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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, 1995 or
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[_] 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
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U.S. ENERGY CORP
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(Exact Name of Registrant as Specified in its Charter)
Wyoming 83-0205516
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West
Riverton, WY 82501
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (307) 856-9271
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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
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(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 _____
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The aggregate market value of the shares of voting stock held by non-
affiliates of the Registrant as of September 1, 1995, computed by reference to
the closing price of the Registrant's common stock as reported by the National
Market System of NASDAQ on that date, was approximately $19,266,342.
Class Outstanding at September 1, 1995
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Common Stock, $0.01 par value 6,210,129 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, 1995 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. DESCRIPTION OF BUSINESS
(A) GENERAL.
U.S. Energy Corp. ("USE", the "Company" or the "Registrant") is in the general
minerals business of acquiring, developing, exploring and/or selling or leasing
of mineral properties and, from time to time, mining and marketing of minerals.
USE is now engaged in two principal mineral sectors: uranium and gold.
Interests are held in other mineral properties (principally molybdenum), but are
either non-operating interests or undeveloped claims. It also carries on a
small oil and gas operation. Other USE business segments are commercial
operations (real estate and general aviation), manufacturing and marketing of
professional and recreational outdoor products, and construction operations.
Most 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"). Manufacturing and/or marketing of
professional and recreational outdoor products is conducted through The Brunton
Company ("Brunton"), a wholly-owned USE subsidiary. USE and Crested also own
oil and gas operations in Montana and Wyoming, which 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.
USE was incorporated in Wyoming in 1966. All operations are in the United
States. Principal executive offices are located at 877 North 8th Street West,
Riverton, Wyoming 82501, telephone (307) 856-9271.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
(1) 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, and process engineering services and sales. 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.
2
Commercial Operations Manufacture and marketing of professional and
recreational compasses, and the distribution of
outdoor recreational products, including knives
and binoculars. Operation and rental of real
estate, operation of an aircraft fixed base
operation (including airplane charter service,
aircraft fuel sales, flight instruction and
aircraft maintenance), and provision of various
contract services, including managerial services
for subsidiary companies; operations (through
Plateau Resources Limited ("Plateau"), a wholly-
owned subsidiary of USE) of a motel and rental
real estate in Utah.
Construction Operations Construction of irrigation, flood control,
municipal sewer and similar projects.
(2) The Registrant is not required to include interim financial statements.
NET REVENUES BY USE SEGMENT
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,
1995 1994 1993
------- ------- -------
Minerals 1% 50% 53%
Commercial Operations 60% 13% 10%
Construction Operations 14% 30% 20%
USE did not receive revenues from the mining of either uranium or gold in the
three fiscal years ended May 31, 1995. Moreover, during fiscal 1995, there were
no revenues from mineral sales as a result of the arbitration involving Sheep
Mountain Partners ("SMP", a partnership). During fiscal 1994 and 1993, mineral
revenues were received from sales of mineral properties and from sales of
uranium under certain of the utility supply contracts held by SMP, USE and
Crested delivering their one-half share of uranium and receiving sales proceeds
therefrom. Future uranium contract revenues are expected to be affected by the
outcome of the SMP arbitration/litigation (see Item 3 - "Legal Proceedings").
However, regardless of the outcome of such proceedings, commencement of uranium
mining at Green Mountain, Wyoming and/or Ticaboo, Utah is expected to result in
the procurement of utility supply contracts for Green Mountain Mining Venture
(of which USE and Crested are joint venture partners with Kennecott Uranium
Company), and/or Plateau. There can be no assurance such mining operations will
commence, or that new utility supply contracts will be procured. See
Description of "Business - Minerals - Uranium."
For the fiscal year ended May 31, 1995, USE commercial and construction
operations provided a majority of net revenues to USE. For a discussion of why
revenues from mineral sales decreased in this period, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Results
of Operations for Fiscal 1995 Compared to 1994."
(C) NARRATIVE DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT (INCLUDING ITEM 2 -
PROPERTIES DISCLOSURE).
3
MINERALS
URANIUM
USE has interests in several uranium properties in Wyoming and Utah, including
uranium processing mills in Sweetwater County, Wyoming ("Sweetwater Mill") and
in southeastern Garfield County, Utah ("Shootaring Mill"). USE is holding these
interests in anticipation of renewed demand for uranium concentrates
("U\\3\\O\\8\\") by public utilities in the United States that operate nuclear
powered electrical generation facilities.
All the uranium properties are located in areas which have produced significant
amounts of uranium in the 1970s and 1980s.
The property interests are:
Unpatented lode mining claims on Green Mountain (Fremont County, Wyoming),
including 105 claims on which the Round Park uranium deposit is located, and
the Sweetwater Mill, (23 miles south of Green Mountain). These assets are held
by the Green Mountain Mining Venture ("GMMV"), owned 50 percent by USE and
USECC, and 50 percent by Kennecott Uranium Company ("Kennecott"), a subsidiary
of Kennecott Corporation. All claims are accessible by county and United States
Bureau of Land Management ("BLM") access roads. Exploration and delineation of
the principal uranium resources in the proposed Jackpot Mine into the Round Park
deposit have been substantially completed and the BLM has prepared a draft
Environmental Impact Statement for the proposed mine. The proposed Jackpot Mine
has had no previous operators, and would be a new mine when opened. The Big
Eagle Mine and related claim groups (which are part of the claims held by 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 (these claims are adjacent to and west of the Big Eagle mining
claims held by GMMV). These assets are held by the Sheep Mountain Partners
partnership ("SMP"), the partners of which are USE and Crested, doing business
as the USECC Joint Venture, and Nukem, Inc. ("NUKEM") through its wholly-owned
subsidiary Cycle Resource Investment Corporation ("CRIC"). The Sheep Mountain
Mines 1 and 2 are accessible by county and private roads and were first operated
by Western Nuclear, Inc. in the late 1970s.
The above properties contain uranium mineralization in sandstones of Tertiary
age, as is typical of most Wyoming uranium deposits. Electric power to all the
above Wyoming properties is furnished by either Pacific Power & Light or Hot
Springs Rural Electric Association.
The Tony M and Frank M Mines are underground uranium mines located on unpatented
lode mining claims in San Juan County, Utah. These mines are accessible by
county roads. The mines (originally developed by Plateau at the time Plateau
was owned by Consumers Power Company, a Michigan public utility), the nearby
Shootaring Mill, low grade uranium ore stockpiled at the mill, and related mill
support facilities, are held by Plateau. Significant areas of uranium
mineralization have been accessed and delineated by the prior owner's
underground workings. When the above uranium mines are in production, they
produce ore containing about four to eight pounds of uranium concentrates per
ton and this ore must be processed at a mill into U\\3\\O\\8\\, the saleable
product.
4
There can be no assurance of renewed market demand for uranium concentrates,
that would result in sufficient price increases for concentrates, to warrant
commencement of mining and milling operations on any of the foregoing
properties.
GREEN MOUNTAIN PROJECT
GMMV. In fiscal 1990, USE and Crested sold 50 percent of their interests in
certain unpatented lode mining claims on Green Mountain (hereafter, "Green
Mountain 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).
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
uranium oxide concentrates 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). Kennecott will also 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 $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 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 GMMV operations, proportionate to its interest before reduction.
GMMV cash flows will be shared between Kennecott and the USE Parties according
to their participation interests. However, 105 of the Green Mountain Claims
cover the Round Park uranium deposit, currently believed to be the most
significant mineralized resource on Green Mountain. These 105 claims 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 from such
properties will be shared 50 percent by USE and 50 percent by Kennecott.
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 deposit is developed and placed into production and 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. The USE Parties acted as project manager during fiscal 1991 and 1992
and in fiscal 1993, Kennecott succeeded as project manager and has continued as
project manager since then. USECC has continued work on a contract basis at
Kennecott's request.
5
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 application to the U. S. Nuclear Regulatory
Commission ("NRC") to convert the Sweetwater Mill license from standby to an
operating license. For fiscal 1996, GMMV plans to complete a sediment dam,
sediment basin and drainage diversion ditch, build a fuel storage facility and
other support facilities and make improvements to existing facilities.
PROPERTIES AND MINE PLAN. GMMV owns 443 Green Mountain Claims, including the
105 claims on which the Round Park 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 properties, which formerly belonged to USE and
Crested. These deposits are undeveloped.
Drilling and exploration work has been conducted on the Round Park deposit, and
USECC has constructed two portals for the Jackpot Mine declines. Roads and
utilities have been put in place, which are believed to be satisfactory to
support future mine development.
GMMV also owns the Big Eagle Properties on Green Mountain, which contain
substantial 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 38,000 and 8,000 square foot buildings
formerly used by PMC in mining operations. Also included are three ore-hauling
vehicles, each having a 100-ton capacity. Permits transferred to GMMV for the
properties include: a permit to mine, an air quality permit, and water discharge
and water quality permits. GMMV owns the mineral rights to the underlying
unpatented lode mining claims.
The Round Park mining claims contain a deposit of uranium which has been
estimated by USECC to contain 52 million pounds of U\\3\\O\\8\\ 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). GMMV plans to mine this deposit from the
Jackpot Mine, which will be driven underground from the south side of Green
Mountain when the market for uranium oxide concentrates improves. The first of
several mineralization horizons is about 2,300 feet down from the top of Green
Mountain.
The mine plan provides for two declines to be driven from the side of Green
Mountain, extending about 10,400 feet into the deposit; one decline will be used
for ventilation and transportation of personnel, and the other will convey ore,
rock and waste out of the mine.
USE expects mine development costs will not exceed $25,000,000 to begin
production from the Round Park deposit. However, cost estimates may change as
exploration and initial development progress. Pursuant to the GMMV agreement,
Kennecott has agreed to fund the initial $50,000,000 in development costs
including reclamation costs. Additional costs would be funded by operations
and/or by cash assessments on the venturers.
SWEETWATER MILL. In fiscal 1993, GMMV acquired the Sweetwater uranium
processing mill and associated properties located in Sweetwater County, Wyoming,
23 miles south of the proposed Jackpot Mine, from Union Oil Company of
California ("UNOCAL"), primarily in consideration of Kennecott and GMMV assuming
environmental liabilities, and decommissioning and reclamation obligations.
6
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. Cash operating costs are defined as all
costs for labor (supervisory, operating, maintenance and laboratory), reagents,
utilities, materials and supplies (fuels, grinding balls and other mill
equipment, etc.), road and access maintenance, environmental and regulatory
costs (including permitting and remediation costs), concentrate shipping costs,
vehicle and equipment operating costs, insurance, and employee health and
benefit costs.
Kennecott, as mill operator, has initiated discussions and appropriate 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 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 at times. 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 $23,960,000. None of the
GMMV future reclamation and closure costs are reflected in the USE Consolidated
Financial Statements (see Note K to USE Consolidated Financial Statements).
UNOCAL has agreed that if 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 reimburse GMMV the first $8,000,000 of such expenditures. Any such
reimbursement may be recovered by UNOCAL from 20% of future cash flows from sale
of uranium concentrates processed through the mill. In any event, until such
time as environmental and reclamation undertakings are liquidated against the
bonds, such costs are not deemed expenditures under Kennecott's $50,000,000
development commitment (but bond costs may be charged against such commitment).
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. Current liabilities
for such efforts have been established at approximately $16,322,900 by the
Wyoming Department of Environmental Quality ("WDEQ") for mine pit site matters
(exercising EPA-delegated jurisdiction to administer the Clean Water Act and the
Clean Air Act, and directly
7
administering Wyoming statutes on mined land reclamation), and 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,
USE believes it is unlikely USE 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 may be within the $50,000,000
development commitment of Kennecott Uranium Company for GMMV. These costs are
not expected to increase materially if the mill is not put into operation.
Second, to the extent GMMV is required to spend money on reclamation and
environmental liabilities related to mill and site operations during ownership
by Minerals Exploration Company, UNOCAL has agreed to fund up to $8,000,000 of
such costs (provided such costs are incurred before February 1, 2001 and before
mill production resumes), which would be recoverable only out of future mill
production (see above). Third, payment of reclamation and environmental
liabilities related to the mill is guaranteed by Kennecott Corporation, parent
of Kennecott Uranium Company. Last, the GMMV will set aside a portion of
operating revenues to fund reclamation and environmental liabilities when mining
and milling operations are shut down.
Kennecott Corporation will be entitled to contribution from the USE Parties in
proportion to their participation interests in GMMV, if Kennecott Corporation is
required to pay mill cleanup costs directly pursuant to its guarantee. Such
contributions to Kennecott Corporation only would be required if the liabilities
cannot be satisfied within the initial $50,000,000 development commitment, and
then only to the extent there are insufficient funds from the accumulated
reclamation reserve. 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 Corporation
would be required to pay on its guarantee. However, notwithstanding the
preceding, the extent of any ultimate USE liability for contribution to mill
cleanup costs cannot be predicted.
PERMITS. In March 1993, GMMV applied to the WDEQ for a Permit to Mine the Round
Park deposit through the Jackpot Mine, for up to 22 years; this document
presently is under review and a hearing has been set on the permit before the
Wyoming Environmental Quality Council ("EQC") for the week of September 18,
1995. Until this Permit is granted, no further construction of mine facilities
is allowed; no further underground mine development can occur, and the Round
Park Deposit cannot be mined.
Initial environmental studies have been submitted to appropriate governmental
regulators, and are being reviewed. Applications to appropriate water have been
made, and an NPDES permit has been obtained (expiring December 31, 1997).
Additional surface water, weather and wetland studies have also been initiated.
In 1993, the BLM, as manager of federal lands, determined that the potential
effects of the Jackpot Mine (and associated work areas and roads) on surface and
ground waters, air quality, animal habitat and local fauna at Green Mountain
should be presented and analyzed by an environmental impact statement ("EIS").
A draft EIS has been prepared by the BLM (funded by the GMMV) and published for
public comment. A final EIS is expected to be submitted to the WDEQ in the near
future. Following the WDEQ technical review of the Jackpot Mine plan, the
Permit Application will be presented for public comment. After the EIS record
of decision by the BLM, the Permit to Mine would be issued by the WDEQ (with any
amendments to conditions required after public hearings and final WDEQ review).
8
Also in 1993, an application was submitted to the BLM for upgrading roads to the
Sweetwater Mill. This application is still under review as part of the EIS.
Uranium was mined on Green Mountain in the 1970s and 1980s. USE and Crested do
not anticipate any adverse environmental impacts from the Jackpot Mine which
cannot be mitigated to acceptable levels. Accordingly, the Permit to Mine the
Round Park deposit through the Jackpot Mine portal is expected to be issued by
the WDEQ in due course, subject to delays from objections and appeals of WDEQ
decision by possible project opponents.
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. GMMV may need to install
venting at mine sites, 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.
CONCERNING KENNECOTT. Kennecott Corporation is a wholly-owned United States
subsidiary of The RTZ Corporation PLC ("RTZ"),. a United Kingdom public company.
RTZ is one of the world's leading international natural resource companies and
one of the largest companies in the United Kingdom with a market capitalization
exceeding $9 billion. Kennecott Corporation owns and operates several mines
through wholly-owned subsidiaries, including the Bingham Canyon, Utah open pit
copper mine which was started in 1906.
USE has no knowledge of any guarantee by Kennecott Corporation or RTZ of the
performance by Kennecott Uranium Company of Kennecott Uranium Company's
development commitment under the GMMV joint venture agreement. Further, USE has
no knowledge whether earnings of Kennecott Uranium Company are retained by it,
or remitted to its parent Kennecott Corporation. Accordingly, performance by
Kennecott Uranium Company of its development commitment under the GMMV joint
venture agreement is not assured.
SHOOTARING CANYON MILL
ACQUISITION OF PLATEAU RESOURCES. On August 11, 1993, USE purchased from
Consumers Power Company ("CPC"), all outstanding stock of Plateau, a Utah
corporation. Plateau owns the Shootaring Canyon uranium processing mill and
support facilities in southeastern Utah ("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.
9
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
disclosed above, and against third-party claims related to an agreement between
Plateau and the third-party. See Note K to the USE audited Consolidated
Financial Statements.
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 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 negotiated and closed solely for the account of 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 operating
cash flows, pursuant to the USECC Joint Venture.
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 suspended operations and put
the mill on standby because of the depressed uranium concentrate market.
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 have been performed.
The current source materials license with the NRC is for a standby operation
only and expired on December 31, 1993. Prior to expiration, USE applied for, and
expects either license renewal or extension of its expiration date in due
course.
Plateau owns approximately 90,000 tons of low grade uranium ore stockpiled at
the mill site.
USE intends to cause Plateau to continue maintenance activities pending
evaluation of resuming Shootaring Mill operations to process uranium ores to
concentrates in anticipation of increased concentrate prices. NRC and DOGM
approval will be required prior to commencing such operations.
10
TICABOO TOWNSITE
Plateau also 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 mill. The Ticaboo site includes a 66 room motel, general
store, laundromat facility, 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. USE and Crested plan to further develop the townsite,
and have been seeking financial partners. Interim funding for limited
improvements on the commercial operations are being provided by a private
company affiliated with a director of USE. See Part III, Item 12 "Certain
Relationships and Related Transactions."
SHEEP MOUNTAIN PARTNERS ("SMP")
PARTNERSHIP. SMP is a Colorado general partnership formed on December 21, 1988
between USECC, and Nukem, Inc. through its wholly-owned subsidiary Cycle
Resource Investment Corporation ("CRIC"). Nukem, of Stamford, Connecticut is a
uranium brokerage and trading concern. During fiscal 1991, certain disputes
arose among the partners of SMP. These matters are in arbitration and a
decision is expected by December 1995 or early in calendar 1996. See Item 3 -
"Legal Proceedings."
In February 1988, USE and Crested acquired uranium mines and mining equipment
properties (Sheep Mountain Mines) at Crooks Gap in south-central Fremont County,
Wyoming, from Western Nuclear, Inc. (a subsidiary of Phelps-Dodge Corporation).
USE and Crested, doing business as USECC, mined and sold uranium ore from one of
the underground mines in fiscal 1988 and 1989. Production ceased in fiscal
1989, because uranium could be purchased from the spot market at prices below
SMP mining and milling costs. These Crooks Gap properties are adjacent to the
Green Mountain Project.
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 USE and Crested received an undivided 50 percent
interest. Each group provided one-half of $350,000 (later reduced to $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 because of the arbitration/litigation pending between the parties.
PROPERTIES. SMP owns 77 unpatented lode mining claims on the Crooks Gap
properties, including two open-pit and five underground uranium mines, mining
equipment, and an inventory of uranium ore. An ion-exchange plant is located
near the SMP properties, but is held by USECC and not SMP. 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.
Two Wyoming State leases (one for minerals covering 640 acres, and one for
surface use covering 142 acres) expired in early 1994, and will not be renewed.
Various structures and equipment are located on the properties: three operating
and three non-operating mine headframes with hoists; maintenance shops; offices;
and other buildings, equipment and supplies.
11
SMP also has interests in 59 unpatented mining claims, one State mineral lease
and one State surface use lease, which have been conveyed to Pathfinder Mines
Corporation ("PMC"). The conveyance originally was made to induce PMC to mill
ore produced from the properties, at PMC's mill. These properties contain a
previously-mined open-pit uranium mine (the Congo pit) 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 has completed an exploration program on a portion of
these properties, and advises it presently does not intend any further
development. The 59 claims and two leases may be reacquired from PMC by SMP.
PMC has decommissioned and dismantled its two uranium mills in the vicinity.
An ion exchange plant on the former PMC properties (and now held by USECC) 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. However,
management is reviewing the economics of relicensing this facility as part of a
potential in-situ leach uranium mining operation.
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.
Nukem/CRIC have refused to allow SMP to pay USECC for care and maintenance and
other work performed since the spring of 1991. Currently, USECC has a limited
care and maintenance staff on site to maintain the mines and pump mine water to
prevent flooding of the mines.
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 assigned to and assumed by Nukem, 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 (five
remaining) for sales of uranium to eight domestic utilities. SMP had paid
annual nonaccountable fees of $300,000 for marketing to Nukem, but SMP ceased
making such payments in the spring of 1991, when Nukem/CRIC refused to authorize
payment of care and maintenance costs.
SMP's uranium supply contracts either are base-price escalated or market-related
(referring to how price is determined for uranium to be delivered). 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. The current base-price
escalated contract of SMP requires deliveries of 130,000 pounds of uranium
concentrates per year through 1997. The amounts deliverable under the contract
may be increased or decreased by the utility, in amounts from 10% to 25%.
Prices of uranium for deliveries under the base-escalated price 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 and the price at which a willing seller will sell its U\\3\\O\\8\\
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 903,200 to
1,213,800 pounds of uranium annually from 1996 to 2000, which amounts may be
increased or decreased by specified percentages.
12
Through fiscal 1995, USE and its affiliates have satisfied most of these
contracts with either uranium previously produced by SMP, borrowed from others,
or purchased on the open market. A number of disputes have arisen among USECC
and Nukem/CRIC, and USECC initiated litigation against Nukem, CRIC and certain
of their affiliates, which, by stipulation of the parties, is to be resolved by
binding arbitration. See Item 3 - "Legal Proceedings."
Nukem's performance under the SMP utility supply contracts has been in dispute
since fiscal 1993, and the cooperation of Nukem to assure deliveries to
customers pending resolution of the SMP disputes, is not assured.
PERMITS. Permits to operate current 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 year, SMP did not discharge wastewater into Crooks Creek, and
the mine water is presently being discharged into the McIntosh Pit.
URANIUM MARKET INFORMATION. In recent years there have been several major
producers of uranium in the United States (Pathfinder Mines Corporation, Chevron
Resources, Uranium Resources Inc., Freeport-McMoRan Resource Partners, L.P.,
Energy Fuels Nuclear, Inc., Ferrett Exploration, General Atomics and others).
Many of these operations are in standby mode due to current low prices for
U\\3\\O\\8\\. There are currently several major producers in Canada (Cameco,
Cogema Canada, Ltd. and Rio Algom); Australia (Energy Resources of Australia and
Pancontinental Mining, Ltd.); Africa (Cogema and RTZ's Rossing unit), and
Europe. The market deteriorated as the Commonwealth of Independent States
("CIS"), increased exports to the western uranium spot market, which slowed down
the reduction of western inventories.
Uranium is primarily used in nuclear reactors that heat water to drive turbines
that generate electricity. There are presently some 546 commercial nuclear
power plants worldwide either operating, under construction or planned. Of
them, 72 are under construction and 52 are planned. Current worldwide
consumption is about 150 million pounds of U\\3\\O\\8\\ per year, but worldwide
production is only about 75 million pounds per year. 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 72 power plants which are ordered or under
construction.
Pursuant to Suspension Agreements signed in fiscal 1993 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 U\\3\\O\\8\\ by certain CIS republics, all spot sales of U\\3\\O\\8\\
delivered into the U.S. now reflect quota restrictions on U\\3\\O\\8\\ imports
from the CIS. However, there are provisions which allow certain long-term
uranium sales contracts entered into with domestic utilities prior to March 5,
1992, to be grandfathered.
13
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 U\\3\\O\\8\\ 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 U\\3\\O\\8\\
--------------------------
May 31, High Low
----------- ---- ---
1991..............11.70 8.35
1992...............9.05 7.75
1993..............10.05 7.75
1994..............10.20 9.25
1995..............11.00 9.50
US NEV was $11.85 as of July 31, 1995.
On August 31, 1993, NUEXCO made a public release that clarified its definition
of the NEV with reference to restricted and unrestricted terminology, so that
the restricted market values 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.
In the U.S., uranium is generally supplied to electric utilities under medium to
long-term supply agreements, which require deliveries more than one year after
entry into the contract. These agreements are designed to provide both the
producer-supplier and the customer with comfort as to the amount of uranium
desired and the availability of supply at a predictable price. Utilities
generally seek supply contracts at least two to three years before their needs
occur. It is expected that a large portion of U.S. demand will be secured by
electric utilities entering into contracts in the next two to four years. There
also is an active spot market, through which approximately 5 to 10 percent of
uranium concentrate needs are satisfied.
NUEXCO reports that through the first six months of 1995, U.S. utilities bought
22,100,000 pounds U\\3\\O\\8\\ equivalent in the spot and near term market, and
another 64,000,000 pounds U\\3\\O\\8\\ equivalent was purchased under
outstanding long-term contracts. A portion of the spot and near term market
sales may have supplied purchases under long-term contracts. While total demand
in 1994 exceeded domestic production, there remains a near-term supply of
U\\3\\O\\8\\ equivalent from domestic producers' inventory, and from
unrestricted (i.e., not under quotas) foreign producers current production and
inventory. USE expects these and other factors (e.g., weapons grade uranium
conversions) will moderate price increases, which otherwise might be expected
from the shortfall of United States production meeting demand, into fiscal 1996,
in spite of increasing interest from U.S. utilities in renewing long-term
contracts at higher than spot market prices. To date in fiscal 1995, long-term
contract prices have increased moderately.
14
GOLD
LINCOLN PROJECT (CALIFORNIA)
SUTTER GOLD MINING COMPANY. In fiscal 1991, USE acquired an interest in the
Lincoln Project (including the underground Lincoln Mine) in the Mother Lode
Mining District of Amador County, California. This property, formerly held by
the Sutter Gold Venture ("SGV"), a mining joint venture, is now wholly owned by
USECC Gold L.L.C., a Wyoming limited liability company. Until the end of fiscal
1994, Seine River Resources Inc. (a Vancouver Stock Exchange listed company
which is not affiliated with USE or its subsidiaries, "SRRI") was a joint
venture party in SGV. USECC Gold is a subsidiary of Sutter Gold Mining Company,
a Wyoming corporation ("SGMC").
USECC Gold expects to commence additional exploration and mine development as
soon as funding is provided through a joint venture or other source. Although
SGMC is in discussions with possible joint venture partners, there can be no
assurance that sufficient funding will be made available. It is unlikely,
therefore, that this property will be placed into production during the 1996
fiscal year. See "Permits and Future Plans."
USECC Gold and SRRI had intended to operate SGV as equal 50 percent venturers.
However, because of SRRI defaults on its obligations, USE and Crested had
acquired (through USECC Gold) by the end of fiscal 1993 a 90 percent aggregate
equity interest in the Lincoln Project (and the interests in USECC Gold were
owned 88.89 percent by USE, and 11.11 percent by Crested). By the end of fiscal
1994, SRRI owed USE and Crested $1,970,507 for SGV property holding costs,
permitting costs and mine maintenance expense incurred and paid for by USE and
Crested since March 1992, including interest and management fees charged by USE
and Crested. As of May 23, 1994 SRRI agreed to assign its remaining 10 percent
interest in SGV to USE as payment for the $1,970,507 owed USE and Crested.
However, only the $1,389,272 of costs and expenses paid for by USE and Crested
was recorded; $581,235 for interest and management fees was written off as
uncollectible. SRRI also issued 400,000 common shares of stock and delivered
them to USE as final payment of any deficiencies for pre-fiscal 1994
indebtedness (owed by SRRI to SGV) which had been secured with SRRI's interest
in SGV and which USE and Crested acquired in lieu of foreclosure (see Note F to
the USE Consolidated Financial Statements). SRRI's 10% interest was delivered
to USE and Crested in fiscal 1994.
Subsequent to the end of fiscal 1994, the Sutter Gold Venture was terminated,
USE and Crested formed Sutter Gold Mining Company, and agreed to exchange their
interests in USECC Gold for common stock of Sutter Gold Mining Company
(hereafter, "SGMC"). SGMC is owned 89 percent by USE and 11 percent by Crested;
USECC Gold is a subsidiary of SGMC.
SGMC continues to seek an industry partner or other means to obtain the capital
necessary for additional exploration, mine development, construction of a gold
mill and related facilities, and startup capital to put the gold mine into full
production at an initial rate of 300 tons per day.
During fiscal years 1992 through 1995, SGV conducted environmental studies,
drafted initial mine and mill designs, mined bulk samples from the Lincoln Mine
for assay and mill design purposes, installed an underground water treatment
plant to treat mine water seepage, and performed other work to support
application for operating permits. See "Properties", below.
PROPERTIES. SGMC (through its subsidiary USECC Gold) holds approximately 14
acres of surface and mineral rights (owned), 362 acres of surface rights
(leased), 217 acres of mineral rights (leased), and 374 acres of mineral rights
(owned), all on patented mining claims near Sutter Creek, Amador County,
15
California. 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.
Total land holding costs are estimated at $418,200 for the two fiscal years
ending May 31, 1997, including $77,400 for payments on two parcels (14 acres)
purchased in 1994; payment of advance royalties and lease rental payments coming
due in 1995 and 1996 on other surface and mineral properties, totalling
$340,840; and property taxes of $60,000 ($30,000 annually); and other
miscellaneous lease payments. Property taxes will increase to about $100,000
annually when the mill is built and the mine is in production.
The leases are for varying terms (the earliest expires in November 1995), 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. Other leases may be extended for various periods on terms similar to
those contained in the original leases. Production royalties are from four to
seven percent, and up to 20 percent for some areas of high-grade ore. The
various leases have different methods of calculating royalty payments (net
smelter return, gross proceeds, and net profits interest).
Amador United Gold Mines ("Amador United") was a prior owner of certain leases
which it conveyed to the Lincoln Project when owned by Meridian Minerals, in
return for which 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. Although all of the properties which Amador
United conveyed to the Lincoln Project were relinquished by Meridian as
uneconomic or of marginal utility to the Project, Amador United remains entitled
to its net profits interest. "Net profits" will be determined by deducting from
gross revenues from sale of minerals produced by the Lincoln Project, an amount
equal to 105 percent of all costs and expenses in excess of $6,000,000 which are
directly or indirectly attributable and necessary or incidental to the
acquisition, exploration, development, mining and marketing of minerals produced
from all of the properties comprising the Lincoln Project. Costs and expenses
are defined to include (but not be limited to): ad valorem real property and
personal property taxes; reasonably anticipated reclamation costs; salaries and
wages of employees assigned to property acquisition, exploration, development,
mining and marketing activities; travel expenses and transportation of
employees, material equipment and supplies; all payments to contractors; assay,
metallurgical testing and other analyses to determine the quality and quantity
of minerals on all of the properties; costs to obtain environmental permits and
other permits, rights-of-way and similar rights, as incurred in connection with
acquisition, exploration, development, mining and marketing activities; property
acquisition and holding expenses; costs for feasibility studies; costs for title
curative work; and 1.25 percent monthly interest on such costs and expenses
which are not paid.
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 determined in the same manner as the Amador
United net profits interest (i.e., gross mineral revenues less an amount equal
to 105 percent of numerous categories of costs and expenses). An additional 0.5
percent net profits interest is held by a consultant to a lessee prior to
Meridian's acquisition of the properties, which 0.5 percent interest covers the
same properties in the Lincoln Project.
There have been an estimated $15,000,000 of investments to date in the Lincoln
Project by Meridian and USECC Gold, and current estimates call for up to
$17,974,000 of additional investment to put the properties
16
into full production. Payment of any amount to Amador United and the other
holders of net profits interests will only occur after the Lincoln Project has
generated gross revenues in excess of the amount invested. Lease royalties
burdening the Lincoln Project properties are in addition to Amador United's net
profits interest.
In connection with SRRI's transfer of interests in the Lincoln Project to USE
and Crested at formation of the SGV, and thereafter upon USE's and Crested's
acquisition of SRRI's remaining interests in SGV due to default by SRRI, Amador
United was provided notice of its right of first refusal to acquire such
interests for amounts equal to USE's and Crested's advances to SRRI. Amador
United has made technical objections to the notices given, however, USE and
Crested believe these objections are without merit.
Since fiscal 1991, USE and Crested expended $12,305,000 to acquire the Lincoln
Project and for mine development, mining and processing bulk samples of
mineralization, exploration, feasibility studies, project permitting costs,
holding costs, and related general and administrative costs, which amount
includes advances by USE and Crested to cover SRRI's share of such costs. The
amount of such expenditures during the 1995 fiscal year was $675,100.
GEOLOGY AND RESERVES. The minerals consulting firm Pincock, Allen & Holt
("PAH") has prepared a prefeasibility study of the Lincoln Project. 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 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. In nearly all cases, the veins (approximately 17 in
number, though at some points several veins appear to briefly converge) in the
three areas sampled are believed by PAH to extend well beyond these limits.
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.
In fiscal 1992, SGV mined 8,000 tons of material (including waste rock and low
grade mineralization) out of drifts and raises off the Stringbean Alley decline
(see "Permits and Future Plans", below) in a bulk sampling program to test
mining techniques and milling recoveries. Milling results indicated at least 94
percent of the gold in the ore should be recoverable with gravity, flotation and
cyanidation milling circuits (1,400 ounces of gold were recovered in this
program). Subsequent metallurgical tests by the engineering firm Brown & Root,
Inc. (using test data from the Lincoln Project developed by Hazen Research,
Inc.) indicate mill recovery could be in excess of 96 percent. PAH has
estimated the recovery rate as between 93 and 95 percent.
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
17
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.
Initial mining using standard cut-and-fill overhead stoping techniques, is
planned for the Lincoln and Comet Zones, by an existing 15 feet by 12 feet by
2,800 feet decline (the Stringbean Alley decline), which runs from the surface
down through the Comet and into the Lincoln Zone. Screened tailings from the
mill flotation circuit will be used to back-fill the stopes and stabilize the
wall rocks; this recycling will also greatly reduce the volume of tailings going
into the tailings ponds. In the pre-production stage, the Stringbean Alley
decline will be extended down to 750 feet, then a drift driven back horizontally
along the 750 foot level (above sea level).
The CUP requires that within 18 months after operations start up, a new decline
(to be named the Lincoln Decline) will have to be completed running for 1,850
feet from the surface at the mill site (1,340 feet above sea level) down to a
new drift to be driven at the 1,000 foot (above sea) level; the new decline will
be used for access of mining personnel and supplies to the underground workings,
as well as to permit ore haulage up the decline by conveyor, thus eliminating
ore haulage on the surface from mine portal to the mill.
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.
Preliminary estimates are that SGMC will require up to $17,974,000 financing to
construct the mill and prepare the mine for full scale production, and for
interim holding costs. The mill design has been reviewed by PAH, and SGMC
expects to follow PAH's recommendations in building the recovery circuits. The
mill will be constructed to allow a 500 ton per day operations, but initially
equipped so as to handle 300 tons per day throughput. Exclusive of attached lab
and other support facilities, the central mill building is expected to cover
approximately 20,000 square feet, and will be constructed with interior
mezzanine levels to hold different banks of equipment. Adequate power is
available at the boundaries of the Lincoln Project from the local utility; water
also is available from a utility if needed, although the Lincoln Mine is
expected to produce adequate water for mining and milling operations.
SGMC is in discussions with possible joint venture partners, to provide
additional funding, but there can be no assurance that sufficient funding will
be made available to proceed with mine development.
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 merged with Cyprus Mineral
Company and was renamed Cyprus Amax Minerals Company in November, 1993)
delineated a deposit of molybdenum containing approximately 146 million tons of
mineralization averaging 0.43% molybdenum 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. During fiscal 1995, USE recognized $85,500 of advance
royalty revenue under this arrangement. These royalties are shown in the
Statements of Operations as a component of gains from restructuring mineral
properties agreements. See Note F to the USE
18
Consolidated Financial Statements. The 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. 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. The Company has
asserted that the reported merger of AMAX into 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 the Company is
considering its 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 its option in August, 1994 and subsequently sold that
property for $970,300 in cash and notes receivable. The advance royalties will
resume in mid-fiscal 1996.
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 the
companies merged.
Worldwide demand for molybdenum in calendar 1994 was reportedly 220 million
pounds, its highest level ever. Production for that period was about 210
million pounds, but is projected to increase to 220 million pounds in 1995 as
excess capacity of the primary producers is put back into production. 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 1996.
Molybdenum prices on the open spot market increased substantially, from $3.35
per pound of technical molybdic oxide (the principal product) in September 1994,
to $15.50-17.50 per pound in February 1995. However, by mid-August 1995 prices
had declined to $4.25 to $5.00 per pound.
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. They have also been assigned certain
extralateral rights associated with the claims and certain royalty rights
relating to a prior lease on those properties. The lease to USE
19
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 have informed BGBI that payments are owed to them
pursuant to extralateral rights on the claims. BGBI in turn has 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. The case
was set for July 1995 but because of a conflict, the Judge reset the case for
December 11-14, 1995. See Item 3 - "Legal Proceedings."
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; five 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. Energx intends to drill and
test three exploratory wells, and otherwise develop the area in conjunction with
NuGas Resources U. S. Inc. ("NuGas"). If Energx determines there is potential
for a natural gas field, Energx (and NuGas) will have exclusive exploration
rights for shallow gas (down to the top of the Muddy formation, approximately
4,000 feet) on approximately 325,000 acres of tribal mineral lands on the
Reservation for a period of five years. The Agreement is renewable for
successive five year terms, provided Energx drills another five exploration
wells during each term. The first three dry holes would be funded by NuGas.
With additional fee and Tribal allotted acreage assembled by Energx and NuGas,
and the 170,000 acres subject to a farmout agreement with Placid Oil (see
below), the Agreement now covers approximately 500,000 contiguous acres within
the Fort Peck Indian Reservation.
Durring the initial exploration program, proceeds from production will be
allocated to NuGas to recoup the initial eight wells' drilling and completion
expense (except for up to three dry holes), Thereafter, net revenues will be
allocated 40 percent to the Tribes and 60 percent to Energx and NuGas. Pursuant
to United States Law, only the Tribes may own beneficial interests in
reservation minerals; Energx' and NuGas' share of net revenues is compensation
for operating services.
The Fort Peck tribal lands are believed to contain significant shallow gas
deposits, analogous to the Bowdoin Gas Field (eastern Montana) and other
Cretaceous age gas producing reservoirs in the Northern Great Plains Gas
Province. Numerous wells drilled for deep oil on the Fort Peck tribal lands
have documented shallow gas shows. However, no reserves have been established
for the acreage subject to the Agreement with Energx. Two major gas transmission
systems cross the Fort Peck Reservation (Northern Border and Williston Basin).
20
NUGAS RESOURCES (U.I.) INC. AGREEMENT. By the Joint Venture Agreement ("JVA")
of July 18, 1994, NuGas is obligated to Energx to drill and complete (or
abandon) at NuGas' sole expense, eight exploratory shallow gas wells on the Fort
Peck Reservation (three before December 31, 1994, now extended to late fall
1995, and five more by July 1, 1996), to earn a one-half interest in Energx'
rights under the Fort Peck Shallow Gas Agreement. Well gathering, gas
dehydration and related equipment costs will be shared equally by NuGas and
Energx. Energx will not be required to contribute to the costs of drilling the
first eight exploratory wells.
NuGas has 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 three exploratory wells. Due to the
unexpected complexity of assembling the necessary land packages, NuGas and
Energx have postponed the drilling of the initial exploratory wells until late
in the fall of 1995.
NuGas and Energx each will receive 50 percent of proceeds from gas produced and
sold from the initial eight wells, until NuGas receives 50 percent of such
wells' drilling, completion, geological and equipping costs; thereafter,
distributions will be shared 30 percent each to NuGas and Energx, and 40 percent
to the tribes pursuant to the Fort Peck Shallow Gas Agreement. NuGas will not
be entitled to recoup any of drilling and geological costs related to up to
three dry holes drilled in the initial eight well drilling program. All
activities after the initial exploration drilling program will be funded equally
by NuGas and Energx.
Energx received $200,000 under the JVA as a prospect generation fee, and will be
the operator of record.
NuGas is a subsidiary of a Toronto Stock Exchange company with substantial
experience in shallow gas exploration and production, principally in the
northern plains states and Canada, where the company currently operates more
than 500 shallow gas wells and produces 30,000,000 cubic feet of gas per day.
FARMOUT AGREEMENT. In late August 1995, Placid Oil Company, a subsidiary of
Occidental Petroleum and other parties (hereafter together referred to as
"Placid"), submitted a Farmout Agreement to Energx and NuGas which is currently
under review. Under the proposed agreement, Energx and NuGas as operator will
have the right to drill and complete shallow gas wells on approximately 170,000
acres of non-Tribal lands within the Fort Peck Indian Reservation, at the sole
expense of the operator. The Farmout Agreement contemplates three phases: (i)
drilling and completion (or abandonment) of three test wells on widely dispersed
drilling locations; (ii) subject to performance of (i), continuous drilling and
completion (or abandonment) of option wells, also on widely dispersed drilling
locations; and (iii) subject to performance of (i), continuous drilling and
completion (or abandonment) of additional wells on blocks not covered by (i) and
(ii). The first three wells are to be drilled on specific sections within the
170,000 acres.
Drilling of the first test well is to commence in October 1995; the last of the
three wells is to be drilled and completed (or abandoned) within 45 days of the
commencement of drilling the first well. Upon completion of the last test well,
and on or before June 1, 1996, the operator has the option to continue drilling
on the acreage until March 31, 1997, with not more than 30 days to elapse
between completion (or abandonment) date for a well and commencement of drilling
of the next well, until all the acreage has been fully developed.
On or before the March 31, 1997 Farmout Agreement termination date, the operator
shall make an election as to each lease in the acreage that is undeveloped or
which covers lands not included in a producing unit from the drilling of test or
option wells, to (i) continuously drill wells so as to fully
21
develop the lease on 160 acre units, (ii) pay Placid $35.00/acre rental on the
desired acreage, or (iii) forego the subject acreage and reassign it back to
Placid, et al.
In addition to lessor royalties, Placid will receive a 6 percent overriding
royalty interest on the acreage developed under the Farmout Agreement. Operator
will reimburse Placid for delay rentals on the acreage until placed into
production.
Energx has agreed with NuGas that NuGas' payment of all drilling and completion
(or abandonment) costs on the three test wells under the Farmout Agreement will
constitute performance by NuGas as to the first three wells required under the
Energx/NuGas agreement. In turn, the Tribes have agreed that drilling and
completion (or abandonment) of the three test wells under the Farmout Agreement
will be accepted in lieu of drilling the first three test wells required under
the Fort Peck Shallow Gas Agreement. Energx will be an equal participant with
NuGas in paying for the Farmout Agreement option wells' drilling and completion
(or abandonment) costs and production proceeds therefrom.
WIND RIVER BASIN, WYOMING - MONUMENT BUTTE PROSPECT. Approximately 30,000 acres
of BLM leases (10 year term) in Fremont County, WY are now held by Energx, and
are believed to be prospective of shallow coalbed methane and conventional
stratigraphic natural gas and oil deposits. Acreage in this part of the basin
has been leased by major oil and gas companies in the past, but very little of
the Energx acreage has been drilled. Energx expects to negotiate farmout
arrangements with other companies to test the acreage. Two large independent
oil and gas exploration and production companies have acreage near Energx's
positions.
BIG HORN COUNTY, MONTANA - BIG HORN PROSPECT. On October 24, 1994 Energx signed
a Prospect Participation Agreement with Harrington & Bibler, Inc. ("H&B"),
Kalispell, Montana, by which Energx had the right to acquire 53 percent of H&B's
coalbed methane rights in approximately 24,000 contiguous acres in Big Horn
County, Montana. H&B has represented it holds a minimum 81 percent net revenue
interest in the leases covered by the Prospect Participation Agreement.
Approximately another 24,000 acres were acquired jointly with H&B. Energx'
rights to earn were subject to Energx drilling and completion through setting of
production casing, at Energx expense, seven wells down to the first coalbed
methane producing horizon (but not more than 1,000 feet).
All the acreage is prospective of coalbed methane gas. The drilling schedule
required under the Prospect Participation Agreement was to have been completed
by June 30, 1995. No wells have been drilled by Energx to date. However, due
to lack of access agreements from surface interest owners, the BLM (at Energx's
request) has suspended expiration of the leases targeted for drilling, and in
turn granded an extension of the drilling schedule for the seven wells. Current
status of surface access to the acreage surrounding three of the wells presently
is uncertain.
No drilling schedule has been established for the other 12,500 acres, whereon
drilling and completion costs would have been shared equally by Energx and H&B.
In early September 1995, Energx elected to cease paying delay rentals on all
acreage covered by the Prospect Participation Agreement, thereby terminating the
agreement, and resigned as operator of the project.
Energx operations to date have been funded with USECC equity investments and
advances, and transaction revenue (the NuGas prospect generation fee). Energx
expects to fund future operations by a combination of private equity financing
and by seeking industry and private investor participation on prospects.
However, due to depressed gas prices in calendar 1995, equity financing as well
as joint
22
venture industry participation of natural and coalbed methane gas projects has
been difficult to obtain. Accordingly, in fiscal 1996 Energx will be monitoring
its acreage positions (other than Fort Peck) to evaluate whether to continue
paying the acreage holding costs and/or drill to earn acreage rights (as
applicable), or to turn operations over to another company in the industry in
exchange for an overriding royalty from future production payable to Energx.
COMMERCIAL OPERATIONS
THE BRUNTON COMPANY
Brunton operates in the industry segment of manufacture and sales of outdoor
professional and sporting products and professional engineering products. All
common stock of Brunton not previously owned by USE was acquired by USE as of
May 1994, in exchange for 276,470 registered common shares of USE.
Brunton is the manufacturer of the original Brunton pocket transit (developed by
D.W. Brunton in 1884), and has been manufacturing and marketing pocket transits
to the professional surveying, mining, geology and military markets world wide
since 1972, when the product line was purchased from a Denver company and moved
to Riverton, Wyoming.
Brunton also manufactures and sells a line of sporting compass products, and
imports and distributes optical products and Lakota cutlery, having acquired
Lakota cutlery in 1982. These products are marketed through traditional
sporting goods channels by distributors, catalog houses, retailers and chain
stores nationally and internationally. Additional markets include ad specialty,
military and the U.S. government. A majority of the products are marketed as
quality items commanding premium prices.
Brunton sales for fiscal 1995 (compared to fiscal 1994) by product line were:
39 percent (35 percent) sporting compasses; 22 percent (26 percent) professional
products; 31 percent (27 percent) optical products; and 6 percent (7 percent)
cutlery. The balance of 1995 revenues were from interest income, paint shop
custom work, and warranty service. All Brunton sporting products experience
seasonal sales, with stronger sales in July through December and declining in
January and February. No customer accounted for more than 10 percent of Brunton
sales in any of the three fiscal years ended May 31, 1995. Loss of any one of
the major customers would not have a material adverse effect on Brunton,
however, loss of more than one in any one product line could cause significant
market share loss.
Brunton has 37 full-time employees and 15 part-time employees, none under
collective bargaining agreements. Employee relations are considered
satisfactory.
PROFESSIONAL PRODUCTS
POCKET TRANSITS AND ACCESSORIES. Brunton is a manufacturer of pocket transits.
This instrument is a hand-held compass with a mirrored protective cover and long
bar sight, capable of calculating both horizontal (compass bearings) and
vertical (inclination) angles. Primary advantages of the pocket transit include
small size and accuracy.
Several versions of this instrument are produced to satisfy the needs of civil
engineers, mining engineers, archaeologists, foresters, geologists and military
personnel. Many units are waterproof. Numerous product options, high quality
and ready serviceability separate Brunton instruments from its competition.
Suggested retail price for the pocket transit range from $191 to $274 per unit.
Brunton also manufactures and sells non-magnetic tripods and field accessories.
23
Professional products are sold on a direct basis to 240 wholesale dealers,
distributors and catalog supply houses throughout the world. In addition,
Brunton markets professional products to the U.S. government (GSA) and military
organizations including the U.S. Army.
Brunton faces competition for its pocket transits with look-a-like models
manufactured in the far east by companies substantially larger than Brunton who
include their competing product as one of several surveying type instruments
available from the company. Despite larger competitors, and despite somewhat
higher prices for Brunton pocket transits, management believes Brunton holds a
majority of the United States market share for the pocket transit market. This
is due to name brand recognition, highest quality workmanship, excellent
wholesale and consumer service and consistent advertising programs.
Sales of pocket transits are seasonal with increased sales in the spring and
summer due to minerals exploration and college/university field exercises.
Brunton currently seeks to increase penetration of South American markets to
counter seasonality of North American sales.
One customer accounted for 13 percent of professional product sales in fiscal
1995. Loss of this customer would not have a material adverse effect on
Brunton.
SPORTING PRODUCTS
There are three lines of Brunton sporting products: compasses, optics and
cutlery. Compasses and optics are marketed under the Brunton name; cutlery is
marketed under the Lakota label.
COMPASSES. Brunton map compasses were first introduced in 1979 to the general
sporting goods market. To the best of management's knowledge, Brunton compasses
continue to be the only 100 percent made in USA map compasses. A complete
priced line of compasses (22 different models) is offered, with a suggested
retail price range of $3.99 to $274. All sporting compasses are liquid damped,
which means that the compass housing contains a clear oil-based fluid to dampen
the action of the magnetic needle, which allows for quicker and more accurate
instrument readings.
Two national discount chains accounted for approximately 26 percent of compass
sales in fiscal 1995, compared to 21 percent in fiscal 1994. Loss of these
customers would have a material impact on Brunton's operations.
Competition in the compass line is provided by several foreign firms, including
Silva in Sweden and Suunto in Finland. Brunton is unable to determine its
market share for compass sales, as data therefor are unreliable, but Silva and
Suunto are believed to have larger market shares than Brunton in the United
States compass market; such companies are believed to have resources
substantially greater than Brunton.
OPTICS. Brunton optics include a range of high quality binoculars and
monoculars, which are manufactured primarily in Japan and Korea to Brunton
specifications. Brunton optical products are targeted to wholesale accounts
that market to quality conscious consumers willing to pay premium prices for
quality optical products. Additional features are found on its optics,
including upgraded lenses and prisms, fully-coated optics, long eye relief (so
eyeglass wearers can enjoy full field of view), and lens coatings (to
significantly reduce both ultraviolet (UV) and infrared (IR) light from entering
the product). Suggested retail prices for the 11 standard optical products
range from $99 to $749. A new optics product introduced in fiscal 1995 is the
Intelloptics/tm/ binoculars line, featuring LED and range finding micro
electronic components, whereby the user can focus on distant objects and
immediately determine their distance from the user.
24
Brunton optical products compete with products form at least ten other firms,
all of which have a larger percentage of the United States binocular market.
Most of these competitors have substantially greater marketing and other
resources.
Substantially all optics are manufactured for Brunton by one Japanese firm.
Although the services of such firm could be replaced if necessary, attendant
delays would adversely impact Brunton and could result in eroding market share.
Relations between such firm and Brunton are considered excellent. However,
further erosion of the dollar against the yen could lead to price increases
which may be difficult for Brunton to pass along to customers.
Loss of any one of the major customers would not have a material adverse effect
on Brunton, however, loss of more than one in the same product line could cause
significant market share loss.
CUTLERY. Lakota cutlery offers high quality cutlery for the outdoors person,
with models that include unique lockback and fixed blade designs. Lakota
cutlery is manufactured in Japan by a quality conscious subcontractor. Leather
sheaths and packaging are assembled at Brunton headquarters. A majority of
Lakota designs are for hunters, campers and fishermen. Twenty models are
currently in the Lakota line, with a suggested retail price range of $15 to
$171. The current cutlery manufacturer could be replaced if necessary, although
Brunton would be adversely affected depending on the lead time required for a
new firm to come on line.
Lakota cutlery faces competition from over ten competitors, all of which have
larger United States market shares and greater marketing and other resources
than Brunton.
All Brunton sporting products are distributed throughout the United States and
overseas markets by its direct sales force and manufacturers sales
representatives, to over 1,000 retailers, including sporting goods retailers,
mass merchandisers, catalog houses, cutlery shops, and certain U.S. Army/Navy PX
stores. In addition, Brunton sells some of nearly every model of its products
to corporations and other organizations for promotional purposes, premium and
employee gift award programs, and corporate identity programs.
In fiscal 1995, foreign sales represented 14 percent of Brunton sales (all
lines), and sales in the United States represented 86 percent of sales. These
percentages are not expected to change materially in fiscal 1996.
INTELLECTUAL PROPERTY
Brunton currently holds United States utility patent Nos. 4,175,333 (expires
2005), covering its pocket transit, and 5,079,846, covering a liquid-type
survival compass (expires 2009). Eight other United States utility patents are
held which cover different compass constructions that expired in 1993 to 1994,
and one United States utility patent (4,578,864) is held on a cutlery model
(expires 2002).
Five United States design patents are held on compasses and cutlery, which
expire between 1998 and 2004.
United States patent applications are filed for significant new products, as
developed. No notice of adverse determinations has been received with respect
to pending applications.
Foreign patent protection in certain countries (principally Canada and Europe)
has been obtained on a limited number of products.
25
REAL ESTATE AND OTHER COMMERCIAL OPERATIONS
USE owns varying interests, alone and with Crested, in affiliated companies
engaged in real estate, transportation, and engineering businesses. The
affiliated organizations include Western Executive Air, Inc. ("WEA") and Canyon
Homesteads, Inc. through Plateau. Activities of these subsidiaries in these
business sectors include a variety of real estate operations (ownership and
management of a commercial office building, ownership and management of a
trailer home park in Riverton, Wyoming, and ownership and management of town
sites and a motel facility in Ticaboo, Utah). WEA owns and operates an aircraft
fixed base operation with fuel sales, charter planes and flight school in
Riverton, Wyoming.
USECC
WYOMING PROPERTIES. USECC owns a 14-acre tract in Riverton, Wyoming, with a two-
story 30,400 square foot office building (including underground parking). The
first floor is rented to affiliates, nonaffiliates and government agencies; the
second floor is occupied by USE and Crested and is adequate for their executive
offices. USECC also owns and operates Wind River Estates, a 100-unit trailer
park on 19.7 acres in Riverton. The preceding two properties are mortgaged to
the State of Wyoming as security for future reclamation work on the SMP
properties.
USECC owns a fixed base aircraft operation at the Riverton Municipal Airport,
including a 10,000 square foot aircraft hangar and associated offices and
facilities. This operation is located on land leased from the City of Riverton,
for a term ending December 16, 2005, with an option to renew on mutually
agreeable terms for five years. The annual rent is presently $1,156 (adjusted
annually to reflect changes in the Consumer Price Index), plus a $0.02 fee per
gallon of fuel sold.
On June 14, 1995, USECC signed a six year option to acquire a 7,200 square foot
hangar at the Riverton airport, for $110,000, from a private company affiliated
with a director of USE and of Crested. See Part III, Item 12, "Certain
Relationships and Related Transactions." The purchase price under the option
agreement is a minimum $110,000, subject to upward adjustment for market values
for similar improved commercial real estate in Riverton.
USE and Crested also own 18 undeveloped lots on 26.8 acres of the Wind River
Airpark near the Riverton Municipal Airport, and three mountain sites covering
16 acres in Fremont County, Wyoming.
USECC owns various buildings, 600 city lots and other properties at the Jeffrey
City townsite in south-central Wyoming. More than 4,000 people resided in
Jeffrey City in the early 1980s, when the nearby Crooks Gap and Big Eagle
uranium mining projects were active. The townsite may be utilized for worker
housing as the Jackpot Mine and Sweetwater Mill are put into operation.
USE owns five city lots and a 20-acre tract with improvements including two
smaller office buildings and three other buildings with 19,000 square feet of
office facilities, 5,000 square feet of laboratory space and repair and
maintenance shops containing 8,000 square feet, all in Riverton, Wyoming.
COLORADO PROPERTIES. In connection with the AMAX transaction for the molybdenum
properties near Crested Butte, Colorado, USECC acquired an option from AMAX (now
Cyprus Amax) to purchase (until June, 2002) approximately 57 acres for $200,000
in Mountain Meadows Business Park, Gunnison, Colorado. The property is zoned
commercial and industrial, and is adjacent to Western State College. In fiscal
1995, USECC and Cyprus Amax agreed on exercise of the option by USE and Crested
agreeing to forego six quarters of advance royalties from Cyprus Amax (the
option purchase price was $200,000), plus payment of certain expenses i.e. real
property taxes from 1987 and other expenses amounting to
26
$19,358. See "Minerals -Molybdenum" above. Thereafter, USE (together with
Crested) signed option agreements with Pangolin Corporation, a Park City, Utah
developer, for sale of the 57 acres, and a separate parcel owned in Gunnison
County, Colorado. If both options are exercised, the combined purchase price is
US$1,851,920. The acreage is not otherwise encumbered and was sold in fiscal
1995.
The first option (exercised in February, 1995) was for the 57 commercial and
noncommercial zoned acres in the City of Gunnison, Colorado; the purchase price
was $970,300. Pangolin paid $345,000 cash and $625,300 in three year nonrecourse
promissory notes, of which $137,900 was repaid during fiscal 1995. 19.25 acres
have been deeded to Pangolin; the remaining acreage secures the note, and will
be released to the buyer against principal payments on the note as development
(mixed commercial and residential) advances. The remaining note bears interest
at 7.5% per annum.
The second option covers 472.5 acres of ranch land northwest of the City of
Gunnison, Colorado (purchase price $822,460). Pangolin paid $10,000 for the
option; on option exercise and closing, Pangolin paid $46,090 in cash and
$776,370 by two nonrecourse promissory notes (each with principal and unpaid
interest due on the third anniversary of closing except for $35,000 on the first
anniversary). At closing, 22.19 acres were deeded to Pangolin; different parcels
of the remaining acreage secure the notes, and will be released for principal
payments in the course of development. The sale was accounted for as an
installment sale and thus the gain on sale was deferred to be recorded as the
notes are paid.
Both notes ($145,500 and $630,870) will require annual payments of accrued
interest: the larger note accrues interest at 7.5 percent; the initial interest
rate on the smaller note was 7.5 percent through August 28, 1995 and 12 percent
thereafter (with a $35,000 principal payment on the first anniversary).
CANYON HOMESTEADS, INC.
UTAH PROPERTIES. Canyon Homesteads, Inc. (a Plateau subsidiary) owns a majority
interest in a joint venture which holds the Ticaboo Townsite in Ticaboo, Utah
(see Minerals - Uranium-Shootaring Mill and Facilities, above). In fiscal 1994,
a swimming pool was built at the motel. In fiscal 1995, USE agreed to acquire
the minority interest in the joint venture from a nonaffiliate. Further
recreational improvements to the townsite are planned for fiscal 1996, to
develop a commercial operation directed to Lake Powell tourists. However, as the
anticipated joint venture partners did not fund development plans in fiscal
1995, (and the proposed joint ventures for such purpose were not formed), and
USE and Crested have not been successful in finding other sources of development
funding, limited interim funding has been provided by a private company
(Arrowstar Investments, Inc.) controlled by USE affiliates. See Part III
information ("Certain Transactions").
CONSTRUCTION
FOUR NINES GOLD, INC. On May 5, 1995 FNG was awarded a 14 month $2,584,434
contract by the City of Lead, South Dakota for municipal road and drainage
construction, and rock slide area stabilization. As of August 4, 1995, change
orders by the City of Lead have increased the contract to $3,178,615 and FNG had
performed 42 percent ($1,330,391) of the contract, billing $1,197,351 (after 10
percent retainage by the City of Lead against completion of the project). As of
August 4, 1995, $965,584 had been paid, and $231,767 was due. FNG expects the
contract to be profitable
See Note I to USE Consolidated Financial Statements for information concerning a
significant customer in the minerals business. Neither commercial nor
construction operations are dependent upon a single customer, or a few
customers, the loss of which would have a materially adverse effect on USE.
27
RESEARCH AND DEVELOPMENT
USE has incurred no research and development expenditures, either on its own
account or sponsored by customers, during the past three fiscal years.
ENVIRONMENTAL
USE operations are subject to various federal, state and local laws and
regulations regarding the discharge of materials into the environment or
otherwise relating to the protection of the environment, including the Clean Air
Act, the Clean Water Act, the Resource Conservation and Recovery Act ("RCRA"),
and the Comprehensive Environmental Response Compensation Liability Act
("CERCLA"). With respect to mining operations conducted in Wyoming, Wyoming's
mine permitting statutes, Abandoned Mine Reclamation Act and industrial
development and siting laws and regulations impact USE. Similar laws in
California affect SGMC operations. Utah statutes will effect Plateau's
operations.
To USE's knowledge, it is in compliance in all material respects with current
environmental regulations. To the extent that production by SMP, GMMV or SGMC is
delayed, interrupted or discontinued due to need to meet additional provisions
which relate to environmental protection, future USE earnings could be adversely
affected.
CERTAIN PERMITS, COSTS
A number of legislative proposals and regulations have been introduced in
Congress and in the legislative bodies of various states which, if enacted,
would significantly affect the minerals industry. For example, in fiscal 1993
the Mining Law of 1872 was revised to change methods of acquiring and
maintaining mining claims on public lands, by requiring the payment of an annual
fee of $100 per claim for assessment rather than performing $100 worth of work
on each unpatented mining claim. This law already has affected USE, as a number
of unpatented claims were dropped in fiscal 1993 due to high holding costs. A
limited number of such claims are currently held.
Status and estimated future costs for permits not previously disclosed in this
Report follow:
CROOKS GAP. An inoperative ion exchange facility at Crooks Gap currently holds a
NRC license for possession of uranium operations byproducts. To date, a notice
of minor violations was received from the NRC, which USE has resolved. USE has
applied to the NRC for permission to decommission and decontaminate the plant,
dispose low level waste into the Sweetwater Mill tailings cell, and keep intact
such of the facility as does not require dismantling. Costs for this two year
effort (once approved by the NRC) are not expected to exceed $150,000.
Management of USE and Crested are reviewing the economics of relicensing this
facility as part of a potential in-situ leach uranium mining operation.
GMMV. During the fiscal year ending May 31, 1995, expenditures by GMMV to comply
with provisions of the mine permits and licenses, or otherwise to protect the
environment, were approximately $200,000, of which approximately 50 percent were
for capital expenditures. There ultimately will be an effect on USE earnings
from environmental compliance expenditures by GMMV, since GMMV operations will
be accounted for by the equity method. GMMV's expenses for compliance with
environmental laws (as well as other matters) are not expected to materially
affect USE cash flow during the next two years, as Kennecott will fund the first
$50,000,000 of costs of GMMV.
28
Actual costs for compliance with environmental laws may vary considerably from
estimates, depending upon such factors as changes in environmental laws and
regulation (e.g., the new Clean Air Act), and conditions encountered in minerals
exploration and mining.
USE does not anticipate that expenditures of SMP, GMMV and SGMC to comply with
laws regulating the discharge of materials into the environment, or which are
otherwise designed to protect the environment, will have any substantial impact
on the USE's competitive position.
EMPLOYEES
USE has 54 full-time employees not including Brunton. Crested uses approximately
50 percent of the time of USE employees, and reimburses USE accordingly. Payroll
expense has been shared by USE and Crested since 1981.
MINING CLAIM HOLDINGS
The majority of mining properties owned by USE are unpatented mining claims,
valid title to which depends upon numerous factual matters. Due to changes in
the 1872 Mining Law, USE and/or its co-venturers is obligated to pay $100 annual
per claim in order to preserve the right to possession of unpatented mining
claims. In addition to annual rental fee obligations there are a number of
technical requirements which must be met to establish a valid mining claim.
Satisfaction of these technical requirements cannot be assured.
ITEM 3. LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
ARBITRATION. On June 26, 1991, CRIC submitted certain disputed matters
concerning SMP to arbitration before the American Arbitration Association in
Denver, Colorado, to which USE and Crested filed a responsive pleading and
counterclaim alleging violations of contracts and duties by CRIC related to SMP.
CRIC asserted that USE and Crested, d/b/a/ USECC, were in default under the SMP
partnership agreement ("SMP Agreement"). Prior to initiation of arbitration
proceedings, USE and Crested had notified CRIC it was in default under the SMP
Agreement. The issues raised in the arbitration proceedings were generally
incorporated in the Federal proceedings (see below), wherein the U.S. District
Court of Colorado stayed further proceedings in arbitration. See "Stipulated
Arbitration", below.
FEDERAL PROCEEDINGS. On July 3, 1991, USE and Crested ("plaintiffs") filed Civil
Action No. 91-B-1153 in the United States District Court for the District of
Colorado against CRIC, Nukem and various affiliates of CRIC and Nukem (together,
the "defendants"), alleging that CRIC and Nukem misrepresented material facts to
and concealed material information from the plaintiffs to induce their entry
into SMP Agreement and various related agreements. Plaintiffs also claim CRIC
and Nukem have wrongfully pursued a plan to obtain ownership of the USE-Crested
interests in SMP through various means, including overcharging SMP for uranium
"sold" to SMP by defendants. Plaintiffs further allege that defendants refused
to provide a complete accounting with respect to dealings in uranium with and on
behalf of SMP, and that certain defendants misappropriated SMP property and
engaged in other wrongful acts relating to the acquisition of uranium by SMP.
Plaintiffs requested that the court order rescission of the SMP Agreement and
related contracts, and ask the court to determine the amounts payable to CRIC by
USECC as a result of any such rescission order to place the parties in status
quo. USE and Crested also requested that the court order defendants to
29
make a complete accounting to them concerning the matters alleged in the Amended
Complaint. They requested an award of damages (including punitive, exemplary and
treble damages, interest, costs and attorneys' fees) in an amount to be
determined at trial. Plaintiffs further requested imposition of a constructive
trust on all property of SMP held by defendants, and on profits wrongfully
realized by defendants on transactions with SMP.
The defendants filed various motions, an answer and counterclaims against
plaintiffs, claiming plaintiffs misappropriated a partnership opportunity by
being involved with Kennecott on the Green Mountain uranium properties.
Defendants also requested damages (including punitive, exemplary and treble
damages, interest costs and attorney fees).
STIPULATED ARBITRATION. In fiscal 1994, the plaintiffs and defendants agreed to
proceed with exclusive, binding arbitration before a panel of three arbitrators
with respect to any and all post-December 21, 1988 disputes, claims and
controversies (including those brought in the 1991 arbitration proceedings, the
U.S. District Court proceeding and the Colorado State Court proceeding described
below), that any party may assert against the other. All pre-December 21, 1988
claims, disputes and controversies pending before the U.S. District Court have
been stayed by stipulation between the parties, until the arbitrators enter an
order and award in the arbitration proceeding.
In connection with agreeing to proceed to arbitration as stated above, the
plaintiffs have affirmed the Sheep Mountain Partners partnership, and are
proceeding on common law damages and other claims in the arbitration.
Approximately $15 million cash, comprising part of the damages claimed by
plaintiffs, has been placed in escrow by agreement of the parties pending
resolution of the disputes. Both parties are claiming substantial additional
damages.
The arbitration evidentiary proceedings were completed on May 31, 1995,
following which the parties filed with the arbitrators proposed findings of fact
and conclusions of law and proposed awards on August 7, 1995. Nukem and CRIC
have alleged, among other things, that USECC violated its fiduciary duty to SMP;
transferred USECC's interest in SMP to Kennecott in violation of the SMP
partnership agreement; breached the Uranium Marketing Agreement between USECC
and Nukem; failed to perform under the Operating Agreement for the Sheep
Mountain properties, and overcharged SMP. NUKEM and CRIC seek damages against
USECC in the amount of $47,122,535.
For its claims, USECC is seeking damages against Nukem and CRIC in an amount
exceeding $200 million, which amount USECC requested be trebled under RICO and
similar state law provisions.
The award of the arbitrators is expected by December 1995 or early in calendar
1996. As in most litigation, there is no assurance of the outcome.
COLORADO STATE COURT PROCEEDING. On September 16, 1991, USE and Crested filed
Civil Action No. 91CV7082 in Denver District Court against SMP, seeking
reimbursement of $85,000 per month from the spring of 1991 for maintaining the
SMP underground uranium mines at Crooks Gap on a standby basis. On behalf of
SMP, CRIC filed an answer, affirmative defenses and a counterclaim against
plaintiffs. Plaintiffs filed a motion for summary judgment; the court denied the
motion and stayed all proceedings pending resolution of the Federal proceeding,
which in turn have been stayed through arbitration (see "Stipulated Arbitration"
above).
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BGBI LITIGATION
On July 30, 1991, Bond Gold Bullfrog, Inc. ("BGBI") filed Civil Action No. 11877
in the District Court of the Fifth Judicial District of Nye County, Nevada,
naming USE, Crested, USECC, Parador and H. B. Layne Contractor, Inc. ("Layne"),
as defendants. The complaint primarily concerns extralateral rights associated
with two patented mining claims owned by Parador and initially leased to a
predecessor of BGBI. USE and Crested assert certain interests in the claims
under an April 1991 assignment and lease with Parador, which claims are in and
adjacent to BGBI's Bullfrog open pit and underground mine.
The BGBI complaint alleges Layne owns 20 unpatented mining claims adjacent to or
in the vicinity of the subject claims, which 20 claims are allegedly under lease
by Layne to BGBI. BGBI seeks a declaratory judgment on any extralateral rights
of defendants to the various claims at the Bullfrog Mine. Parador, USE and
Crested had previously advised BGBI that they are entitled to royalty payments
with respect to extralateral rights of the subject claims on minerals produced
at the Bullfrog Mine, claiming that the lode or vein containing the gold
mineralization apexes on the Parador claims and dips under the Layne claims.
BGBI also seeks to quiet title to its leasehold interest in the subject claims,
alleging that lease thereof to USE and Crested is adverse to the interest
claimed by BGBI, and that the assertions by USE and Crested of an interest in
the claims have no foundation. BGBI seeks a determination that USE and Crested
have no rights in the Claims, and an order enjoining USE and Crested from
asserting any interest in them. BGBI further asserts that in attempting to lease
an interest in the subject claims to USE and Crested, Parador breached the
provisions of its lease to BGBI, and that Parador is responsible for the legal
fees and costs incurred by BGBI in the quiet title action which may be offset
against royalties. Under an arrangement to pay certain legal expenses of
Parador, USE and Crested may be responsible for any such amounts.
BGBI alleges that by entering into the Assignment and Lease of Mining Claims
with Parador, USE and Crested disrupted the contractual relationship between
BGBI and Parador. In addition, BGBI claims that the USECC-Parador agreement
slanders BGBI's title to the Claims. BGBI seeks compensatory damages from
Parador, USE and Crested; punitive damages from USE and Crested; and costs and
other appropriate relief from Parador, USE and Crested, all in amounts to be
determined.
USE and Crested believe that they have rightfully acquired interests in
extralateral rights concerning the subject claims, and have filed an answer,
counterclaim against BGBI and cross-claim against Layne asserting rights to
royalties and other obligations due from BGBI.
The parties have held discovery conferences, exchanged exhibits and scheduled
depositions. USE and Crested filed a motion for summary judgment, which was
denied, and Layne has filed a motion for summary judgment against USE, Crested
and Parador which is pending. This litigation is not expected to have a material
adverse impact on USE, regardless of its outcome. If USE's and Crested's
position concerning extralateral rights is sustained, substantial additional
revenues and income may be received by USE and Crested from royalties payable
with respect to gold produced from the Bullfrog Mine. Trial of the extralateral
rights issues is scheduled for December 11-14, 1995.
ILLINOIS POWER COMPANY LITIGATION
On October 29, 1993, Illinois Power Company ("IPC") filed Civil Action No. 93-
2247 in United States District Court, Central District of Illinois, naming USE,
Crested, USECC, CRIC, Nulux Nukem Luxemburg GmbH ("Nulux") Dresdner Bank, and
SMP, seeking a declaratory judgment that IPC was
31
entitled to terminate the 1988 uranium supply contract between IPC (a utility)
and USECC. Under this contract, IPC agreed to purchase a total of 1.2 million
pounds of uranium in increments from 1990 to 2000 with an option for an
additional 479,440 pounds U\\3\\O\\8\\. Contract prices started at $20.00 per
pound plus escalator provisions, and currently are substantially over spot
market prices.
The Dresdner Bank was dismissed from the case in fiscal 1994. The remaining
defendants filed Motions for Summary Judgment. Following the hearing on May 27,
1994, the Court granted defendants' motions to dismiss IPC's complaint, and
granted summary judgment on all of the defendants' counterclaims against IPC. A
trial to the court on the amounts of plaintiffs' damages was set for October 23,
1995. But in June 1995, the parties settled by amending the IPC contract (with
IPC affirming the validity of the contract), to provide for SMP delivery of
486,443 pounds of uranium concentrates over a three year period, at prices
substantially in excess of current spot market prices. The first delivery of
226,443 pounds U3O8 was made on June 30, 1995 and the monies were placed in
escrow. IPC's payments on the contract as it is performed will be escrowed, with
escrowed payments to go to the prevailing party or as otherwise directed by the
arbitrators in the SMP arbitration. Payments after the SMP dispute is resolved,
will be made as directed by the arbitrators in their award.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On November 23, 1994 USE sent a proxy statement and proxy to its
shareholders of record on October 28, 1994, for the Annual Meeting of
Shareholders held on December 16, 1994.
(b) Proxies for the meeting were solicited under Regulation 14 of the
Securities Exchange Act of 1934; there was no solicitation in opposition to
management's slate, and nominees John L. Larsen and Max T. Evans were elected.
Directors Don C. Anderson and Nick Bebout, Harold F. Herron and David W. Brenman
continued as directors. Voting results were:
Director Name Votes For Votes Withheld
------------- --------- --------------
John L. Larsen 3,435,184 15,898
Max T. Evans 3,434,911 16,091
INFORMATION CONCERNING EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS.
The following information is provided pursuant to Instruction 3, Item 401 of
Reg. S-K, regarding certain of the executive officers of USE who are not also
directors.
ROBERT SCOTT LORIMER, age 44, has been Controller and Chief Accounting Officer
for USE and Crested for more than the past five years. Mr. Lorimer also has been
Chief Financial Officer for both these companies since May 25, 1991, and their
Treasurer since December 14, 1990. He serves at the will of the Boards of
Directors. There are no understandings between Mr. Lorimer and any other person,
pursuant to which he was named as an officer, and he has no family relationship
with any of the other executive officers or directors of USE or Crested. During
the past five years, he has not been involved in any Reg. S-K Item 401(f) listed
proceeding.
DANIEL P. SVILAR, age 66, has been General Counsel for USE and Crested for more