Gold forward sale boosts First Uranium shares

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Gold forward sale boosts First Uranium shares
Brendan Ryan
Posted: Mon, 17 Nov 2008

[miningmx.com] -- THE DEAL announced by First Uranium (FUM) on November 4 to sell forward some of its expected gold production to Gold Wheaton has breathed life into the uranium/gold company’s share price.

That’s despite the fact that FUM is selling gold forward at an effective $638/ounce, compared with the current price of about $740/oz while gold industry sentiment is still in favour of reducing forward sales in anticipation of higher gold prices.

FUM’s main listing is on the Toronto Stock Exchange (TSX) with a secondary listing on the JSE. The TSX share price shot up from 1.35 Canadian dollars to trade as high as about C$3, before pulling back to current levels of about C$2.20.

According to FUM investor relations vice-pesident Bob Tait, “what the deal seems to have done is wake investors up to the fact that we have considerable exposure to gold production, despite the fact that we are primarily a uranium producer.

“Our share price did not react at all to gold’s run-up to more than $1,000/oz earlier this year. The deal has also been well received by analysts who have realised that this not a hedge transaction,” Tait said.

In terms of the deal, Gold Wheaton has contracted to buy 25% of the estimated life-of-mine gold production from FUM’s Mine Waste Solutions tailings recovery operation (MWS).

MWS is expected to produce around 2.1m oz of gold over its economic life so the Gold Wheaton has contracted to buy about 525,000oz.

Payment is in two stages, with an upfront amount of US$125m due before February 27 next year. This is equivalent to $238/oz of gold to be purchased.

In addition, FUM will get a further payment equal to “the lesser of $400/oz and the prevailing spot price” as and when it takes delivery of the gold produced by MWS.

That’s equivalent in total to $638/oz, unless the spot price falls below $400/oz in which case the received price will drop below $638 by a matching amount.

Tait insisted this was not a hedge transaction because FUM is not obligated to deliver a specific amount of gold and has not contracted to do so.

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“Gold Wheaton is entitled to buy 25% of the MWS production. If that turns out to be less than the estimated 2.1m oz, they will buy less than 525,000oz. If it’s more, they will be able to buy more than 525,000oz. “

Tait also maintained there would be no liability in FUM’s accounts should the gold price trade above $638/oz at the time of sale.

“It just means we will be selling a portion of our gold at less than the going price. Most of our gold production remains open to the upside on the price,” he said.

Tait said FUM’s long-term gold price forecast used in the evaluation of its projects was $748/oz. He commented the price discount was justified by the fact that FUM was getting money up-front for gold that would be produced up to 15 years later.

Tait added the deal was an innovative way of raising funds that FUM needed at a time when it had become increasingly more difficult for companies to raise capital through conventional methods, “even when they have good growth potential”.