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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 for the fiscal year ended May 31, 2000 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 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 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
The aggregate market value of the shares of voting stock held by
non-affiliates of the Registrant as of August 26, 2000, computed by reference to
the average of the bid and asked prices of the Registrant's common stock as
reported by the National Market System of NASDAQ on that date, was approximately
$14,551,464.
Class Outstanding at August 26, 2000
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Common Stock, $0.01 par value 9,041,261 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, 2000
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. [ ]
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
fact included in this Report, including without limitation the statements under
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the disclosures about the Green Mountain Mining Venture development
schedule for the Wyoming properties, the projected operating status of Plateau
Resources Limited's Shootaring Canyon uranium mill in Utah, future market prices
for uranium oxide, possible utility contracts for uranium oxide, and the plan of
operations for Yellow Stone Fuels Corp., Rocky Mountain Gas, Inc. and Sutter
Gold Mining Company (subsidiaries of U.S. Energy Corp.), are forward-looking
statements. In addition, when words like "expect," "anticipate" or "believe" are
used, U.S. Energy Corp. is making forward-looking statements.
Although U. S. Energy Corp. believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. Important factors that could cause
actual results to differ materially from such expectations are disclosed in this
Annual Report. The forward-looking statements should be carefully considered in
the context of all the information set forth in this Annual Report.
PART I
ITEM 1 AND ITEM 2. BUSINESS AND PROPERTIES
(A) GENERAL.
U.S. Energy Corp. ("USE" or the "Company") is in the business of
acquiring, exploring, developing and/or selling or leasing mineral properties,
and the mining and marketing of minerals. USE is now engaged in three principal
mineral sectors, uranium and gold, both of which are currently in the care and
maintenance mode, and coalbed methane gas. The most significant uranium
properties are located on Green Mountain and Sheep Mountain in Wyoming, and in
southeast Utah. The gold property is located in Sutter Creek, California, east
of Sacramento. Interests are held in other mineral properties (principally
molybdenum), but are either non-operating interests or undeveloped claims. The
coalbed methane gas property development and contract drilling and construction
sector is conducted through Rocky Mountain Gas, Inc. in southeastern Montana and
northeastern and southwestern Wyoming. USE also carries on small oil and gas
operations in Montana and Wyoming. Other USE business segments are commercial
operations (real estate and general aviation) and construction operations. USE
has a May 31 fiscal year.
USE was incorporated in Wyoming in 1966. USE and Crested Corp.
("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. All of USE's (and Crested's)
operations are in the United States. Principal executive offices are located in
the Glen L. Larsen building at 877 North 8th Street West, Riverton, Wyoming
82501, telephone 307.856.9271.
Most of USE operations are conducted through subsidiaries, a joint
venture with Crested and various jointly-owned subsidiaries of USE and Crested.
The joint venture with Crested is referred to as "USECC". Construction
operations are carried on primarily through USE's subsidiary Four Nines Gold,
Inc. ("FNG").
2
Until September 11, 2000, USE and Kennecott Uranium Company
("Kennecott"), owned the Green Mountain Mining Venture ("GMMV"), which holds a
large uranium deposit and uranium mill in Wyoming. The GMMV ceased mine
development operations in fiscal 1999 and its properties are in a care and
maintenance status due to the depressed market for uranium oxide. On September
11, 2000, USE and Crested settled litigation with Kennecott involving the GMMV
by selling all their interest in the GMMV and its properties back to Kennecott
for $3.25 million. Please see "Minerals-Uranium-The Green Mountain Mining
Project" below. Other principal uranium properties and an uranium mill in
southeast Utah are held by Plateau Resources Ltd., a wholly-owned subsidiary of
USE. The Utah uranium properties are also in a care and maintenance status. At
some future date, if the uranium oxide market improves, USE and Crested may
consolidate their remaining uranium assets into a single subsidiary and finance
the startup of its mines and mill operations, subject to obtaining the necessary
debt or equity funding. There are no current plans to implement this strategy at
the present time.
The gold assets held by Sutter Gold Mining Company ("SGMC"), a
majority-owned subsidiary of USE, are also in a care and maintenance status,
with a minor amount of improvements being made to the surface infrastructure in
fiscal 2000, because the current price of gold (less than $280/oz. in early
August 2000) prevents raising the capital necessary to put the properties into
production. See "Gold" below.
In fiscal 2000, USE provided contract drilling and related services to
companies that own and are developing coalbed methane ("CBM") wells in the
Powder River Basin of Wyoming and Montana and other basins in Wyoming. USE
bought more drilling equipment for this purpose to meet the expanding market for
contract services. Numerous major oil and gas companies, utilities and gas
transmission companies have, drilled and are producing a significant number of
CBM wells in Wyoming.
In addition, in fiscal 2000, USE and Crested formed Rocky Mountain Gas,
Inc. ("RMG"), a Wyoming corporation, to acquire properties with potential for
coalbed methane in the Powder River Basin of Wyoming and Montana, and other
basins in Wyoming, for development of coalbed methane gas wells for RMG's own
account.
Until February 1996, USE conducted manufacturing and/or marketing of
professional and recreational outdoor products through The Brunton Company
("Brunton"), a wholly-owned subsidiary. As of February 1, 1996, USE sold Brunton
to Silva Production AB. The sale eliminated Brunton's manufacturing and/or
marketing of professional and recreational outdoor products from the commercial
segment of USE's business as of January 31, 1996, except to the extent that
there are net profits payments from Silva through 2000.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
USE operates in three business segments: (i) minerals, (ii) commercial
operations, and (iii) contract drilling/construction. The Company engages in
other miscellaneous activities such as oil and gas exploration, development and
production. The principal products of the operating units within each of the
reportable industry segments are:
3
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.
Advance royalties on molybdenum
property.
Commercial Operations Operation of a motel and rental of
real estate, operation of an
aircraft fixed base operation
(aircraft fuel sales, flight
instruction and aircraft
maintenance), and provision of
various contract services,
including managerial services for
subsidiary companies.
Contract drilling/Construction Contract drilling of coalbed
methane gas wells, construction of
drill sites, gas pipe lines,
reservoirs and reclamation of
locations.
Percentage of Net Revenue contributions by the three segments in the last three
fiscal years were:
Percentage of Net Revenues During the Year Ended
-------------------------------------------------
May 31, May 31, May 31,
2000 1999 1998
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Minerals 2% 2% 9%
Commercial Operations 36% 27% 23%
Construction Operations 46% 0% 0%
Interest and Other 16% 71% 68%
In fiscal 2000, USE received $132,600 in revenues from the minerals
segment as compared to $150,600 in fiscal 1999. USE had no sales of uranium
during fiscal 2000 as compared to $87,600 for uranium sales in fiscal 1999, when
mineral revenues were generated from sales of uranium under certain of the
utility supply contracts held by Sheep Mountain Partners ("SMP"), a Colorado
general partnership and the molybdenum royalty. During fiscal 1998, there were
revenues from mineral sales of $211,000 from molybdenum advance royalties and
$858,700 for uranium contract deliveries.
Commercial operations during fiscal 2000 resulted in revenues of
$2,786,800 as compared to revenues of $2,977,800 during fiscal 1999. The
decrease in fiscal 2000 was as a result of no equipment being rented to the GMMV
during fiscal 2000. Contract drilling and construction operations in the coalbed
methane business resulted in revenues of $3,504,900 during fiscal 2000. No
revenues were recognized in this segment prior to fiscal 2000.
4
(C) NARRATIVE DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT (INCLUDING ITEM 2 -
PROPERTIES DISCLOSURE).
MINERALS
COALBED METHANE
GENERAL. Rocky Mountain Gas, Inc. ("RMG") was incorporated in Wyoming
on November 1, 1999 as a subsidiary of USE (owning 92%). Separately, through
USECC, in fiscal year 2000, USE offered independent drilling and completion
services to owners of CBM properties in the Rocky Mountain area (principally
Wyoming and Montana).
Methane is the primary commercial component of natural gas produced
from conventional gas wells. Methane also exists in its natural state in coal
seams. Natural gas produced from conventional wells also contains, in varying
amounts, other hydrocarbons, which generally require the natural gas to be
processed. However, the methane gas produced from coalbeds generally contains
only methane and is pipeline-quality gas after simple water dehydration.
CBM production is similar to conventional natural gas production in
terms of the physical producing facilities. However, the subsurface mechanisms
that allow the gas to move to the wellbore are very different. Conventional
natural gas wells require a porous and permeable reservoir, hydrocarbon
migration and a natural structural or stratigraphic trap. Coalbed methane gas is
trapped (adsorbed) in the coal itself and in the water contained in the pore
space, until released by pressure changes when the water contained in the
coalbed is removed. In contrast to conventional gas wells, new coalbed methane
wells initially produce water for several months; then, as the water production
decreases, the containing water pressure on the gas in the coal drops, and
methane gas production increases.
Methane is a common component of coal since methane is created as part
of the coalification process. Coals vary in their methane content as measured by
standard cubic feet per ton. Whether a coalbed will produce commercial
quantities of methane gas depends on the coal quality, its content of natural
gas per ton of coal, the thickness of the coalbeds, the reservoir pressure, the
existence of natural fractures and the permeability of the coal.
Due to the shallow coal seams in the Powder River Basin, the drilling,
discovery, development and production of CBM has significant economic advantages
compared with conventional gas targets. Over the past several years, CBM has
become an important source of pipeline quality gas in the United States. Methane
gas production from coalbed reservoirs has grown from virtually nothing a decade
ago to more than five percent of the total United States gas production today.
Development of coalbed methane in the Powder River Basin of northeastern Wyoming
and southeastern Montana is the fastest growing CBM play in the United States.
The principal coals in the Powder River Basin include the thick coal
seams of the Tongue River member of the Paleocene Fort Union Formation, which
are among the thickest in the world. Individual coalbeds range in thickness from
a few feet up to 250 feet. A typical well might penetrate multiple coal zones
over a 200 to 1,200 foot range. Based on reports filed by other companies with
the State of Wyoming, reserves per CBM well can vary considerably but a typical
estimate can exceed 300 million cubic feet (MMcf) of gas per well. Given the
expected low drilling and completion costs, these levels of reserves have made
CBM wells attractive to gas companies and resulted in a significant amount of
exploration and production activity in the Powder River Basin.
5
To date, RMG has drilled, deepened and/or tested 3 wells on the Quantum
property to depths of 1,044 ft., 1,103 ft. and 1,503 ft. In two of the wells,
testing of four zones indicated potential for gas. Further drilling has been
curtailed by the temporary moratorium imposed by the Montana Oil and Gas
Commission.
CBM CONTRACT SERVICES. USE owns 10 truck mounted drilling rigs
(drilling capacity generally down to 1,500 feet, with one rig to 5,000 feet) and
related equipment with which it provides services to third parties who own and
develop CBM properties in the Powder River Basin in Wyoming and Montana. These
services include site preparation, drilling, casing, completion, dam
construction, compressor and gathering pipeline construction and site
reclamation.
For fiscal 2000, USE had completed or was performing at May 31, 2000,
contract services for approximately 12 companies active in the CBM sector.
During this period, USE worked on over 300 CBM wells (including infrastructure
projects involving CBM wells). USE spent approximately $1,557,800 to buy
additional equipment and materials for the contract services business in fiscal
2000. See Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations. The contracts are negotiated on a turnkey or time and
materials basis, depending on the project and the customer's needs. USECC
contracts with the operator of the wells; USECC does not act as the operator on
any of the services wells or projects. The largest customer in fiscal 2000 was
J.M. Huber, Inc., representing $2,603,100, 33% of USE's gross revenues and 73%
of its net revenues from all contract drilling and construction operations.
Due to the expected continued growth in the CBM play in Wyoming and
Montana, the amount of business done by USE's contract services business in
fiscal 2000 could continue at the same or improved levels in fiscal 2001, if RMG
and Quantum start developing substantial numbers of CBM wells on their acreage
position. See below.
ROCKY MOUNTAIN GAS, INC. RMG was formed by USE and Crested as an
independent energy company to engage in the acquisition, exploration,
development, production and exploitation of CBM, for its own account. It is
expected that USECC will provide support services in CBM property development by
RMG for RMG's own account, and may also provide competitive services to develop
wells on acreage held by RMG and Quantum (see below). Compression of the coalbed
methane gas in order for it to be fed into a pipeline and pipeline construction,
is presently planned to be contracted out to others seeking to buy gas
production.
CBM wells in the Powder River Basin are generally 300 to 1200 feet
deep, typically take three to ten days to drill and complete and cost between
$30,000 - $120,000 per well. In comparison to conventional oil and gas wells,
Powder River Basin coalbed methane wells can generally be characterized by their
low cost and short drilling time frame. RMG intends to continue acquiring CBM
acreage. While the costs to acquire leasehold interests in the Powder River
Basin have increased, RMG believes that attractive lease acquisition
opportunities are still available.
In fiscal 2000, RMG acquired from Quantum Energy LLC an undivided 50%
working interest (WI) and 40% net revenue interest (NRI) in approximately
185,000 net mineral acres of coalbed methane leases located in the Powder River
Basin of southeastern Montana. See "The Quantum Agreement" below. With this
acquisition, RMG became one of the larger holders of gas leases in this area.
The gas collection systems and related equipment associated with these wells may
be furnished by RMG or provided by a third party (transmission company) at a
negotiated price per thousand cubic feet (Mcf) of gas transported in the
pipeline. The produced and gathered gas would then be sold into a transmission
company's pipeline.
In addition to the acreage held with Quantum, RMG has acquired
approximately 64,000 net acres of other coalbed methane prospects in Wyoming.
See below.
6
RMG presently does not have any proved developed or undeveloped gas
reserves. RMG plans to drill a total of 125 coalbed methane wells in fiscal 2001
and 2002. Quantum also plans to drill an additional 100 wells in which RMG will
have a 50% working interest. Attaining these objectives will depend on when and
where on RMG's acreage in Wyoming and Montana the necessary drilling permits can
be obtained, see "CBM Permits" below. RMG and Quantum have identified over 200
drilling locations on state and fee portions of the acreage. The actual number
of wells to be drilled in fiscal 2001 and 2002 will depend on future operating
results, availability of capital, the prevailing price of methane gas, and
issuance of permits.
To fund startup operations and acquire acreage interests from Quantum
Energy LLC, RMG sold 1,203,333 shares of restricted common stock at $3.00 per
share to accredited investors (including USE and Yellow Stone Fuels Corp.) for
net proceeds of $3,509,000 ($100,000 was paid in offering expenses and
commissions to a registered broker-dealer for placement services on sales to
investors other than USE and Yellow Stone Fuels Corp.). These shares are in
addition to the initial shares acquired by USE and employees of the companies on
the formation of RMG. Additional capital from institutions and/or joint ventures
with industry partners is needed in fiscal 2001 and 2002 to begin fully
exploiting the CBM acreage. See Item 7.
THE QUANTUM AGREEMENT. RMG's largest prospects are the Castle
Rock/Kirby prospects in southeast Montana consisting of approximately 185,000
net mineral acres jointly owned with Quantum. RMG acquired a 50% working
interest (WI) and 40% net revenue interest (NRI), on these properties under an
Agreement with Quantum, which closed on January 3, 2000. RMG and Quantum are
also currently negotiating to acquire additional acres in their area of mutual
interest ("AMI") of the Powder River Basin in Montana. Under the Quantum
Agreement, the ultimate purchase price is $5,500,000, of which $3,200,000 was
paid on January 3, 2000 and $1,000,000 was paid on May 1, 2000. A payment of
$1,300,000 is due on or before December 31, 2000. If RMG fails to pay the last
purchase installment of $1,300,000 on or before December 31, 2000, RMG must
assign 12% of its undivided 50% WI in the properties back to Quantum. At
Quantum's sole option, it may elect to have RMG drill and complete additional
wells for the equivalent cost of $1,300,000. If Quantum exercises this option,
RMG would own a 50% WI (40% NRI) in the wells drilled with those funds, but only
after Quantum has received $1,300,000 in net revenues (payback) from those
wells.
The acreage held with Quantum is all in Montana, and includes 82,807
net acres of BLM land, 14,910 net acres of state land (Montana), and 90,430 net
acres of fee land.
A separate provision in the Quantum Agreement requires RMG to spend
$2,500,000 to drill and complete 25 CBM wells, as identified and agreed to by
the operating company Powder River Gas, LLC (see below).
Quantum will have a carried working interest in these wells, which
means that RMG must pay all of the drilling and completion costs for these
wells; after production begins, the 80% net revenue interest will be split 40%
to RMG and 40% to Quantum, and operating costs will be split 50% to RMG and 50%
to Quantum. RMG will not be entitled to recover any of the drilling and
completion costs for these wells.
If RMG does not spend $2,500,000 to drill and complete the 25 wells by
November 30, 2000, and Quantum spends part or all of that amount of funds to
drill and complete wells on the acreage, then RMG will have the right (until
November 30, 2001) in effect to buy back its 50% WI for an amount equal to
Quantum's expenditures, plus Quantum's cost of funds (if borrowed). Quantum will
hold 100% of the WI and the full 80% NRI until such time as RMG buys back its
50% WI in the subject wells. If RMG buys back its 50% WI, Quantum would hold a
48% NRI, and a 50% working interest in the subject wells until two years after
RMG buys back its 50% working interest. In this period of time, RMG would hold a
50% WI but only a 32% NRI from the subject wells. After two years from the buy
back date, RMG would hold a 40% net revenue interest in production from the
subject wells; RMG would maintain its 50% WI starting with its buy back date.
7
In addition, the Quantum Agreement calls for RMG and Quantum to drill
and complete a total of an additional 100 wells between January 1, 2000 and
December 31, 2000, subject to force majeure. Each party shall pay 50% of the
wells' drilling and completion costs during the year 2000, for a 40% net revenue
interest to each party. Neither RMG nor Quantum will have a carried interest in
any of these wells. Instead, in the event that either Quantum or RMG elects not
to drill the wells during the year 2000, then the party who elects to drill the
wells shall recover the funds advanced by it to pay for the other party's share
of costs to drill and complete the wells, plus a 300% penalty. Until the paying
party recovers its costs plus the penalty, the paying party will hold 100% of
the working interest and the full (i.e., 80%) net revenue interest. After such
recovery of advances and penalty, the non-consenting party will own its 50%
working interest and 40% net revenue interest. This penalty provision shall also
apply to all future years between the parties as to wells not equally
participated in on the Quantum acreage.
The RMG-Quantum properties will be operated through Powder River Gas,
LLC, a Wyoming limited liability company owned 50% by RMG and 50% by Quantum.
CBM well sites will be selected from the acreage as approved by a management
committee in which Quantum and RMG have equal representation; drilling,
completion and gathering system costs will be authorized by the committee and
funded by RMG and Quantum according to their interests in the acreage as
determined by the Agreement with Quantum. USECC has the right to provide
drilling services on the first 25 wells drilled by Powder River Gas, LLC based
on competitive drilling rates in the areas surrounding the wells to be drilled.
Thereafter, USECC will have the right to submit bids on a competitive basis to
Powder River Gas LLC for drilling contracts on additional acreage.
RMG plans to operate a majority, if not all of the Powder River Basin
properties it owns outside the Quantum acreage.
PERMITTING
Drilling CBM wells requires obtaining permits from various governmental
agencies. The ease of obtaining the necessary permits depends on the type of
mineral ownership and the state in which the property is located. Intermittent
delays in the permitting process can reasonably be expected throughout the
development of any play. For example, there is currently a temporary moratorium
for drilling CBM wells on fee and state lands in Montana. RMG may shift its
strategy as needed to drill in different parts of the CBM play or drill
conventional shallow natural gas wells in order to evaluate all formations,
including coal, for gas potential and expedite production capabilities. As with
all governmental permit processes, there is no assurance that permits will be
issued in a timely fashion or in a form consistent with RMG's anticipated
operations.
On March 16, 2000, the Northern Plains Resource Council, Inc. (NPRC)
filed suit against the Montana Board of Oil and Gas Conservation requesting an
order of the court compelling the defendant to prepare a Supplemental
Environmental Impact Statement (EIS) for coalbed methane development, which
could further delay development. RMG and others have filed a motion to intervene
to participate in this litigation and to ensure that drilling can be performed
during any environmental analysis. The case is pending.
The Wyodak Environmental Impact Statement (EIS) for the Powder River
Basin in Wyoming was issued in the fall of 1999, which allowed the permitting of
5,000 CBM wells to be drilled on Federal lands in Wyoming. More CBM well
applications have been submitted causing the BLM to begin a second EIS for the
Powder River Basin Area in Wyoming that will include CBM and conventional oil
and gas wells. This new EIS is scheduled to commence in early summer 2000 and
continue for 20 to 24 months. Development on Federal lands in Wyoming has been
stopped with the balance of the Wyodak EIS permitted wells (4,000) occurring on
fee and state lands. BLM has started an EA reviewing drainage issues which could
allow an additional 1,500 new CBM well permits in the same region. This was
scheduled for scoping in early April
8
2000 with completion expected the following October. Again, there is no
assurance that the EA and EIS will not negatively impact RMG's business or
operations.
In addition, the Wyoming and Montana Departments of Environmental
Quality have regulations applying to the surface disposal of water produced from
CBM drilling operations. CBM operators are currently seeking changes in permit
requirements and department policy that would allow operators more flexibility
to discharge water on the surface. If these changes are not made, it may be
necessary to install and operate treatment facilities or drill disposal wells to
reinject the produced water back into the underground rock formations adjacent
to the coal seams or lower sandstone horizons. If RMG is unable to obtain the
appropriate permits or if applicable laws or regulations require water to be
disposed of in an alternative manner, the costs to dispose produced water will
likely increase. These costs could have a material effect on operations in this
area, including potentially rendering future production and development in the
affected areas uneconomic.
In Montana, RMG has pending applications to the BLM for approximately
60 permits to drill into shallow gas sand formations on Federal land held with
Quantum; these permits are expected to be issued in September 2000, and may be
converted to production status upon receiving approval from the Montana Board of
Oil and Gas. These wells would evaluate potential CBM production as well as
conventional gas. Regarding other land held with Quantum in Montana, the State
of Montana may lift its moratorium for CBM wells on private and state ground in
Montana, and start issuing new permits on these lands in October 2000 (a
voluntary moratorium is currently in place for wells on private and state ground
in Montana). RMG has not determined to what extent it will participate in this
procedure, and is evaluating how best to protect its position to have reasonable
exploration for CBM wells proceed on state and fee ground.
As approximately 40% of RMG's acreage in the Castle Rock prospect in
Montana (held with Quantum) is on Federal land, RMG expects to have ample
acreage permitted by the BLM by late calendar 2000 to begin drilling and
evaluating gas potential in both shallow sands and coal formations. These
favorable outcomes are predicted but not assured.
GATHERING AND TRANSMISSION OF CBM GAS
Companies involved in CBM production generally outsource their gas
gathering, compression and transmission. RMG intends to outsource its
compression and gathering needs as well, possibly on a competitive basis with
transmission companies in the immediate area. Negotiations with various
transmission companies have been initiated by RMG in order to better manage
future capital investment, but no contracts have been signed to date.
Coalbed methane production growth in the Powder River Basin has
historically been impeded by a shortage of gathering system capacity and
transport capacity out of the Basin. However, two large diameter gathering
pipelines were completed in September 1999 and a third was ready for service in
early 2000. The two completed pipelines will provide an additional 900 million
cubic feet, or MMcf, of daily gas capacity as set forth below:
Fort Union Gas Gathering, LLC's 106-mile, 24" gathering pipeline,
commenced operations September 1, 1999, with an initial capacity of 450 MMcf per
day;
Thunder Creek Gas Services, LLC's 126-mile, 24" gathering pipeline,
commenced operations September 1, 1999, with an initial capacity of 450 MMcf per
day; and
Additionally, CMS Energy's 110-mile, Big Horn Gas Gathering pipeline,
that connects to the northern terminus of the Fort Union pipeline, is continuing
to be expanded in length and has an initial capacity of 256
9
MMcf per day which can readily be upgraded to 500 MMcf per day with the addition
of booster compression. Further, on June 19, 2000, Big Horn Gas Gathering
announced the extension of its pipeline to serve producers in the Sheridan area.
This 50+ mile extension will place a 20" high pressure pipeline within 5 miles
of the Montana border and within close proximity to the development planned by
RMG and Quantum in their Kirby Prospect area.
Wyoming Interstate Gas Company's 143-mile, 24" Medicine Bow Lateral
pipeline commenced operations in November 1999 with an initial capacity of 260
MMcf per day. This pipeline will transport natural gas from the Thunder Creek
and Fort Union pipelines at the south end of the Powder River Basin to
interconnect with multiple interstate pipelines accessing markets to the east
and along the front range of Colorado. This system is already being expanded as
demand for transportation space grows. Further transmission lines are being
planned by other companies in the area.
POWDER RIVER BASIN PROPERTIES. As of June 1, 2000, RMG owned a 50%
working interest in oil and gas leases covering approximately 185,000 net acres
in the Powder River Basin in Montana. These leases generally have two to ten
year primary terms. The federal leases are generally ten year term leases and
newly acquired fee and state leases are generally two to five year term leases.
There are five separate project areas as follows:
1. CASTLE ROCK. This property consists of approximately 125,000 net
acres of leases held jointly with Quantum located in Powder River County, west
of Broadus, Montana. Additional properties in this area are under negotiation.
The Castle Rock prospect covers a large area and there are four separate
prospective areas: Otter Creek, Kirby, Bartholemew and Castle Rock areas.
Coals present in the Castle Rock prospect are in the Tongue River
Member of the Fort Union Formation. Coalbed methane production in the Wyoming
portion of the Powder River Basin is also from the Tongue River Member coals.
Coals of primary interest are the Sawyer, Knobloch and Flowers-Goodale coals.
Other coals present in the prospect area include the Pawnee, Brewster Arnold,
Terret and Stag coals. Gas shows from the Sawyer, Knobloch, and Flowers-Goodale
coals have been noted in several shallow water wells drilled in the area. The
apparent character, quality and gassiness of RMG project coals in the Castle
Rock project appear comparable to the coals in CBM projects by other operators
located near the Montana/Wyoming border area in Johnson and Campbell Counties,
Wyoming.
An initial permitting and drilling program in this area began in late
1999 and, to date, three holes have been completed. Coals encountered in the
first drill test are outlined in the following table:
COAL DEPTH THICKNESS
---- ----- ---------
Pawnee 245 feet 26 feet
Brewster 348 feet 20 feet
Sawyer 565 feet 22 feet
Knobloch 640 feet 20 feet
Flowers-Goodale 850 feet 26 feet
Misc other coals various 16 feet
-------
TOTAL COAL 130 feet
2. KIRBY: This lease block contains approximately 60,000 net acres held
jointly with Quantum located in Big Horn and Rosebud Counties, Montana, north of
Sheridan, Wyoming. Additional property in the area is being considered for
acquisition.
The prospect is located in the northwestern portion of the Powder River
Basin. Coalbed methane production has been established south of the prospect at
another field which is currently being developed by
10
Redstone Gas Partners. Redstone recently received Discharge Permits from the
Montana DEQ to discharge up to 1,650 gallons per minute into the Tongue River.
Redstone has production with 150 active locations in the field at this time.
Pennaco Energy is planning to drill several wells on a prospect east of the
field. PETCO is reportedly planning a 20 well test project offsetting project
acreage.
Several coal seams are present in the prospect area with total coal
thickness of approximately 100 feet. The thickest coal is the Wall coal which is
50-85 feet thick. Drilling depth to the Wall coal is about 500 feet and drilling
to 1000-1400 feet will test all coal sections.
Coals present at Kirby prospect are in the Tongue River member of the
Tertiary Fort Union Formation. Productive coals in the Wyoming portion of the
Powder River Basin in the CX field are also Fort Union Formation coals.
Potentially productive coals at Kirby prospect include the Canyon, Wall,
Carlson, Poker Jim-Pawnee, Brewster-Arnold, King-Sawyer, and Flowers-Goodale
coals. The Wall coal is the thickest coal in the prospect area with 50-60 feet
of development throughout the area. The Wall coal splits and thins south and
east of the prospect area. Drilling depth to the Wall coal is about 500 feet
over most of the prospect. The Wall coal outcrops along the Kirby on the east
margin of the prospect and along Rosebud Creek on the northwest portion of the
prospect.
At present there has been no gas content analysis of the Wall coal in
the immediate vicinity. However, at a recent spacing hearing before the Montana
Oil and Gas Commission for wells located in T9S R42E, Pennaco Energy presented
an exhibit with estimated gas content for various coals. Pennaco's estimate for
the Wall coal is 118 ft3/ton.
The coal intervals below the Wall coal range in thickness from 5 feet
or less to around 20 feet. The King-Sawyer coal and Flowers-Goodale are each
10-15 feet thick throughout the prospect area. Both of these coal zones have
produced some gas from shallow water wells located east of the prospect area.
Total combined coal thickness over the area is around 100 feet.
The Kirby prospect is located in a developing portion of the Powder
River Basin. Production and sales of coalbed methane have been established south
of the prospect. Gas market and pipeline access are closely established in the
area. Thick and multiple coals are present in the prospect area. Production from
the area may be enhanced by the structural features present over the prospect.
Successful completion of multiple coal zones in wells will greatly add to the
potential reserves of the area. CMS's Big Horn Gas Gathering is extending a new
20" gathering system to the Montana border near Decker, Montana.
3. GILLETTE NORTH. RMG holds a 100% working interest in 80 acres of
leases in this project area located in Campbell County, Wyoming. This State
lease lies at the north end of the City of Gillette. Potential exists for one
billion cubic feet of gas on this 80 acres alone. Existing coalbed methane wells
lay in the section immediately north. Permitting of 2 wells has begun on RMG's
property. RMG intends to conduct test drilling and production techniques in this
area that lies in the heart of the current coalbed methane play in the Gillette
area.
4. FINLEY. RMG holds 160 acres of leases in this project area located
in Converse County, Wyoming. This prospect is a State lease 12 miles east of
Edgerton, Wyoming. Review for a two well test is underway.
5. SUSSEX. RMG holds 640 acres of leases in this project area located
in Johnson County, Wyoming. This State lease lies 3 miles south of Sussex,
Wyoming. RMG has a 100% working interest.
OTHER PROPERTIES
RMG has also acquired two properties in Wyoming.
11
6. BAGGS NORTH. This prospect contains 120 acres of leases located in
Carbon County, Wyoming. This State lease is located 7 miles north of Baggs,
Wyoming. RMG has a 100% working interest in this prospect.
7. OYSTER RIDGE. Oyster Ridge is located in southwestern Wyoming in the
Ham's Fork Coal Field. It is midway between Evanston and Kemmerer, Wyoming and
lies in the counties of Uinta and Lincoln. Wyoming Highway 189 provides
excellent access into the area. Total property held by RMG at Oyster Ridge is
approximately 63,000 net mineral acres. RMG holds a 100% working interest and a
net revenue interest of 81.5% to 83.5%. Surface and mineral ownership is
approximately 60% Union Pacific Resources (UPR), 35% BLM, 5% state of Wyoming.
Union Pacific Resources retains the right to back into each years exploration
program for a 25% working interest. The coal formations of interest on this
project are the Cretaceous Frontier and Adaville. Both formations trend roughly
north-south through the project area. The Frontier Formation (early Late
Cretaceous) outcrops on the east side and dips westerly at 15(degree) to
30(degree). The Frontier coals are higher rank but much thinner than the
Adaville. The Adaville Formation (Late Cretaceous) outcrops on portions of the
west side of the property. Dips here are also 15(degree) to 30(degree).
Cumulative coal thickness in the Adaville is up to 100 feet. Frontier cumulative
coal thickness varies from 10 to 20 feet.
MINERALS - URANIUM
GENERAL. USE has interests in several uranium-bearing properties in
Wyoming and Utah and in uranium processing mills in Sweetwater County, Wyoming
(the "Sweetwater Mill") and in southeastern Garfield County, Utah (the
"Shootaring Mill"). All the uranium-bearing properties are in areas which
produced significant amounts of uranium in the 1970s and 1980s. USE plans to
develop and operate these properties (directly or through a subsidiary company
or a joint venture) to produce uranium concentrates ("U3O8") for sale to public
utilities that operate nuclear powered electricity generating plants. In
addition, other uranium-bearing properties in New Mexico and Wyoming are held by
Yellow Stone Fuels Corp. (a minority joint subsidiary of USE and Crested).
However, until uranium oxide prices improve significantly, all of the
uranium properties are in care and maintenance mode, meaning that work is
performed to keep the assets in stand-by mode and ready for later activity and
permitting work is done as needed (mostly monitoring and reporting) to keep
existing permits in effect.
GREEN MOUNTAIN
521 unpatented lode mining claims (the "Green Mountain Claims") on
Green Mountain in Fremont County, Wyoming, including 105 claims on which the
Round Park (Jackpot) uranium deposit is located, and the Sweetwater Mill,
(approximately 23 miles south of the proposed Jackpot Mine), are held by the
Green Mountain Mining Venture ("GMMV"), owned by Kennecott Uranium Company
("KUC" or "Kennecott"), a subsidiary of Kennecott Energy and Coal Company of
Gillette, WY. Kennecott Energy and Coal Company is a subsidiary of Rio Tinto
plc, formerly RTZ plc of London. Until September 11, 2000, USE (and Crested and
USECC) owned a 50% interest in the GMMV, but sold its interest to Kennecott in a
settlement of litigation. See below.
SHEEP MOUNTAIN
Unpatented lode mining claims, underground and open pit uranium mines
and mining equipment in the Crooks Gap area are located on Sheep Mountain in
Fremont County, Wyoming and are adjacent to and west of the GMMV mining claims.
From December 21, 1988 to June 1, 1998, these assets were held by Sheep Mountain
Partners ("SMP"). On June 1, 1998, USE received back from SMP all of the Sheep
Mountain mineral properties and equipment, in partial settlement of disputes
with Nukem, Inc. ("Nukem")
12
and its subsidiary Cycle Resource Investment Corp. ("CRIC"). The judgment
against Nukem/CRIC and the CIS uranium supply contracts in constructive trust
remained in dispute. See "Legal Proceedings." The Sheep Mountain Mines 1 and 2
were first operated by Western Nuclear, Inc., a subsidiary of Phelps Dodge
Corporation, in the late 1970s.
YELLOW STONE FUELS CORP.
Yellow Stone Fuels Corp.("YSFC"), was organized on February 17, 1997 in
Ontario, Canada. As of February 17, 1997, YSFC acquired all the outstanding
shares of Common Stock of Yellow Stone Fuels, Inc. (a Wyoming corporation which
was organized on June 3,1996), in exchange for YSFC issuing the same number of
shares of YSFC Stock to the former shareholders of Yellow Stone Fuels, Inc.
("YFI"). YSFC and its wholly-owned subsidiary Yellow Stone Fuels, Inc. are
herein collectively referred to as YSFC.
In order to concentrate the efforts of USE on conventional uranium
mining using the Shootaring Canyon and Sweetwater Mills, USE decided to take a
minority position in YSFC and not be directly involved in properties believed
suitable for the production of uranium through the in-situ leach ("ISL") mining
process. USE will have the right of first refusal with respect to any uranium
ore bodies YSFC discovers which are amenable to conventional mining and milling
and YSFC will have the right of first refusal with respect to ore bodies
discovered by USE amenable to the ISL process. In the ISL process, groundwater
fortified with oxidizing agents is pumped to the ore body, causing the uranium
contained in the ore to dissolve. The resulting solution is pumped to the
surface where it is further processed to uranium oxide which is shipped to
conversion facilities for eventual sale. Generally, the ISL process is more cost
effective and environmentally benign compared to conventional mining techniques.
In addition, less time may be required to bring an ISL mine into operation than
to permit and build a conventional mine and mill.
YSFC has ceased operations and abandoned all of its claims, due to the
depressed market for uranium oxide. YSFC's equipment which had been stored at
the GMMV's Sweetwater Uranium Mill, has been conveyed to Kennecott as part of
the settlement agreement with Kennecott.
REGISTERED EXCHANGE OFFER. In fiscal 1998, YSFC sold 1,219,000 shares
of Common Stock to 94 investors in a private placement, at $2.00 per share; net
proceeds to YSFC were $2,041,060 after payment of $316,940 in commissions to the
placement agent (AFFC, Denver, Colorado) and $80,000 in legal and accounting
expenses. Most of these investors were "accredited" investors. The securities
were sold pursuant to Rule 506 of Regulation D under the Securities Act of 1933,
and are restricted from resale under Rule 144. In connection with the private
placement, in September 1997, USE entered into an Exchange Rights Agreement with
YSFC and AFFC.
Pursuant to the Exchange Rights Agreement between USE, YSFC and AFFC,
USE made a registered Exchange Offer to each of the YSFC shareholders who
invested in YSFC through AFFC in late 1997 and early 1998. The Exchange Offer
also was made by USE to each holder of the YSFC Warrants, who exchanged some or
all of the YSFC Warrants for USE Warrants (see below). Shareholders of YSFC who
did not invest in YSFC through AFFC were not eligible to participate in the
Exchange Offer.
The Exchange Rights Agreement was intended to provide liquidity to the
YSFC shareholders (and the holders of the YSFC Warrants), by allowing them the
opportunity to exchange their securities in a private company (YSFC) for
securities in a NASDAQ NMS public company (USE). The Exchange Rights Agreement
was negotiated at arms' length between YSFC, USE (which had founded and
organized YSFC), and AFFC (as YSFC's placement agent in the private offering of
YSFC restricted shares). Under the Exchange Rights Agreement, if YSFC were not
listed on NASDAQ NMS by the eighteenth month anniversary of the Exchange Rights
Agreement, USE would be required at that time to make an offer to the YSFC
shareholders to exchange free trading shares of USE Common Stock for their
restricted shares of YSFC. An initial listing
13
on NASDAQ NMS would require YSFC to meet several conditions, including having
minimum net tangible assets of $6,000,000 and at least 400 shareholders. YSFC
did not meet these conditions to listing. Therefore, USE filed a registration
statement on Form S-4 (declared effective in March 1999).
The Exchange Ratio for shares was based upon (x) the original
investment amount paid by the YSFC shareholder plus 10 percent simple annual
interest, divided by (y) the average of the closing NASDAQ NMS bid prices for a
share of USE Common Stock for the five trading days before USE receives the
Notice of Election to Exchange from each YSFC shareholder. The average price for
USE Common Stock is referred to as the "USE share value." No fractional USE
shares will be issued; any fractional shares will be rounded up to the next full
USE share.
As of May 31, 2000, the Exchange Offer had been completed. USE issued
734,919 shares in exchange for 1,219,000 YSFC shares, and USE Warrants to
purchase 67,025 USE shares (at $3.64 per share) in exchange for all the YSFC
Warrants. YSFC has 11,851,500 shares of Common Stock issued and outstanding as
of August 26, 2000, including 4,359,000 shares (36.8%) issued to USE and
Crested.
THE PROPERTY INTERESTS OF USE IN UTAH THROUGH PLATEAU RESOURCES LIMITED
("PLATEAU") ARE:
Plateau Resources Limited is a wholly-owned subsidiary of USE. See
"Plateau Shootaring Canyon Mill" below.
The Tony M Mine and the Frank M properties, underground uranium
deposits in San Juan County, Utah are located partially on Utah State mining
leases.
Plateau is the lessee of the Tony M Mine and portions of the Frank M
properties and has posted a bond securing Plateau's obligations to reclaim these
properties. The Tony M mine was originally developed by Plateau at the time
Plateau was owned by Consumers Power Company ("CPC"), a Michigan public utility.
Significant areas of uranium mineralization have been accessed and delineated by
the prior owner's underground workings. When the Tony M Mine was in production
(while Plateau was owned by CPC), it produced ore containing from three to eight
pounds of uranium concentrates per ton. Some of this ore was processed at the
Shootaring Mill. In addition, low grade uranium ore was stockpiled at the Tony M
Mine and at the Shootaring Mill.
Plateau also acquired the Velvet Mine and the nearby Woods Complex in
the Lisbon Valley area in southeastern Utah. The Velvet Mine was fully developed
and permitted by its prior owner and is located approximately 178 miles by road
from the Shootaring Mill. The Woods Complex was formerly an operating uranium
mine with a remaining undeveloped resource. Access to this resource would be by
extending a drift approximately 2,500 feet from the former Wood Mine. The Woods
Mine property is not permitted, but USE does not expect difficulty in obtaining
a new permit because the surface facilities would occupy the site that has been
disturbed from previous operations.
THE GREEN MOUNTAIN MINING VENTURE ("GMMV") PROJECT
GMMV. In fiscal 1991, USE entered into an agreement to sell 50 percent
of its interests in the Green Mountain uranium claims, and certain other rights,
to Kennecott for $15,000,000 and a commitment by Kennecott to fund the first
$50,000,000 of GMMV expenditures pursuant to Management Committee budgets. At
the same time USE and Kennecott formed the GMMV and entered into a joint venture
agreement (the "GMMV Agreement") with USE to develop, mine and mill uranium ore
from the Green Mountain Claims, and market uranium oxide. For detailed
explanation of the GMMV agreement, please see U.S. Energy Corp's. 1999 Form 10-K
at pages 8-11, and footnote F to the financial statements.
14
In fiscal 2000, Kennecott filed a lawsuit to dissolve the GMMV. USE
counterclaimed for damages. This lawsuit was settled on September 11, 2000.
Kennecott and USE have agreed to ask the Court to dismiss all parties' claims in
the lawsuit. Under the settlement agreement, Kennecott has paid the Company
$0.25 million and will pay $1,375,000 five days after court approval is received
and another $1,625,000 in January 2001, to acquire all of USE's (and Crested and
USECC's) interest in the GMMV, its properties and the Sweetwater Uranium Mill
(with certain exemptions). Kennecott also has assumed all reclamation and other
liabilities associated with the GMMV, its properties, the Sweetwater Mill and
all liabilities associated with the GMMV since its inception, including the
historical liabilities associated with the Sweetwater Mill prior to its
acquisition by the GMMV. USE (and Crested and USECC) together have retained a 4%
net profits royalty in any future uranium oxide produced from the GMMV mining
claims through the Sweetwater Mill (currently in a standby mode and not
operational).
The ion exchange facility on the Sheep Mountain properties will not be
transferred to Kennecott, nor will the cleanup liabilities associated therewith
be assumed by Kennecott. However, USE and Kennecott have agreed to cooperate in
the disposal of the facility into the Sweetwater Mill's disposal and impoundment
areas.
Also, certain items of mining equipment held by the GMMV have been
conveyed to USE, and will be removed from the GMMV properties in 2001.
At such time as Kennecott has completed necessary reclamation work on
the Green Mountain unpatented lode mining claims (including the Round Park
uranium deposit proposed to be mined through the Jackpot Mine) Kennecott will
quit claim all such mining claims to USE (and Crested), as well as certain
equipment currently being used at the mine (including a compressor and standby
generator). Kennecott will keep the Sweetwater Mill.
For information on the Green Mountain claims, see below.
PROPERTIES
The Green Mountain claims include the Big Eagle Properties on Green
Mountain, which contain substantial uranium mineralization, and are adjacent to
other mining claims. The Big Eagle Properties contain two open-pit mines, as
well as related roads, utilities, buildings, structures, equipment and a
stockpile of 500,000 tons of uranium material with a grade of approximately .05%
U3O8. The assets include two buildings (38,000 square feet and 8,000 square
feet) formerly used by Pathfinder Mines Corporation ("PMC") in mining
operations. Also included are three ore-hauling vehicles, each having a 100-ton
capacity.
The Round Park (Jackpot) mining claims contain deposits of uranium
which have been estimated to contain 52,000,000 pounds of U3O8; the grade
averages 4.6 pounds of U3O8 per ton of mineralized material. The GMMV had
planned to mine this mineralized material from two decline tunnels (-17 percent
slope) in the Jackpot Mine driven underground from the south side of Green
Mountain. The first of several mineralized horizons in the Round Park deposits,
is about 2,300 feet vertically down from the surface of Green Mountain. This
work was halted in July 1998.
SWEETWATER MILL. In fiscal 1993, the GMMV acquired the Sweetwater
uranium processing mill and associated properties located in Sweetwater County,
Wyoming, approximately 23 miles south of the proposed Jackpot Mine, from a
subsidiary of Union Oil Company of California ("UNOCAL"), primarily in
consideration of Kennecott and the GMMV assuming environmental liabilities, and
decommissioning and reclamation obligations.
The Sweetwater Mill was designed as a 3,000 ton per day ("tpd")
facility. UNOCAL's subsidiary, Minerals Exploration Company, reportedly
processed in excess of 4,200 tpd for sustained periods. The Mill
15
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). The GMMV is responsible for compliance with mill
decommissioning and land reclamation laws, for which the environmental and
reclamation bonding requirements are approximately $24,330,000, which includes a
$4,560,000 bond required by the NRC. None of the GMMV future reclamation and
closure costs are reflected in the consolidated financial statements.
The reclamation and environmental liabilities assumed by the GMMV (and
now Kennecott's sole responsibility) 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. The Wyoming DEQ exercises delegated jurisdiction
from the United States Environmental Protection Agency ("EPA") to administer the
Clean Water Act and the Clean Air Act, and directly administers Wyoming statutes
on mined land reclamation. The Sweetwater Mill is also regulated by the NRC for
tailings cells and mill decontamination and cleanup. The EPA has continuing
jurisdiction under the Resource Conservation and Recovery Act, pertaining to any
hazardous materials which may be on site when cleanup work is started.
PLATEAU'S SHOOTARING CANYON MILL
ACQUISITION OF PLATEAU RESOURCES LIMITED ("PLATEAU"). In August 1993,
USE purchased from Consumers Power Company ("CPC"), all of the outstanding stock
of Plateau which owns the Shootaring Canyon uranium processing mill and support
facilities in southeastern Utah (the "Shootaring Mill") for a nominal cash
consideration. The Shootaring Mill holds a source materials license from the
NRC. In the purchase of the stock from CPC, USE agreed to various obligations
more fully set out in USE's 1998 Form 10-K at pages 15 and 16.
SHOOTARING MILL AND FACILITIES. The Shootaring Mill is located in
southeastern Utah and occupies 19 acres of a 265 acre plant site. The mill was
designed to process 750 tpd, but only operated on a trial basis for two months
in mid-summer of 1982. In 1984, Plateau placed the mill on standby because CPC
had canceled the construction of an additional nuclear energy plant.
Plateau also owns approximately 90,000 tons of uranium mineralized
material stockpiled at the mill site and approximately 172,000 tons of
mineralized material stockpiled at the Tony M Mine. Included with mill assets
are tailings cells, laboratory facilities, equipment shop and inventory. The NRC
issued a license to Plateau authorizing production of uranium concentrates,
however, since the mill was shut down, only maintenance and required safety and
environmental inspection activities were performed and the source materials
license with the NRC was for standby operations only. Plateau applied to the NRC
to convert the source materials license from standby to operational and upon
increasing the reclamation bond, the NRC issued the new license on May 2, 1997.
Plateau has a cash bond in favor of the NRC in the amount of $7,952,602 plus an
additional $1,315,100 in government securities for future bonding and licenses
for reclamation.
Plateau obtained approval of a water control permit for the tailings
cell from the Utah Water Control Division and is awaiting the NRC's review of
the operating license conditions so Plateau can continue with construction of
tailing facilities.
16
TICABOO TOWNSITE
Plateau owns all of the outstanding stock of Canyon Homesteads, Inc.
("Canyon"), a Utah corporation, which developed the Ticaboo, Utah Townsite 3.5
miles south of the Shootaring Mill. The Ticaboo site includes a motel,
restaurant, lounge, convenience store and single family, mobile home and
recreational vehicle sites (all with utility access). The Townsite is located on
a State of Utah lease near Lake Powell and is being operated as a commercial
enterprise. An amendment was entered into on April 1, 1997 on the Utah State
lease covering the Ticaboo Townsite whereby the State deeded portions of the
Townsite to Canyon on a sliding scale basis. USE and Crested have been
developing the Townsite and are selling home and mobile home sites.
YELLOW STONE FUELS CORP.
YSFC has abandoned all of its unpatented mining claims and State leases
due to historically low uranium market prices.
SHEEP MOUNTAIN PARTNERS ("SMP")
SMP PARTNERSHIP. In February 1988, USE acquired uranium mines, mining
equipment and mineralized properties (Sheep Mountain Mines) at Crooks Gap in
south-central Fremont County, Wyoming, from Western Nuclear, Inc. These Crooks
Gap mining properties are adjacent to the Green Mountain uranium properties. SMP
mined and sold uranium ore from one of the underground Sheep Mines during fiscal
1988 and 1989. Production ceased in fiscal 1989, because uranium could be
purchased from the spot market at prices below the mining and milling costs of
SMP. In December 1988, USE sold 50 percent of the interests in the Crooks Gap
properties to Nukem's subsidiary CRIC for cash. The parties thereafter
contributed the properties to and formed Sheep Mountain Partners ("SMP"), in
which USE received an undivided 50 percent interest. SMP is a Colorado general
partnership formed on December 21, 1988, between USE and Nukem, Inc. of
Stamford, CT ("Nukem") through its wholly-owned subsidiary Cycle Resource
Investment Corporation ("CRIC"). Each group provided one-half of $315,000 to
purchase equipment from Western Nuclear, Inc.; USE also contributed its
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. Nukem is a uranium brokerage and trading concern.
SMP was directed by a management committee, with three members
appointed by USE, and three members appointed by Nukem/CRIC. The committee has
not met since 1991 as a result of the SMP arbitration/litigation. During fiscal
1991, certain disputes arose between the partners of SMP. These disputes
resulted in arbitration/litigation and subsequent consensual arbitration from
which an Order and Award was issued on April 18, 1996. Such proceedings are
still under appeal.
PROPERTIES. Until June 1, 1998, SMP owned 80 unpatented lode mining
claims on the Crooks Gap properties, including two open-pit and five underground
uranium mines and an inventory of uranium ore. In connection with a partial
settlement of litigation/arbitration between USE and Nukem/CRIC, SMP conveyed
these mineral properties and equipment to USE. Production from the properties is
subject to sliding-scale royalties payable to Western Nuclear, Inc., with rates
ranging from one to four percent on recovered uranium concentrates. As of the
date of this report, SMP and/or USE and USECC owned 98 unpatented lode mining
claims and a 644 acre Wyoming State Mineral Lease in the Crooks Gap area.
An ion exchange plant is located on the properties which can be used to
remove natural soluble uranium from mine water. USE has submitted a plan to the
NRC to decommission this facility and obtained
17
a three year extension for timeliness of decommissioning. This facility may be
disposed of at the Sweetwater Mill impoundment facility (see above).
PROPERTY MAINTENANCE. Currently, USE has a maintenance staff on site to
care for and maintain the properties.
PERMITS. Permits to operate existing mines on the Crooks Gap 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, a NPDES
water discharge permit under the Clean Water Act has been obtained. Monitoring
and treatment of water removed from the mines and discharged in nearby Crooks
Creek is generally required. During the past two years, SMP did not discharge
wastewater into Crooks Creek, and the mine water is presently being discharged
into the SMP McIntosh Pit.
URANIUM MARKET INFORMATION.
URANIUM SPOT MARKET. Uranium spot prices averaged $8.05/lb. U3O8 on
August 7, 2000, a decrease of 5.9% from $8.45 at the end of May, 2000. During
the first half of 2000, total spot market volume was approximately 7 million
pounds U308 compared with 14 million pounds for the first half of 1999.
URANIUM LONG-TERM MARKET. The long-term market continued to be
relatively quiet in the second calendar quarter with the long-term uranium price
indicator at 9.50/lb. U3O8. Demand in the long-term market is expected to
increase over the remainder of the year as utilities move to cover future needs
and volume for the year is expected to exceed the 1999 demand. For a detailed
analysis of past uranium market development, please see USE's 1998 Form 10-k.
GOLD
SUTTER GOLD MINE (CALIFORNIA)
SUTTER GOLD MINING COMPANY. In fiscal 1991, USE acquired an interest in
the Lincoln Project (including the underground Lincoln Mine and the 2,800 foot
Stringbean Alley decline) in the Mother Lode Mining District of Amador County,
California. The entire Lincoln Project is now owned by Sutter Gold Mining
Company, a Wyoming corporation ("SGMC"), which is a 66.3% owned and controlled
subsidiary of USE as of May 31, 2000. The Lincoln Project has been renamed the
Sutter Gold Mine ("SGM").
As discussed below, SGMC has a plan to put the SGM into production.
However, implementation of this plan will require substantial capital financing.
Recent record low prices for gold have made financing difficult. These low
prices and the lack of capital have resulted in a substantial write down of the
SGMC assets. See "Managements Discussion and Analysis of Financial Condition and
Results of Operations" for fiscal 1999.
Due to the depressed gold price and lack of available funding, SGMC has
deferred the start of construction of the 1,000 ton-per-day gold mill complex
and development of the underground mine. Plans to develop the mine into a
visitor's center to generate cash flow while the gold prices remain depressed
are being evaluated.
Like uranium, current gold prices are too low to allow SMGC to raise
the capital necessary to place the gold property into production. Except for
limited infrastructure improvements in 2000, the assets are in care and
maintenance mode and the exploration permits are being kept current as
necessary.
18
In fiscal 1997, SGMC completed private financings totaling a net of
US$7,115,400 ($1,272,000 through a private placement conducted in the United
States by RAF Financial Corp., now American Fronteer Financial Corp. or "AFFC",
and $5,843,400 through a private placement conducted in Toronto, Ontario, Canada
by C.M. Oliver & Company Limited). The net proceeds of $6,511,200 from these
financings (after deduction of commissions and offering costs) were applied to
pre-production mine development, mill design, permitting and property holding
and acquisition cost. Additional financing of up to $15,000,000 will be sought
to fund the development and construction of the mine/mill.
During fiscal 1998, SGMC amended its 1993 Conditional USE Permit (see
"Permits and Future Plans"), finalized the process flow of the mill, entered
into the final design engineering contract with the engineering firm of Lockwood
Greene of Dallas, Texas and built the entrance road to the mine. Once a decision
to commence production is made, from that date, it is estimated it will take
approximately 18 months to complete the mill complex construction and pour the
first bar of gold.
After completion of the two private financings, and taking into account
a restructuring of the ownership of USE in SGMC, USE owns a $10,000,000
Contingent Stock Purchase Warrant (the "USE Warrant") which was issued to USE in
connection with the restructuring of SGMC for the Canadian private placement.
The USE Warrant provides that for each ounce of gold over 300,000 ounces added
to the proven and probable category of SGMC's reserves (up to a maximum of
400,000 additional ounces), using a cut-off grade of 0.10 ounces of gold per ton
(at a minimum vein thickness of 4 feet), USE will be entitled to cash or
additional shares of Common Stock from SGMC (without paying additional
consideration) at SGMC's election. The number of additional shares issuable for
each new ounce of gold reserves will be determined by dividing US$25 by the
greater of $5.00 or the weighted average closing price of the Common Stock for
the 20 trading days before exercise of the USE Warrant. The USE Warrant is
exercisable semi-annually. SGMC may prevent the exercise of the USE Warrant by
paying USE US$25 in cash for each new ounce of gold (payable out of a maximum of
60% of net cash-flow from SGMC's mining operations). Additional ore reserves
will be determined by an independent geologist agreed upon by the parties.
APRIL 1998 TRANSACTION FOR CASH AND SGMC SPECIAL WARRANTS. As of April
7, 1998, USE entered into four separate Stock Purchase Agreements with four
Canadian investment funds, for the issuance of 658,895 shares of Common Stock of
USE, in consideration of the funds' payment to USE of $1,190,000 in cash and the
delivery to USE of 888,900 Special Warrants of SGMC. The funds had paid SGMC a
total of Cdn $4,888,950 in May 1997, pursuant to a private offering in Canada,
to purchase the Special Warrants from SGMC. In fiscal 1999, USE issued 89,059
shares of its common stock in exchange for 207,500 Special Warrants from SGMC
shareholders increasing USE's ownership of SGMC by 4%. For further information
on the transaction, please see Footnote F to the financial statements.
USECC MANAGEMENT AGREEMENT WITH SGMC. Effective June 1, 1996, SGMC
entered into a Management Agreement under which USE provides administrative
staff and services to SGMC. USE is reimbursed for actual costs incurred, plus an
extra 10% during the exploration and development phases; 2% during the
construction phase; and 2.5% during the mining phase (such 2.5% charge to be
replaced with a fixed sum which the parties will negotiate at the end of two
years starting when the mining phase begins). The Management Agreement replaces
a prior agreement by which USE provided administrative services to SGMC.
PROPERTIES. SGMC (through its subsidiary USECC Gold L.L.C.) holds
approximately 14 acres of surface and mineral rights (owned), 240 acres of
surface rights (owned), 436 acres of surface rights (leased), 158 acres of
mineral rights (leased), and 380 acres of mineral rights (owned), all on
patented mining claims near Sutter Creek, Amador County, California. The acreage
of mineral rights owned will be decreased to about 280-300 acres in 2000. The
properties are located in the western Sierra Nevada Mountains at from 1,000 to
1,500 feet in elevation; year round climate is temperate. Access is by
California State Highway 16
19
from Sacramento to California State Highway 49, then by paved county road
approximately .4 miles outside of Sutter Creek.
Surface and mineral rights holding costs will aggregate approximately
$225,000 from June 1, 2000 through May 31, 2001. Property taxes for fiscal 2001
are estimated to be $30,000.
The leases are for varying terms, and require rental fees, advance
production royalties, real property taxes and insurance. The lease that was to
expire in February 1998 has been extended through its force majeure clause due
to the low price of gold. Leases expiring before 2010 will generally be extended
automatically, so long as minerals are continuously produced from the property
that is subject to the lease or minimum payments are made. Other leases may be
extended for various periods on terms similar to those contained in the original
leases. Production royalties are from 2.5% to 6% (most are 4%). The various
leases have different methods of calculating royalty payments (net smelter
return and gross proceeds).
A separate holder of four of the properties that were assembled into
the SGM holds a 5 percent net profits interest on production from such
properties, which was granted by a prior owner of the project. An additional 0.5
percent net smelter return royalty is held by a consultant to a lessee prior to
that owner's acquisition of the properties, which 0.5 percent interest covers
the same four properties.
PERMITS AND FUTURE PLANS. In August 1993, the Amador County Board of
Supervisors issued a Conditional USE Permit ("CUP") allowing mining of the SGM
and milling of production, subject to conditions relating to land USE,
environmental and public safety issues, road construction and improvement, and
site reclamation. The permit will allow construction of the mine and mill
facilities in stages as the project gets underway, thereby reducing initial
capital outlays. Additional permits (for road work, dust control and
construction of mill and other surface improvements) need to be applied for in
due course. In August and September 1998, the Amador County Board of Supervisors
certified the Final Subsequent Environmental Impact Report ("FSEIR") and
approved all of the amendments requested by SGMC. Amendments to the CUP will
remove two tailings dams, eliminate the need to use cyanide on-site, and
eliminate mine related traffic on two county roads. The certification and
decision has been challenged in a lawsuit filed by a local citizens' group, see
"Legal Proceedings". Since SGMC already has a valid CUP, SGMC believes it may be
able to move forward on certain parts of the development of the
mine/mill/visitor center. In any event, SGMC does not expect the appeal process
to materially impact the current development plan or schedule.
VISITOR'S CENTER. In fiscal 2000, SGMC spent approximately $298,000 for
surface infrastructure related to improving access to the mine site, and to a
lesser extent tourist related improvements. These improvements will help SGMC
develop the tourist potential of Sutter Gold Mine, pending improvements in the
price of gold. Demographics indicate that within a 150 mile radius, there is a
total market population of 19.4 million people with 9.0 million tourists
visiting the area each year. The Sutter Gold Mine/Museum attraction is located
along scenic Highway 49 (known as the Gold Road) between the historic gold
mining towns of Sutter Creek and Amador City, Amador County, California. The
Amador County Chamber of Commerce estimates that 2.5 million people drive by
SGM's entrance each year. Facilities include a Visitor's Center with a gift shop
and museum, a self-guided tour of modern mining activities, visitor
gallery/museum, hiking trails, picnic areas and a special gold panning area.
SGMC is evaluating how the tourism business performs during fiscal 2000 and the
first quarter of 2001. These evaluations could result in the business being
curtailed, shut down or sold.
MOLYBDENUM
As a holder of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, USE is entitled
to receive annual advance royalties of 50,000 pounds of molybdenum, or cash
equivalent. AMAX Inc. (which was acquired by Cyprus Minerals Company and was
20
renamed Cyprus Amax Minerals Company in November 1993 and was acquired later by
Phelps Dodge) delineated a deposit of molybdenum containing approximately
146,000,000 tons of mineralization averaging 0.43% molybdenum disulfide on the
properties of USE.
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 USE. See "Note F to the USE consolidated financial statements." The advance
royalty payments reduce the operating royalties (six percent of gross production
proceeds) which would otherwise be due from Cyprus Amax from production. There
is no obligation to repay the advance royalties if the property is not placed in
production.
The Agreement with AMAX also provides that USE receive $2,000,000, at
such time as the Mt. Emmons properties are put into production and, in the event
AMAX sells its interest in the properties, USE receives 15 percent of the first
$25,000,000 received by AMAX. USE has asserted that the acquisition of AMAX by
Cyprus Minerals Company was a sale of AMAX's interest in the properties which
would entitle USE to such payment. Cyprus Amax has rejected such assertion and
USE is considering remedies. USE recognized $132,600, $150,600 and $211,000 of
revenues in fiscal 2000, 1999 and 1998 respectively, related to this royalty
interest.
MOLYBDENUM MARKET INFORMATION
Molybdenum is a metallic element with applications in both metallurgy
and chemistry. Principal consumers include the steel industry, which uses
molybdenum alloying agents to enhance strength and other characteristics of its
products, and the chemical, super-alloy and electronics industries, which
purchase molybdenum in upgraded product forms.
The molybdenum market is cyclical with prices influenced by production
costs and the rate of production of foreign and domestic primary and by-product
producers, world-wide economic conditions particularly in the steel industry,
the U.S. dollar exchange rate, and other factors such as the rate of consumption
of molybdenum in end use products. When molybdenum prices rose dramatically in
the late 1970s, for example, steel alloys were modified to reduce reliance on
molybdenum. AMAX and Cyprus Minerals Company were the two major primary
producers of molybdenum in the United States until November 1993, when AMAX was
acquired by Cyprus and formed Cyprus AMAX. Thereafter, Phelps Dodge acquired
Cyprus Amax. This further concentrates copper production capabilities and added
molybdenum reserves to Phelps Dodge.
PARADOR MINING (NEVADA)
USE is a sublessee and assignee from Parador Mining Co., Inc.
("Parador"), of certain rights under two patented mining claims located in the
Bullfrog Mining District of Nye County, Nevada. The claims are immediately
adjacent to and part of a gold mine operated by Bond Gold Bullfrog, Inc.
("BGBI"), a non- affiliated third party (now known as Barrick Bullfrog, Inc.).
USE has 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 is for a ten year primary term, is subject to a prior lease to
BGBI on the properties, and allows USE to explore for, develop and mine minerals
from the claims. If USE conducts activities on the claims, they are entitled to
recover costs out of revenues from extracted minerals. After recovering any such
costs, USE will pay Parador a production royalty of 50 percent of the net value
of production sold from the claims.
USE and Parador presently are in litigation concerning this property.
See "Legal Proceedings - BGBI Litigation" below.
21
OIL AND GAS
FORT PECK LUSTRE FIELD (MONTANA). USE conducts a small oil production
operations at the Lustre Oil Field on the Ft. Peck Indian Reservation in
north-eastern Montana. Until December 1998, four wells were producing, but were
shut in pending an increase in oil prices. Recently, three of the wells were
again placed into production. USE received 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, have been pledged or mortgaged as security for
a $1,000,000 line of credit from a bank.
COMMERCIAL OPERATIONS
REAL ESTATE AND OTHER COMMERCIAL OPERATIONS. USE owns varying
interests, alone and with Crested, in affiliated companies engaged in real
estate, transportation, and commercial businesses. The affiliated organizations
include Western Executive Air, Inc. ("WEA") and Canyon Homesteads, Inc. (through
Plateau). Activities of these and other subsidiaries in the business sectors
include ownership and management of a commercial office building, the townsite
of Jeffrey City, Wyoming and the townsite, motel, convenience store and other
commercial facilities in Ticaboo, Utah.
WYOMING PROPERTIES. USE 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. The property is mortgaged to the WDEQ as security for future
reclamation work on the SMP Crooks Gap uranium properties.
USE and Crested (through WEA) also owns a fixed base aircraft operation
at the Riverton Municipal Airport, including a 10,000 square foot aircraft
hangar and 7,000 square feet of 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 $1,180 (adjusted annually to reflect changes
in the Consumer Price Index), plus a $0.02 fee per gallon of fuel sold. WEA owns
and operates an aircraft fixed base operation with fuel sales, flight
instruction services and aircraft maintenance in Riverton, Wyoming.
USE and Crested also own 18 semi-developed lots on 26.8 acres and 63
acres of undeveloped land near the Riverton Municipal Airport, and three
mountain sites covering 16 acres in Fremont County, Wyoming.
USECC owns various buildings, 290 city lots and/or tracts and other
properties at the Jeffrey City townsite in south-central Wyoming, where about
130 people presently live. Nearly 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 when, and if the
Jackpot Mine and Sweetwater Mill are put into operation.
In Riverton, Wyoming, 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.
COLORADO PROPERTIES. In connection with the AMAX transaction for the
Mt. Emmons molybdenum properties near Crested Butte, Colorado, USECC acquired an
option from AMAX (now Cyprus Amax) to purchase approximately 57 acres for
$200,000 in Mountain Meadows Business Park, Gunnison, Colorado. See "Minerals -
Molybdenum" above. The property is zoned commercial and industrial, and is
adjacent to Western State College. In fiscal 1995, USECC and Cyprus Amax agreed
to exercise the option by USE and
22
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 $19,358.
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.
Although initial payments on the option agreements were received, the
developer is in default on the balance. In July 1998, USE filed a lawsuit
seeking recovery of the balance owing on promissory notes and contracts. See
"Item 3 - Legal Proceedings."
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 Canyon Mill - Ticaboo
Townsite" above). In fiscal 1995, USE acquired the minority interest in the
joint venture from a nonaffiliate.
Commercial operations are not dependent upon a single customer, or a
few customers, the loss of which would have a materially adverse effect on the
Company.
CONSTRUCTION
FOUR NINES GOLD, INC. For fiscal 2000, FNG had one contract for
construction work. It also performed contract construction work in the coalbed
methane business for various companies. Rental revenues totaled $260,400 for
fiscal 2000 at a profit of $54,000.
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 the Company.
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
GENERAL. USE's 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 also impact USE. Similar
laws and regulations in California affect SGMC, operations and in Utah laws and
regulations effect Plateau's operations.
USE's management believes USE is currently in compliance in all
material respects with existing environmental regulations. To the extent that
production by SMP, GMMV, SGMC or RMG is delayed, interrupted or discontinued due
to need to satisfy existing or new provisions which relate to environmental
protection, future USE earnings could be adversely affected.
CROOKS GAP. An inoperative ion exchange facility at Crooks Gap
currently holds a NRC license for possession of uranium operations byproducts.
USE has applied to the NRC for permission to decommission
23
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 and which is approved for unrestricted operation.
OTHER ENVIRONMENTAL COSTS. 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 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 adverse impact on the competitive
position of the Company.
EMPLOYEES
As of August 26, 2000, USE had approximately 86 full-time employees.
Crested uses approximately 50 percent of the time of USE employees, and
reimburses USE on a cost reimbursement basis.
MINING CLAIM HOLDINGS
TITLE TO PROPERTIES. Nearly all the uranium mining properties held by
GMMV, USE and Plateau are on federal unpatented claims. Unpatented claims are
located upon federal public land pursuant to procedure established by the
General Mining Law. Requirements for the location of a valid mining claim on
public land depend on the type of claim being staked, but generally include
discovery of valuable minerals, erecting a discovery monument and posting
thereon a location notice, marking the boundaries of the claim with monuments,
and filing a certificate of location with the county in which the claim is
located and with the BLM. If the statutes and regulations for the location of a
mining claim are complied with, the locator obtains a valid possessory right to
the contained minerals. To preserve an otherwise valid claim, a claimant must
also pay certain rental fees annually to the federal government (currently $100
per claim) and make certain additional filings with the county and the BLM.
Failure to pay such fees or make the required filings may render the mining
claim void or voidable. Because mining claims are self-initiated and
self-maintained, they possess some unique vulnerabilities not associated with
other types of property interests. It is impossible to ascertain the validity of
unpatented mining claims solely from public real estate records and it can be
difficult or impossible to confirm that all of the requisite steps have been
followed for location and maintenance of a claim. If the validity of an
unpatented mining claim is challenged by the government, the claimant has the
burden of proving the present economic feasibility of mining minerals located
thereon. Thus, it is conceivable that during times of falling metal prices,
claims which were valid when located could become invalid if challenged.
Disputes can also arise with adjoining property owners for encroachment or under
the doctrine of extralateral rights (see "Legal Proceedings - BGBI Litigation").
RMG's properties and mineral leases of BLM, state and fee lands, which
require annual cash payments totaling approximately $515,000 during fiscal 2001,
50% of which is the obligation of RMG to keep the leases in effect.
PROPOSED FEDERAL LEGISLATION. The U.S. Congress has, in legislative
sessions in recent years, actively considered several proposals for major
revision of the General Mining Law, which governs mining claims and related
activities on federal public lands. If any of the recent proposals become law,
it could result in the imposition of a royalty upon production of minerals from
federal lands and new requirements for mined land reclamation and other
environmental control measures. It remains unclear whether the current Congress
will pass such legislation and, if passed, the extent such new legislation will
affect existing mining claims and operations. The effect of any revision of the
General Mining Law on USE' operations cannot be determined conclusively until
such revision is enacted; however, such legislation could materially increase
the carrying costs of mineral properties which are located on federal unpatented
mining claims, and could increase both the capital and operating costs for such
projects and impair USE's ability to hold or develop such properties.
24
ITEM 3. LEGAL PROCEEDINGS
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
In 1991, disputes arose between USE/Crested, and Nukem, Inc. and its
subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation
and operation of the Sheep Mountain Partners partnership for uranium mining and
marketing, and activities of the parties outside SMP. Arbitration proceedings
were initiated by CRIC in June 1991 and in July 1991, USECC filed a lawsuit
against Nukem, CRIC and others in the U.S. District Court (District of Colorado)
in Civil No. 91B1153. Later, USECC filed another suit for the standby costs at
the SMP mines against SMP in the Colorado State Court. The Federal Court stayed
both the arbitration proceedings and the State Court case. In February 1994, all
of the parties agreed to exclusive and binding arbitration of the disputes
before the American Arbitration Association ("AAA"), for which the legal claims
made by both sides included fraud and misrepresentation, breach of contract,
breach of duties owed to the SMP partnership, and other claims.
Following 73 hearing days and various submissions by the parties, the
AAA panel (the "Panel") entered an Order and Award (the "Order") in April 1996
and clarifying the Order on July 3, 1996, finding generally in favor of USE and
Crested on certain of their claims (including the claims for reimbursement for
standby maintenance expenses and profits denied SMP in Nukem's trading of
uranium), and in favor of Nukem/CRIC and against USE and Crested on certain
other claims. USECC filed a petition for confirmation on the Order and on June
30, 1997, the U.S. District Court confirmed the Order in its Second Amended
Judgment (the "Judgment"). Thereafter, Nukem/CRIC appealed the Judgment to the
10th Circuit Court of Appeals ("10th CCA") in Nos. 96-1532 ss. 97-1332.
A three judge panel of the 10th CCA issued an Order and Judgment in the
Nukem/CRIC arbitration/litigation matter on October 22, 1998, which unanimously
affirmed the Federal District Court Second Amended Judgment without
modification. The ruling of the 10th CCA affirmed (i) the imposition of a
constructive trust in favor of SMP on Nukem's rights to purchase CIS uranium,
the uranium acquired pursuant to those rights, and the profits therefrom; and
(ii) the damage award against Nukem/CRIC. As a result of the ruling of the 10th
CCA, USE and Crested received an additional $6,077,264 (including interest and
court costs) from Nukem in February 1999 for a total net monetary award of
$15,468,625 in the arbitration/litigation, and equitable relief in the form of
USE's and Crested's interest in SMP, which holds the constructive trust over the
CIS contracts. Nukem/CRIC filed motions for entry of final satisfaction of
Judgment. The U.S. District Court denied both motions, the last one on July 16,
1999 and on August 16, 1999, Nukem filed a Notice of Appeal to the 10th CCA.
USECC opposes the appeal and filed a brief in opposition to Nukem/CRIC brief in
the 10th CAA. The appeal is pending. For more information see Note K to the
financial statements.
GMMV LITIGATION
On November 10, 1999, Kennecott Uranium Company and Kennecott Energy
Company ("Kennecott") filed a civil action against defendants U.S. Energy Corp.,
Crested Corp. an USECC in the Sixth Judicial District Court, Campbell County,
Wyoming, No. 22406. Kennecott is seeking to dissolve the GMMV joint venture with
USECC and judicial approval of a plan to sell the GMMV or liquidate its assets
plus attorney fees and costs. Defendants filed a motion to change venue to the
District Court in Fremont County, Wyoming and the Sixth Judicial District court
granted the motion. The case was then transferred to the Ninth Judicial District
Court of Fremont county, Wyoming in civil Action No. 31322. The parties have
initiated discovery proceedings each seeking production of documents from the
other and certain documents of the parties have been received and reviewed.
25
On March 13, 2000, defendants U.S. Energy, Crested Corp. and USECC
filed an answer denying the various allegations of Kennecott and counterclaims
against plaintiff Kennecott and its parent Rio Tinto plc. Defendants also filed
a separate third party complaint against Rio Tinto plc. Kennecott filed a motion
to dismiss the complaint and Rio Tinto filed a motion for judgment on the
pleadings. A hearing date on the respective motions was set for May 30, 2000 but
was continued for a time in September or October, 2000 to be set by the Court,
as the parties are attempting to negotiate a settlement. On July 14, 2000,
Kennecott and USECC entered into a partial settlement wherein Kennecott paid
USECC $250,000 to settle claims peripheral to the case concerning accounts
receivables and other minor claims for work done and equipment used and
mobilized by USECC for the GMMV.
On September 11, 2000, the parties executed a settlement agreement and
related documentation and releases (the "Settlement"). Under the Settlement,
USECC will sell all of its interests in the GMMV and the GMMV properties,
including those within a described Area of Interest to an affiliate of
Kennecott. The purchase consideration is $3,250,000 in cash and a 4% net profits
royalty interest in certain of the mining claims at the Big Eagle and Jackpot
Mines. USECC is allowed to retain certain mining equipment and supplies, and has
the right to receive certain mining claims that may be abandoned by Kennecott.
Until final bond release, USECC may not compete in the Area of Interest.
Kennecott assumes the reclamation obligations (to the extent required by
applicable regulatory authority) at the GMMV properties and USECC retains
liabilities relating to its activities as a contractor to the GMMV. The
Settlement provides that Kennecott is under no obligation to develop any of the
properties or the underlying claims and may instead choose to sell the
properties and claims or to abandon the claims as they are no longer required.
USECC and Kennecott agree to dismiss the case and to release each other from
further liability. The Settlement is effective upon approval by the trial judge.
TICABOO TOWNSITE LITIGATION
In fiscal 1998, a prior contract operator of the Ticaboo restaurant and
lounge, and two employees supervising the motel and convenience store in Utah
(owned by Canyon Homesteads, Inc.) and their corporation Dejavue, Inc. sued USE,
Crested and others in Utah State Court 3rd Judicial District in Civil No.
960901865CV. The Plaintiff, Dejavue, Inc., recovered a judgment against USE and
USE appealed to the Utah Court of Appeals which affirmed the judgment. After a
denial by the Utah Supreme Court, USE petitioned for Writ of Certiorari, USE
paid $294,787 being the full amount of the judgment plus interest. USE is
seeking reimbursement from the insurance company. See footnote K.
BGBI LITIGATION
USE and Crested are defendants and counter- or cross-claimants in
certain litigation in the District Court of the Fifth Judicial District of Nye
County, Nevada in Civil No. 11877, brought by Bond Gold Bullfrog Inc. ("BGBI")
on July 30, 1991. BGBI (now known as Barrick Bullfrog, Inc.) is an affiliate of
Barrick Corp., a large international gold producer headquartered in Toronto,
Canada. The litigation primarily concerns extra-lateral rights associated with
two patented mining claims owned by Parador Mining Company Inc. ("Parador") and
initially leased to a predecessor of BGBI, which claims are in and adjacent to
BGBI's Bullfrog open pit and underground mine. USE and Crested assert certain
interests in the claims under an April 1991 assignment and lease with Parador,
which is subject to the lease to BGBI's predecessor.
A partial or bifurcated trial to the Court of the extra-lateral rights
issues was held on December 11 and 12, 1995, to determine whether the Bullfrog
orebody is a vein apexing on Parador's Claims. The Court found that Parador had
failed to meet its burden of proof and therefore Parador, USE and Crested have
no right, title and interest in the minerals lying beneath the claims of Layne
pursuant to extralateral rights. The partial trial did not address the issues of
breach of contract by the defendants and BGBI for specific performance and they
were tried before the Court commencing on January 26, 1998. After the trial, the
Court found against the
26
parties on their respective claims. BGBI, Parador and USE/Crested all appealed
the decision to the Nevada Supreme Court. The appeal is pending.
DEPARTMENT OF ENERGY LITIGATION
On July 20, 1998, eight uranium mining companies with operations in the
United States (including USE, Crested, YSFC) and the Uranium Producers of
America (a trade organization) filed a complaint against the United States
Department of Energy (the "DOE") in a lawsuit (file no. 98 CV 1775) in the
United States District Court, Cheyenne, Wyoming. The complaint seeks declaratory
judgment and injunctive relief. The plaintiffs allege that the DOE violated the
USEC Privatization Act of 1996, when the DOE transferred 45 metric tons of low
enriched uranium and 3,800 metric tons of natural uranium to United States
Enrichment Corp. ("USEC").
The plaintiffs have asked the Court to declare that (i) the DOE
violated its statutory authority by transferring uranium to USEC in excess of
statutory limits on volume; (ii) the excess amounts were not "sold" by the DOE
to USEC for fair value, as required by the Act, and mandated findings by the DOE
concerning possible adverse impacts were not supported in fact; and (iii) the
DOE be enjoined from future transfers in violation of the Act. The DOE filed a
motion to dismiss the complaint claiming that the U.S. Congress withdrew its
consent to be sued in connection with the USEC Inc. privatization and that USEC
Inc. must be joined as an indispensable party. The State of Wyoming moved to
join in the litigation on behalf of the plaintiffs. A hearing was held on the
motions on January 8, 1999 before the U.S. District Court in Cheyenne, Wyoming.
The Court took the motions under advisement and has not entered a decision.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the United States District
Court, Denver, Colorado, Case No. 98WM1630, against Contour Development Company,
L.L.C. and entities and persons associated with Contour Development Company,
L.L.C. (together, "Contour") and the original developer Pangolin Corporation,
seeking compensatory and consequential damages of more than $1.3 million from
the defendants for dealings in real estate owned by USE and Crested in Gunnison,
Colorado.
See "Business - Commercial Operations - Real Estate and Other
Commercial Operations - Colorado Properties" above, and Note K to the
Consolidated Financial Statements.
Three of the defendants also filed motions to dismiss seeking relief
from USE's notice of lis pendens. That motion has not been decided pending
settlement discussions that were terminated by USE on July 15, 1999. The
defendants, Gunnison Center Properties, L.L.C. and Val Olson, petitioned for
protection under Chapter 11 of the Bankruptcy Code. The remaining defendants own
other property which USE believes has sufficient value to satisfy any judgment
that USE may obtain.
SGMC LITIGATION
In 1993, Amador County issued a conditional use permit ("CUP") to allow
SGMC to develop the SGM near the town of Sutter Creek, Amador County,
California. A number of conditions were attached to the original CUP which
accommodated local citizen and government agency concerns about noise, waste
disposal, traffic and other aspects of the proposed mining operation.
In 1997 and 1998, SGMC proposed amendments to the CUP for a new design
of the SGM which would lower its environmental impact by reducing traffic,
potentially eliminating the use of cyanide on-site, and removing two large
tailings dams which would have been built to hold mine and mill waste. The new
design also would significantly reduce capital and operating costs for the
mine/mill complex, but cover more
27
land for waste disposal and other purposes. The certification and approval by
the Amador County Planning Commission of the Final Subsequent Environmental
Impact Report ("FSEIR") and CUP amendments on July 14, 1998 was appealed (by
another local citizens project opposition group) to the Amador County Board of
Supervisors. In August and September 1998, the Board of Supervisors certified
the FSEIR and approved the amendments to the CUP.
On September 28, 1998 a lawsuit was filed in Amador County Superior
Court, California (Case No. 98 CV 3298) by Concerned Citizens of Amador County
as plaintiffs, against the County of Amador and the Amador County Board of
Supervisors, and against SGMC as a real party in interest. The lawsuit
challenges the actions of Amador County and its Board of Supervisors in
certifying the FSEIR and approving the amended CUP. A hearing was held on June
7, 1999 and the Court denied all claims by the Concerned Citizens Plaintiff. The
matter is on appeal, see Note K to the financial statements.
DENNIS SELLEY ET AL VS U.S. ENERGY CORP., CRESTED CORP. ET AL. On May
14, 1999, Dennis Selley personally and as personal representative of the Estate
of Hannah Selley and his wife Mary B. Selley, filed a Civil Action No. 30869 in
the Ninth Judicial District Court of Fremont County, Wyoming against U.S. Energy
Corp. and Crested Corp., Plateau Resources Limited and USECC the joint venture,
alleging that the defendants were negligent as a landlord in renting a double
wide trailer (converted to a bunkhouse) near Ticaboo, Utah to plaintiffs'
daughter Hannah Selley and seek various unspecified damages. Hannah Selley was
employed by U.S. Energy Corp. ("USE") at the Ticaboo Lodge in June 1998. Because
no housing was available for employees, she and five other USE employees rented
rooms in the bunkhouse provided by USE, located about 1/2 mile from the Ticaboo
Lodge. In the late evening of June 5, 1998 and early the next morning, the
occupants built a bonfire near the bunkhouse and had guests over for a party. At
about 4:00 a.m. the morning of June 6, 1998, a fire started in the bunkhouse.
All occupants were awakened and left the living quarters during the fire except
Ms. Selley who perished in the fire. Plaintiffs allege inter alia that
defendants were negligent in providing faulty living quarters and that
defendants submitted a false filing with the Utah Workers Compensation Fund.
Defendants deny negligence in providing the living facility and assert various
defenses including plaintiffs' complaint is barred by the Workers Compensation
statutory immunity as well as the defense of an intervening clause. The case is
scheduled for a pre-trial conference on September 8, 2000 and if Defendants'
various motions are denied, the trial may commence on September 25, 2000. See
Note K to the financial statements.
DECLARATORY JUDGMENT ACTION. The Workers Compensation Fund of Utah has
filed a complaint for declaratory relief on or about July 26, 1999 against U.S.
Energy Corp., Crested Corp., Plateau Resources Limited, Dennis and Mary Selley
and others in Civil Action No. 99090 7500 before the Utah Third Judicial Court
of Salt Lake County, Utah. The suit is to determine its obligation to defend and
indemnify U.S. Energy Corp. and its affiliates in the above Hannah Selley case.
Defendants filed a motion for summary judgment in July 2000. See Note K to
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 49, has been the Chief Accounting Officer for
both 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, their
Treasurer since December 14, 1990, and Vice President Finance since April 1998.
28
He serves at the will of each board 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, Mr. Lorimer
has not been involved in any Reg. S-K Item 401(f) listed proceeding.
DANIEL P. SVILAR, age 71, has been General Counsel for USE and Crested
for more than the past five years. He also has served as Secretary and a
director of Crested, and Assistant Secretary of USE. His positions of General
Counsel to, and as officers of the companies, are at the will of each board of
directors. There are no understandings between Mr. Svilar and any other person
pursuant to which he was named as officer or General Counsel. He has no family
relationships with any of the other executive officers or directors of USE or
Crested, except his nephew Nick Bebout is a USE director. During the past five
years, Mr. Svilar has not been involved in any Reg. S-K Item 401(f) proceeding.
MAX T. EVANS, age 75, has been Secretary for USE and President of
Crested for more than the past five years. Mr. Evans had been a director of USE
for more than the past five years, prior to April 17, 1997. He serves at the
will of each board of directors. There are no understandings between Mr. Evans
and any other person pursuant to which he was named as an officer. He has no
family relationships with any of the other executive officers or directors of
USE or Crested. During the past five years, Mr. Evans has not been involved in
any Reg. S-K Item 401(f) proceeding.
29
PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Shares of USE Common Stock are traded on the over-the-counter market,
and prices are reported on a "last sale" basis by the National Market System
("NMS") of the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"). The range by quarter of high and low sales prices for the
Common Stock is set forth below for fiscal 1999 and 1998.
High Low
---- ---
Fiscal year ended May 31, 2000
First quarter ended 8/31/99 $5.09 $3.25
Second quarter ended 11/30/99 4.50 3.19
Third quarter ended 2/29/00 3.88 3.13
Fourth quarter ended 5/31/00 3.63 2.06
Fiscal year to end May 31, 1999
First quarter ended 8/31/98 $7.25 $1.63
Second quarter ended 11/30/98 4.06 .81
Third quarter ended 2/28/99 3.63 1.56
Fourth quarter ended 5/31/99 6.75 3.25
(b) Holders
(1) At August 31, 2000, the closing bid price was $2.19 per share and there
were approximately 731 shareholders of record for Common Stock.
(2) Not applicable.
(c) USE has not paid any cash dividends with respect to its common stock.
There are no contractual restrictions on USE's present or future ability to pay
cash dividends, however, USE intends to retain any earnings in the near future
for operations.
(d) During the year ended May 31, 2000, USE issued 6,020 shares to outside
directors; 15,357 shares of Common Stock to private investors for the exchange
of securities of Sutter Gold Mining Company; and 57,752 shares in an exchange of
YSFC common stock. No underwriter was involved in any of these transactions.
30
ITEM 6. SELECTED FINANCIAL DATA.
The following tables show certain selected historical financial data
for USE for the five years ended May 31, 2000. The selected financial data is
derived from and should be read with the financial statements for USE included
in this Report.
May 31,
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2000