) (346%)
Ezulwini Mine (1,571) (924) (70%)
Gross profit (loss) 6,753 (3,925) 272%
MWS 11,532 5,740 101%
Ezulwini Mine (4,779) (9,665) 51%
Other income 776 280 177%
Other expenditures(b) (10,351) (6,799) (52%)
Operating loss(c) (2,822) (10,444) 73%
Investment income 203 706 (71%)
Foreign exchange gain (loss) 3,891 (16,408) 124%
Accretion expense on asset retirement (388) (492) 21%
obligations
Fair value loss on derivative liabilities (4,022) (477) (742%)
Interest and accretion expenses (8,605) (3,558) (142%)
Loss before income taxes (11,743) (30,673) 62%
Income tax charge (282) (2,591) 89%
Loss for the period (12,025) (33,264) 64%
Other comprehensive loss (32) - -
Comprehensive loss for the period (12,057) (33,264) 64%
Loss per common share (0.07) (0.22) 68%
Notes:
a. "Cash Costs" are costs directly related to the physical activities of
producing gold and uranium and include mining, processing and other
plant costs; third-party refining and smelting costs; marketing expense,
on-site general and administrative costs; royalties; on-mine drilling
expenditures that are related to production and other direct costs. Sales
of by-product metals such as uranium and silver are deducted from the
above in computing cash costs. Cash costs exclude depreciation, depletion
and amortization, corporate general and administrative expense,
exploration, interest, and pre-feasibility costs and accruals for mine
reclamation. Cash costs are calculated and presented using the "Gold
Institute Production Cost Standard" applied consistently for all periods
presented. The Gold Institute was a non-profit industry association
comprised of leading gold producers, refiners, bullion suppliers and
manufacturers. This institute has now been incorporated into the National
Mining Association. The guidance was first issued in 1996 and revised in
November 1999. Total cash costs per ounce is a non-GAAP measurement and
investors are cautioned not to place undue reliance on it and are advised
to read all GAAP accounting disclosures presented in the Corporation`s
Financial Statements.
b. Other expenditures include general, consulting and administrative
expenditures, pumping feasibility and rehabilitation costs, stock-based
compensation and non-production related amortization. See page 3 to the
Financial Statements for detail.
c. This is a non-GAAP measurement. Operating loss is loss before interest
income, interest and accretion expenses, fair value gain or loss on
derivative liability, foreign exchange gain or loss and income tax
charges. See page 3 to the Financial Statements for more detail.
Other income consisted primarily of fees for sludge pumping services to a
third party, scrap sales and rental income at the Ezulwini Mine and varies
from period to period relative to the pumping activity, sales and occupation
(see Note 18 to the Financial Statements).
Other expenditures (as defined in Note (b) to the Consolidated Results of
Operations table on page 6) in Q1 2011 were 52% higher compared to Q1 2010 and
were mainly attributable to increased pumping costs from increased mining
activities at the Ezulwini Mine along with an increase in stock-based
compensation resulting from the 5,368,000 stock options and 826,000 restricted
stock units granted during Q1 2011 (see Note 16 to the Financial Statements).
Investment income primarily related to interest income earned on cash and cash
equivalents invested in short-term deposits with the Corporation`s bankers
until required for capital projects or to fund operating costs. The overall
lower interest income in Q1 2011 reflected the on average lower cash balances
compared to Q1 2010, as well as lower interest rates.
The foreign exchange gain (loss), which was primarily unrealized, resulted
from the translation of the value of Canadian and South African denominated
assets, liabilities, revenues and expenses into US dollars. The foreign
exchange gain on translation in Q1 2011 reflects primarily the strengthening
of the US dollar against the Cdn$ and ZAR during the respective period. During
Q1 2010 the US dollar weakened against both the ZAR and Cdn$ resulting in the
significant foreign exchange loss during this period.
The accretion expense on Asset Retirement Obligations in Q1 2011 mainly
decreased compared to its comparative periods as a result of the weaker ZAR
compared to the US dollar.
The fair value loss on the derivative liabilities in Q1 2011 related to the
movement in fair value on the derivative liability related to the Ezulwini
Mine, while the fair value loss in Q1 2010 related to the movement in fair
value on the derivative liability related to MWS. In both quarters the fair
value loss was driven by a higher gold price at the end of the quarter
compared to the gold price at the end of the preceding quarter.
The substantial increase in interest and accretion expenditures compared to Q1
2010 was primarily due to the additional interest and accretion expenses
charged on the Notes issued on April 26, 2010 pursuant to the Offering (see
Note 20 to the Financial Statements).
The income tax charge in Q1 2011 was derived from the taxable profits
generated by MWS during the respective periods offset by the decrease in net
deferred tax liability from MWS. The income tax charge in Q1 2010 was
attributable to the increase in the profitability from the MWS operations and
the net deferred tax liability arising from it.
The lower consolidated loss in Q1 2011 compared to Q1 2010 was attributable to
the foreign exchange gain on translation in Q1 2011 compared to a substantial
foreign exchange loss in Q1 2010 along with improved results from the
operations, partially offset by increased other expenditures and interest and
accretion expenditures.
Other comprehensive loss in Q1 2011 was comprised of unrealized losses
resulting from decreases in the value of investments included in the asset
retirements funds from the end of the previous reporting period.
Consolidated Financial Position
Summary Balance Sheet and Key financial ratios
(thousands of dollars)
FY 2011 FY 2010 %
Change
Cash and cash equivalents 102,621 10,177 908%
Other current assets (a) 18,611 17,345 7%
Current liabilities 55,172 123,728 55%
Total assets 783,847 684,643 15%
Total liabilities 484,703 411,513 (18%)
Debt (b) 308,709 169,462 (82%)
Total shareholders` equity 299,144 273,130 10%
Key financial ratios:
Current ratio (c) 2.20:1 0.22:1
Debt-to-equity (d) 1.03:1 0.62:1
Notes:
a. Other current assets include accounts receivable and inventories.
b. The liabilities relating to the Debentures and the Notes translated to US
dollar at the exchange rate at the end of the reporting period plus
Facility with Simmer & Jack at the end of the reporting period.
c. Current assets divided by current liabilities at the end of the reporting
period.
d. Debt divided by total shareholder`s equity at the end of the reporting
period.
Balance sheet review
Total assets were comprised of property, plant and equipment, cash and cash
equivalents, inventories, accounts receivable and asset retirement funds.
The 15% increase in total assets since FY 2010 was primarily attributable to
the $141.5 million net cash proceeds raised from the Notes issued pursuant to
the Offering on April 26, 2010, increase in property, plant and equipment
resulting mainly from capital expenditures at MWS and increase in inventories
due to increased mining activities at the Ezulwini Mine.
The 18% increase in total liabilities since FY 2010 represented the net
movement relating to the $143.6 million debt portion of the Notes issued
offset by the settlement of the GW penalty and the Facility with Simmer & Jack
pursuant to the terms of the Offering, decreased accounts payable and accrued
liabilities due to the settlement of MWS capital commitments and other long
outstanding accounts and an increase in future tax liability arising from the
increased asset base at MWS during the period.
Off-Balance Sheet Arrangements
The Corporation does not have any off-balance sheet arrangements.
Cash Flows
Cash flows for the three months ended June 30, 2010 are summarized below:
(thousands of dollars)
Q1 2011 Q1 2010 %
Change
Cash flows utilized in operating (15,303) (32,028) 52%
activities
Cash flows utilized in investing (33,705) (49,611) 32%
activities
Cash flows from financing activities 141,452 92,616 52%
Net increase in cash and cash 92,444 10,977 742%
equivalents for the period
Cash and cash equivalents at beginning 10,177 112,005 91%
of period
Cash and cash equivalents at end of 102,621 122,982 (17%)
period
The decreased in cash utilized compared to Q1 2010 was primarily due to
increased profits generated by MWS and reduced losses incurred by the Ezulwini
Mine as discussed under the Financial Review section of this MD&A. The cash
utilized in operating activities for Q1 2010 was mainly attributable to the
Ezulwini Mine which had limited production during the quarter that was not
sufficient to cover the quarter`s operating costs.
During Q1 2011, capital expenditures of $27.5 million were incurred at MWS and
$6.1 million at the Ezulwini Mine, respectively. During Q1 2010 capital
expenditures of $37.8 million and $11.2 million were incurred at MWS and the
Ezulwini Mine, respectively.
The cash from financing activities during Q1 2011 was attributable to $141.5
million net cash received pursuant to the Offering in April 2010. During Q1
2010 $92.6 million net proceeds were raised from a bought deal private
placement in June 2009.
Liquidity and Capital Resources
At June 30, 2010, the Corporation had sufficient resources to fund its
outstanding commitments, current operational and capital activities and
corporate overhead expenses. The Corporation plans to rely, in part, on cash
flows generated from the operations to fund the capital expenditure
obligations to complete construction and commissioning of the remaining
capital projects at MWS.
Use of Proceeds
Inclusive of the initial public offering in December 2006, First Uranium has
raised over $784.5 million to date. At the end of Q1 2011, $246.4 million of
the funds raised had been utilized at the Ezulwini Mine on the rehabilitation
and re-engineering of the mine`s main shaft, the building of the gold and
uranium plant and pre-production costs, and $364.0 million of the funds raised
had been utilized at MWS primarily on the MWS capital expansion project. The
Corporation used $71.5 million to fund costs relating to operating activities
at the Ezulwini Mine, which currently still exceeds its cash revenues
generated, and general and working capital requirements.
Financial Instruments
First Uranium uses a mixture of cash, long-term debt and shareholders` equity
to maintain an efficient capital structure and ensure adequate liquidity
exists to meet the cash needs of its operations. In the normal course of
business, the Corporation is inherently exposed to currency and commodity
price risk. The Corporation does not currently hedge its exposure to currency
or commodity price risk. The Corporation does hold certain derivative
instruments that do not qualify for hedge accounting. These non-hedge
derivatives are described in note 11 of the Financial Statements. For a
discussion of certain risks and assumptions that relate to the use of
derivatives, including market risk, market liquidity risk and credit risk,
refer to note 26 of the Financial Statements. For a discussion of the methods
used to value financial instruments, refer to note 2 of the financial
statements for the year ended March 31, 2010.
Commitments and Contingencies
At the end of Q1 2011, the Corporation had $9.8 million of commitments, of
which $0.5 million related to the Ezulwini Mine and $9.3 million to MWS. The
existing commitments at MWS included $0.9 million relating to the construction
and commissioning of the second gold module and the first two uranium modules,
$7.3 million relating to the construction of the third gold module, $0.1
million for the construction of the new TSF and $1.0 million on-mine capital
requirements.
Pursuant to the Offering, the Corporation settled the completion penalty
obligation penalty to GW in respect of the MWS Gold Stream Transaction with
the issuance of 14 million common shares in First Uranium valued at $18.2
million to GW and a commitment by the Corporation to complete construction of
the third gold plant module at MWS and satisfaction of the technical
completion tests prior to September 1, 2011. In the event that the
construction and tests are not met by such date, a $1.5 million payment shall
be payable by the Corporation to GW on the first day of each of September,
October, November and December 2011 unless such tests have been met prior to
such date. In the event that these commitments to construction and technical
completion are not met prior to December 1, 2011, a remaining penalty of $30
million will be payable, such sum to be settled in cash or in common shares of
First Uranium at the election of GW (at the lowest issue price permitted by
the rules of the TSX).
On August 4, 2009, Aberdeen International Inc. ("Aberdeen") filed a claim for
$11.4 million against Simmer & Jack and First Uranium (Proprietary) Limited
("FUSA"), a subsidiary of First Uranium, alleging certain breaches of a loan
agreement dated March 30, 2006 and as amended by agreement on November 30,
2006 (together the "Loan Agreement"). FUSA was not a party to the Loan
Agreement. Simmer & Jack, FUSA and Aberdeen entered into an arrangement
agreement (the "Arrangement Agreement") dated December 20, 2006. Also see
Related Party Transactions section in this MD&A in connection with the sale of
the Buffelsfontein Tailings by Simmer & Jack to FUSA. The Arrangement
Agreement provides for FUSA to pay to Simmer & Jack an amount equal the
royalty payable to Aberdeen by Simmer & Jack under the Loan Agreement in
respect of the gold produced from the Buffelsfontein Tailings. Of the total
amount claimed, Aberdeen asserts that an additional royalty was payable by
FUSA for the period October 16, 2008 to December 31, 2008 in the amount of
approximately $400,000. FUSA has fulfilled or has caused its obligations to be
fulfilled under the Arrangement Agreement and the agreement explicitly states
that Aberdeen shall have no recourse to FUSA. Management believes that the
claim against FUSA has no merit and that Aberdeen has no recourse to First
Uranium or FUSA and as such the Corporation has not made any provision in this
regard.
At June 30, 2010, First Uranium had the following contractual obligations:
Payments due by date
Within 3 Months Between After
(thousands of dollars) 3 to a Year 1-3 3 Total
Months Years Years
Debentures - 6,081 149,164 - 155,245
Notes 6,390 7,006 193,564 - 206,960
Asset retirement 304 911 2,783 22,517 26,515
obligations
Derivative liabilities 3,492 11,710 8,229 - 23,431
Purchase obligations 9,777 - - - 9,777
Capital leases 55 178 584 1,163 1,980
Operating leases 48 144 528 - 720
Total contractual 20,100 23,081 291,916 23,680 358,777
obligations
Outlook
During Q1 2011, the Corporation initiated a cost cutting exercise, reducing
corporate and non-core costs, to reduce the Corporation`s overall cost base.
At the end of July 2010, the Corporation also completed the new Ezulwini Mine
ramp-up plan. These initiatives are aimed at preserving First Uranium`s cash
reserves, enabling the Company to execute on its capital program and achieve
business milestones.
As part of this exercise, management are in the process of moving its
corporate office in Johannesburg to the Ezulwini Mine premises. This move will
also ensure that management will be able to closely monitor the Ezulwini
Mine`s progress on achieving its newly disclosed plan.
Key findings of optimization review - MWS
MWS is performing substantially better than plan, primarily due to the
improved stability of its current tailings facility combined with the DWA`s
granting of the WUL, which has allowed a significantly higher deposition rate
than planned for in March 2010. The aim is to reduce peak funding requirements
without compromising project sustainability or efficiency.
- Production to increase from 975 ktpm to 1,200 ktpm at the start of
October 2010
- New TSF to be commissioned by May 2011, enabling production increase from
1,200 ktpm to 1,800 ktpm
- Certain construction contracts restructured to fixed price and fixed
timeline to manage project costs and schedules
Estimated capital requirements to complete MWS capital program
Total spent Remainder
at June of
(thousands of 30, 2010 FY 2011 FY 2012 FY FY 2014 Total
ZAR) 2013
Construction
of the second
gold and 1,508,387 35,629 19,361 - - 1,563,377
uranium plant
modules
Construction
of the third 577,835 310,873 91,364 - - 980,072
gold plant
module
New TSF 136,624 92,297 - - 66,695 295,616
On-mine 14,976 24,620 9,600 9,600 9,600 68,396
capital
Eskom - 11,200 - - - 11,200
substations
Total in 2,237,822 474,619 120,325 9,600 76,295 2,918,661
ZAR000
The implementation of the pressure leach process is subject to further review.
Key findings of optimization review - Ezulwini Mine
On the basis of the plan for year one (FY 2011), management expects the
Ezulwini Mine to be cash flow positive after capital expenditures in Q4 2011
at current commodity prices. The revised production ramp-up plan includes:
- Production of 81,000 ounces of gold and 117,000 pounds of uranium in FY
2011
- Capital expenditures of $15.8 million in FY 2011
- Average unit cash costs is anticipated to decrease to $857/oz of gold in
- Q4 2011, averaging at $1,182/oz of gold for FY 2011
- Incremental production build-up of approximately 320 ounces (10
kilograms) per month from FY 2012 to FY 2013, requiring development of an
additional three panels per month to be put into production
- Production ramp-up of two panels per month from FY 2014 onward
- Peak production of 309,000 oz gold planned for FY 2019 and 909,000 lbs
uranium in FY 2018
Technical Disclosure
All technical disclosure in this MD&A relating to Ezulwini Mine has been
prepared in accordance with National Instrument 43-101 by or under the
supervision of Mark Glasspool, an employee of the Company who is a
professional engineer and is a "qualified person" under NI 43-101.
All technical disclosure in this MD&A relating to MWS has been prepared in
accordance with National Instrument 43-101 by or under the supervision of Jim
Fisher, an employee of the Company, who is a Chartered Engineer and is a
"qualified person" under NI 43-101.
Related Party Transactions
As of August 5, 2010 Simmer & Jack owned 34.35% of the common shares of First
Uranium.
During Q1 2011 the Corporation paid $0.6 million to Simmer & Jack pursuant to
the Shared Services Agreement (Q1 2010: $0.8 million). For Q1 2011 $0.4
million of the fees paid to Simmer & Jack were related to technical services
provided to the operations that were capitalized (Q1 2010: $0.3 million). For
a description of the Shared Services Agreement, see the Corporation`s most
recently filed Annual Information Form ("AIF").
At the end of Q1 2011, the amount payable to Simmer & Jack was $0.4 million
compared to $2.5 million payable at the end of FY 2010.
First Uranium has agreed to reimburse Simmer & Jack for 50% of the fees that
Simmer & Jack is required to pay to an empowerment company for consulting.
During Q1 2011 the Corporation paid $0.06 million to Simmer & Jack in
connection with such services (Q1 2010: $0.06 million).
Pursuant to the Buffelsfontein Tailings and Rights Agreement and the Aberdeen
Arrangement (Refer to the Corporation`s AIF for more detail), MWS is liable to
pay: (i) to Simmer & Jack, an amount equal to the royalty payable by Simmer &
Jack to Aberdeen pursuant to the Aberdeen Loan Agreement in respect of gold
produced from the Buffelsfontein Tailings, and (ii) to BGM a royalty of 1% of
the gross revenue earned by MWS from the sale of uranium, gold, sulphur and
other minerals recovered from the processing of the Buffelsfontein Tailings.
During Q1 2011 the total royalties and payments, inclusive of the amounts due
in respect of the Aberdeen Loan Agreement were $0.5 million (Q1 2010: $0.2
million).
On August 14, 2009, the Corporation finalized a one-year term credit facility
of ZAR160 million (the "Facility") with Simmer & Jack. The Corporation drew
down the entire Facility during Q2 2010. The Facility carried interest at the
three-month Johannesburg Interbank Agreed Rate (JIBAR) for ZAR denominated
loans (currently 7.40%) plus 7% per annum. An arrangement fee of 3% was paid
on the Facility amount and the Corporation paid for the legal and other costs
relating to the Facility. As at March 31, 2010, the Facility with Simmer &
Jack was $22.5 million. The interest accrued on the Facility during Q1 2011
until conclusion of the Offering was $0.2 million.
Pursuant to the Offering, Simmer & Jack subscribed to 296,084 Rand Notes for a
cash consideration of Cdn$40 million on April 26, 2010. For Q1 2011, a $2.2
million interest and accretion expense was accrued for relating to Simmer &
Jack related Rand Notes. Also pursuant to the Offering, the Facility with
Simmer & Jack including the unpaid interest on the Facility ($22.5 million)
was settled in full on April 26, 2010 with the issue of 167,812 Rand Notes to
Simmer & Jack.
On September 27, 2007, the Board approved a loan in the amount of Cdn$1
million to the President and CEO of First Uranium for the purpose of
facilitating his purchase of a family home. The loan was for a term of six
years, was unsecured and bore interest at 4% per annum payable monthly in
arrears. At the resignation of the CEO in March 2010 and as part of his
severance package, the Board agreed to forgive this loan in full. The
outstanding loan amount of Cdn$1 million was written off and recognized as an
expense in Q4 2010. In addition, a tax amount related to this transaction of
$0.4 million was also incurred by the Corporation and recognised as an expense
in Q4 2010.
Disclosure Controls and Procedures and Internal Control over Financial
Reporting
The CEO and Chief Financial Officer ("CFO"), together with other members of
management, have designed the Corporation`s disclosure controls and procedures
("DC&P") in order to provide reasonable assurance that material information
relating to the Corporation and its consolidated subsidiaries would have been
known to them and by others within those entities.
Additionally, they have designed internal controls over financial reporting
("ICFR") to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial reporting in accordance
with Canadian GAAP. The control framework used in the design of both the DC&P
and ICFR is the internal control integrated framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO").
There have been no significant changes in the design of the Corporation`s
internal controls over financial reporting during the three months ending June
30, 2010 that would materially affect, or is reasonably likely to affect, the
Corporation`s internal controls over financial reporting.
While the Officers of the Corporation have designed the Corporation`s DC&P and
ICFP, they expect that these controls and procedures may not prevent all
errors and fraud. A control system, no matter how well conceived or operated,
can only provide reasonable, not absolute, assurance that the objectives of
the control system are met.
Critical Accounting Policies and Estimates
The accounting policies used in the preparation of the accompanying unaudited
consolidated financial statements are consistent with those used in the
Corporation`s audited consolidated financial statements for the fiscal year
ended March 31, 2010, and described in Note 2 therein, except for the changes
in accounting policies described in the following section.
The preparation of these consolidated financial statements in accordance with
Canadian GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amount of revenues and expenses during the year.
Areas of judgement that have the most significant effect on the amounts
recognized in the financial statements are estimation of asset lives,
determination of ore reserve estimates, capitalization of exploration and
evaluation costs, and identification of functional currencies. Key sources of
estimation uncertainty that have a significant risk of causing material
adjustments to the carrying amounts of assets and liabilities are the
estimation of close-down and restoration costs and the timing of expenditures,
the review of asset carrying values and impairment charges and reversals, the
estimation of environmental clean-up costs and the timing of expenditures and
the recoverability of potential future income taxes. Financial results as
determined by actual events could differ from those estimated. Management
estimates are also applied in arriving at the useful lives of items of
property, plant and equipment and in determining the fair value of stock
options.
Changes in accounting policies
There were no changes to the accounting polices used in the preparation of the
Corporation`s audited consolidated financial statements for the year ended
March 31, 2010.
Future and new accounting standards
The CICA issued the following amendments to the accounting standards for
periods beginning on or after April 1, 2011:
Business Combinations/Consolidated Financial Statements/Non-Controlling
Interests
In January 2009, the CICA adopted Sections 1582 - Business Combinations, 1601
- Consolidated Financial Statements, and 1602 - Non-Controlling Interests
which superseded current Sections 1581 - Business Combinations and 1600 -
Consolidated Financial Statement. Section 1625, Comprehensive Revaluations of
Assets and Liabilities, has been amended as a result of issuing CICA 1582,1601
and 1602. These amendments will be effective prospectively for comprehensive
revaluations of assets and liabilities occurring in years beginning on or
after January 1, 2011. The Section 3251, Equity, has been amended as a result
of issuing Section 1602 to be adopted by all entities that will adopt Section
1602,
These new sections replace existing guidance on business combinations and
consolidated financial statements to harmonize Canadian accounting for
business combinations with International Financial Reporting Standards. These
sections will be applied prospectively to business combinations for which the
acquisition date is on or after April 1, 2011. Earlier adoption is permitted.
If the Corporation applies these sections before April 1, 2011, it is required
to disclose that fact and apply each of the new sections concurrently. The
Corporation is currently evaluating the impact of the adoption of these
changes on its consolidated financial statements.
International financial reporting standards ("IFRS")
IFRS are premised on a conceptual framework similar to Canadian GAAP, however,
significant differences exist in certain matters of recognition, measurement
and disclosure. While adoption of IFRS will not change the cash flow of the
Corporation, the adoption of IFRS will result in changes to the reported
financial position and results of operations of the Corporation. The
Corporation identified a number of key areas where differences between
Canadian GAAP and IFRS exist and the Corporation reviews any new financial
information on an ongoing basis to identify further areas of differences.
The key areas identified where the most substantial differences exist are as
follows:
- the accounting treatment of the gold stream transactions;
- the valuation methods used for the debt and equity portions on
convertible debentures;
- the discount rates and foreign exchange rates used to determine the value
of the asset retirement obligations at the end of reporting periods; and
- the determination of functional currency and the treatment of foreign
exchange differences resulting from the translation of functional
currencies of the different reporting entities within the group to
reporting currencies.
Management are in the process of quantifying the key differences identified
and revising the Corporation`s accounting policy manual to incorporate these
differences.
Management plans to have IFRS consolidated financial statements including
first-time adoption reconciliations prepared by the end of Q2 2011. To
maintain effective disclosure controls and procedures and internal controls
over financial reporting throughout the IFRS project, management is also
evaluating the impact of the conversion to IFRS on the Corporation`s control
environment in order to identify the additional controls that need to be
developed. Management plans to have the additional controls identified and
developed by the end of Q2 2011 for the review of the IFRS comparative
financial information.
Management is also reviewing the financial information systems to identify
changes required by the transition date in order to setup processes to ensure
that financial information is recorded under both Canadian GAAP and IFRS for
comparative purposes.
Management analyzes the Corporation`s accounting policies on an ongoing basis
to identify opportunities where alternatives are permitted including IFRS 1
exemptions, if required.
Outstanding Share Data
Q1 2011 FY 2010
Common shares outstanding at beginning 166,847,037 151,574,037
of the period
Shares issued during the period 14,000,000 15,250,000
Restricted share unit shares issued - 23,000
Common shares outstanding at end of 180,847,037 166,847,037
the period
Unexercised common share purchase 10,250,000 10,250,000
warrants at end of the period
Unexercised restricted units 1,003,000 177,000
outstanding at end of the period
Unexercised stock options outstanding 8,435,622 3,204,622
at end of the period
Average strike price of outstanding 5.34 7.74
options (Cdn$)
At August 5, 2010, First Uranium had 180,847,037 common shares outstanding and
there were 7,837,620 unexercised stock options outstanding at an average
strike price of Cdn$4.99 per share and 973,664 restricted stock units
outstanding.
Each warrant is exercisable for one common share of First Uranium at a
purchase price of Cdn$4.15 until February 11, 2011.
At June 30, 2010 and August 5, 2010, First Uranium had Cdn$150 million ($143.1
million as at June 30, 2010) principal amount of Debentures outstanding which
are convertible into 60.9013 common shares for each Cdn$1,000 principal amount
of Debentures, representing 9,135,195 common shares.
At June 30, 2010 and August 5, 2010, First Uranium had Cdn$110 million ($105.0
million as at June 30, 2010) principal amount of Canadian Notes outstanding
which are convertible into 769.23 common shares for each Cdn$1,000 principal
amount of Canadian Notes, representing 84,615,384 common shares.
At June 30, 2010 and August 5, 2010, First Uranium had R463.9 million ($60.6
million as at June 30, 2010) principal amount of Rand Notes outstanding which
are convertible into 107.53 common shares for each R1,000 principal amount of
Rand Notes, representing 49,882,736 common shares.
Risks and Uncertainties
Uncertainties
There are a number of uncertainties in the mining business of First Uranium,
some of which are beyond First Uranium`s control:
government legislation regarding mining companies in South Africa, including
without limitation, securing authorizations and permits required thereunder
within the timeframes required to achieve the Corporation`s plans and
objectives;
- the ability of the Corporation to provide financial assurance for
rehabilitation liabilities to the satisfaction of the DMR;
- prices for the Corporation`s future production of uranium and gold;
foreign exchange and interest rates;
- the supply and cost of other re-agents, including sulphuric acid, used by
the Corporation in the process to extract gold and uranium;
- the consistent supply of sufficient electrical power;
- the decisions and activities of the Corporation`s competitors in the
uranium and gold mining business, which impact the supply of uranium and
the demand for available services, construction materials, labour and the
rights for prospecting and mining;
- the continued endorsement of nuclear power as a preferred source for the
world`s growing energy needs;
- the decisions of investors to continue to buy and hold the securities of
the Corporation;
- securities regulation regarding public listed companies in Canada and
South Africa; and
- natural disasters, war or random occurrences or acts that could result in
a material change to economic and market performance, business conditions
or operations.
Risks
In addition, First Uranium`s mining properties are in the development stage
and are subject to the risks and challenges similar to other companies in a
comparable stage of development and production start-up. The risks include,
but are not limited to, certain business, operational and market risks. For a
detailed discussion of the Corporation`s risks please refer to the
Corporation`s most recent AIF, which is available on the Corporation`s website
www.firsturanium.com and on www.sedar.com or upon request from the
Corporation.
Additional Information
Additional information relating to First Uranium is contained in the
Corporation`s filings with the Canadian Securities regulator, including the
AIF. These are available on SEDAR at www.sedar.com and on the Corporation`s
website at www.firsturanium.com.
Forward-looking Information
This MD&A and consolidated financial statements for the three months ended
June 30, 2010 contain certain forward-looking statements. Forward-looking
statements include but are not limited to those with respect to the timing and
amount of estimated future production, the timing and receipt of required
permits, costs of production, capital expenditures, price of uranium and gold,
supply and price of sulphuric acid, the availability and price of electrical
power, the estimation of mineral resources and reserves, the realization of
mineral reserve estimates, costs and timing of development of new deposits,
success of exploration activities, permitting time lines, currency
fluctuations, requirements for additional capital, availability of financing
on acceptable terms, government regulation of mining operations, environmental
risks, unanticipated reclamation expenses and title disputes or claims and
limitations on insurance coverage. In certain cases, forward-looking
statements can be identified by the use of words such as "goal", "objective",
"plans", "expects" or "does not expect", "is expected", "budget", "scheduled",
"estimates", "forecasts", "intends", "anticipates", or "does not anticipate",
or "believes" or variations of such words and phrases, or state that certain
actions, events or results "may", "could", "would", "might" or "will" be
taken, occur or be achieved. Forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of First Uranium to be materially
different from any future results, performance or achievement expressed or
implied by the forward-looking statements. Such risks and uncertainties
include, among others, the actual results of current exploration activities,
conclusions of economic evaluations, changes in project parameters as plans
continue to be refined, possible variations in grade and ore densities or
recovery rates, failure of plant, equipment or processes to operate as
anticipated, accidents, labour disputes or other risks of the mining industry,
delays in obtaining government approvals or financing or in completion of
development or construction activities, risks relating to the integration of
acquisitions, to international operations, to prices of uranium and gold.
Although First Uranium has attempted to identify important factors that could
cause actual actions, events or results to differ materially from those
described in forward-looking statements, there may be other factors that cause
actions, events or results not to be as anticipated, estimated or intended. It
is important to note, that: (i) unless otherwise indicated, forward-looking
statements indicate the Corporation`s expectations as at the date of this
MD&A; (ii) actual results may differ materially from the Corporation`s
expectations if known and unknown risks or uncertainties affect its business,
or if estimates or assumptions prove inaccurate; (iii) the Corporation cannot
guarantee that any forward-looking statement will materialize and,
accordingly, readers are cautioned not to place undue reliance on these
forward-looking statements; and (iv) the Corporation disclaims any intention
and assumes no obligation to update or revise any forward-looking statement
even if new information becomes available, as a result of future events or for
any other reason. In making the forward-looking statements in this MD&A, First
Uranium has made several material assumptions, including but not limited to,
the assumption that: (i) projected metal production, operating and capital
cost estimates, metal prices, exchange rates and discount rates applied in the
preliminary economic assessment for the Ezulwini Mine and the prefeasibility
study for MWS and as updated by the Corporation in its continuous disclosure
from time to time are achieved;(ii) approvals to transfer or grant, as the
case may be, mining rights or prospecting rights will be obtained; (iii)
consistent supply of sufficient power will be available to develop and operate
the projects as planned; (iv) mineral reserve and resource estimates are
accurate; (v) the technology used to develop and operate its two projects has,
for the most part, been proven and will work effectively; (vi) that labour and
materials will be sufficiently plentiful as to not impede the projects or add
significantly to the estimated cash costs of operations; (vii) that BEE
investors will maintain their interest in the Corporation and the Corporation
will be able to secure additional BEE investment in the Corporation`s common
shares to a sufficient level to maintain compliance with BEE requirements as
required by applicable law; and (viii) that the innovative work on stabilizing
the main shaft at the Ezulwini Mine will be successful in maintaining a safe
and uninterrupted working environment until 2024.
Non-GAAP Measures
The Corporation believes that in addition to conventional measures prepared in
accordance with Canadian GAAP, the Corporation and certain investors and
analysts use certain other non-GAAP financial measures to evaluate the
Corporation`s performance including its ability to generate cash flow and
profits from its operations. The Corporation has included certain non-GAAP
measures in this document. Non-GAAP measures do not have any standardized
meaning prescribed under Canadian GAAP, and therefore they may not be
comparable to similar measures employed by other companies. The data is
intended to provide additional information and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with Canadian GAAP. Readers are advised to read all GAAP accounting
disclosures presented in the Corporation`s Financial Statements for more
detail.
06 August 2010
Sponsor: Investec Bank Limited
Date: 06/08/2010 07:48:01 Produced by the JSE SENS Department.
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