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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
[Fee Required] for the fiscal year ended MAY 31, 1997 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
[No Fee Required] for the transition period from to
Commission file number 0-6814
U.S. ENERGY CORP.
(Exact Name of Registrant as Specified in its Charter)
WYOMING 83-0205516
- ------------------------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West
RIVERTON, WY 82501
- ------------------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (307) 856-9271
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
-----------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ____
The aggregate market value of the shares of voting stock held by
non-affiliates of the Registrant as of September 12, 1997, computed by reference
to the average of the bid and asked prices of the Registrant's common stock as
reported by the National Market System of NASDAQ on that date, was approximately
$52,375,989.
CLASS OUTSTANDING AT SEPTEMBER 12, 1997
- ---------------------------------------- -----------------------------------
Common Stock, $0.01 par value 6,826,025 shares
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the documents listed below have
been incorporated by reference into the indicated parts of this report as
specified in the responses to the referenced sections of this filing.
Annual Meeting Proxy Statement for the fiscal year ended May 31, 1997
into Part III of the filing.
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
PART I
ITEM 1 AND ITEM 2. BUSINESS AND PROPERTIES
(A) GENERAL.
U.S. Energy Corp. ("USE", the "Company" or the "Registrant") is in the
general minerals business of acquiring, exploring, developing and/or selling or
leasing of mineral properties and, mining and marketing of minerals. USE is now
engaged in two principal mineral sectors: uranium and gold, both of which are in
the development stage. Interests are held in other mineral properties
(principally molybdenum), but are either non-operating interests or undeveloped
claims. The Company also carries on small oil and gas operations in Montana and
Wyoming. Other USE business segments are commercial operations (real estate and
general aviation) and construction operations.
Subsequent to May 31, 1997, USE and USECC (see below) signed an
Acquisition Agreement with Kennecott Uranium Company ("Kennecott"), for the
purchase of Kennecott's interest in the Green Mountain Mining Venture ("GMMV").
In general terms, as a consequence of the Acquisition Agreement and the various
transactions associated therewith, USE and USECC received $4,000,000 as a bonus
for signing the Acquisition Agreement. In addition, pending closing of the
Acquisition Agreement, USECC has been provided the opportunity to move the GMMV
project forward, as follows: USECC has leased the mineral properties from GMMV
in order to develop the Jackpot Mine for production mining, and has been
appointed an independent contractor to ready the Sweetwater uranium mill (owned
by the GMMV) for changeover to operational processing status. Kennecott is to
provide a line of Credit to the GMMV of up to $16,000,000 for the mine
development and mill work being conducted by USECC. Closing of the Acquisition
Agreement will require payment to Kennecott of $15,000,000 cash and the
assumption of various reclamation and other liabilities. For the details of this
fiscal 1998 transaction, please see "Minerals-Uranium-The Green Mountain Mining
Project-June 23, 1997 Acquisition Agreement with Kennecott Uranium Company"
below.
Most of USE operations are conducted through a joint venture with
Crested Corp. ("Crested"), a majority-owned subsidiary), and various joint
subsidiaries of USE and Crested. The joint venture with Crested is hereafter
referred to as "USECC". Construction operations are carried on primarily through
USE's subsidiary Four Nines Gold, Inc. ("FNG"). Oil and gas operations are
carried on through Energx, Ltd., a subsidiary of the Company and Crested. USE
and Crested originally were independent companies,with two common affiliates
(John L. Larsen and Max T. Evans). In 1980, USE and Crested formed a joint
venture to do business together (unless one or the other elected not to pursue
an individual project). As a result of USE funding certain of Crested's
obligations from time to time (due to Crested's lack of cash on hand), and later
payment of the debts by Crested issuing common stock to USE, Crested became a
majority owned subsidiary of USE in fiscal 1993. See Part III of this Report.
Until February 1996, the Company conducted manufacturing and/or
marketing of professional and recreational outdoor products through The Brunton
Company ("Brunton"), a wholly-owned USE subsidiary. As of February 1, 1996,
Registrant sold all of the shares of Brunton to Silva Production AB for
$4,300,000 ($3,300,000 in cash and a $1,000,000 promissory note) plus 45% of the
net profits before taxes derived from the sale of Brunton products for four
years and three months. The Registrant began receiving the net profits payments
in fiscal 1997. The sale eliminated Brunton's manufacturing and/or marketing of
professional and recreational outdoor products from the commercial segment of
Registrant's business as of January 31, 1996, except to the extent that there
are net profit payments from Silva through 2000. For the fiscal year ended May
31, 1996, Brunton's sales provided 25% of net revenues of USE
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(before reclassification to reflect Brunton as discontinued operations with
respect to the Company) compared with 49% net revenues for the fiscal year ended
May 31, 1995.
The Brunton sale was prompted in part by Registrant's desire to focus on
its core minerals sector. In fiscal 1998, the Company intends to implement plans
to consolidate its uranium assets into a single subsidiary and finance the
startup of its mines and mill operations with debt or equity funding. Of course,
there can be no assurance uranium prices will remain at their current level,
that USE will succeed in its efforts to obtain long-term uranium supply
contracts required to operate its uranium properties profitably, or that the
required financing will be available to put such properties into operation.
USE was incorporated in Wyoming in 1966. All of its operations are in
the United States. Principal executive offices are located in the Glen L. Larsen
building at 877 North 8th Street West, Riverton, Wyoming 82501, telephone (307)
856-9271.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Registrant operates in three business segments: (i) minerals, (ii)
commercial operations, and (iii) construction operations. See Footnote I to the
Consolidated Financial Statements. The Registrant engages in other miscellaneous
activities such as oil and gas exploration, development and production. The
principal products of the operating units within each of the reportable industry
segments are:
INDUSTRY SEGMENTS PRINCIPAL PRODUCTS
----------------- ------------------
Minerals Sales and leases of mineral-bearing
properties and, from time to time, the
production and/or marketing of uranium,
gold and molybdenum.
Commercial Operations Operation of a motel and rental
of real estate, operation of an aircraft
fixed base operation (aircraft fuel sales,
flight instruction and aircraft
maintenance), and provision of various
contract services, including managerial
services for subsidiary companies.
Construction Operations Construction of irrigation, flood
control, municipal sewer and similar
projects.
Percentage of Net Revenue contributions by the three USE segments in the last
three fiscal years were:
PERCENTAGE OF NET REVENUE DURING YEAR ENDED
-------------------------------------------
May 31, May 31, May 31,
1997 1996 1995
------- -------- -------
Minerals 4% 32% 2%
Commercial Operations 56% 15% 26%
Construction Operations 18% 39% 28%
3
USE did not receive revenues from the mining of either uranium or gold
in the last three fiscal years ended May 31, 1997. During fiscal 1996, however,
mineral revenues were generated from sales of uranium under certain of the
utility supply contracts held by Sheep Mountain Partners ("SMP", a Colorado
general partnership), USE and Crested delivering their one-half share or 100% of
uranium and receiving net sales proceeds therefrom with profits deposited in SMP
accounts. During fiscal 1997 and 1995, there were no revenues from mineral sales
in part due to the arbitration proceedings involving SMP (see Item 3 - "Legal
Proceedings - Sheep Mountain Partners Arbitration/Litigation"). USE plans to
commence production of uranium concentrates from the mill belonging to Plateau
Resources Limited ("Plateau"), a 100% subsidiary of the Company, at Ticaboo,
Utah which is expected to result in the procurement of utility supply contracts
for Plateau in fiscal 1998. There can be no assurance, however, such milling
operations will commence, or that new utility supply contracts will be procured.
See Description of "Business - Minerals - Uranium."
(C) NARRATIVE DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT (INCLUDING ITEM 2 -
PROPERTIES DISCLOSURE).
MINERALS
URANIUM
GENERAL
USE has interests in several uranium-bearing properties in Wyoming and
Utah and in uranium processing mills in Sweetwater County, Wyoming (the
"Sweetwater Mill") and in southeastern Garfield County, Utah (the "Shootaring
Mill"). All the uranium-bearing properties are located in areas which have
produced significant amounts of uranium in the 1970s and 1980s. The Company is
planning to develop and operate these property interests (directly or through a
joint venture in which another company may be the operator) to produce uranium
concentrates ("U3O8") for sale to public utilities that operate nuclear powered
electricity generating plants. In addition, in fiscal 1997, additional
properties were acquired in New Mexico and Wyoming by Yellow Stone Fuels Corp.
The property interests in Wyoming are:
521 unpatented lode mining claims (the "Green Mountain Claims") on Green
Mountain in Fremont County, Wyoming, including 105 claims on which the Round
Park (Jackpot) uranium deposit is located, and the Sweetwater Mill,
(approximately 23 miles south of the proposed Jackpot Mine). These assets are
held by the Green Mountain Mining Venture ("GMMV"), owned 50 percent by USE and
USECC (the "USE Parties"), and 50 percent by Kennecott Uranium Company ("KUC"),
a subsidiary of Kennecott Energy and Coal Company of Gillette, WY. Kennecott
Energy and Coal Company and Kennecott Corporation of Salt Lake City, UT are
subsidiaries of Rio Tinto plc, formerly RTZ PLC of London. RTZ (now part of the
RTZ-CRA Group) is one of the world's leading natural resource companies.
Kennecott Corporation owns and operates several mines including the Bingham
Canyon, Utah open pit copper mine which started in 1906.
KUC is also referred to in this report as Kennecott. All mining claims
are accessible by county and United States Bureau of Land Management ("BLM")
access roads. Substantial exploration and delineation of the principal uranium
resources in the proposed Jackpot Mine have been completed. The BLM has signed a
Record of Decision approving the Jackpot Mine Plan of Operations following
preparation of a final Environmental Impact Statement ("EIS") for the proposed
mine, and on June 25, 1996, the Wyoming Department of Environmental Quality
("WDEQ") issued Mine Permit No. 660 that is required for GMMV to develop the
underground Jackpot Mine and mine the uranium deposits. The
4
proposed mine has had no previous operators, and will be a new mine when opened.
The Big Eagle Mine and related claim groups (which are near the proposed Jackpot
Mine and are part of the Green Mountain Claims held by the GMMV), are accessible
by county and private roads. The Big Eagle Mine was first operated by Pathfinder
Mines Corporation ("PMC") starting in the late 1970s.
Unpatented lode mining claims, underground and open pit uranium mines
and mining equipment in the Crooks Gap area are located on Sheep Mountain in
Fremont County, Wyoming and are adjacent to and west of the Big Eagle mining
claims held by the GMMV. These assets are held by the Sheep Mountain Partners
partnership ("SMP"), the partners of which are USE and Crested, doing business
as USECC, and Nukem, Inc. ("Nukem"), through its wholly-owned subsidiary Cycle
Resource Investment Corporation ("CRIC"). The SMP Sheep Mountain Mines 1 and 2
are accessible by county and private roads and were first operated by Western
Nuclear, Inc., a subsidiary of Phelps Dodge Corporation, in the late 1970s. The
SMP and GMMV properties contain uranium mineralization in sandstones of Tertiary
age, as is typical of most Wyoming uranium deposits.
Approximately 10,825 acres of properties are held by 437 unpatented
mining claims which have been staked by, plus four leases (including three state
leases) held by Yellow Stone Fuels Corp. (an Ontario, Canada corporation, or by
its wholly-owned subsidiary Yellow Stone Fuels, Inc., a Wyoming corporation,
hereafter "YSFC" including the subsidiary). The properties are located in
Wyoming and New Mexico, and are believed to be prospective of uranium and
suitable for in-situ leaching. USE and Crested each own 14.3% of YSFC.
Electric power to all the above Wyoming properties is furnished by
either Pacific Power & Light or the Hot Springs Rural Electric Association.
The property interests in Utah are:
The Tony M Mine and the Frank M property are underground uranium
deposits in San Juan County, Utah located partially on Utah State mining leases.
These properties are accessible by county roads.
Plateau is the owner of the Tony M mine and portions of the Frank M
properties and has posted a bond securing Plateau's obligations to reclaim these
properties. The Tony M mine was originally developed by Plateau at the time
Plateau was owned by Consumers Power Company ("CPC"), a Michigan public utility.
Significant areas of uranium mineralization have been accessed and delineated by
the prior owner's underground workings. When the Tony M Mine was in production
(while Plateau was owned by CPC) it produced ore containing from three to eight
pounds of uranium concentrates per ton. Some of this ore was processed at the
Shootaring Mill into U3O8, the saleable product. In addition, low grade uranium
ore was stockpiled at the Tony M mine and at the Shootaring Mill, and related
mill support facilities, which are held by Plateau.
Plateau also owns the Velvet Mine and the nearby Wood Mine complex in
the Lisbon Valley area in southeastern Utah. The Velvet uranium mine was fully
developed and permitted by its prior owner and is located approximately 178
miles by road from the Shootaring Mill. The Wood Mine complex was formerly an
operating uranium mine with a remaining undeveloped resource. Access to this
resource would be by extending a drift approximately 2,500 feet from the former
Wood Mine. The Wood Mine property is not permitted at this time, but the Company
does not expect difficulty in obtaining a new permit because the surface
facilities would occupy the site that has been disturbed from previous
operations.
5
THE GREEN MOUNTAIN MINING VENTURE PROJECT
GMMV. Subsequent to May 31, 1997, USE and USECC signed an Acquisition
Agreement for the acquisition from Kennecott Uranium Company of its interest in
the GMMV. The following is a description of the formation of GMMV and certain of
its terms, which terms have been modified as a result of the Acquisition
Agreement and related transactions, as set forth under "June 23, 1997
Acquisition Agreement with Kennecott Uranium Company" below.
In fiscal 1991, USE and USECC entered into an agreement to sell 50
percent of their interests in the Green Mountain uranium claims, and certain
other rights to Kennecott for $15,000,000 cash (USE's share of the proceeds was
$12,600,000, and the balance was Crested's) and a commitment by Kennecott to
fund the first $50,000,000 of GMMV expenditures. In fiscal 1991, USE and USECC
("USE Parties") and Kennecott formed the GMMV to develop, mine and mill uranium
ore from the Green Mountain Claims, and market U3O8 to utilities using nuclear
power to generate electricity.
Kennecott agreed to fund the first $50,000,000 of GMMV expenditures,
pursuant to Management Committee budgets. Thereafter, GMMV expenses will be
shared by the parties generally in accordance with their participating interests
(50 percent Kennecott, 50 percent USE Parties). The agreement also provides that
Kennecott will pay a disproportionate share (up to an additional $45,000,000) of
GMMV operating expenses, but only out of cash operating margins from sales of
processed uranium at more than $24.00/lb (for $30,000,000 of such operating
expenses), and from sales of processed uranium at more than $27.00/lb (for the
next $15,000,000 of such operating expenses).
Pursuant to the joint venture agreement, each party's participation
interest in the GMMV is subject to reduction for voluntary or involuntary
failure to pay its share of expenses as required in approved budgets (including
Kennecott's commitment to fund the initial $50,000,000 of the GMMV
expenditures), so that in effect, the interest held by each party collateralizes
its performance. However, a defaulting party would remain liable for third party
liabilities incurred during the GMMV operations, proportionate to its interest
before reduction.
The GMMV cash flows will be shared between Kennecott and the USE Parties
according to their participation interests. However, 105 of the Green Mountain
Claims, which cover the Round Park (Jackpot) uranium deposit, currently believed
to be the most significant mineralized resource on Green Mountain, were formerly
owned solely by USE. Pursuant to an agreement between USE and Crested, cash flow
from production of uranium out of these 105 Green Mountain Claims will be
distributed only to USE and Kennecott, and GMMV expenditures on such properties
will be shared 50 percent by USE and 50 percent by Kennecott. Milling costs will
be paid by the GMMV as operating costs and shared among the participants
according to their ownership interests in the ore being milled.
The USE Parties' share of GMMV cash flow resulting from the balance of
the properties (outside the 105 claims), previously owned by USE and Crested
together, will be shared equally by USE and Crested. GMMV expenditures from such
properties will be shared 25 percent each by USE and Crested, and 50 percent by
Kennecott. Such latter properties are expected to be developed after the Round
Park (Jackpot) deposit is placed into production; uranium deposits on these
properties may be accessed through the proposed tunnels at the Jackpot Mine.
The GMMV Management Committee has three Kennecott representatives and
two USECC representatives, acts by majority vote, and appoints and supervises
the project manager. In fiscal 1993, Kennecott became the GMMV project manager
and has continued as project manager through May 31, 1997. USECC has continued
work on a contract basis at Kennecott's request through May 31, 1997.
6
Pre-development activities on the GMMV properties have included
environmental and mining equipment studies, mine permitting and planning work,
property maintenance, setting up a uranium marketing program, acquisition and
monitoring of the Sweetwater Mill and preparation of an application to the U. S.
Nuclear Regulatory Commission ("NRC") to convert the Sweetwater Mill license
from standby to an operating license. During fiscal 1996, GMMV completed a
sediment dam, sediment basin and drainage diversion ditch, built a fuel storage
facility and other support facilities and made improvements to existing
facilities. As of the date this 10-K Report is filed, the GMMV has commenced
mine pre-development work necessary to put the GMMV properties into production,
see "June 23, 1997 Acquisition Agreement with Kennecott Uranium Company" and
"Permitting Activities" below.
JUNE 23, 1997 ACQUISITION AGREEMENT WITH KENNECOTT URANIUM COMPANY
Subsequent to May 31, 1997, USE and USECC signed an Acquisition
Agreement with Kennecott Uranium Company, a Delaware corporation ("Kennecott"),
for the right to acquire Kennecott's interest in the Green Mountain Mining
Venture ("GMMV") for $15,000,000 and other consideration. Kennecott paid USE and
USECC $4,000,000 on signing, and committed to provide the GMMV up to $16,000,000
for payment of reimbursable costs incurred by USECC in developing the proposed
underground Jackpot Uranium Mine for production and in changing the status of
the Sweetwater Mill from standby to operational. The work to develop the
proposed Jackpot Mine and ready the Sweetwater Mill for operations will be
undertaken, prior to closing of the terms of the Acquisition Agreement scheduled
for July 31, 1998, by USECC, as lessee of all the GMMV mineral properties under
a Mineral Lease Agreement between the GMMV and USECC (the "Mineral Lease"), and
as an independent contractor under a Contract Services Agreement (the "Mill
Contract") between Kennecott (as manager of the GMMV) and USECC. Both the
Mineral Lease and the Mill Contract, as well as a Fourth Amendment to the GMMV
Mining Venture Agreement among Kennecott, USE and USECC (the "Fourth Amendment
to the GMMV Agreement"), were executed simultaneously with the Acquisition
Agreement.
The $16,000,000 being provided by Kennecott to the GMMV was advanced to
Kennecott by an affiliate, Kennecott Energy Company ("KEC") under a secured
recourse Promissory Note (the "Note") bearing interest at 10.5% per annum
starting April 1999 until paid in full. The Note is payable quarterly out of 20%
of cash flow from the GMMV properties, but not more than 50% of the earnings for
such quarter from the GMMV operations, before interest, income tax, depreciation
and amortization. However, the Note is payable (i) in full on June 23, 2010
regardless of cash flow and earnings of the GMMV, or (ii) sooner (on December
31, 2005) if an economically viable uranium mine has not been placed into
production by such date. The Note is secured by a first mortgage lien against
Kennecott's 50% interest in the GMMV pursuant to a Mortgage, Security Agreement,
Financing Statement and Assignment of Proceeds, Rents and Leases granted by
Kennecott to KEC (the "Mortgage"). USE and USECC will assume the Note, and the
assets of the GMMV will be subject to the Mortgage, at closing of the
Acquisition Agreement.
Pursuant to the Mineral Lease and the Mill Contract of the Acquisition
Agreement, USECC is to expend funds to develop the proposed Jackpot Mine and
nearby Big Eagle Mine, and work with Kennecott in preparing the Sweetwater Mill
for renewed operations. Such work will be funded from the $16,000,000 being
provided to the GMMV by Kennecott. Under the Fourth Amendment to the GMMV
Agreement, Kennecott will be entitled to a credit against Kennecott's original
$50,000,000 commitment to fund the GMMV, in the amount of two dollars of credit
for each one dollar of such funds out of the $16,000,000 provided by Kennecott
to the GMMV, plus the $4,000,000 paid to USE and USECC on signing of the
Acquisition Agreement. It is anticipated that such credits will satisfy the
balance of Kennecott's initial funding commitment to acquire a 50% interest in
the GMMV.
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Pursuant to the Fourth Amendment to the GMMV Agreement, Kennecott
initially advanced $1,000,000 to the GMMV, which the GMMV has advanced to USECC
pursuant to the Mineral Lease and the Mill Contract, to allow USECC to establish
a working capital account. On a monthly basis, USECC is to submit detailed
invoices for reimbursable costs, defined in the Mineral Lease and Mill Contract
to include USECC's labor and equipment costs (maintenance and rental),
environmental compliance costs, direct office costs of USECC staff incurred in
monitoring and invoicing project costs and expenditures and associated
engineering costs and expenditures, and an additional amount equal to 10% of all
the preceding costs and expenditures as an administrative charge (the same 10%
as previously allowed in the GMMV Agreement). USECC is permitted to charge the
GMMV rental expense for equipment owned by USECC. The reimbursable cost
allocations for each phase of the development of the Jackpot Mine and upgrade of
the Sweetwater Mill to operating status are set forth in budgets of the Mineral
Lease and Mill Contract. Also included in reimbursable costs will be the amounts
required to cover all reclamation activities that will result from operations
conducted on the mining properties pursuant to the Mill Contract and the Mineral
Lease (USE and USECC will be required to put such reclamation cost amounts aside
in a sinking fund to pay for the reclamation work when production commences).
Kennecott has agreed to provide funds to the GMMV each month in an
amount adequate to reimburse USECC for invoiced costs and restore the USECC
working account balance to $1,000,000. Payment by GMMV of the monthly invoiced
costs is subject to Kennecott's confirmation that such costs conform to the
Mineral Lease and Mill Contract budgets. Subject to and at the closing of the
Acquisition Agreement, Kennecott will advance to the GMMV cash equal to any
difference between (i) the $16,000,000 commitment and (ii) amounts advanced to
pay reimbursable costs and maintain the working capital account.
Also pursuant to the Mineral Lease, USECC is to pay the GMMV a monthly
lease fee of $3,363, starting July 1, 1997. Separately and pursuant to the
Mineral Lease, USE and USECC are required to pay all rental, leasehold, property
and other payments relating to the mining properties, and all utility and other
payments, taxes and assessments that may be assessed against such properties
during the term of the Mineral Lease.
Closing of the Acquisition Agreement is subject to USE and USECC
satisfying several conditions, including: (i) the acquiring entity (which may be
USE, USECC, or an entity formed by USE and USECC to acquire Kennecott's interest
in the GMMV) must have a market capitalization of at least $200,000,000; (ii)
the parties to the Acquisition Agreement must have received all authorizations,
consents, permits and approvals of government agencies required to transfer
Kennecott's interest in the GMMV to the acquiring entity; (iii) USE and USECC
shall have replaced, or caused the replacement of, approximately $25,000,000 of
reclamation bonds, in addition to other guarantees, indemnification and
suretyship agreements posted by Kennecott on behalf of the GMMV; and (iv) USE
and USECC, or the acquiring entity, must pay $15,000,000 in cash to Kennecott at
closing and assume all obligations and liabilities of Kennecott with respect to
the GMMV (including repayment of the $16,000,000 Note and the Mortgage) from and
after the closing. Under very limited circumstances, the scheduled closing date
may be postponed to another date no later than October 30, 1998. The parties to
the Acquisition Agreement also executed a mutual General Release with respect to
any and all claims that they may have with respect to any prior disputes
concerning the GMMV, which General Release would be delivered to all such
parties at closing of the Acquisition Agreement. Upon closing of the Acquisition
Agreement, the Mineral Lease and the Mill Contract will be terminated and USE,
USECC or the acquiring entity will own Kennecott's 50% of the GMMV, although its
properties will remain subject to the Mortgage until the Note is paid in full.
The current 50% interest in GMMV held by USE and USECC will not change when the
Acquisition Agreement is closed.
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If the Acquisition Agreement is not closed by December 1, 1997, then USE
and USECC (or an entity formed by them to acquire the GMMV interest owned by
Kennecott) are to provide to Kennecott a commitment letter from a recognized
national investment banking firm to complete an underwritten public offering of
the securities of USE (or an entity formed or introduced to acquire Kennecott's
GMMV interest (the "Acquiring Entity")), in amount sufficient to close the
Acquisition Agreement transactions. Such amount is estimated by USE to be
approximately $40,000,000, (for the $15,000,000 closing cash purchase price to
Kennecott, plus $25,000,000 to assume or cause the replacement of reclamation
bonds, guarantees, indemnification agreements and suretyship agreements related
to the GMMV properties and the Sweetwater Mill. Alternatively, USE, USECC or the
Acquiring Entity must provide evidence to Kennecott of a commitment letter from
a bank, other financial institution or industry entity to provide private or
joint venture financing in such approximate amount. Failure to provide evidence
of such financial commitment by December 1, 1997 would entitle Kennecott to
terminate the Acquisition Agreement, the Mineral Lease and the Mill Contract.
Subject to providing evidence of adequate financial resources to close
the Acquisition Agreement with funds from a public financing or otherwise, the
$4,000,000 signing bonus paid by Kennecott is nonrefundable.
If the Acquisition Agreement is not closed, USE and USECC, and
Kennecott, shall own their respective 50% interest in the GMMV, and Kennecott's
obligation to repay the $16,000,000 loaned by KEC shall remain Kennecott's
obligation, without any adverse effect on the 50% interest in the GMMV held by
USE and USECC. However, the Jackpot Mine development work and Sweetwater Mill
upgrade work funded by the $16,000,000 advance, will have benefitted all parties
to the GMMV.
PROPERTIES AND MINE PLAN. The GMMV owns a total of 521 claims on Green
Mountain, including the 105 claims on which the Round Park (Jackpot) uranium
deposit is located. Surface rights are owned by the United States Government
under management by the BLM. In addition, other uranium mineralization has been
delineated in the Phase 2 and Whiskey Peak deposits on these claims, which
formerly belonged to USE and Crested. These deposits are undeveloped. Roads and
utilities have been put in place, which are believed to be satisfactory to
support future mine development.
The GMMV also owns the Big Eagle Properties on Green Mountain, which
appear to contain substantial remaining uranium mineralization, and are adjacent
to the other GMMV mining claims. The Big Eagle Properties contain one
underground and two open-pit mines, as well as related roads, utilities,
buildings, structures, equipment and a stockpile of ore. The assets include a
38,000 and an 8,000 square foot buildings formerly used by Pathfinder Mines
Corporation ("PMC") in mining operations. Also included are three ore-hauling
vehicles, each having a 100-ton capacity. Permits transferred to the GMMV for
the properties include: a permit to mine, an air quality permit, and water
discharge and water quality permits. The GMMV owns the mineral rights to the
underlying unpatented lode mining claims.
The Round Park (Jackpot) mining claims contain deposits of uranium which
have been estimated to contain 52,000,000 pounds of U3O8 averaging .23% uranium
oxide using a grade-thickness cut-off of .6 (i.e., deposit areas were excluded
unless deposit bed thickness at intercept, times intercept grade of uranium
mineralization, exceeded .6). The GMMV plans to mine this deposit from two
tunnels in the Jackpot Mine, which will be driven underground from the south
side of Green Mountain. The first of several mineralization horizons is about
2,300 feet vertically down from the top of Green Mountain.
The Jackpot Mine Plan of Operations provides for two declines to be
driven from the side of Green Mountain, extending about 10,400 feet into the
deposits; one decline will be used for ventilation and transportation of
personnel, and the other will convey ore, rock and waste out of the mine. The
mine
9
plan estimates that the Jackpot Mine will produce about 3,000 tons of uranium
ore per day and will have an expected mine life of 13 to 22 years. It will
utilize the existing Big Eagle Mine facilities located about three miles west of
the Jackpot Mine site. As many as 250 workers will be required during mining
full operations.
USE Parties expect mine development costs will not exceed $25,000,000 to
begin production from the Round Park (Jackpot) deposit. However, cost estimates
may change as exploration and initial development progress. Pursuant to the GMMV
agreement, Kennecott had agreed to fund the initial $50,000,000 in development
costs including reclamation costs. To May 31, 1997, such expenditures totaled
approximately $20,416,400. Additional costs would be funded by the $16,000,000
loan, operations and/or by cash advance by the venturers.
SWEETWATER MILL. In fiscal 1993, GMMV acquired the Sweetwater uranium
processing mill and associated properties located in Sweetwater County, Wyoming,
approximately 23 miles south of the proposed Jackpot Mine, from Union Oil
Company of California ("UNOCAL"), primarily in consideration of Kennecott and
the GMMV assuming environmental liabilities, and decommissioning and reclamation
obligations.
Kennecott is manager of the Sweetwater Mill and, as such, will be
compensated by GMMV out of production. Payments for pre-operating management
will be based on a sliding scale percentage of mill cash operating costs prior
to mill operation; payments for operating management will be based on 13 percent
of mill cash operating costs when processing ore. Mill holding costs have been
paid by GMMV and funded by Kennecott as part of its $50,000,000 funding
commitment.
The Sweetwater Mill includes buildings, milling and related equipment,
real estate improvements, mining and mill site claims and other real property
interests, personal property and intangible property (including government
permits relating to operation of those properties). The major assets are the
mill buildings and equipment located on approximately 92 acres.
The mill was designed as a 3,000 ton per day ("tpd") facility. UNOCAL's
subsidiary Minerals Exploration Company reportedly processed in excess of 4,200
tpd for sustained periods. The mill is one of the newest uranium milling
facilities in the United States, and has been maintained in good condition.
UNOCAL has reported that the mill buildings and equipment have historical costs
of $10,500,000 and $26,900,000, respectively.
As consideration for the Sweetwater Mill, GMMV agreed to indemnify
UNOCAL against certain reclamation and environmental liabilities, which
indemnification obligations are guaranteed by Kennecott Corporation (parent of
Kennecott Uranium Company). GMMV has agreed to be responsible for compliance
with mill decommissioning and land reclamation laws, for which the environmental
and reclamation bonding requirements are approximately $24,330,000, which
includes a $4,560,000 bond required by the NRC. None of the GMMV future
reclamation and closure costs are reflected in Registrant's Consolidated
Financial Statements (see Notes F and K to USE Consolidated Financial Statements
for fiscal year ended May 31, 1997).
The reclamation and environmental liabilities assumed by GMMV consist of
two categories: (1) cleanup of the inactive open pit mine site near the mill
(the source of ore feedstock for the mill when operating under UNOCAL),
including water (heavy metals and other contaminants) and tailings (heavy metals
dust and other contaminants requiring abatement and erosion control) associated
with the pit; and (2) decontamination and cleanup and disposal of the mill
building, equipment and tailings cells after mill decommissioning. On June 18,
1996, Kennecott established an irrevocable Letter of Credit through
10
Morgan Guaranty Trust Company of New York City in the amount of $19,767,079 in
favor of the Wyoming Department of Environmental Quality ("WDEQ") for
reclamation requirements of the GMMV. The Letter of Credit was increased by
$10,000 on August 26, 1996 to cover off-permit wetland enhancement. The WDEQ
exercises delegated jurisdiction from the United States Environmental Protection
Agency ("EPA") to administer the Clean Water Act and the Clean Air Act, and
directly administers Wyoming statutes on mined land reclamation. The Sweetwater
Mill is also regulated by the NRC for tailings cells and mill decontamination
and cleanup. The EPA has continuing jurisdiction under the Resource Conservation
and Recovery Act, pertaining to any hazardous materials which may be on site
when cleanup work is started.
Although the GMMV is liable for all reclamation and environmental
compliance costs associated with mill and site maintenance, as well as mill
decontamination and cleanup and site reclamation and cleanup after the mill is
decommissioned, USECC believes it is unlikely USECC would have to pay for such
costs directly. First, based on current estimates of cleanup and reclamation
costs (reviewed annually by the oversight agencies), such costs covered by the
letters of credit or other surety appear to be within the $24,330,000
reclamation bonds posted by Kennecott for GMMV. These costs are not expected to
increase materially if the mill is not put into operation. Second, UNOCAL has
agreed that if the GMMV incurs expenditures for environmental liabilities prior
to the earlier of commercial production by GMMV or February 1, 2001, (which
liabilities are not due solely to the operations of GMMV), then UNOCAL will loan
the GMMV the first $8,000,000 of such expenditures. Any reimbursement for the
loan may only be recovered by UNOCAL from 20% of future cash flows from sale of
uranium concentrates processed through the Sweetwater Mill. Third, payment of
reclamation and environmental liabilities related to the Mill is guaranteed by
Kennecott. Last, the GMMV will set aside a portion of operating revenues to fund
reclamation and environmental liabilities when mining and milling operations are
finally shut down.
Kennecott will be entitled to contribution from the USE Parties in
proportion to their participating interests in the GMMV, if Kennecott is
required to pay mill cleanup costs directly pursuant to its guarantee. Such
contributions would be required only if the liabilities cannot be satisfied by
Kennecott within the balance of any development commitment as provided by the
Acquisition Agreement, after the credits provided by the Fourth Amendment to the
GMMV (see the "June 32, 1997 Acquisition Agreement with Kennecott above). In
addition, if and to the extent such liabilities resulted from UNOCAL's mill
operations, and payment of the liabilities was required before February 1, 2001
and before mill production resumes, then up to $8,000,000 of that amount would
be paid by UNOCAL, before Kennecott would be required to pay on its guarantee.
However, notwithstanding the preceding, the extent of any ultimate USECC
liability for contribution to mill cleanup costs cannot be predicted.
PERMITTING AND ACTIVITIES. In March 1993, the GMMV applied to the WDEQ
for a Permit to Mine the Round Park deposit through the Jackpot Mine. Following
preparation of a final EIS by the BLM, including a series of public meetings and
a period for receipt of written comments on both the preliminary and final EIS,
on April 24, 1996 the BLM signed the Record of Decision ("ROD") approving the
Jackpot Mine Plan of Operations. With the entry of the ROD, the WDEQ issued the
mine permit for the Jackpot Mine on June 26, 1996. This Permit allows the GMMV
to proceed with construction of mine surface facilities, further underground
mine development and eventual mining of the Round Park (Jackpot) Deposit.
General activity increased at the Jackpot mine site during fiscal 1997
and to the date of this Report, in anticipation of increased uranium prices.
Some of the principle activities were: a major portion of the access/haulroad
from the Jackpot Mine to the Big Eagle Mine was widened to a 40 foot running
surface eliminating various curves to accommodate the GMMV's 100 ton haul
trucks; permits and
11
approvals were obtained for construction of Jackpot Reservoirs No. 2 and 3 and
construction was started and completed except for installing liners, and Jackpot
Reservoir No. 1 was completed and is operational (catch basin for sediment and
runoff). The GMMV is in compliance with all permit conditions. Significant
progress is being made in preparing for and running the double declines into the
Round Park (Jackpot) deposit, pursuant to the pre-development operations plan
agreed to between USECC and Kennecott. Two shifts are currently working
underground with a third shift being assembled.
The Jackpot Mine Plan of Operations and a combination of the
alternatives analyzed in the EIS will allow for the disposal of mine waste rock
in the Big Eagle Mine pits some three miles from the Jackpot declines, the
upgrading of existing roads, and the construction of new haul road segments to
transport ore to the Sweetwater Mill. These roads will be subject to
modification in alignment necessary to minimize or avoid adverse impacts to
riparian and cultural resources.
The maximum area of new disturbance required for the project will be 289
acres. This disturbance will include approximately 118 acres for mine site
development and approximately 171 acres for transportation corridor construction
and/or improvement. When uranium reserves have been depleted, the mine portals
will be plugged; the ground surface recontoured and reclaimed to blend with the
natural landscape; surface structures will be removed; roads closed per
landowner or BLM request, and disturbed areas reclaimed.
Kennecott, as operator of the Sweetwater Mill, has initiated discussions
and made filings with the NRC regarding amendments to the Source Material
License to resume ore processing at the Sweetwater Mill. Separately, Kennecott
has applied to the NRC for permission to use a mill tailings cell to hold low
level tailings waste from an ion exchange plant owned by USE and Crested in the
Crooks Gap area.
The United States Environmental Protection Agency ("EPA") has advised
Kennecott, as operator of the GMMV, that if Kennecott would level the tailings
within the existing tailings impoundment and install a new liner with leak
detection capability, the EPA would allow the use of the existing 60 acre
tailings cell for milling operations. Although this could result in a cost
savings to the GMMV, a new 40 acre tailings cell has been designed by an outside
engineering firm and is scheduled to be constructed.
The Environmental Protection Agency has promulgated final rules for
radon emissions. These regulations affect the mining and milling of uranium and
may require substantial expenditures for compliance. The GMMV may need to
install venting at the mine site, and must monitor radon emissions at the mines,
as well as wind speed, direction and other conditions. USE believes all of the
uranium operations in which it owns an interest are in compliance with these
rules.
There ultimately will be an effect on the earnings of USE and Crested
from environmental compliance expenditures by the GMMV, since the GMMV
operations will be accounted for by the equity method if the acquisition of
Kennecott's interest in the GMMV pursuant to the Acquisition Agreement does not
close. GMMV's expenses for compliance with environmental laws (as well as other
matters) are not expected to materially affect the cash flow of USE and Crested
during the next two years. Out of Kennecott's initial $50,000,000 commitment,
Kennecott has funded about $20,416,400 through May 31, 1997.Nevertheless,
advances to the GMMV made pursuant to the Acquisition Agreement will reduce
Kennecott's development commitment by two dollars for each dollar advanced
pursuant to the Fourth Amendment to the GMMV Agreement.
12
PLATEAU'S SHOOTARING CANYON MILL
ACQUISITION OF PLATEAU RESOURCES, LIMITED ("PLATEAU"). In August 1993,
USE purchased from Consumers Power Company ("CPC"), all of the outstanding stock
of Plateau, which owns the Shootaring Canyon uranium processing mill and support
facilities in southeastern Utah (the "Shootaring Mill"). The Shootaring Mill
holds a source materials license from the NRC.
USE paid nominal cash consideration for the Plateau stock, but as
additional consideration, USE has agreed:
(a) to perform or cause Plateau to perform all studies, remedial or
other response actions or other activities necessary from time to time for
Plateau to comply with environmental monitoring and other provisions of (i)
federal and state environmental laws relating to hazardous or toxic substances,
and (ii) the Uranium Mill Tailings Radiation Control Act, the Atomic Energy Act
of 1954, and administrative orders and licenses relating to nuclear or
radioactive substances or materials on the property of, or produced or released
by, Plateau; and
(b) to indemnify CPC from all liabilities and costs related to the
presence of hazardous substances or radioactive materials on Plateau property,
and to any future violation of laws and administrative orders and licenses
relating to the environment or to nuclear or radioactive substances.
At closing, Plateau transferred $2,500,000 cash to fund the "NRC Surety
Trust Agreement" with a commercial bank as trustee. The trustee is to pay future
costs of Shootaring Mill decommissioning, site reclamation, and long term site
surveillance, as directed by the NRC. The amount transferred to the trust is the
minimum amount now required by the NRC as financial assurance for clean up after
permanent shut down of the Shootaring Mill.
Also at closing, Plateau transferred $4,800,000 cash to fund the "Agency
Agreement" with a commercial bank. These funds will be available to indemnify
CPC against possible claims related to environmental or nuclear matters as
described above, and against third-party claims related to an agreement between
Plateau and the third-party (see Note K to the USE Consolidated Financial
Statements for fiscal year ended May 31, 1997).
There are no present claims against funds held under either the Trust
Agreement or Agency Agreement. Funds (including accrued interest) not disbursed
under the Trust and Agency Agreements will be paid over to Plateau upon
termination of such Agreements with NRC concurrence.
The consideration paid by USE was determined by negotiation with CPC,
taking into account further estimated annual Shootaring Mill holding costs, and
estimated future Mill decommissioning and site reclamation costs as required by
the NRC and the Utah Department of Natural Resources, Division of Oil, Gas and
Mining ("DOGM").
The Plateau acquisition was done solely with USE, in light of potential
NRC objections to selling Plateau to the USECC joint venture. Subsequent to
closing, in September 1993, USE and Crested agreed that after Plateau's
unencumbered cash has been depleted, USE and Crested each will assume one-half
of Plateau's obligations, and share equally in Plateau's operating cash flows,
pursuant to the USECC Joint Venture.
13
SHOOTARING MILL AND FACILITIES. The Shootaring Mill is located in
south-eastern Utah, approximately 13 miles north of Lake Powell, and 50 miles
south of Hanksville, Utah via State Highway 276, then four miles west on good
gravel roads. The entire facility occupies 18.9 acres of a 264.52 acre plant
site. The mill was designed to process 750 tpd, but only operated on a trial
basis for two months in mid-summer 1982. In 1984, Plateau put the mill on
standby because of the depressed U3O8 market.
Plateau also owns approximately 90,000 tons of uranium mineralized
material stockpiled at the mill site and approximately 172,000 tons of
mineralized material stockpiled at the Tony M Mine. Included with mill assets
are tailings cells, laboratory facilities, equipment shop and inventory. The NRC
issued a license to Plateau authorizing production of uranium concentrates,
however, since the mill was shut down, only maintenance and required safety and
environmental inspection activities were performed and the source materials
license with the NRC was for standby operations only. On July 31, 1996, the NRC
approved Plateau's application to postpone initiation of the requirements of
timeliness in decommissioning of the Shootaring Mill for five years, which
postponement enabled Plateau to upgrade the source materials license to
operational status. Plateau applied to the NRC to convert the source materials
license from standby to operational and upon increasing the reclamation bond to
$6,700,000, the NRC issued the new license on May 2, 1997. Plateau has an
additional $1,600,000 of government securities available for further bonding
needs.
In fiscal 1997 and into fiscal 1998, in anticipation of resuming milling
operations, Plateau commenced a complete reactivation and rehabilitation program
at the Mill (updating the control systems and testing gauges, relining wooden
acid leach tanks, etc.)
TICABOO TOWNSITE
Plateau owns all of the outstanding stock of Canyon Homesteads, Inc.
("Canyon"), a Utah corporation, which developed the Ticaboo, Utah townsite 3.5
miles south of the Shootaring Mill. The Ticaboo site includes a 66 room motel,
convenience store, 98 single family home sites, 151 mobile home sites, and 26
recreational vehicle sites (all with utility access). The townsite is located on
a State of Utah lease near Lake Powell and is being operated as a commercial
enterprise. An amendment was entered into on April 1, 1997 on the Utah State
lease covering the Ticaboo townsite whereby the State deeded portions of the
Townsite to Canyon Homesteads, Inc. on a sliding scale basis. USE and Crested
plan to further develop the townsite, and have been seeking financial partners
for this purpose. Interim funding for limited improvements on the commercial
operations were provided by a private corporation controlled by family members
of the Chairman of the Board, President and Chief Executive Officer of USE. See
Part III, Item 12 "Certain Relationships and Related Transactions - Transactions
with Arrowstar Investments, Inc.". USE now operates all commercial facilities
including the motel, restaurant, convenience store, mobile home/RV park and boat
storage as the renovation of the nearby Shootaring Canyon uranium mill is
underway.
YELLOW STONE FUELS CORP.
Yellow Stone Fuels Corp., hereafter ("YSFC") was organized on February
17, 1997 in Ontario, Canada. As of February 17, 1997, YSFC acquired all the
outstanding shares of Common Stock of Yellow Stone Fuels, Inc. (a Wyoming
corporation which was organized on June 3,1996), in exchange for YSFC issuing
the same number of shares of YSFC Stock to the former shareholders of Yellow
Stone Fuels, Inc. ("YFI"). YSFC and its wholly-owned subsidiary Yellow Stone
Fuels, Inc. will hereafter be referred to collectively as YSFC.
14
In order to concentrate the efforts of USECC on conventional uranium
mining using the Shootaring and Sweetwater Mills, USECC decided to take a
minority position in Yellow Stone Fuels, Inc. and not be directly involved in
properties believed suitable for the production of uranium through the in- situ
leach ("ISL") mining process. USECC will have first call on any uranium ore
bodies YSFC discovers which are amenable to conventional mining and milling and
YSFC will have a call on ore bodies discovered by USECC amenable to the ISL
process. In the ISL process, groundwater fortified with oxidizing agents is
pumped into the ore body, causing the uranium contained into the ore to
dissolve. The resulting solution is pumped to the surface where it is further
processed to a dried form of uranium which is shipped to conversion facilities
for eventual sale. Generally, the ISL process is more cost effective and
environmentally benign compared to conventional underground mining techniques.
In addition, less time may be required to bring an ISL mine into operation than
to permit and build a conventional mine.
As of May 31, 1997, YSFC had 10,495,000 shares of Common Stock issued
and outstanding, including 3,000,000 shares (28.5%) issued to USE and Crested.
Most of the funds used by YSFC have been provided by USECC under a $400,000 loan
facility. As part consideration for the loan, USE and Crested entered into a
Voting Trust Agreement having an initial term of 24 months with two principal
shareholders of YSFC, whereby USE and Crested will have voting control of more
than 50% of the outstanding shares of YSFC. See Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
majority of the remaining outstanding YSFC shares are owned by affiliates of USE
and Crested. See Part III, Item 13, "Certain Relationships and Related
Transactions."
In Wyoming, YSFC has staked and/or holds 304 unpatented mining claims
and has entered into three State leases covering a total of 9,280 acres located
in the Powder River Basin uranium district. The State leases have a 10 year term
expiring October 1, 2006; require annual rental of $1.00 per acre for five
years, then $2.00 for the second five years, or sooner upon the discovery of
commercial quantities of minerals; and a 5% gross royalty of the value of
uranium bearing ore mined from the leased properties is payable to the State of
Wyoming.
Also in Wyoming, the Peterson claim group includes 50 unpatented mining
claims covering approximately 1,000 acres in the southern part of the power
River Basin uranium district. In addition to owning the Peterson claim group,
YSFC has leased the surface rights to the mineral properties for five years, at
$4.00 per acre annual rent per year plus a production royalty of $0.50 per pound
of uranium concentrates (U3O8) sold at or for less than $22.00 per pound (the
royalty increases to $0.75 per pound for uranium sold at more than $30.00 per
pound). The Low claim group, covering 63 unpatented lode mining claims covering
approximately 1,260 acres, is also located in the southern part of the Powder
River Basin uranium district, approximately 20 miles northwest of the producing
Rio Algom's Smith Ranch Mine. The Low claims may be similar in geology and
hydrology to the Smith Ranch and Cameco's Highland ISL operations.
In New Mexico, YSFC has staked and holds 39 unpatented mining claims and
has leased 8 patented mining claims. These properties in the aggregate cover
approximately 945 acres located in the Grants uranium region of New Mexico. The
8 unpatented mining claims (covering 165.44 acres) are held by a 5 year
renewable lease from Parador Mining Company, requiring $500 monthly rental
payments to Parador Mining Company, which has retained a 5% gross royalty on
revenues from uranium sold from the property. The Parador area was mined for up
to 600,000 pounds U3O8 at a grade of 0.24% by other companies in the 1970s. The
extent of further mineral resources on the properties is presently unknown.
15
The geological and geophysical data acquired with the Pioneer Nuclear,
Inc. ("PNI") library may assist YSFC in evaluating the viability of the various
uranium claims to in-situ processing. This library of information was assembled
in the 1970s by PNI in its uranium exploration program, and the library was
acquired from a person in exchange for shares of YSFC common stock.
As of the date of this Annual Report on Form 10-K, YSFC is negotiating
to acquire additional properties in Converse, Fremont and Sweetwater Counties,
Wyoming which in some instances will include certain tangible assets. However,
there are no contracts or agreements in principle for such acquisitions at this
report date.
YSFC will require additional funding to maintain its property
acquisition program, conduct the geological and engineering studies on
properties to evaluate their suitability to in-situ recovery methods, and to
build and operate in-situ recovery facilities on suitable properties. YSFC is
currently seeking additional funding, but there is no assurance that such
funding will be obtained.
In fiscal 1997, USE and USECC entered into several agreements with YSFC,
including a Milling Agreement through Plateau Resources. The Shootaring Canyon
mill facilities will be available to YSFC to transport uranium concentrate
slurry and loaded resin to the mill and process it into uranium concentrate
("yellowcake"), for which Plateau will be paid its direct costs plus 10%. Other
agreements include a Drill Rig Lease Agreement for YSFC to have access to USE
drilling rigs at the prevailing market rates; an Outsourcing and Lease Agreement
for assistance from USECC accounting and technical personnel on a cost plus 10%
basis and a sublease for 1,000 square feet of office space for $1,000 per month;
and a Ratification of Understanding by which USECC will offer to YSFC (with a
reserved royalty in amounts to be agreed on later) any uranium properties
amenable to in-situ production which USECC acquires or has the right to acquire.
In return, YSFC will offer to USECC ( with a reserve royalty in amounts to be
agreed on later) uranium properties amenable to conventional mining methods
which YSFC acquires or has the right to acquire. USECC also will make its
library of geological information and related materials available to YSFC . YSFC
also has a Storage Agreement with GMMV by which YSFC stores used low-level
contaminated mining equipment purchased from a third party at GMMV's Sweetwater
Mill; YSFC is responsible for any bonding and handling obligations for the
stored equipment, and pays GMMV nominal rent for the storage.
SHEEP MOUNTAIN PARTNERS ("SMP")
PARTNERSHIP. SMP is a Colorado general partnership formed on December
21, 1988, between USECC and Nukem, Inc. of Stamford, CT ("Nukem") through its
wholly-owned subsidiary Cycle Resource Investment Corporation ("CRIC"). Nukem is
a uranium brokerage and trading concern. During fiscal 1991, certain disputes
arose between the partners of SMP. These disputes resulted in
arbitration/litigation and subsequent consensual arbitration from which an Order
and Award was issued on April 18, 1996. USE and Crested filed petitions for
confirmation of the Order and Award with the U.S. District Court of Colorado and
the Court has entered a Second Amended Judgment confirming the monetary and
equitable provisions of the Order and Award. See "Legal Proceedings - Sheep
Mountain Partners Arbitration/Litigation".
In February 1988, USE and Crested acquired uranium mines, mining
equipment and mineralized properties (Sheep Mountain Mines) at Crooks Gap in
south-central Fremont County, Wyoming, from Western Nuclear, Inc. These Crooks
Gap mining properties are adjacent to the Green Mountain uranium properties.
USECC mined and sold uranium ore from two of the underground Sheep Mines during
fiscal 1988 and 1989. Production ceased in fiscal 1989, because uranium could be
purchased from the spot market at prices below the mining and milling costs of
SMP.
16
USE and Crested sold 50 percent of their interests in the Crooks Gap
properties to Nukem's subsidiary CRIC for cash. The parties thereafter
contributed the properties to SMP, in which USECC received an undivided 50
percent interest. Each group provided one-half of $315,000 to purchase equipment
from Western Nuclear, Inc.; USE and Crested also contributed their interests in
three uranium supply contracts to SMP and agreed to be responsible for property
reclamation obligations. The SMP Partnership agreement provided that each
partner generally had a 50 percent interest in SMP net profits, and an
obligation to contribute 50 percent of funds needed for partnership programs or
discharge of liabilities. Capital needs were to have been met by loans, credit
lines and contributions.
SMP was directed by a management committee, with three members appointed
by USECC, and three members appointed by Nukem/CRIC. The committee has not met
since 1991 as a result of the SMP arbitration/litigation.
PROPERTIES. SMP owns 80 unpatented lode mining claims on the Crooks Gap
properties, including two open-pit and five underground uranium mines and an
inventory of uranium ore. Production from the properties is subject to
sliding-scale royalties payable to Western Nuclear, Inc.; the rates are from one
to four percent on recovered uranium concentrates. Thirty-eight claims were
conveyed by PMC to SMP in August 1996, see below.
Various structures and equipment are located on the properties including
three operating and three non-operating mine headframes with hoists; maintenance
shops; offices; and other buildings, equipment and supplies. An ion-exchange
plant is located near the SMP properties, but is held by USECC and not SMP.
Until recently, SMP also had interests in 59 an additional unpatented
mining claims, one State mineral lease and one State surface use lease, which
had been conveyed to Pathfinder Mines Corporation ("PMC"). In August 1996, PMC
conveyed 38 of the 59 claims to SMP, retaining 21. SMP chose to retain only 3 of
the 38 claims. These SMP properties contain a previously-mined open-pit uranium
mine and three underground mines. PMC has the right to mine a portion of these
properties (the Congo area), by open-pit or in-situ techniques to certain
depths, without royalty or other obligations to SMP. PMC has the responsibility
for reclamation work needed thereon as a result of its activities. If PMC mines
any portion of the properties outside the Congo area, a 3% royalty is owed to
SMP. Conversely, SMP has the right to mine portions of the claims and leases
outside the Congo area (and specified surrounding zones) by underground mining
techniques, subject to a 3% royalty to PMC. PMC had conducted an exploration
program on a portion of these properties, and has advised the Company that it
does not intend any further development. PMC has decommissioned and dismantled
its two uranium mills in the vicinity.
An ion exchange plant on the SMP properties is owned USECC and was used
to remove natural soluble uranium from mine water. USE, on behalf of USECC, has
submitted a plan to the NRC to decommission this facility and obtained a three
year extension for timeliness of decommissioning. Management is reviewing the
economics of relicensing this facility as part of a potential in-situ leach
uranium mining operation. See "Environmental" below.
PROPERTY MAINTENANCE. As operating manager for SMP, USECC is responsible
for exploration, mining, and care and maintenance of SMP mineral properties.
USECC was to have been reimbursed by SMP for certain expenditures on the
properties. During the SMP arbitration/litigation, Nukem/CRIC refused to allow
SMP to pay USECC for care and maintenance and other work performed on the
properties since the spring of 1991. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources at May 31, 1996". As part of the Order and Award made on April
18, 1996, the Arbitration Panel awarded USECC $2,065,989 for
17
Nukem/CRIC's 50% share of care and maintenance expenses for the SMP properties
plus interest of $446,834 to March 31, 1996 and per diem cost of $616
thereafter. See Item 3, Legal Proceedings Sheep Mountain Partners
Arbitration/Litigation - Stipulated Arbitration." Currently, USECC has a
maintenance staff on site to care for and maintain the mines and pump mine water
to prevent flooding of the mines, which could destroy equipment and the concrete
lined vertical shafts accessing the various levels of uranium mineralization.
SMP MARKETING. Nukem, Inc. was engaged by SMP to provide SMP with
financial expertise and marketing services. SMP entered into a marketing
agreement with CRIC, which was concurrently assigned to and assumed by Nukem.
Nukem was to provide marketing and trading services for SMP, which included
acquiring uranium for SMP by purchasing or borrowing. Nukem was to be reimbursed
at its direct costs for acquiring such uranium for SMP. USECC, SMP and Nukem had
seven long-term contracts plus an additional long-term contract with PSE&G that
was awarded to SMP by the Arbitration Panel (four of these contracts remain) for
sales of uranium originally to eight domestic utilities. SMP's uranium supply
contracts are either base-price escalated or market-related (referring to how
price is determined for uranium to be delivered at a future date). Base-price
escalated contracts set a floor price which is escalated over the term of the
contract to reflect changes in the GNP price deflator. Two of the base priced
contracts have been fulfilled and the third base-price escalated contract of
SMP, required delivery of 130,000 pounds of uranium concentrates in 1997 which
was made, completing that contract. The fourth contract calls for delivery of
750,000 lbs. U3O8 through 2001. Prices of uranium for deliveries under the
base-price escalated contract currently exceed prices at which uranium can be
purchased in the spot market.
Under the market-related contracts, the purchaser's cost depends on
quoted market prices based on estimated prices at which a willing seller would
sell its U3O8 during specified periods before delivery. Some of these contracts
place a ceiling on the purchase price, substituting a base-price escalated
amount, if the market price exceeds a certain level. Under the terms of the
various market-price related contracts, SMP is required to deliver from 250,000
to 900,000 pounds of U3O8 annually from 1997 to 2000, which amounts may be
increased or decreased by specified percentages.
Through fiscal 1997, USECC and its affiliates have satisfied most of
these contracts with uranium concentrates previously produced by SMP, borrowed
from others, or purchased on the open market. The future role of Nukem in making
deliveries under these contracts on behalf of SMP cannot be assured
notwithstanding the April 18, 1996 Order and Award of the Arbitration Panel. See
"Legal Proceedings -
Sheep Mountain Partners Arbitration/Litigation."
PERMITS. Permits to operate existing mines on SMP properties have been
issued by the State of Wyoming. Amendments are needed to open new mines within
the permit area. As a condition to issuance of the permits, an NPDES permit
under the Clean Water Act has been obtained. Monitoring and treatment of water
removed from the mines and discharged in nearby Crooks Creek is generally
required. During the past two years, SMP did not discharge wastewater into
Crooks Creek, and the mine water is presently being discharged into the McIntosh
Pit.
URANIUM MARKET INFORMATION. There are currently nine producers of
uranium in the United States, which collectively produced 5,800,000 pounds of
U3O8 during calendar 1995 and produced approximately 6,300,000 pounds in
calendar 1996. Production in the U.S. for 1997 is estimated at 7,000,000 pounds.
In addition, there are several major producers in Canada (Cameco, Cogema Canada,
Ltd., Rio Algom and Uranerz); Australia (Energy Resources of Australia and
Pancontinental Mining, Ltd.); Africa (Cogema and RTZ's Rossing unit), and
Europe, which collectively produced about 66,000,000 pounds of U3O8 during
calendar year 1996 and are expected to produce approximately
18
73,000,000 pounds in calendar 1997. Several members of the Commonwealth of
Independent States ("CIS"), also export uranium into the western markets
although the amount of such exports to the United States and European markets
are currently limited.
Uranium is primarily used in nuclear reactors to heat water which drive
turbines and generators generating electricity. According to the Uranium
Institute based in London, England ("UI"), nuclear plants generated
approximately 17% of the world's electricity in 1996, up from less than 2% in
1970. According to the UI, through the year 2000, nuclear generating capacity is
expected to grow at 1 % per annum primarily as a result of new reactor
construction outside the United States and increased efficiencies of existing
reactors.
In 1996, 442 nuclear power plants were operating and 36 were under
construction worldwide, according to the International Atomic Energy Agency. The
plants combined to generate more than 23 trillion kilowatt hours of electricity
last year. Five plants totaling 5,717 megawatts - including Tennessee Valley
Authority's Watts Bar 1 - began commercial operation in 1996. Uranium
consumption by Western World commercial reactors has increased from about
60,000,000 pounds in 1981 to approximately 142,000,000 pounds in 1996.
SUPPLY AND DEMAND
From the early 1970s through 1980, the Western World uranium industry
was characterized by increasing uranium production fueled by overly optimistic
projections of nuclear power growth. From 1970 to 1985, production exceeded
consumption by approximately 500,000,000 pounds. By the end of 1985 enough
inventory had been amassed to fuel Western World reactor needs for over five
years. In response, sales of excess inventory followed and prices plummeted from
highs above $40 per pound in 1979 to below $8 per pound in 1992. As prices fell,
Western World production declined dramatically from a high of 115,000,000 pounds
in 1980 to a low of 57,000,000 pounds by 1994. Since 1985, consumption of
uranium in the Western World has exceeded Western World production by over
400,000,000 pounds. In 1995, consumption of uranium in the Western World was
129,000,000 pounds, nearly double the production of 66,000,000 pounds by Western
World producers. In 1996, Western World consumption rose to an estimated
142,000,000 pounds, while production increased only to an estimated 74,000,000
pounds. Accordingly, by the end of 1995, excess inventory levels in the Western
World (inventory in excess of preferred levels) had been reduced to less than
two years of forward reactor requirements, and excess inventories in the U.S.
had been reduced to less than one year of projected forward requirements. This
trend continued in 1996 and 1997.
Countering the drawdown of Western World inventories and contributing
directly to the downturn of market prices was the importation, starting in 1989,
of uranium from the CIS republics, and to a lesser extent, from Eastern Europe
and mainland China. As the result of an anti-dumping suit in 1991 filed in the
U.S. ("CIS Anti-dumping Suit") against republics of the CIS, suspension
agreements were signed by six CIS republics (Russia, Ukraine, Kazakhstan,
Uzbekistan, Kyrgstan and Tajikistan) in October 1992, which applied price
related volume quotas to CIS uranium permitted to be imported into the U.S.
The Russian Suspension Agreement was amended in March 1994 allowing for
up to 43,000,000 pounds of Russian uranium to be imported into the U.S. over the
10 years beginning March 1994, but only if it is matched with an equal volume of
new U.S. production. Based on U.S. consumption for the 1994-2003 period (as
reported or projected by the Department of Energy), the matched volumes could
account for up to 18% of the supply to the U.S. market during this period.
19
In 1995, the Republics of Kazakhstan and Uzbekistan concluded
negotiations with the U.S. Department of Commerce to amend their respective
suspension agreements. Both amendments lowered initial prices relating to their
respective import quotas allowing imports to occur. Additionally, the amendments
require that uranium mined in those Republics and enriched in another country
for importation in the U.S. will count against their respective quotas. The
Uzbekistan amendment replaces the price-tied quota system with one based upon
U.S. production rates after October 1997. As U.S. rates increase, additional
imports from Uzbekistan are allowed.
Although these amendments to the suspension agreements may increase the
supply of uranium to the U.S. market, they provide increased predictability
concerning CIS imports into the U.S. Due to declining production levels in the
CIS republics, uranium from these sources has recently been difficult to obtain.
Consequently, the market impact of CIS primary production may be diminishing.
In January 1994, the U.S. and Russia entered into an agreement (the
Russian HEU Agreement") to convert highly enriched uranium ("HEU"), derived from
dismantling nuclear weapons to low enriched uranium ("LEU") suitable for use in
nuclear power plants. At a projected maximum conversion rate for HEU and LEU,
approximately 18,000,000 pounds of U3O8 will be available to Western World
markets.
In 1996, the U.S. Congress passed legislation in compliance with the
suspension agreements which allows the converted HEU material to be sold in the
U.S. marketplace at an annual rate not to exceed 2,000,000 pounds in 1998,
increasing gradually to 20,000,000 pounds in 2009. At this maximum rate, HEU
material could supply approximately 40% of annual U.S. reactor requirements
projected for 2009. However, the Russians may require much of the material for
its own internal use and the amounts which may be imported into the U.S. cannot
be predicted. In addition, an uncertain amount of HEU material is allowed to be
used in the U.S. for overfeeding of enrichment facilities and as a source of
Russian uranium for matching sales.
Industry analysts expect annual Western World consumption to be at
levels between 135,000,000 and 150,000,000 pounds U3O8 through 2001. The Company
estimates that between 30,000,000 and 40,000,000 pounds of this demand could be
filled by a combination of government stockpiles (including converted Russian
and U.S. HEU) and imports from CIS republics and former Eastern Bloc countries.
To achieve market equilibrium by 2001 primary production in the Western World
will need to supply between 95,000,000 and 120,000,000 pounds U3O8 on an annual
basis subject to some adjustment for any remaining inventory drawdown and
limited uranium reprocessing. Production from existing facilities in the Western
World, however, is projected to decline from current levels to approximately
57,000,000 pounds U3O8 by 2001 as reserves are depleted. New production
therefore will have to be brought on line to fill a potential annual gap of
between 38,000,000 and 63,000,000 pounds U3O8. While current price levels may
sustain 1996 production levels, USECC believes that higher prices will be needed
to support the required investment in new higher cost production as lower cost
production reserves are depleted.
1996 was also a transition year in the industry as the spot price for
U3O8 concentrates rose to a high of $16.60 per pound in July 1996 following a
surge in spot buying activity. Since then the spot price has declined to $10.30
per pound. And, while the spot price has eroded to 1995 levels, USECC believes
that it is only a reflection of a near term equilibrium of supply and demand
that was fueled by utilities exercising option flexibilities of up to an
additional 50% of contracted volumes of material as the spot price climbed
during 1996. On the contrary, utilities have also likely exercised downward
flexibilities of up to 50% of contracted volumes as the spot price has declined
to levels below contracted prices and are planning to buy materials at a lower
price.
20
Overall, USECC believes that adequate supply of U3O8 material to meet
firm demand cannot be sustained at spot price levels below $15.00 per pound.
And, while production remains at levels just above 50% of consumption in the
Western World, existing and planned production will not sufficiently meet supply
either, even if new production comes on stream as planned.
In the near term, USECC believes that the spot price for U3O8 will rise
to mid teen levels and remain there for a period before trending upwards to the
low $20s for a sustained period of time. If there is any disruption in HEU
supply or new planned capacity, USE believes the price will increase to much
higher levels.
Published reports indicate that approximately 31 percent of the
worldwide nuclear-powered electrical generating capacity is in the U.S., 49
percent is in western Europe, and 14 percent is in the Far East. Although the
reactors in western Europe have a greater aggregate generating capacity and fuel
usage, the supply of uranium for those reactors has been obtained for relatively
long periods, and the market requiring the greatest supply of uranium for the
next few years is believed to be the United States. The Asia Pacific region is
also developing into a significant uranium consumer, due to announced plans for
rapid expansion of nuclear power programs in Japan, Korea, Taiwan and the
Russian Federation. This region accounts for most of the 98 power plants which
are ordered or under construction.
Pursuant to Suspension Agreements signed in October 1992 between the
United States Department of Commerce ("DOC") and certain of the Republics of the
CIS, to rectify prior damage to domestic United States uranium producers from
dumping sales of U3O8 by certain CIS republics, all spot sales of U3O8 delivered
into the U.S. now reflect quota restrictions on U3O8 imports from the CIS.
However, there are provisions which allow CIS uranium to be imported for certain
long-term uranium sales contracts entered into with domestic utilities prior to
March 5, 1992 ("grandfathered contracts").
NUEXCO EXCHANGE VALUE. The market related contracts of SMP are based on
an average of the Nuexco Exchange Value ("NEV") for 2, 3 or more months before
uranium delivery. The high and low NEV reported on U3O8 sales during USE's past
five fiscal years are shown below. NUEXCO Exchange Values are reported monthly
and represent NUEXCO's judgment of the price at which spot and near term
transactions for significant quantities could be concluded. NEVs for fiscal 1993
are higher for U.S. transactions, due to the impact of CIS import restrictions
since late 1992. These prices ("US NEV") were reported by NUEXCO for spot sales
in the restricted U.S. market.
NUEXCO EXCHANGE VALUE
---------------------
Years Ended US $/POUND OF U3O8
MAY 31, HIGH LOW
------------- ---- ---
1992 $ 9.05 $ 7.75
1993 10.05 7.75
1994 10.20 9.25
1995 11.00 9.50
1996 16.60 13.00
1997* 14.80 10.30
* Through September 1, 1997.
NUEXCO's restricted market values ("U.S. NEV") apply to all products and
services delivered in the U.S. as well as non-CIS origin products and services
delivered outside the U.S.
21
GOLD
LINCOLN PROJECT (CALIFORNIA)
SUTTER GOLD MINING COMPANY. In fiscal 1991, USE acquired an interest in
the Lincoln Project (including the underground Lincoln Mine and the 2,800 foot
Stringbean Alley decline) in the Mother Lode Mining District of Amador County,
California, held by a mining joint venture known as the Sutter Gold Venture
("SGV"). The entire interest of SGV is now owned by USECC Gold L.L.C., a Wyoming
limited liability company, which is a subsidiary of Sutter Gold Mining Company,
a Wyoming corporation ("SGMC").
In fiscal 1997, SGMC completed private financings totalling a net of
$7,115,100 ($1,271,600 through a private placement conducted in the United
States by RAF Financial Corporation, and $5,843,500 through a private placement
conducted in Toronto, Ontario, Canada by C.M. Oliver & Company Limited). The net
proceeds of $6,411,816 from these financings (after deduction of commissions and
offering costs) are being applied to pre-production mine development, mill
design, and property holding and acquisition cost. SGMC anticipates production
mining will commence in mid- calendar 1998 and that by that time, construction
of a 500 ton per day gold mill will have been completed. Additional financing
will be sought in 1998 to complete mill construction and start production
mining.
As of the date of this Annual Report on Form 10-K, SGMC is preparing to
apply for listing on the Toronto Stock Exchange. SGMC does not have any class of
its securities registered with the Securities and Exchange Commission, and none
of its securities are traded in the United States.
After completion of the two private financings, and taking into account
a restructuring of the ownership of USE and Crested in SGMC (and additional
issue of 75,000 shares to settle a dispute with Amador United, see below), USE
and Crested each own the following securities of SGMC:
(a) 30.7% and 3.2% of the outstanding shares of Common Stock which would
be reduced to 23.5% and 2.5%, respectively, in the event outstanding warrants
held by the Canadian investors to purchase 1,454,800 more shares of Common Stock
are exercised at Cdn$6.00 per share 18 months from the date of closing of the
Offering and the outstanding warrants held by C.M. Oliver to purchase 145,480
more shares of Common Stock are exercised at Cdn$5.50 per share, before May 13,
1999. The preceding percentages of SGMC Common Stock do not reflect 345,200
warrants that may be sold in the Offering or shares that may be acquired by USE
and Crested pursuant to the USECC $10,000,000 Contingent Stock Purchase Warrant
(described below) issued as consideration for the voluntary reductions in the
ownership of SGMC shares by USE and Crested. One reorganization of the capital
structure was required by RAF Financial Corporation in connection with its
private placement of SGMC shares, and the other was required by C.M. Oliver &
Company Limited in the Canadian private placement.
(b) A $10,000,000 Contingent Stock Purchase Warrant (the "USECC
Warrant") was issued to USE and Crested in connection with the restructuring of
SGMC. The USECC Warrant is owned 88.9% by USE and 11.1% by Crested. The USECC
Warrant provides that for each ounce of gold over 300,000 ounces added to the
proven and probable category of SGMC's reserves (up to a maximum of 400,000
additional ounces), using a cut-off grade of 0.10 ounces of gold per ton (at
minimum vein thickness of 4 feet), USE and Crested will be entitled to acquire
additional shares of Common Stock from SGMC (without paying additional
consideration). The number of additional shares issuable for each new ounce of
gold reserves will be determined by dividing US$25 by the greater of $5.00 or
the weighted average closing price of the Common Stock for the 20 trading days
before exercise of the USECC Warrant. The USECC Warrant is to be exercised
semi-annually. However, as an alternative to exercise
22
of the USECC Warrant, SGMC has the right to pay USE and Crested US$25 in cash
for each new ounce of gold (payable out of a maximum of 60% of net cash-flow
from SGMC's mining operations). Additions to reserves will be determined by an
independent geologist agreed upon by the parties.
In fiscal 1997, SGMC issued 75,000 shares of Common Stock to Amador
United Gold Mines to settle certain disputes between such company and SGMC, USE
and Crested (see "Properties" below). In addition, SGMC bought about one-third
of the outstanding shares of Keystone Mining Company owned by The Salvation
Army. The Keystone Mining Company owns property in the Lincoln Project leased to
SGMC.
Effective June 1, 1996, SGMC entered into a Management Agreement (dated
as of May 22, 1996) with USE under which USECC provides administrative staff and
services to SGMC. USECC is reimbursed for actual costs incurred, plus an extra
10% during the exploration and development phases; 2% during the construction
phase; and 2.5% during the mining phase (such 2.5% charge to be replaced with a
fixed sum which with parties will negotiate at the end of two years starting
when the mining phase begins). The Management Agreement replaces a prior
agreement by which USE provided administrative services to SGMC.
PROPERTIES. SGMC (through its subsidiary USECC Gold) holds approximately
14 acres of surface and mineral rights (owned), 436 acres of surface rights
(leased), 158 acres of mineral rights (leased), and 380 acres of mineral rights
(owned), all on patented mining claims near Sutter Creek, Amador County,
California. The majority of these properties were acquired from Meridian
Minerals Company and the balance were acquired in 1995 and 1994. The properties
are located in the western Sierra Nevada Mountains at from 1,000 to 1,500 feet
elevation; year round climate is temperate. Access is by California State
Highway 16 from Sacramento to California State Highway 49, then by paved county
road approximately .4 miles outside Sutter Creek.
On October 1, 1996, SGMC entered into three letter agreements (the
"Lincoln Letter Agreements") with the property owners of 185 acres ("185 Acre
Property") on the west side of California State Highway 49 ("Hwy 49") and 32.58
acres ("32 Acre Property") of minerals which include 20.5 acres of surface on
the east side of Hwy 49 adjacent to the Stringbean Decline. The 185 Acre
Property is the proposed new location for the Surface Fill Unit and the 32 Acre
Property provides the land necessary for access and utility easements to Hwy 49.
Formal agreements have been submitted for execution but are awaiting approval of
the probate court of an estate of a deceased who owned an interest in the
properties.
The 185 Acre Property, which includes the surface and mineral rights, is
being purchased for $2,000 per acre (or $370,000) plus a 2% net smelter royalty
on any precious metals produced from this property. SGMC also agreed to purchase
for $185,000 the rights to the certified Environmental Impact Report ("EIR") on
the 185 Acre Property. The EIR saves SGMC approximately six to nine months of
permitting time. Payments for the 185 Acre Property and the EIR are monthly with
the final payments to be made before the construction of a surface fill unit for
the property (the "Surface Fill Unit"). The purchase of the 185 Acre Property
and EIR is contingent on SGMC obtaining an amendment to the Conditional USE
Permit to allow the placement of processed ore in to the Surface Fill Unit on
this property.
The transaction contemplated with respect to the 32 Acre property
contains two separate components. The first is the purchase of the road access
and utility easements and the second is a lease of the mineral rights on this
property. The purchase price of the easements is $15,000 which is to be made in
three equal payments. SGMC is obligated to spend up to $15,000 to quiet title
both the surface and mineral rights. Upon successful quiet title, SGMC is
obligated to complete a two year exploration
23
program of mapping and core drilling of at least 1,000 feet or in lieu of
drilling make a $5,000 payment. If an ore reserve can be developed on the 32
Acre property (in SGMC's sole judgment) then SGMC will enter into a lease with
the owners and pay up to a 4% net smelter royalty on minerals extracted from the
32 Acre Property with a minimum annual payment of $2,500 tied to the Gross
Domestic Product Implicit Price Index ("GDPIP") (base year shall be the year the
quiet title on the 32 Acre property is obtained). Lease payments will be offset
by the earned royalties in excess of $15,000 escalated by the GDPIP.
Surface and mineral rights total holding costs will be approximately
$225,000 from April 1, 1997 through May 31, 1998, including $45,000 for payments
on two parcels (9.1 acres) bought in 1994; an estimated $30,000 for one-time
costs to acquire surface easements on the 32 Acre property to access the mill
site from California State Highway 49; and property taxes of approximately
$35,000 for the year ended May 31, 1997 Annual property taxes are estimated to
increase to more than $100,000 when the Lincoln Project is built and put into
operation. Estimated acquisition costs for the 185 Acre Property and the EIR on
the 185 Acre Property will be approximately $600,000.
The leases are for varying terms (the earliest expires in February
1998), and require rental fees, advance production royalties, real property
taxes and insurance. Leases expiring before 2010 will generally be extended, so
long as minerals are continuously produced from the property that is subject to
the lease or minimum payments are made . Other leases may be extended for
various periods on terms similar to those contained in the original leases.
Production royalties are from 2.5% to 6% (most are 4%). The various leases have
different methods of calculating royalty payments (net smelter return and gross
proceeds).
Amador United Gold Mines ("Amador United") was a prior owner of certain
leases which it conveyed to the Lincoln Project when the project was owned by
Meridian Minerals Company ("Meridian"). In return for its conveyance of such
leases Amador United received a right of first refusal to buy the Lincoln
Project and a 20 percent net profits interest in production from any of the
Lincoln Project properties. In fiscal 1997, Amador United sold all of its rights
in the Lincoln Project to SGMC, in consideration of SGMC issuing 75,000 shares
of Common Stock to Amador United.
A separate holder of four of the properties that were assembled by
Meridian into the Lincoln Project holds a 5 percent net profits interest on
production from such properties, which was granted by Meridian when it acquired
the properties. The "net profits" generally will be equal to gross mineral
revenues less an amount equal to 105 percent of numerous categories of costs and
expenses. An additional 0.5 percent net smelter return royalty is held by a
consultant to a lessee prior to Meridian's acquisition of the properties, which
0.5 percent interest covers the same four properties in the Lincoln Project.
Through May 31, 1997, there has been an estimated $20,000,000 of
spending in the Lincoln Project by Meridian, USECC Gold and their predecessors
to acquire the Lincoln Project and for mine development, mining and processing
bulk samples of mineralization, exploration, feasibility studies, permitting
costs, holding costs, and related general and administrative costs. The amount
of such expenditures during the 1997 fiscal year was approximately $572,700
($637,300 in 1996). Certain of the expenditures have been expensed and the rest
have been capitalized as assets.
GEOLOGY AND RESERVES. The minerals consulting firm Pincock, Allen & Holt
of Lakewood, CO ("PAH") prepared a prefeasibility study of the Lincoln Project
in fiscal 1994. PAH reviewed core drilling data on the Lincoln Zone on 100-foot
centers from the surface, and drilling on the Comet Zone from both surface and
underground. PAH also reviewed data from drilling on the Keystone Zone from
surface on 200-foot centers. Total data is from 162 exploration core holes
(surface and underground), with total
24
footage of 64,700 feet. PAH based its estimate of proven reserves on mineralized
material within 25 feet of sample information; probable reserves were based on
material located between 25 and 50 feet of sample information.
Using a cutoff grade of 0.25 ounces of gold per ton in place, PAH
estimates the Lincoln Project contains 194,740 tons of proven and probable
reserves grading 0.57 ounces of gold per ton. If operating economics indicate a
lower cutoff grade is feasible, the tonnages for the stated reserves would be
increased. Historical data (underground maps and production records) from
historic (now closed) mines within the Lincoln Project boundaries indicate
certain areas of those mines were not "mined out", such that additional
mineralized resources may exist on the property.
The geology within the Lincoln Project is typical of the historic Mother
Lode region of California, with a steeply dipping to vertical sequence of
metavolcanic and metasedimentary rocks hosting the gold- bearing veins.
Depending on location along the strike length on the vein systems, the
gold-bearing veins are slate, metavolcanic greenstone, or an interbedded unit of
slates and volcanics. The Lincoln Project covers over 11,000 feet of strike
length along the Mother Lode vein systems.
PERMITS AND FUTURE PLANS. In August 1993, the Amador County Board of
Supervisors issued a Conditional Use Permit ("CUP") allowing mining of the
Lincoln Mine and milling of production, subject to conditions relating to land
use, environmental and public safety issues, road construction and improvement,
and site reclamation. The permit will allow construction of the mine and mill
facilities in stages as the project gets underway, thereby reducing initial
capital outlays. Additional permits (for road work, dust control and
construction of mill and other surface improvements) need to be applied for in
due course.
PROPOSED MINE PLAN
General. SGMC is evaluating different mine plans for properties within
the Lincoln Project. The mine plan summarized below is allowed by the CUP.
Different plans will require an amendment to the CUP, which may add several
months to the time required to obtain final approvals to commence operations on
the properties affected. It should be noted that the mine workings actually
developed may vary substantially from the plan adopted, depending on the
different conditions and grades of mineralization that are encountered.
SGMC proposes to mine the Lincoln and Comet Zones initially by access
through the existing Stringbean Alley decline. Production will be by overhand
cut-and-fill and open sub-level stoping techniques. Screened tailings from the
mill's flotation circuit (support fill) will be used to back fill the stopes,
which will stabilize the hanging and foot wall vein rocks, and greatly reduce
the volume of processed ore going into the Surface Fill Unit.
Mining (ore extraction) is anticipated to start by mid-1998, at a rate
increasing up to 500 tons per day ("tpd") during the first six months of mining
operations. Ore initially will be taken to surface with ore trucks through the
existing Stringbean Alley decline. A new underground level is planned to be
driven at 1,000 feet above sea level, (approximately 120 feet below surface)
during the next six months. Mining will coincide with development of additional
stopes and may allow an increase in mine production up to 1,00 tpd in
approximately the third year of operation. After the first 18 months of
operations, which is a condition in the Conditional Use Permit, it is
anticipated that the Lincoln decline connecting the Stringbean Alley decline and
the surface of the approved mill site will have been completed, running
underground from near underneath the location of the mill site to the mine's
1,000-foot level. The Lincoln decline would run for 1,850 feet at an inclination
of minus 19% (cross section 12 feet by 12 feet),
25
and will be used for access of personnel and supplies to the underground
workings as well as for ore haulage up the decline by conveyor thus eliminating
ore haulage on the surface from the portal of the mine to the mill.
SGMC has applied to amend the CUP to relocate the mill to eliminate the
need to drive the Lincoln decline and to minimize haulage to the mill and other
operating costs. It is anticipated that the land acquisition costs for such
relocation would be significantly less than the added capital costs and
operating costs to drive and operate the Lincoln decline. However, such
application has not yet been approved.
Pre-Production Development. Current access to the mine is through the
Stringbean Alley decline, the portal of which is 1,183 feet above sea level
leading to the bottom of the decline at 835 feet above sea level. This decline
was driven to access the Lincoln and Comet Zones, both of which were originally
core drilled from the surface, with the Comet Zone thereafter core drilled from
underground. Raises have been started in the "M" vein of the Comet Zone section
on 200-foot centers to establish stoping areas to access ore. The raises will
provide access, ventilation, fill access and escape ways for initial stopes.
Further crosscuts will be driven for more stopes as the Stringbean Alley decline
is extended and levels driven out horizontally.
Underground mine water seepage into the Stringbean Alley decline is
approximately 5 to 15 gallons per minute, depending on the season. Accumulated
water in the decline is now being pumped through a treatment plant located
underground in the Stringbean Alley decline. The plant removes arsenic and other
naturally occurring minerals, and the treated water is discharged by spray
evaporation at the surface. This plant will continue treating mine seepage water
as the mine goes into production. The treated water not used underground in
operations will be pumped to the surface for mill operations as needed.
Production. All veins will be drifted on the first floor above the
crosscuts, which will serve as the bottom floor of the stopes. Raises will be
driven to the level above for ventilation and access for fill. Initially, in the
Comet Zone, these raises will be driven on 200-foot centers and, assuming
continuity of ore, will be two steps, one on either side of the raise. Ore will
be mined out of stopes with the overhand cut and fill open sub-level stoping
methods, with each layer of stope filled back in with mill tailings which have
been recycled from the surface mill facility. Broken ore will be loaded onto
15-ton underground trucks and hauled over to the underground crushing station,
then either transported to the surface via truck up the Stringbean Alley decline
or, if the Lincoln decline is driven, via the ore conveyor belt.
Concurrently with production mining, SGMC intends to maintain an
aggressive underground development program to delineate (on an on-going basis)
two to three years of developed ore in sight.
MILL PLAN
General. The proposed mill process essentially involves three stages:
first, wet grinding of the ore into fine particles in a semi-autogenous grinder
("SAG") mill, with the resulting finely-milled ore run through a gravity process
to remove free particles of gold through gravity; second, ore containing gold
which was not captured in the first gravity process will be fed to a ball mill
for more grinding. The resulting finely-ground material is run through a second
gravity recovery circuit into flotation cells for mixing with non-toxic
chemicals and water to further remove gold from the ore (referred to as the
flotation stage); and third, processing the flotation concentrate with dilute
sodium cyanide to chemically remove most of the remaining gold. The mill is
designed to produce three gold-bearing products: free gold, a high-grade gravity
concentrate, and a Merrill-Crowe precipitate. All three will be smelted to a
dore bullion for shipment to a precious metal refinery. SGMC is also considering
selling the flotation
26
concentrate rather than installing a Merrill-Crowe circuit to precipitate gold.
An economic analysis of this alternative is being completed by SGMC.
In fiscal 1992, SGMC's predecessors mined 8,000 tons of material,
including waste rock and low grade mineralization, out of drifts and raises off
the Stringbean Alley decline, which were processed through a nearby mill in a
bulk sampling program to test mining techniques and mill recoveries. Milling
results indicated at least 94% of the gold in the ore should be recoverable with
a combination of gravity, flotation and cyanidation milling circuits.
Approximately 1,400 ounces of gold were recovered in this program. PAH believes
the mill recovery rate should be between 93% and 95% using the proposed gravity,
flotation and cyanidation milling circuits. In its prefeasibility study, PAH
used a 90% mill recovery rate because in its study, the mill was designed to
recover gold in only a single stage gravity circuit. Since the PAH
prefeasibility study, Lookewood Greene Engineers, Inc. of Dallas, Texas has
designed a new mill circuit to recover 95% of the gold.
The central mill building (exclusive of attached lab and other support
facilities) will cover up to approximately 20,000 square feet. If warranted,
mill capacity may be increased beyond 500 tpd in the second year of operations,
since the CUP allows for up to 1,000 tpd mining and milling operations.
Possible Alternative Mill and Waste Management Sites. SGMC presently is
evaluating a possible relocation of the waste management unit (or Surface Fill
Unit) site and the mill site. Although this relocation would require the
purchase of additional properties, and an amendment to the CUP, management of
SGMC believes the cost will be more than offset and would be recovered in
approximately five years by dropping the land surface leases for which the waste
management sit is currently approved. Net capital savings could be significant
if the new approach is adopted. The proposed new mill site also is anticipated
to significantly reduce operating costs through reductions in hauling distance;
elimination of the need for constructing the Lincoln decline; and the need to
build large dams, and the hauling costs of importing clay for pond liners.
MOLYBDENUM
As holders of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, USE and Crested
are entitled to receive annual advance royalties of 50,000 pounds of molybdenum,
or cash equivalent (one-half to each). AMAX Inc. (which was acquired by Cyprus
Minerals Company and was renamed Cyprus Amax Minerals Company in November 1993)
delineated a deposit of molybdenum containing approximately 146,000,000 tons of
mineralization averaging 0.43% molybdenum disulfide on the properties.
Advance royalties are paid in equal quarterly installments, until: (i)
commencement of production; (ii) failure to obtain certain licenses, permits,
etc., that are required for production; or (iii) AMAX's return of the properties
to the USE and Crested. USE did not receive any advance royalties during fiscal
1996 because of an arrangement with Cyprus Amax described below. During fiscal
1995, USE recognized $85,500 of advance royalty revenue under this arrangement.
These royalties are shown in the Consolidated Statements of Operations as a
component of gains from restructuring mineral properties agreements. See Note F
to the USE Consolidated Financial Statements. The advance royalty payments
reduce the operating royalties (six percent of gross production proceeds) which
would otherwise be due from Cyprus Amax from production. There is no obligation
to repay the advance royalties if the property is not placed in production.
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The Agreement with AMAX also provides that USE and Crested are to
receive $2,000,000 (one-half to each), at such time as the Mt. Emmons properties
are put into production and, in the event AMAX sells its interest in the
properties, USE and Crested would receive 15 percent of the first $25,000,000
received by AMAX. USE and Crested have asserted that the acquisition of AMAX by
Cyprus Minerals Company was a sale of AMAX's interest in the properties which
would entitle USE and Crested to such payment. Cyprus Amax has rejected such
assertion and USE and Crested are considering their remedies.
Subsequent to May 31, 1994, USE and Crested reached agreement with
Cyprus Amax to forego six quarters of advance royalties (starting fourth quarter
calendar 1994) as payment for the option exercise price for certain real estate
in Gunnison, Colorado owned by Cyprus Amax and the subject of a purchase option
held by USE and Crested. The option exercise price is valued at $266,250. USE
and Crested exercised their option in August 1994 and subsequently sold that
property for $970,300 in cash and notes receivable. The advance royalties
resumed in the second quarter of calendar 1996, however, the payment was not
received until June 1996, being the first quarter of fiscal 1997. In fiscal
1997, $207,300 was received by USECC from advance royalty payments.
MOLYBDENUM MARKET INFORMATION
Molybdenum is a metallic element with applications in both metallurgy
and chemistry. Principal consumers include the steel industry, which uses
molybdenum alloying agents to enhance strength and other characteristics of its
products, and the chemical, super-alloy and electronics industries, which
purchase molybdenum in upgraded product forms.
The molybdenum market is cyclical with prices influenced by production
costs and the rate of production of foreign and domestic primary and by-product
producers, world-wide economic conditions particularly in the steel industry,
the U.S. dollar exchange rate, and other factors such as the rate of consumption
of molybdenum in end-use products. When molybdenum prices rose dramatically in
the late 1970s, for example, steel alloys were modified to reduce reliance on
molybdenum. AMAX and Cyprus Minerals Company were the two major primary
producers of molybdenum in the United States until November 1993, when AMAX was
acquired by Cyprus.
Worldwide demand for molybdic oxide in calendar 1996 was reported at
approximately 230,000,000 pounds, its highest level ever. Production for that
period was about 225,000,000 pounds. There is however, excess capacity from the
primary molybdenum mines which are currently not producing. In addition,
by-product molybdenum (primarily from Chilean copper mining companies) has a
major impact on available supplies. It is unlikely that any major new primary
deposits will be developed during fiscal 1998.
Molybdenum prices on the open spot market increased substantially, from
$3.35 per pound of technical grade molybdic oxide (the principal product) in
September 1994, to $15.50 - $17.50 per pound in February 1995. However, by May
31, 1996, prices declined to $3.00 - $3.35 per pound but are in the $4.00 to
$4.40 per pound range in September 1997.
PARADOR MINING (NEVADA)
USE and Crested are sublessees and assignees from Parador Mining Co.,
Inc. ("Parador"), on certain rights under two patented mining claims located in
the Bullfrog Mining District of Nye County, Nevada. The claims are immediately
adjacent to and part of a gold mine operated by Bond Gold Bullfrog, Inc.
("BGBI"), a non-affiliated third party (now known as Barrick Bullfrog, Inc.).
USE and Crested have also been assigned certain extralateral rights associated
with the claims and certain royalty rights relating
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to a prior lease on those properties. The lease to USE and Crested is for a ten
year primary term, is subject to a prior lease to BGBI on the properties, and
allows USE and Crested to explore for, develop and mine minerals from the
claims. If USE and Crested conduct activities on the claims, they are entitled
to recover costs out of revenues from extracted minerals. After recovering any
such costs, USE and Crested will pay Parador a production royalty of 50 percent
of the net value of production sold from the claims.
USE, Crested and Parador informed BGBI that payments are owed to them
pursuant to extralateral rights on the claims. BGBI in turn initiated legal
proceedings to establish the rights of the various parties in the claims.
Thereafter, Parador notified BGBI that BGBI had defaulted in its lease and that
Parador had terminated the lease. BGBI denies that it has defaulted. A trial on
the bifurcated issue of extralateral rights only to the court in December 1995
resulted in a decision that Parador had failed to meet its burden of proof to
establish that its claims are entitled to assert extralateral rights and that
Parador, USE and Crested have no right, title or interest in the adjacent BGBI
claims. Parador, USE and Crested filed an appeal of this ruling as erroneous as
a matter of law but the appellate court dismissed the appeal as being premature.
The remaining issues have not been considered or set for trial. See Item 3,
"Legal Proceedings - BBGI Litigation".
OIL AND GAS.
FORT PECK LUSTRE FIELD (MONTANA). USECC conducts oil production
operations at the Lustre Oil Field on the Ft. Peck Indian Reservation in
north-eastern Montana; four wells are producing, and USE and Crested receive a
fee based on oil produced. USE is the operator of record. No further drilling is
expected in this field. This fee and certain real property of USE and Crested,
have been pledged or mortgaged as security for a $1,000,000 line of credit from
a bank.
ENERGX, LTD. FORT PECK GAS PROJECT. Energx, Ltd., a Wyoming corporation
owned 45% by USE, 45% by Crested, and 10% by the Assiniboine and Sioux Tribes,
signed in October 1993 an "Agreement Between The Assiniboine and Sioux Tribes of
the Fort Peck Indian Reservation and Energx, Ltd. to Explore, Develop and
Produce Shallow Gas." This Agreement has been approved by the Secretary of the
Interior and the United States Bureau of Indian Affairs. In the fourth quarter
of calendar 1995 Energx drilled and tested three exploratory wells, in
conjunction with NuGas Resources U.S. Inc. ("NuGas"). These three were all dry
holes, having been drilled under a farmout agreement with Placid (see below);
these three wells counted against the eight well commitment under this Agreement
(see below). Energx (and NuGas) drilled five more exploratory wells during the
fall of 1996. All five of these wells were dry holes. All eight dry holes were
funded by NuGas in accordance with the provisions of the Agreement. Due to the
fact that all eight holes were dry, NuGas has no further obligations to drill
under the Agreement. Since the fall of 1996 there has been no other exploration
or drilling activities performed by Energx or NuGas under this Agreement.
Reclamation of the dry hole bores began in 1997. Energx may terminate or farmout
the Fort Peck Gas Project if further exploration work does not appear to be
warranted.
NUGAS RESOURCES (U.S.) INC. AGREEMENT. By the Joint Venture Agreement
("JVA") with Energx dated July 18, 1994, NuGas was obligated to Energx to drill
and complete (or abandon) at NuGas' sole expense, eight exploratory shallow gas
wells on the Fort Peck Reservation by July 1, 1996, which was extended to July
1, 1997, to earn a one-half interest in Energx' rights under the Fort Peck
Shallow Gas Agreement.
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NuGas contributed $100,000 to pay for costs of acquiring leases and
easements on non-Tribal lands contiguous to Tribal lands, to assemble adequate
sized drilling units for the first eight exploratory wells. In fiscal 1995
Energx received $200,000 under the JVA as a prospect generation