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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(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, 1999 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 0-8773
CRESTED CORP.
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(Exact Name of Registrant as Specified in its Charter)
Colorado 84-0608126
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West
Riverton, WY 82501
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (307) 856-9271
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 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 voting stock held by non-affiliates of
the Registrant as of August 26, 1999 computed by reference to the average of the
bid and asked prices for the Registrant's common stock as reported by National
Quotation Bureau on Pink Sheets for the week then ended, was approximately
$1,583,231.
Class Outstanding at August 26, 1999
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Common Stock, $0.001 par value 10,349,664 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 item numbers involved:
1999 Annual Meeting Proxy Statement for the fiscal year ended May 31,
1999, into Items 10-13 of 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. [ ]
1
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. and Sutter Gold Mining Company
(subsidiaries of Crested), are forward-looking statements. In addition, when
words like "expect," "anticipate" or "believe" are used, Crested is making
forward-looking statements.
Although Crested believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been 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.
Crested Corp. ("Crested" or the "Registrant") and its parent U.S. Energy
Corp.("USE") are in the business of acquiring, exploring, developing and/or
selling or leasing mineral properties, and the mining and marketing of minerals.
Crested is now engaged in two principal mineral sectors: uranium and gold, both
of which are currently in the care and maintenance mode. The most significant
uranium properties are located on Green Mountain and Sheep Mountain in Wyoming,
and in southeast Utah. USE's gold operations are conducted through Sutter Gold
Mining Company ("SGMC"), a 63% USECC owned subsidiary. Interests are held in
other mineral properties (principally molybdenum), but are either non-operating
interests or undeveloped claims. Crested and USE also carry on small oil and gas
operations in Montana and Wyoming. Other Crested business segments are
commercial operations (real estate and general aviation). Crested has a May 31
fiscal year.
Crested was incorporated in Colorado in 1970. All of its operations are
in the United States. Principal executive offices are located in the Glen L.
Larsen building at 877 North 8th Street West, Riverton, Wyoming 82501, telephone
(307) 856-9271.
Most of Crested's operations are conducted through a joint venture with
USE, which owns a majority of Crested's Common Stock, and various jointly owned
subsidiaries of USE and Crested. The joint venture with USE is referred to in
this Report as "USECC". Construction operations are carried on primarily through
USE's subsidiary Four Nines Gold, Inc. ("FNG"). Oil and gas
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operations are carried out through Energx, Ltd., a subsidiary of USE and
Crested. USE and Crested originally were independent companies, with two common
affiliates (John L. Larsen and Max T. Evans). In 1980, USE and Crested formed a
joint venture to do business together (unless one or the other elected not to
pursue an individual project). As a result of USE funding certain of Crested's
obligations from time to time (due to Crested's lack of cash on hand), and later
payment of the debts by Crested issuing common stock to USE, Crested became a
majority owned subsidiary of USE in fiscal 1993. See Part III of this Report.
In fiscal 1998, USE and USECC signed an agreement with Kennecott Uranium
Company ("Kennecott"), for the purchase of Kennecott's interest in the Green
Mountain Mining Venture ("GMMV") (the "Acquisition Agreement"). Please see
"Minerals-Uranium-The Green Mountain Mining Project-June 23, 1997 Acquisition
Agreement with Kennecott Uranium Company" below.
In fiscal 1998, USE and Crested continued the development of the GMMV
uranium mines and the upgrade of the GMMV's Sweetwater uranium mill and the
Shootaring Canyon uranium mill in southeast Utah (owned by Plateau Resources
Ltd., a wholly-owned USE subsidiary). In addition, USE intends to implement
plans for it and Crested to consolidate their 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 is no assurance such
financing can be obtained.
For fiscal 2000, USE and Crested intend to seek the financing necessary
to re-commence development work at the Jackpot Mine. In late July 1998, USE,
Crested and Kennecott made a business decision to temporarily cease development
work at the Jackpot Mine because of the expected negative impact on uranium
prices due to the amount of uranium inventory which USEC Inc. (a newly
privatized government entity, see USEC Inc. below) announced was held in its
inventory and could be sold into the market. However, other factors are
affecting the uranium market (reductions in current and planned production),
such that the resumption of development work and putting the Utah uranium
properties into production in the near-term may be warranted. See "Uranium
Market Information." USE and Crested are in discussions with various sources of
capital for this purpose, however, no funding agreements have been reached as of
the date of this Report and there is no assurance any such funding would be
received. Such funding would also finance USE's and Crested's purchase of
Kennecott's interest in the GMMV. See "June 23, 1997 Acquisition Agreement with
Kennecott Uranium Company" below.
USE also will be refining the mine and mill plan for the Lincoln Project
in California (held by Sutter Gold Mining Company, a majority-owned subsidiary
of USE and a minority owned subsidiary of Crested), with the objective of
continuing mine development, building a gold mill and producing gold, when the
financing becomes available. Permitting costs for the Lincoln Project will be
funded internally by Sutter Gold Mining Company, as supplemented by additional
funding from USE and/or third parties. However, there are no outside funding
agreements as of the date of this Report and there is no assurance needed
funding will be received. See "Gold" below.
3
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Registrant operates in two business segments: (i) minerals and (ii)
commercial operations. The Registrant engages in other miscellaneous activities
such as oil and gas exploration, development and production. The principal
products of the operating units within each of the reportable industry segments
are:
INDUSTRY SEGMENTS PRINCIPAL PRODUCTS
Minerals Sales and leases of mineral-bearing
properties and, from time to time, the
production and/or marketing of uranium,
gold and molybdenum.
Commercial Operations Operation of a motel and
rental of real estate, operation of an
aircraft fixed base operation (aircraft
fuel sales, flight instruction and
aircraft maintenance), and provision of
various contract services, including
managerial services for subsidiary
companies.
Percentage of Net Revenue contributions by the two segments in the last three
fiscal years were:
Percentage of Net Revenues During the Year Ended
---------------------------------------------------
May 31, May 31, May 31,
1999 1998 1997
-------- -------- --------
Minerals 3% 11% 6%
Commercial Operations 14% 19% 29%
Crested received $43,800 in revenues from the sale of uranium in fiscal
1999. 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 1997, there were
no revenues from mineral sales (except for molybdenum royalty interest) in part
due to the arbitration proceedings involving SMP (see Item 3, "Legal Proceedings
Sheep Mountain Partners Arbitration/Litigation"). Additional mineral revenue was
generated by Crested's molybdenum interest.
4
(C) NARRATIVE DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT (INCLUDING ITEM 2 -
PROPERTIES DISCLOSURE).
MINERALS
URANIUM
GENERAL
Crested 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. Crested and USE plan 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).
THE PROPERTY INTERESTS OF CRESTED IN WYOMING ARE:
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). These assets are
held by the Green Mountain Mining Venture ("GMMV"), owned 50 percent by USE and
USECC (the "USE Parties"), and 50 percent by Kennecott Uranium Company ("KUC" or
"Kennecott"), a subsidiary of Kennecott Energy and Coal Company of Gillette, WY.
Kennecott Energy and Coal Company and Kennecott Corporation of Salt Lake City,
UT are subsidiaries of Rio Tinto plc, formerly RTZ PLC of London.
All of the GMMV mining claims are accessible by county, private and/or
United States Bureau of Land Management ("BLM") access roads. Exploration and
delineation of the principal uranium resources in the proposed Jackpot Mine have
been substantially completed. The BLM had signed a Record of Decision approving
the Jackpot Mine Plan of Operations following preparation of a final
Environmental Impact Statement ("EIS") for the proposed mine, and on June 25,
1996, the Wyoming Department of Environmental Quality ("WDEQ") issued Mine
Permit No. 660 that is required for GMMV to develop the underground Jackpot Mine
and mine the uranium deposits. The proposed mine has had no previous operators,
and will be a new mine when opened. The Big Eagle Mine and related claim groups
(which are near the proposed Jackpot Mine and are part of the Green Mountain
Claims held by the GMMV), are accessible by county and private roads. The Big
Eagle Mine was first operated by Pathfinder Mines Corporation ("PMC") starting
in the late 1970s.
5
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 SMP. On June
1, 1998, USECC received back from SMP all of the Sheep Mountain mineral
properties and equipment, in partial settlement of disputes with Nukem and CRIC.
See Item 3, "Legal Proceedings." The Sheep Mountain Mines 1 and 2 are accessible
by county and private roads and were first operated by Western Nuclear, Inc., a
subsidiary of Phelps Dodge Corporation, in the late 1970s.
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.
YSFC has 11,851,500 shares of common stock issued and outstanding,
including 2,700,250 shares (22.8%) issued to USE and 1,568,750 shares (13.2%)
issued to Crested.
In order to concentrate the efforts of USECC on conventional uranium
mining using the Shootaring Canyon and Sweetwater Mills, USECC 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. USECC 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 USECC 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.
Approximately 10,825 acres of properties are held by 437 unpatented lode
mining claims which have been staked by, plus four leases (including three state
leases) held by Yellow Stone Fuels Corp. (an Ontario, Canada corporation, or by
its wholly-owned subsidiary Yellow Stone Fuels, Inc., a Wyoming corporation,
hereafter collectively or individually referred to as "YSFC"). The properties
are located in Wyoming and New Mexico, and are believed to be prospective of
uranium and suitable for in-situ leaching.
6
THE PROPERTY INTERESTS OF USE AND CRESTED IN UTAH THROUGH PLATEAU RESOURCES LTD.
("PLATEAU") ARE:
Plateau Resources Ltd. is a wholly-owned subsidiary of USE, however,
Crested owns an interest in Plateau. 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.
These properties are accessible by county roads.
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 Wood
Mine property is not permitted, but USE and Crested do 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 1998, USE and USECC signed the Acquisition Agreement to
acquire Kennecott Uranium Company's interest in the GMMV. The following is a
description of the formation of GMMV and certain of its terms, which have been
modified as a result of the Acquisition Agreement and related transactions, as
set forth under the "June 23, 1997 Acquisition Agreement with Kennecott Uranium
Company" below.
In fiscal 1991, USE and USECC entered into an agreement to sell 50
percent of their interests in the Green Mountain uranium claims, and certain
other rights, to Kennecott for $15,000,000 (USE's share of the proceeds was
$12,600,000, and the balance was Crested's) and a commitment by Kennecott to
fund the first $50,000,000 of GMMV expenditures pursuant to Management Committee
budgets. At the same time, USE and USECC ("USE Parties") and Kennecott formed
the GMMV to develop, mine and mill uranium ore from the Green Mountain Claims,
and market U3O8. For detailed explanation of the GMMV agreement, please see
Crested Corp.'s 1998 Annual Report on Form 10-K at pages 6 and 7.
7
The GMMV Management Committee has three Kennecott representatives and
two USECC representatives, acts by majority vote, and appoints and supervises
the project manager. In fiscal 1993, Kennecott became the GMMV project manager
and has continued as project manager through May 31, 1998. USECC has continued
work on a contract basis at Kennecott's request through May 31, 1999.
Activities on the GMMV properties have included environmental and mining
equipment studies, mine permitting and planning work, property maintenance,
setting up a uranium marketing program, acquisition and monitoring of the
Sweetwater Mill and preparation of an application to the U. S. Nuclear
Regulatory Commission ("NRC") to convert the Sweetwater Mill license from
standby to an operating license. USE and Crested have completed the construction
of additional mining support facilities at the Jackpot Mine in fiscal 1999,
including; the installation of natural gas lines and phone services;
construction of a new shop building containing offices, a dry-change room,
emergency generators, air compressors and mechanical repair base; upgrading the
ore haul road; and installation of a conveyor and stacker and other incidental
mine activities, while maintaining all permits and licenses at the Jackpot Mine
and Sweetwater Mill. For underground mine development work, the GMMV had driven
twin decline tunnels 18 feet wide and 12 feet high on a -17 percent grade
approximately 2,000 feet each into Green Mountain with 1,000 feet of cross cuts
between the declines. All of these development costs in fiscal 1999 have been
funded through the $16,000,000 loan in connection with Kennecott's $50,000,000
work commitment (for its 50 percent interest).
JUNE 23, 1997 ACQUISITION AGREEMENT WITH KENNECOTT URANIUM COMPANY
On June 23, 1997, USE and USECC signed an Acquisition Agreement with
Kennecott, for the right to acquire Kennecott's interest in the GMMV for
$15,000,000 and other consideration. Kennecott paid USE and USECC $4,000,000 as
a signing payment, and committed to provide the GMMV up to $16,000,000 for
payment of reimbursable costs incurred by USECC in developing the proposed
underground Jackpot Uranium Mine for production and in changing the status of
the Sweetwater Mill from standby to operational. The work to develop the
proposed Jackpot Mine and ready the Sweetwater Mill for operations was performed
by USECC as lessee of all the GMMV mineral properties under a Mineral Lease
Agreement between the GMMV and USECC (the "Mineral Lease"), and as an
independent contractor under a Contract Services Agreement (the "Mill Contract")
between Kennecott (as manager of the GMMV) and USECC. Both the Mineral Lease and
the Mill Contract, as well as a Fourth Amendment to the GMMV Mining Venture
Agreement among Kennecott, USE and USECC (the "Fourth Amendment to the GMMV
Agreement"), were executed simultaneously with the Acquisition Agreement. For
detailed explanation, please see Crested Corp. 1998 Annual Report on Form 10-K
and Note F in the consolidated financial statements.
USEC INC. In 1992, Congress enacted the "Energy Policy Act of 1992"
creating the U.S. Enrichment Corporation ("USEC") to operate the U.S. Department
of Energy's ("DOE") uranium enrichment program. Congress later enacted the "USEC
Privatization Act of 1996" to privatize USEC and allowed the DOE to transfer
various forms of uranium to USEC. The DOE has transferred approximately 75
million pounds of uranium and uranium equivalents to USEC. On July 22, 1998,
USEC Inc. became a publicly traded company. Because of the anticipated negative
impact of USEC Inc.'s sales of new uranium inventory in the market (see
"Marketing - U.S.
8
Enrichment Corporation," below) on uranium oxide prices, on July 31, 1998,
Kennecott and USE and Crested made a business decision to temporarily place the
Jackpot Mine on standby, which resulted in the lay off of approximately 45
employees. Resumption of development work with funding from GMMV provided by
Kennecott will depend on resolution of the USEC Inc. uranium inventory sales
issue (see Item 3, "Legal Proceedings") and improved uranium prices.
PROPERTIES AND MINE PLAN.
The GMMV owns the Big Eagle Properties on Green Mountain, which contain
substantial uranium mineralization, and are adjacent to the other GMMV mining
claims. The Big Eagle Properties contain 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. Permits transferred
to the GMMV for the properties include: a permit to mine, an air quality permit,
and water discharge and water quality permits. The GMMV owns the mineral rights
to the underlying unpatented lode mining claims.
The Round Park (Jackpot) mining claims formerly owned solely by USE,
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 plans to mine this mineralized material from two decline
tunnels (-17 percent slope) in the Jackpot Mine, which are being 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.
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 is one of the
newest uranium milling facilities in the United States, and has been maintained
in good condition. UNOCAL has reported that the mill buildings and equipment
have historical costs of $10,500,000 and $26,900,000, respectively.
As consideration for the Sweetwater Mill, GMMV agreed to indemnify
UNOCAL against certain reclamation and environmental liabilities, which
indemnification obligations are guaranteed by Kennecott Corporation (parent of
Kennecott Uranium Company). GMMV has agreed to be responsible for compliance
with mill decommissioning and land reclamation laws, for which the environmental
and reclamation bonding requirements are approximately $24,330,000, which
includes a $4,560,000 bond required by the NRC. None of the GMMV future
reclamation and closure costs are reflected in the Consolidated Financial
Statements (see "Notes F and K to the Consolidated Financial Statements for
fiscal year ended May 31, 1999").
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The reclamation and environmental liabilities assumed by the GMMV
consist of two categories: (1) cleanup of the inactive open pit mine site near
the mill (the source of ore feedstock for the mill when operating under UNOCAL),
including water (heavy metals and other contaminants) and tailings (heavy metals
dust and other contaminants requiring abatement and erosion control) associated
with the pit; and (2) decontamination and cleanup and disposal of the mill
building, equipment and tailings cells after mill decommissioning. On June 18,
1996, Kennecott established an irrevocable Letter of Credit through Morgan
Guaranty Trust Company of New York City in the amount of $19,767,079 in favor of
the Wyoming Department of Environmental Quality ("WDEQ") for reclamation
requirements of the GMMV. The Letter of Credit was increased by $10,000 on
August 26, 1996 to cover off-permit wetland enhancement. On March 8, 1999,
Kennecott exchanged four surety bonds from St. Paul Fire and Marine Insurance
Company in the total amount of $19,777,079 to replace the Morgan Guaranty letter
of credit. This was approved by the WDEQ. The WDEQ exercises delegated
jurisdiction from the United States Environmental Protection Agency ("EPA") to
administer the Clean Water Act and the Clean Air Act, and directly administers
Wyoming statutes on mined land reclamation. The Sweetwater Mill is also
regulated by the NRC for tailings cells and mill decontamination and cleanup.
The EPA has continuing jurisdiction under the Resource Conservation and Recovery
Act, pertaining to any hazardous materials which may be on site when cleanup
work is started.
Although the GMMV is liable for all reclamation and environmental
compliance costs associated with mill and site maintenance, as well as mill
decontamination and cleanup and site reclamation and cleanup after the mill is
decommissioned, USECC believes it is unlikely USECC would have to pay for such
costs directly. First, based on current estimates of cleanup and reclamation
costs (reviewed annually by the oversight agencies), such costs covered by the
surety bonds and other surety appear to be within the $24,330,000 of reclamation
bonds posted by Kennecott for GMMV. These costs are not expected to increase
materially if the mill is not put into operation. Second, UNOCAL has agreed that
if the GMMV incurs expenditures for environmental liabilities prior to the
earlier of commercial production by GMMV or January 1, 2001, (which liabilities
are not due solely to the operations of GMMV), then UNOCAL will loan the GMMV
the first $8,000,000 (escalated according to the Consumer Price Index to current
dollars, from 1993) of such expenditures. Any reimbursement for the loan may
only be recovered by UNOCAL from 20% of future cash flows from sale of uranium
concentrates processed through the Sweetwater Mill. Third, payment of
reclamation and environmental liabilities related to the Mill is guaranteed by
Kennecott. Last, the GMMV will set aside a portion of operating revenues to fund
reclamation and environmental liabilities when mining and milling operations are
finally shut down.
Kennecott will be entitled to contribution from the USE Parties in
proportion to their participating interests in the GMMV, if Kennecott is
required to pay mill cleanup costs directly pursuant to its guarantee. Such
contributions would be required only if the liabilities cannot be satisfied by
Kennecott within the balance of any development commitment as provided by the
Acquisition Agreement, after the credits provided by the Fourth Amendment to the
GMMV (see the "June 23, 1997 Acquisition Agreement with Kennecott" above). In
addition, if and to the extent such liabilities resulted from UNOCAL's mill
operations, and payment of the liabilities was required before January 1, 2001
and before mill production resumes, then up to $8,000,000 (escalated) of that
amount would be advanced in a loan from UNOCAL payable out of production from
the mill, before Kennecott would be required to pay on its guarantee. However,
notwithstanding the preceding, the extent of any ultimate USECC liability for
contribution to mill cleanup costs cannot be predicted.
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Kennecott has made an application to the Wyoming DEQ for a third five year
interim stabilization plan on the Sweetwater Pit where uranium mineralized
material was mined and processed through the mill. The Wyoming Environmental
Quality Council is currently reviewing the application and a decision is
expected in September 1999.
PERMITTING AND ACTIVITIES. The WDEQ issued a mine permit for the Jackpot
Mine on June 26, 1996. This Permit allows the GMMV to proceed with construction
of mine surface facilities, further underground mine development and eventual
mining of the Round Park (Jackpot) Deposit.
The Jackpot Mine Plan of Operations and a combination of the
alternatives analyzed in the EIS will allow for the disposal of mine waste rock
in the Big Eagle Mine pits some three miles from the Jackpot declines, the
upgrading of existing roads, and the construction of new haul road segments to
transport ore to the Sweetwater Mill. These roads will be subject to
modification in alignment necessary to minimize or avoid adverse impacts to
riparian and cultural resources.
Kennecott initiated discussions and made filings with the NRC regarding
amendments to the Source Material License to resume ore processing at the
Sweetwater Mill. On August 25, 1999, the Company was advised that the NRC issued
the Operating Permit for the mill.
Crested believes all of the uranium operations in which it owns an
interest are in compliance with these rules. There ultimately will be an effect
on the earnings of USE and Crested from environmental compliance expenditures by
the GMMV, since the GMMV operations will be accounted for by the equity method
if the acquisition of Kennecott's interest in the GMMV pursuant to the
Acquisition Agreement does not close. GMMV's expenses for compliance with
environmental laws (as well as other matters) are not expected to materially
affect the cash flow of USE and Crested during the next two years.
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. Subsequent to closing, USE and Crested agreed that after
Plateau's unencumbered cash had been depleted, USE and Crested each would assume
one-half of Plateau's obligations, and share equally in Plateau's operating cash
flows, pursuant to the USECC Joint Venture. For detailed explanation of the
transaction, please see Crested Corp.'s 1998 Annual Report on Form 10-K at page
13.
SHOOTARING MILL AND FACILITIES. The Shootaring Mill is located in
south-eastern 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 1982. In 1984, Plateau put the mill on standby because of the
depressed U3O8 market.
Plateau also owns approximately 90,000 tons of uranium mineralized
material stockpiled at the mill site and approximately 172,000 tons of
mineralized material stockpiled at the Tony M Mine. Included with mill assets
are tailings cells, laboratory facilities, equipment shop and inventory. The NRC
issued a license to Plateau authorizing production of uranium concentrates,
11
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 to $6,700,000, the NRC issued the new license on
May 2, 1997. Plateau has an additional $2,390,900 of government securities
available for further bonding needs.
In fiscal 1998 and 1999, in anticipation of resuming milling operations,
Plateau significantly performed a reactivation and rehabilitation program at the
Mill. Plateau obtained approval of a water control permit for the tailings
facility from the State of Utah Water Control Division and is awaiting the NRC's
review of the operating license conditions so Plateau can continue with the
construction of tailings facilities.
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 are developing the
Townsite and selling homes and mobile home sites.
YELLOW STONE FUELS CORP.
Yellow Stone Fuels Corp., 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 USECC on conventional uranium
mining using the Shootaring and Sweetwater Mills, USECC decided to take a
minority position in Yellow Stone Fuels, Inc. and not be directly involved in
properties believed suitable for the production of uranium through the in-situ
leach ("ISL") mining process. USECC will have 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 USECC amenable to the ISL process.
In Wyoming, YSFC has staked and/or holds 243 unpatented mining claims
and has entered into four State leases covering a total of 8,700 acres located
in the Powder River Basin and Red Desert uranium districts. In New Mexico, YSFC
has staked and holds 39 unpatented mining claims (approximately 780 acres) in
the Grants uranium region of New Mexico.
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In fiscal 1997, USE, USECC and the GMMV entered into several agreements
with YSFC, including a Milling Agreement through Plateau Resources. The
Shootaring Canyon mill facilities will be available to YSFC to transport uranium
concentrate slurry and loaded resin to the mill and process it into uranium
concentrate ("yellowcake"), for which Plateau will be paid its direct costs plus
10%. Other agreements include a Drill Rig Lease Agreement for YSFC to access USE
drilling rigs at the prevailing market rates; an Outsourcing and Lease Agreement
for assistance from USECC accounting and technical personnel for $2,000 per
month and a sublease for 1,000 square feet of office space and use of various
office equipment for $1,500 per month; and a Ratification of Understanding by
which USECC will offer to YSFC (with a reserved royalty in amounts to be agreed
on later) any uranium properties amenable to in-situ production which USECC
acquires or has the right to acquire. In return, YSFC will offer to USECC ( with
a reserve royalty in amounts to be agreed on later) uranium properties amenable
to conventional mining methods which YSFC acquires or has the right to acquire.
USECC also will make its library of geological information and related materials
available to YSFC. YSFC also has a Storage Agreement with GMMV by which YSFC
stores used low-level contaminated mining equipment at the Sweetwater Mill.
SHEEP MOUNTAIN PARTNERS ("SMP")
PARTNERSHIP. In February 1988, USE and Crested acquired uranium mines,
mining equipment and mineralized properties (Sheep Mountain Mines) at Crooks Gap
in south-central Fremont County, Wyoming, from Western Nuclear, Inc. These
Crooks Gap mining properties are adjacent to the Green Mountain uranium
properties. 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 and Crested sold 50 percent of their
interests in the Crooks Gap properties to Nukem's subsidiary CRIC for cash. The
parties thereafter contributed the properties to and formed Sheep Mountain
Partners ("SMP"), in which USECC received an undivided 50 percent interest. SMP
is a Colorado general partnership formed on December 21, 1988, between USECC and
Nukem, Inc. of Stamford, CT ("Nukem") through its wholly-owned subsidiary Cycle
Resource Investment Corporation ("CRIC"). Each group provided one-half of
$315,000 to purchase equipment from Western Nuclear, Inc.; USE and Crested also
contributed their interests in three uranium supply contracts to SMP and agreed
to be responsible for property reclamation obligations. The SMP Partnership
agreement provided that each partner generally had a 50 percent interest in SMP
net profits, and an obligation to contribute 50 percent of funds needed for
partnership programs or discharge of liabilities. Capital needs were to have
been met by loans, credit lines and contributions. Nukem is a uranium brokerage
and trading concern.
SMP was directed by a management committee, with three members appointed
by USECC, and three members appointed by Nukem/CRIC. The committee has not met
since 1991 as a result of the SMP arbitration/litigation. 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 (see "Legal Proceedings - Sheep Mountain
Partners Arbitration/Litigation").
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
13
USE/Crested and Nukem/CRIC, SMP conveyed these mineral properties and equipment
to USECC. See "Item 3." Production from the properties is subject to
sliding-scale royalties payable to Western Nuclear, with rates ranging from one
to four percent on recovered uranium concentrates. As of October 30, 1998, USE
and USECC owned 98 unpatented lode mining claims and a 644 acre adjoining State
Mineral Lease in the Crooks Gap area.
The ion exchange plant on the properties was used to remove natural
soluble uranium from mine water. USE, on behalf of USECC, has submitted a plan
to the NRC to decommission this facility and obtained a three year extension for
timeliness of decommissioning. Management is reviewing the economics of
relicensing this facility as part of a potential in-situ leach uranium mining
operation.
PROPERTY MAINTENANCE. Currently, USECC has a maintenance staff on site
to care for and maintain the mines and pump mine water to prevent flooding of
the mines, which could destroy equipment and the concrete lined vertical shafts
accessing the various levels of uranium mineralization.
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 McIntosh Pit.
URANIUM MARKET INFORMATION.
URANIUM SPOT MARKET. Uranium spot prices averaged $10.41/lb. U3O8 on
June 30, 1999, a decrease of 4% from $10.80 at the end of the first calendar
quarter. Although spot demand from utilities and producers was stronger than
last year, sellers were concluding sales by offering lower prices as the quarter
came to a close. During the quarter, total spot market volume was approximately
5 million pounds U3O8 bringing the year-to-date total to more than 13 million
pounds, a significant improvement over the 4 million pounds sold in the first
half of 1998. Currently, the restricted spot price for U3O8 was reported in the
$10.10 to $10.60/lb. range.
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 declining marginally to $10.65/lb. U3O8 from $11.75 at the end of the
previous quarter. 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 1998 estimated level of 50 million pounds
U3O8.
For a detailed analysis of past uranium market developments, please see
Crested Corp.'s 1998 Annual Report on Form 10-K pages 18 - 23.
14
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, held by a mining joint venture known as the Sutter Gold Venture
("SGV"). The entire interest of SGV is now owned by USECC Gold L.L.C., a Wyoming
limited liability company, which is a subsidiary of Sutter Gold Mining Company,
a Wyoming corporation ("SGMC"). The Lincoln Project has been renamed the Sutter
Gold Mine ("SGM").
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 Corporation ("RAF"), 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, 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.
SGMC does not have any class of its securities registered with the
Commission, and none of its securities are traded in the United States or
Canada.
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, but is exploring plans to develop the
mine into a visitor's center to generate positive cash flow while the gold
prices remain depressed.
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. In fiscal 1999,
preparation of the mill and office site started and the engineering firm has
finished construction drawings for the mill. 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 and Crested in SGMC, USE and Crested own
a $10,000,000 Contingent Stock Purchase Warrant (the "USECC Warrant") which was
issued to USE and Crested in connection with the restructuring of SGMC for the
Canadian private placement. The USECC Warrant is owned 88.9% by USE and 11.1% by
Crested. The USECC Warrant provides that for each ounce of gold over 300,000
ounces added to the proven and probable category of SGMC's reserves (up to a
maximum of 400,000 additional ounces), using a cut-off grade of 0.10 ounces of
gold per ton (at a minimum vein thickness of 4 feet), USE and Crested 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
15
of the Common Stock for the 20 trading days before exercise of the USECC
Warrant. The USECC Warrant is exercisable semi-annually. If SGMC decides against
the exercise of the USECC Warrant, it can pay USE and Crested US$25 in cash for
each new ounce of gold (payable out of a maximum of 60% of net cash-flow from
SGMC's mining operations). Additions to reserves will be determined by an
independent geologist agreed upon by the parties.
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, the Company issued
89,059 shares of its common stock in exchange for 207,500 Special Warrants from
SGMC shareholders increasing the Company's ownership of SGMC by 4%.
USECC MANAGEMENT AGREEMENT WITH SGMC. Effective June 1, 1996, SGMC
entered into a Management Agreement (dated as of May 22, 1996) with USE under
which USECC provides administrative staff and services to SGMC. USECC is
reimbursed for actual costs incurred, plus an extra 10% during the exploration
and development phases; 2% during the construction phase; and 2.5% during the
mining phase (such 2.5% charge to be replaced with a fixed sum which 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 USECC provided
administrative services to SGMC.
PROPERTIES. SGMC (through its subsidiary USECC Gold) 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 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 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, 1999 through May 31, 2000. Property taxes for fiscal 2000
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 by
Meridian into the Lincoln Project holds a 5 percent net profits interest on
production from such properties, which was granted by Meridian when it acquired
the properties. The "net profits" generally will be equal to gross
16
mineral revenues less an amount equal to 105 percent of numerous categories of
costs and expenses. An additional 0.5 percent net smelter return royalty is held
by a consultant to a lessee prior to Meridian's acquisition of the properties,
which 0.5 percent interest covers the same four properties in the Lincoln
Project.
PERMITS AND FUTURE PLANS. In August 1993, the Amador County Board of
Supervisors issued a Conditional Use Permit ("CUP") allowing mining of the
Lincoln Mine and milling of production, subject to conditions relating to land
use, environmental and public safety issues, road construction and improvement,
and site reclamation. The permit will allow construction of the mine and mill
facilities in stages as the project gets underway, thereby reducing initial
capital outlays. Additional permits (for road work, dust control and
construction of mill and other surface improvements) need to be applied for in
due course. 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. SGMC is evaluating the possibility of developing the
tourist potential of Sutter Gold Mine, while it waits for the price of gold to
rebound. Demographics indicate, that within 150 mile radius of SGM's operation,
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
would be 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. SGMC's initial studies indicates that
the number of tourists could approximate 2,000 per day. Facilities would include
a Visitor's Center with a gift shop and museum, a self-guided tour of modern
mining activities, visitor gallery/museum attached to the mill building (when
built), hiking trails, picnic areas and a special gold panning area. Revenues
would come from admission tickets, gold value-added products and other
appropriate merchandise. The early 19th century architecture, combined with
expansion of underground tourist displays, rides and exhibits should allow SGMC
to continually upgrade and generate new and renewed interest in the visitor
attractions.
MOLYBDENUM
As holders of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, USE and Crested
are entitled to receive annual advance royalties of 50,000 pounds of molybdenum,
or cash equivalent (one-half to each). AMAX Inc. (which was acquired by Cyprus
Minerals Company and was renamed Cyprus Amax Minerals Company in November 1993)
delineated a deposit of molybdenum containing approximately 146,000,000 tons of
mineralization averaging 0.43% molybdenum disulfide on the properties of USE and
Crested.
17
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 and Crested. 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 and Crested are to
receive $2,000,000 (one-half to each), at such time as the Mt. Emmons properties
are put into production and, in the event AMAX sells its interest in the
properties, USE and Crested would receive 15 percent of the first $25,000,000
(one-half to each) received by AMAX. USE and Crested have asserted that the
acquisition of AMAX by Cyprus Minerals Company was a sale of AMAX's interest in
the properties which would entitle USE and Crested to such payment. Cyprus Amax
has rejected such assertion and USE and Crested are considering their remedies.
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. In a recent announcement, Asarco is proposing to acquire
Cyprus Amax through a merger forming Asarco Cyprus Inc. which would be the
largest publicly traded copper company. More recently, Phelps Dodge made a
buyout offer of Cyprus Amax and Asarco. This would further concentrate these
companies' copper production capabilities and add molybdenum reserves to the
surviving companies. It is too early to evaluate the affect of the merger and
acquisition may have on USECC's molybdenum interest at Mt. Emmons, Co.
PARADOR MINING (NEVADA)
USE and Crested are sublessees and assignees 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 and Crested have also been assigned certain extralateral rights associated
with the claims and certain royalty rights relating to a prior lease on those
properties. The lease to USE and Crested is for a ten year primary term, is
subject to a prior lease to BGBI on the properties, and allows USE and Crested
to explore for, develop and mine minerals from the claims. If USE and Crested
conduct activities on the claims, they are entitled to recover costs out of
revenues from extracted minerals.
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After recovering any such costs, USE and Crested will pay Parador a production
royalty of 50 percent of the net value of production sold from the claims.
USE, Crested and Parador presently are in litigation concerning this
property. See Item 3, "Legal Proceedings - BGBI Litigation."
OIL AND GAS.
FORT PECK LUSTRE FIELD (MONTANA). USECC conducts a small oil production
operation 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, 2 of the wells were again
placed in production. USECC receives a fee based on oil produced. USE is the
operator of record. No further drilling is expected in this field. This fee and
certain real property of USE and Crested, have been pledged or mortgaged as
security for a $1,000,000 line of credit from a bank.
REAL ESTATE AND OTHER COMMERCIAL OPERATIONS
Crested owns varying interests, alone and with USE, 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. USECC owns a 14-acre tract in Riverton, Wyoming,
with a two-story 30,400 square foot office building (including underground
parking). The first floor is rented to affiliates, nonaffiliates and government
agencies; the second floor is occupied by USE and Crested and is adequate for
their executive offices. The property is mortgaged to the WDEQ as security for
future reclamation work on the SMP Crooks Gap uranium properties.
USECC (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. 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 as the Jackpot Mine and Sweetwater Mill are put into
19
operation. In the interim, USE and Crested are selling lots at Jeffrey City and
made sales aggregating $5,600, $38,400 and $21,150 during fiscal 1999, 1998 and
1997, respectively.
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 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 the initial payments on the option agreements were received,
thereafter the developer defaulted in making a payment to Crested of $164,439
(principal plus interest). Also, the first note ($454,894) was not paid in
January 1998. In July 1998, USE and Crested filed a lawsuit against Contour and
associated parties to seek recovery of the balance owing on the 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. Revenues from sale of homesites and operation
of the motel were nominal in 1998.
Commercial operations are not dependent upon a single customer, or a few
customers, the loss of which would have a materially adverse effect on Crested.
20
RESEARCH AND DEVELOPMENT
Crested has incurred no research and development expenditures, either on
its own account or sponsored by customers, during the past three fiscal years.
ENVIRONMENTAL
GENERAL. Crested'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 the Company.
Similar laws and regulations in California affect SGMC operations and in Utah,
will effect Plateau's operations.
The Company's management believes it is currently in compliance in all
material respects with existing environmental regulations. To the extent that
production by SMP, GMMV or SGMC is delayed, interrupted or discontinued due to
need to satisfy existing or new provisions which relate to environmental
protection, future Crested 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 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.
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. Crested
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
Crested's competitive position.
EMPLOYEES
Crested has no full-time employees. Crested uses approximately 50
percent of the time of USE employees, and reimburses USE accordingly. USE had
approximately 82 full-time employees as of the date of this Report. Payroll
expense has been shared by USE and Crested since 1981.
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
21
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 annually pay certain rental fees 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 Item
3, "Legal Proceedings - BGBI Litigation").
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 the Company's operations cannot be determined conclusively
until such revision is enacted; however, such legislation could materially
increase the carrying costs of the Green Mountain mineral properties, the SMP
properties and some of Plateau's mineral properties which are located on federal
unpatented mining claims, and could increase both the capital and operating
costs for such projects and impair the Company's ability to hold or develop such
properties, as well as other mineral prospects on federal unpatented mining
claims.
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). Later, USECC filed another suit for the standby costs at the SMP
mines against SMP in the Colorado State Court. The Federal Court stayed the
arbitration proceedings and the State Court case was also stayed. In fiscal
1994, all of the parties agreed to exclusive and binding arbitration of the
disputes before the American Arbitration Association, 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.
22
Following 73 hearing days and various submissions by the parties, the
arbitration panel (the "Panel") entered an Order and Award (the "Order") in
April 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. For more details
of the litigation, please see Item 3 of Crested's 1998 Form 10-K at pages 33-34
and Footnote K to the Financial Statements in the Annual Report.
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 intends to vigorously oppose the appeal and seek Judicial intervention to
enforce the Constructive Trust.
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, 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 parties on their respective claims. BGBI and Parador,
and USE/Crested all appealed the decision to the Nevada Supreme Court. BGBI
filed its brief on appeal and Parador and USECC have until August 31, 1999 to
file their answer and opening brief.
23
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 (in) 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 as of August 18, 1999, had not
entered a decision.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the United States District
Court, Denver, Colorado 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.
Specifically, USE (which is the assignee of Crested's rights and
interests in certain of the promissory notes, contracts and agreements) alleges
that Contour has breached contracts for the sale of USE's and Crested's Gunnison
properties, and is in default on the promissory notes delivered to pay for the
Gunnison properties. USE has further alleged that Contour fraudulently induced
USE and Crested to enter into restructuring agreements for the original
transactions between the parties in such properties; and further, that Contour
has breached the duties of good faith, honesty, full disclosure and fair dealing
which were owed to USE and Crested by Contour in the course of the transactions.
USE has made additional claims against Contour for unjust enrichment and
conversion of the real estate assets and added additional parties as defendants.
See "Business - Commercial Operations - Real Estate and Other Commercial
Operations - Colorado Properties" above.
As of the date of this Annual Report, the parties are negotiating for a
settlement, however, no final settlement has been reached.
24
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 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 took the matter under advisement. Under California Law,
the Court has 90 days from the hearing date to enter its decision.
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
doublewide 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 bunk house 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. Discovery is
underway.
25
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.
U.S. Energy Corp., Crested Corp. and affiliates have not yet responded to the
complaint in the case.
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 48, 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.
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, he has not
been involved in any Reg. S-K Item 401(f) listed proceeding.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market information.
The principal trading market for the Registrant's Common Stock, $.001
par value, is the over-the-counter market. Prices are reported by the National
Quotation Bureau on Pink Sheets. The range of high and low bid quotations for
the Common Stock is set forth below for each quarter in the two most recently
completed fiscal years. Retail markup or markdown, or commissions, are not
reflected.
Fiscal year ended May 31, 1999 High Low
------------------------------ ---- ---
Fourth quarter ended 5/31/99 $0.52 $0.31
Third quarter ended 2/28/99 0.39 0.218
Second quarter ended 11/30/98 0.42 0.15
First quarter ended 8/31/98 0.35 0.16
Fiscal year ended May 31, 1998
------------------------------
Fourth quarter ended 5/31/98 $0.45 $0.22
Third quarter ended 2/28/98 0.46875 0.25
Second quarter ended 11/30/97 0.71875 0.4375
First quarter ended 8/31/97 0.8125 0.34375
(b) Holders.
(b)(1) At August 20, 1999 there were approximately 1,801 stockholders of
record for Crested common stock.
(b)(2) Not applicable.
(c) Crested has not paid any cash dividends with respect to its common stock.
There are no contractual restrictions on Crested's present or future ability to
pay cash dividends, however, Crested intends to retain any earnings in the near
future for operations.
(d) During the year ended May 31, 1999, Crested issued 46,970 shares of its
Common Stock to its Outside Directors for services rendered.
27
ITEM 6. SELECTED FINANCIAL DATA.
May 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Current assets $ 5,605,700 $ 4,809,300 $ 1,049,500 $ 596,200 $ 512,600
Current liabilities 9,451,000 9,282,300 6,592,400 6,848,300 5,518,500
Working capital (3,845,300) (4,473,000) (5,542,900) (6,252,100) (5,005,900)
Total assets 8,415,000 10,211,400 6,285,700 8,132,500 8,097,800
Long-term obligations(1) 742,600 768,000 741,700 725,900 853,700
Shareholders' equity/(deficit) (1,822,500) 117,200 (1,092,300) 521,900 1,690,800
(1) Includes $725,900, $725,900, $725,900, $725,900 and $847,800 of
accrued reclamation costs on uranium properties for fiscal 1999, 1998,
1997, 1996 and 1995, respectively.
For Years Ended May 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues $4,416,600 $4,659,900 $ 1,703,500 $ 2,509,200 $ 1,160,200
(Loss) income before
equity in loss of
affiliates and
income taxes (291,900) 1,581,700 (862,400) (811,000) (1,031,100)
Equity in loss of
affiliates (1,659,800) (372,200) (807,900) (357,900) (415,900)
---------- -------- --------- -------- ---------
Net (loss) income $(1,951,700) $ 1,209,500 $(1,670,300) $(1,168,900) $(1,447,000)
========== ========== ========== ========== ==========
Net (loss) income
per share $ (.19) $ .12 $ (.16) $ (.12) $ (.14)
========= ========== =========== ========= ==========
Cash dividends per share -0- -0- -0- -0- -0-
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is Management's Discussion and Analysis of those
significant factors which have affected the Company's liquidity, capital
resources and results of operations during the periods covered in the Company's
Consolidated Financial Statements filed with this Report.
Some of the statements in this Management's Discussion and Analysis
constitute "forward- looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by the forward- looking statements.
LIQUIDITY AND CAPITAL RESOURCES AT MAY 31, 1999
During fiscal 1999, cash and cash equivalents increased by $2,496,300 to
a balance of $3,509,000 at May 31, 1999. Cash increases came primarily as a
result of the receipt of cash from the settlement of various Sheep Mountain
Partners ("SMP") arbitration/litigation issues, the collection of accounts and
notes receivable and the sale of certain assets. Cash was provided from
operations and financing activities of $2,039,900 and $470,400, respectively.
Cash of $14,000 was used in investing activities.
The Company received two payments as partial settlement of various
disputes existing between the partners of SMP. The first payment of $2,513,000,
which was recorded as an account receivable at May 31, 1998, represented matters
which the partners of SMP agreed to settle based on the April 18, 1996 Order and
Award which was rendered by the Arbitration Panel and confirmed by the U.S.
District Court of Colorado. The Company received an additional payment of
$3,038,600 after a decision was reached by the 10th Circuit Court of Appeals,
which affirmed the Second Amended Judgment of the U.S. District Court of
Colorado without modification.
During the twelve months ended May 31, 1999, accounts receivable from
related parties increased by $935,400. This increase came primarily as a result
of increased accounts receivable from Plateau Resources Limited ("Plateau") by
$1,177,900. This increase was offset by a reduction of the receivable from the
Green Mountain Mining Venture ("GMMV") of $273,000.
Cash was used to reduce accounts payable and accrued expenses by
$327,100; reduce debt by $137,000; purchase and renovate assets, $135,600; and
to fund continuing operations. During fiscal 1999, proceeds from long term debt
were $100,500.
29
CAPITAL RESOURCES
GENERAL: The primary source of the Company's capital resources for
fiscal 2000 will be cash on hand at May 31, 1999, possible equity financing and
the expected settlement resolution of the SMP arbitration. The Company will also
continue to offer for sale various other assets such as real estate holdings in
Wyoming, Colorado and Utah and various mineral interests. Advance royalties,
interest, rentals of real estate holdings and equipment, aircraft chartering and
aviation fuel sales will also provide cash.
LINE OF CREDIT: The Company and its majority shareholder U.S. Energy
Corp. ("USE") have a $1,000,000 line of credit with a commercial bank. The line
of credit is secured by various real estate holdings and equipment belonging to
the Company and USE. This facility is currently available to the Company and
USE. It is anticipated that this line of credit may be used to finance working
capital needs.
FINANCING: Equity financings are dependent on the market price of
uranium, among other things. Currently the price for uranium is depressed and it
is not known when it will recover. Management believes, based on its analysis of
independent projections, that the market price for uranium will improve in the
future. No assurance can be given that the price will improve during fiscal
2000. If the price does not improve, the ability of the Company to raise equity
financing will be impaired.
The Company believes that cash on hand, its line of credit and cash
projected to be received from operations, along with potential cut backs in
capital development, general and administrative and operating expenses, will be
adequate to fund working capital requirements through fiscal 2000. These capital
resources are not sufficient to provide the funding for major capital
expenditures for the Company's mineral properties and, accordingly, the
Company's development plans may be either temporarily or permanently impacted.
During fiscal 1999, debt to USE increased by $506,900 to $7,054,000.
This debt is a result of USE funding various operations on behalf of the
Company. USE has not made demand for payment of the debt and has not indicated
that it will do so during fiscal 2000. The Company is obligated to repay this
debt and will continue to negotiate the terms of the debt with USE until such
time as adequate resources are available to retire the debt. In the event that
the Company is not able to pay the debt to USE with cash it may be required to
negotiate payment by issuance of its common stock to USE.
The Company's working capital deficit decreased during fiscal 1999 by
$627,700 to $3,845,300 at May 31, 1999. This decrease was primarily due to the
partial settlements of the SMP arbitration/litigation issues. It is anticipated
that this working capital, along with the line of credit and cash received from
operations, along with reductions in capital, general and administrative
expenses and operational costs, will be adequate to fund the working capital
needs of the Company during fiscal 2000. Until either the remaining SMP
arbitration issue is resolved or equity financing is raised, the Company plans
to curtail major development projects on its mineral properties, general and
administrative expenses and commercial operations.
30
CAPITAL REQUIREMENTS
GENERAL: The primary requirements for the Company's working capital
during fiscal 2000 are expected to be associated with corporate general and
administrative and care and maintenance costs of the Plateau and SMP mineral
properties. The Company will also be responsible for the purchase of uranium for
its portion of a delivery pursuant to the one utility contract that was assigned
to the Company as a result of the partial settlement agreement reached with
Nukem, Inc.
in the SMP arbitration.
SUTTER GOLD MINING COMPANY ("SGMC"): The Company owns 4% of the
outstanding stock of SGMC. As such, it is not directly responsible for the
administrative and capital obligations of bringing the SGMC gold properties into
production. Through its affiliations with USE, however, the Company will assist
in the efforts to secure financing necessary to place the SGMC gold properties
into production.
SMP: The Company and USE are responsible for care and maintenance costs
of the SMP properties. During fiscal 1999, these costs averaged $56,900 per
month. One half of these costs are the obligation of the Company and the
remaining 50% is the obligation of USE. There are no current plans to mine the
SMP Crooks Gap uranium properties during fiscal 2000. However, the Company will
continue to preserve the mineral properties and evaluate concepts to reduce care
and maintenance costs.
All matters in the SMP arbitration have been settled with the exception
of the resolution of the Constructive Trust which was impressed by the
arbitration panel on several supply contracts with three republics of the former
Soviet Union. The existence of a Constructive Trust on the contracts was
confirmed by the U. S. District Court of Colorado and affirmed by the 10th
Circuit Court of Appeals. Management believes that the resolution of the
Constructive Trust issue will occur during fiscal 2000. However, no assurance of
the resolution or its ultimate impact on the financial condition or earnings of
the Company can be predicted.
GMMV: Pursuant to an Acquisition Agreement that was signed on June 23,
1997, Kennecott paid the Company $2 million upon execution of the Agreement,
which became non-refundable upon the satisfaction of certain terms. Due to
continued depressed market prices for uranium concentrates The Company and USE
were unsuccessful in obtaining financing which would have allowed the Company
and USE to purchase Kennecott's interest in the GMMV. The $2 million advanced at
closing is classified as a deferred purchase option and will be offset against
any future cash commitments the Company may incur on the GMMV properties.
During July 1998, the GMMV Management Committee unanimously agreed to
place the Jackpot Mine and Sweetwater Mill on active standby status. This
decision was made as a result of uncertainties in the short term uranium market.
During fiscal 1999, the Company and USE elected under the original GMMV
agreement to become non-participating partners in the budgets of the GMMV. This
decision by the Company will have a dilutive effect on its ownership in the
GMMV. The Company can buy back any dilution it may suffer in its ownership under
certain conditions of the GMMV contract. The Company believes that due to
significantly reduced annual care and maintenance costs, the dilution of its
interest will be minor in the short term.
31
As a result of continued depressed uranium prices, the decision to
curtain development activities on the GMMV mineral properties and lack of
funding, GMMV took an impairment against its mineral assets. This impairment
does not affect the Company's carrying value of its investment in GMMV or its
results of operations.
PLATEAU: Although the Company does not directly own any of the
outstanding stock of Plateau, it has a revenue and cost sharing agreement on the
operations of Plateau. Under the terms of this agreement the Company shares
equally in all cash flows with USE, which owns all the outstanding stock of
Plateau. In addition to maintaining the mill and mine properties, Plateau owns
and operates the Ticaboo townsite, motel, convenience store and restaurant.
Operations in fiscal 1999 resulted in a loss of $708,500, a $100,000 decrease
from fiscal 1998. In addition to commercial operations, Plateau is involved in
real estate sales including the sale of developed home and trailer sites as well
as constructed homes.
The Company and USE are currently working to obtain the necessary
permits from the NRC and State of Utah to place Plateau's Shootaring mill
located in southern Utah into production. The Company is seeking debt or equity
financing of between $6,000,000 to $9,000,000 to put the mill and Tony M. Mine
into production. Until such time as the market price for uranium concentrates
reaches economic levels, financing is obtained and profitable contracts are
secured, the Company will not put the properties into production. Plateau is
also evaluating alternate uses for its mill site including a disposal site for
low level radioactive material.
TERM DEBT AND OTHER OBLIGATIONS: Debt is primarily due to USE, with the
remaining balance representing obligations for the purchase of various
equipment. The debt bears various interest rates and is due under various
payment terms. It is anticipated that all debt payments will be able to be made
in the normal course of the Company's business.
RECLAMATION OBLIGATIONS: It is not anticipated that the Company's
working capital will be used in fiscal 2000 for the reclamation of any of its
mineral properties. The reclamation costs are long term and are either bonded
through the use of cash bonds or the pledge of assets. It is not anticipated
that any of the Company's mining properties will enter the reclamation phase
prior to May 31, 2000. At May 31, 1999, all reclamation obligations of the
Company were fully covered by cash, bonds, the pledge of real estate assets, or
in the case of GMMV, surety bonds posted by Kennecott. The Company evaluates all
reclamation liabilities annually with the responsible regulatory agency. When
increases are required, provisions are made in the cash deposits or bonding.
OTHER: The Company is not using hazardous substances or known pollutants
to any great degree in these activities. Consequently, recurring costs for
managing hazardous substances, and capital expenditures for monitoring hazardous
substances or pollutants have not been significant. Likewise, the Company does
not have properties which require current remediation. The Company are also not
aware of any claims for personal injury or property damages that need to be
accrued or funded.
The tax years through May 31, 1994 are closed after audit by the IRS.
The Company currently has filed a request for an appeal hearing on an IRS
agent's findings for the years ended
32
May 31, 1995 and 1996. No assurance of the outcome of the appeal can be given.
However, management of the Company believes that the results of the appeal will
not have a material affect on the financial position of the Company.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
Although the Company experienced positive cash flows during fiscal 1999,
operations resulted in a net loss after taxes of $1,951,700 or $0.19 per share
as compared to a income of $1,209,500 or $0.12 per share in fiscal 1998.
REVENUES: Mineral sales decreased by $415,700 during fiscal 1999. This
decrease resulted from no revenues being recognized during fiscal 1999 from a
SMP base escalated uranium delivery contract which generated revenues of
$429,300 during fiscal 1998 from the final delivery under the contract. There
were reduced revenues from the advance royalty from Cyprus Amax of $30,200, due
to reduced market prices for molybdenum. These decreases in mineral sales
revenue were slightly offset by net profits received from one of the SMP
purchase contracts of $43,800 during fiscal 1999 while no such revenues were
recorded in fiscal 1998.
Commercial operations revenues decreased by $273,500. This decrease
occurred primarily as a result of reduced equipment rentals to the GMMV. The
GMMV properties were on a standby basis during most of fiscal 1999 due to
reduced uranium prices. This decrease of equipment rental of $375,600 was offset
by increased fuel sales.
Oil sales decreased by $43,400 as a result of temporarily closing down
oil production due to continued depressed market prices for crude oil and a
continuing decline in the production of the oil wells. Subsequent to May 31,
1999 the Company began producing two of the oil wells. The Company will continue
to evaluate production of the wells as estimated production rates change and
market prices for crude oil change.
Management fees and other revenues decreased by $268,100 primarily
because of reduced contract work performed at the GMMV properties and management
services at the SMP properties. The fee is based on a percentage of all costs at
the GMMV properties for services provided. During fiscal 1999, operations were
significantly reduced at the GMMV properties which reduced the related
management fees. Upon receiving the SMP mining properties in a partial
settlement of the SMP arbitration issues, the Company was no longer entitled to
a management fee on the SMP properties.
COSTS AND EXPENSES: Mineral operations increased from $832,400 during
fiscal 1998 to $1,121,500 during fiscal 1999. This increase of $289,100
primarily relates to the care and maintenance costs associated with the SMP
properties. The Company became responsible for 100% of these costs at the
beginning of fiscal 1999 due to a partial settlement of the SMP
arbitration/litigation issues which conveyed ownership of the SMP mining
properties to the Company.
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General and Administrative expenses increased from $1,370,300 during
fiscal 1998 by $403,400 to $1,773,700 during fiscal 1999. This increase was as a
result of labor expenses no longer being billed directly to GMMV and SMP.
Significant portions of labor costs were billable either directly or on a
allocation basis to GMMV and SMP during fiscal 1998. As a result of the Company
and USE receiving the SMP properties in partial settlement of the
arbitration/litigation issues and the curtailment of activities at GMMV, these
same labor costs are charged to General and Administrative expense.
The largest increases in costs and expenses were the write off of a
contingent stock warrant and provision for doubtful accounts. During fiscal
1999, the Company wrote off a contingent stock warrant from SGMC in the amount
of $651,000. The write off of the contingent stock warrant does not affect the
ownership of the SGMC properties.
The Company also recognized non-cash expenses in the form of a provision
for doubtful accounts of $182,500. The provision for doubtful accounts is a
result of the continual inability of a third party to pay amounts due the
Company on real estate sold in prior years. The Company will pursue collection
of this amount.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues for the twelve months ended May 31, 1998 totaled $4,659,900 as
compared to revenues of $1,703,500 for the fiscal year ended May 31, 1997. This
increase in revenues of $2,956,400 is primarily the result of the litigation
settlement, increased mineral revenues, commercial operations, management fees
and interest revenues. The litigation revenues of $2,295,000 are the result of
the signing of an partial settlement agreement in the SMP
litigation/arbitration. The increase in mineral revenues of $431,200 is the
result of the receipt by the Company of its portion of the net proceeds from a
delivery of U3O8 under a SMP contract, which was the final delivery under this
contract.
Commercial operations revenues increased $392,600 as compared to fiscal
year 1997. These revenues increased as a result of increased equipment rental to
the GMMV. Management fees and other revenues increased $261,800 over fiscal year
1997 primarily as a result of increased activity at GMMV and Plateau. These
increases were partially offset by a decrease in revenues from the sale of
assets of $28,100.
During the fiscal year ended May 31, 1998, operating costs and expenses
increased $512,300 compared to fiscal year ended May 31, 1997. Increases in
mineral operations and general and administrative expenses were partially offset
by decreases in commercial operations and interest expenses. The increases in
mineral operations of $410,900 and general and administrative of $821,000 were
primarily the result of increased operating expenses at the GMMV and Plateau
uranium properties. The increases in general and administrative expenses were
primarily due to increased compensation.
34
Expenses in commercial operations and interest expense decreased by
$59,400 and $3,500, respectively . These expenses were reduced as a result of
reduced activity on the properties and as a result of the Company and USE not
using their commercial bank line of credit during the twelve months ended May
31, 1998.
Operations resulted in net income of $1,209,500 or $.12 per share in
fiscal 1998 as compared to a net loss of $1,670,300 or $.16 per share in fiscal
1997.
FUTURE OPERATIONS
The Company has generated losses in two of the last three years, as a
result of holding costs and permitting activities in the mineral segment along
with impairments of mineral assets. The Company is in the process of holding its
investments in gold and uranium properties that are currently not generating any
operating revenues. These properties require expenditures for items such as
permitting, care and maintenance, holding fees, corporate overhead and
administrative expenses. Success in the minerals industry is dependant on the
price that a company can receive for the minerals produced. The Company cannot
predict what the long term price for gold and uranium will be and therefore
cannot predict when, or if, the Company will generate net income from
operations. The Company has sufficient capital resources to maintain its mineral
properties on a stand by basis through fiscal 2000. Development activities of
the mineral properties and expansion of commercial operations are dependant on
the Company obtaining equity financing or commercial loans.
In addition, legal expenses associated with the litigation and
arbitration surrounding the SMP Partnership and the inability of the Company to
utilize all the funds that have been awarded to the Company by the Arbitration
Panel and confirmed by the Federal Courts have compounded the Company's
operating and cash flow position in the past. The Company believes that the SMP
arbitration/litigation will be resolved during fiscal 2000.
YEAR 2000 ISSUE
Computer programs written in the past utilize a two digit format to
identify the applicable year. Any date sensitive software beyond December 31,
1999 could fail, if not modified. The result could be, among other
possibilities, disruptions to operations and the inability to process financial
transactions. The Company has evaluated the operating systems on all headquarter
and field office computers and operating systems and has consulted with its
vendors of the computer software which is being used by the Company and its
affiliates. The vendors have confirmed to the Company that all of the Company's
software and information systems are Year 2000 compliant. The Company therefore
does not believe that significant expenditures will be required for the Year
2000 event. In the event that the Company experiences technical problems because
of the Year 2000 problem it will change software vendors. Such a change would
not have a material affect on the Company's results of operations or financial
position.
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EFFECTS OF CHANGES IN PRICES
Mining operations and the acquisition, development and sale of mineral
properties are significantly affected by changes in commodity prices. As prices
for a particular mineral increase, prices for prospects for that mineral also
increase, making acquisitions of such properties costly, and sales advantageous.
Conversely, a price decline facilitates acquisitions of properties containing
that mineral, but makes sales of such properties more difficult. Operational
impacts of changes in mineral commodity prices are common in the mining
industry.
URANIUM. Changes in the prices of uranium affect the Company to the
greatest extent. Currently uranium is at historical low prices. The Company is
continually evaluating market trends and data. The Company does not plan to go
forward with any additional development of its mineral properties until the
market price for gold and uranium obtain and remain at higher levels which will
make the operations profitable.
MOLYBDENUM AND OIL. Changes in prices of molybdenum and petroleum are
not expected to materially affect the Company with respect to either its
molybdenum advance royalties or its fees associated with oil production. A
significant and sustained increase in demand for molybdenum would be required
for the development of the Mt. Emmons properties by Cyprus Amax since Cyprus
Amax has other producing mines.
ITEM 8. FINANCIAL STATEMENTS.
Financial statements for the Company follow immediately.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Crested Corp.:
We have audited the accompanying consolidated balance sheets of CRESTED CORP. (a
Colorado corporation) AND AFFILIATE as of May 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' (deficit) equity and cash
flows for each of the three years in