THIS NEWS RELEASE IS NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR
DISSEMINATION IN THE UNITED STATES.
Uranium Participation Corporation (TSX:U) ("UPC") reports results for the year
ended February 29, 2012. The consolidated financial statements were prepared in
accordance with International Financial Reporting Standards. All amounts are in
Canadian currency unless otherwise noted.
Net asset value decreased to $712.2 million at February 29, 2012 from $934.5
million at February 28, 2011, primarily due to unrealized losses on uranium
holdings. Net asset value declined $223.5 million or $2.09 per common share to
$6.70 at February 29, 2012 from $8.79 at February 28, 2011.
The Company recorded $238.8 million in unrealized losses (2011-$338.9 million in
unrealized gains) on its uranium investment due to the decline in the spot price
of uranium during the year. This was offset by $0.9 million (2011-$1.2 million)
in income from investment lending and interest.
Expenses for the year totaled a net recovery of $14.4 million (2011-$38.4
million expense) which included a $19.0 million recovery (2011-$30.1 million
provision) for future income taxes related to the unrealized losses.
About Uranium Participation Corporation
Uranium Participation Corporation is an investment holding company which invests
substantially all of its assets in uranium oxide in concentrates (U3O8) and
uranium hexafluoride (UF6) (collectively "uranium"), with the primary investment
objective of achieving appreciation in the value of its uranium holdings.
Additional information about Uranium Participation Corporation is available on
SEDAR at www.sedar.com and on Uranium Participation Corporation's website at
www.uraniumparticipation.com.
URANIUM PARTICIPATION CORPORATION
ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE
FEBRUARY 29, 2012
DISCLOSURE
This Annual Management Report of Fund Performance contains financial highlights
but does not contain the complete audited annual consolidated financial
statements of Uranium Participation Corporation ("UPC" or the "Corporation").
You can get a copy of the audited annual consolidated financial statements at
your request, and at no cost, by calling 416-979-1991, by writing to us at 595
Bay Street, Suite 402, Toronto, Ontario, M5G 2C2, or by visiting our website at
www.uraniumparticipation.com or SEDAR at www.sedar.com. You may also contact us
to obtain a copy of the Corporation's quarterly portfolio disclosure.
UPC holds physical commodities and not equity security investments. As a result,
UPC does not have an investment proxy voting disclosure record, nor does it have
proxy voting policies and procedures.
This Annual Management Report of Fund Performance is current as of April 26,
2012. All amounts are in Canadian dollars unless otherwise indicated.
CAUTION REGARDING FORWARD LOOKING INFORMATION
This Annual Management Report of Fund Performance contains certain forward
looking statements and forward looking information that are based on the
Corporation's current internal expectations, estimates, assumptions and beliefs.
Forward looking statements generally can be identified by the use of forward
looking terminology such as "may", "will", "expect", "intend", "estimate",
"anticipate", "plan", "should", "believe" or "continue" or the negative thereof
or variations thereon or similar terminology.
By their very nature, forward looking statements involve numerous assumptions
and estimates. A variety of factors, many of which are beyond the control of the
Corporation, may cause actual results to differ materially from the expectations
expressed in the forward looking statements. For a list of the principal risks
of an investment in the Corporation, please refer to the "RISK FACTORS" section
of UPC's Annual Information Form ("AIF") dated April 26, 2012 available on the
Corporation's website and SEDAR.
These and other factors should be considered carefully, and readers are
cautioned not to place undue reliance on these forward looking statements.
Although management reviews the reasonableness of its assumptions and estimates,
unusual and unanticipated events may occur which render them inaccurate. Under
such circumstances, future performance may differ materially from that expressed
or implied by the forward looking statements. Except where required under
applicable securities legislation, the Corporation does not undertake to update
any forward looking information.
URANIUM PARTICIPATION CORPORATION
UPC was incorporated on March 15, 2005 under the Ontario Business Corporations
Act. The Corporation was created to invest in, hold and sell uranium oxide in
concentrates ("U3O8") and uranium hexafluoride ("UF6") (collectively "uranium").
UPC invests in and holds physical uranium directly and indirectly through its
wholly-owned subsidiary, Uranium Participation Cyprus Limited ("UPCL"). UPCL was
incorporated on September 10, 2006 under the laws of the Republic of Cyprus and
obtained a business license to establish and conduct its operations through a
branch office in Luxembourg. Unless otherwise indicated or where the context
otherwise requires, references to UPC or the Corporation include UPCL.
Uranium Participation Alberta Corp. ("UPAC") and Uranium Limited ("UL") were
also wholly-owned subsidiaries of UPC which directly invested in and held
uranium in prior years. UPAC was incorporated on May 4, 2005 under the Alberta
Business Corporations Act and was amalgamated with UPC on November 21, 2011. UL
was acquired by UPC on March 30, 2010 through a Scheme of Arrangement under the
laws of Guernsey, had its uranium holdings transferred to UPCL and was dissolved
on August 24, 2011.
UPC is governed by its board of directors (the "Board of Directors") and
administered by Denison Mines Inc. (the "Manager") pursuant to a management
services agreement (the "Management Services Agreement"). The common shares of
UPC trade publicly on the Toronto Stock Exchange under the symbol "U".
UPC established an Independent Review Committee ("IRC") from its qualified
independent Board members in October 2007. The IRC has adopted a mandate that
provides that the IRC must provide a recommendation or approval of transactions
in which there is a conflict of interest between the Corporation and its
Manager, as contemplated by National Instrument 81-107-Independent Review
Committee for Investment Funds of the Canadian Securities Administrators ("NI
81-107"). The IRC prepares a report to shareholders on an annual basis. The
report is available on UPC's website at www.uraniumparticipation.com and is also
available to shareholders at no cost by contacting the Corporation at
info@uraniumparticipation.com.
UPC is an investment fund as defined by the Canadian securities regulatory
authorities in National Instrument 81-106-Investment Fund Continuous Disclosure.
Unlike many investment funds, UPC does not qualify as a mutual fund trust under
the provisions of the Income Tax Act (Canada) (the "Act") and, accordingly,
follows the general corporate income tax provisions of the Act.
Canadian Securities laws require each investment fund to have an investment fund
manager ("IFM"). The Corporation has applied to register as an IFM pursuant to
National Instrument 31-103-Registration Requirements and Exemptions. As of the
date hereof, the application remains under review.
INVESTMENT OBJECTIVES AND STRATEGY
The primary investment objective of UPC is to achieve long-term appreciation in
the value of its uranium holdings through a buy and hold investment strategy and
not actively speculate with regard to short-term changes in uranium prices.
While it is not the current intention of UPC to do so in the short term, it may
subsequently sell some or all of its uranium holdings. Ownership of the
Corporation's common shares represents an indirect interest in ownership of
physical uranium. This provides an investment alternative for investors
interested in investing in this commodity without incurring the risks associated
with investments in companies that explore for, mine and process uranium related
products.
In implementing the investment strategy of the Corporation, at least 85% of the
gross proceeds of any equity offering will be invested in, or set aside for
future purchases of uranium. In strictly limited circumstances, the Corporation
can enter into borrowing arrangements to facilitate the purchases of uranium
where the current cash on hand is not adequate to cover such commitments. The
maximum amount of any such borrowing cannot exceed 15% of the net asset value of
UPC. The Corporation may also enter into uranium lending transactions in order
to earn additional returns.
For a more detailed description of the Corporation's investment policies and
by-laws, please refer to UPC's AIF.
INVESTMENT RISK
There are a number of factors that could negatively affect UPC's business and
the value of UPC's securities. Please refer to UPC's AIF for a detailed
discussion of the material risk factors and their potential impacts on UPC's
business.
Some of the more significant changes or trends in economic conditions through
the year that could materially affect the Corporation's future operating results
are as follows:
Uranium Price Volatility
Since almost all of UPC's activities involve investing in uranium, the value of
its securities will be highly sensitive to fluctuations in the prices of
uranium. As a consequence of the March 2011 Japanese nuclear incident, prices
have been volatile in response to reduced demand due to reactor shutdowns and
anticipated inventory sales by government and Japanese utilities. The spot price
per pound of U3O8 began the year at US$69.75, then steadily declined following
the Japanese incident, to a low of US$49.00 in August before recovering to end
the year at US$52.00. The UF6 spot price per KgU showed a similar pattern with
the price of US$194.00 at February 28, 2011, declining to US$141.00 at February
29, 2012.
The fluctuations in these prices have been and will continue to be affected by
numerous other factors beyond UPC's control. Such factors include, among others:
demand for nuclear power; public and political response to a nuclear incident;
reprocessing of used reactor fuel and the re-enrichment of depleted uranium
tails; sales of excess civilian and military inventories (including from the
dismantling of nuclear weapons) by governments and industry participants;
uranium supply, including the supply from other secondary sources; and
production levels and production costs in key uranium producing countries.
Set out in the table below is the spot price(1) for U3O8 per pound and UF6 per
KgU at February 28 (or February 29, if applicable) for each of the last five
years:
------------------------------------------------------------
2008 2009 2010 2011 2012
--------------------------------------------------------------------
U3O8 $ 73.00 $ 45.00 $ 41.75 $ 69.75 $ 52.00
UF6 $ 200.00 $ 126.00 $ 114.00 $ 194.00 $ 141.00
--------------------------------------------------------------------
(1) As published by Ux Consulting Company, LLC ("UxCo") in U.S. dollars.
Foreign Exchange Rates
UPC maintains its accounting records, reports its financial position and
results, pays certain operating expenses and its securities trade in Canadian
currency. As the prices of uranium are quoted in U.S. currency, fluctuations in
the U.S. currency exchange rate relative to the Canadian currency can
significantly impact the valuation of uranium and the associated purchase price
from a Canadian currency perspective. The month-end U.S. dollar relative to the
Canadian dollar fluctuated between 1.0389 and 0.9486 throughout the fiscal year,
starting the year on February 28, 2011 at 0.9739 and ending the year on February
29, 2012 at 0.9866. Future exchange rate fluctuations may have an adverse effect
on UPC's net asset value and net asset value per common share ("NAV") reported
in Canadian dollars.
Lack of Operational Liquidity
The expenses of UPC are funded from cash on hand that is not otherwise invested
in uranium and revenue from the lending of uranium. Once such cash has been
expended, UPC may generate cash from either the lending or sale of uranium, or
the sale of additional equity securities. At February 29, 2012, UPC's cash
balance was sufficient to cover over three years of anticipated expenses.
Public Acceptance of Nuclear Energy
Growth of the uranium and nuclear power industry will depend upon continued and
increased acceptance of nuclear technology as a means of generating electricity.
Because of unique political, technological and environmental factors that affect
the nuclear industry, including the risk of a nuclear incident, the industry is
subject to public opinion risks that could have an adverse impact on the demand
for nuclear power and increase the regulation of the nuclear power industry. As
a consequence of the Japanese nuclear incident in March 2011, most countries,
while declaring their support for nuclear power, have called for technical
reviews of all safety and security systems of existing nuclear plants and those
under construction and a review of the nuclear safety regulations governing the
industry. A few countries, such as Germany and Switzerland have already
announced that they will be curtailing or suspending their nuclear programs. It
is significant, however, that the governments of China, India, South Korea and
Russia have all announced plans to move ahead with their domestic nuclear plans,
albeit following a careful review of the safety of their nuclear plants. In the
long term, the nuclear industry is forecasted to continue growing to meet the
future world energy demands and contribute to efforts for the reduction of
greenhouse gas emissions. UxCo has estimated in its Q1 2012 Uranium Market
Outlook that uranium demand will grow from 172.0 million pounds of U3O8 in 2011
to 222.0 million pounds in 2020.
Nuclear energy competes with other sources of energy, including oil, natural
gas, coal, hydro-electricity and renewable energy sources. These other energy
sources are to some extent interchangeable with nuclear energy, particularly
over the longer term. Sustained lower prices of oil, natural gas and coal may
result in lower demand for uranium concentrates. Technical advancements in
renewable and other alternate forms of energy, such as wind and solar power,
could make these forms of energy more commercially viable and put additional
pressure on the demand for uranium concentrates.
RESULTS OF OPERATIONS
UPC's basic NAV decreased from $8.79 per share at February 28, 2011 to $6.70 at
February 29, 2012 representing a basic NAV loss of 23.8%. Diluted NAV decreased
from $8.76 per share at February 28, 2011 to $6.70 at February 29, 2012
representing a diluted NAV loss of 23.5%. Over the comparable time period, UPC's
benchmark, the S&P/TSX Composite Index, decreased by 10.6%.
UPC's net asset value at February 29, 2012 was $712,160,000 representing a 23.8%
decrease from its net asset value of $934,455,000 at February 28, 2011. Of the
net asset decrease of $222,295,000 over the period, $223,503,000 was
attributable to investment operation performance, $6,743,000 due to common share
repurchases under a normal course issuer bid ("NCIB"), offset by $7,951,000 in
stock option exercises.
Equity Financing
On March 30, 2010, UPC completed the acquisition of UL by issuing 0.50 UPC
shares in exchange for each UL share. A total of 20,624,972 UPC shares were
issued to complete the transaction.
In March 2011, all 2,475,000 outstanding stock options to acquire 1,237,500 UPC
shares were exercised for gross proceeds of $7,951,000.
In June 2011, the Corporation filed an NCIB with the Toronto Stock Exchange
authorizing UPC to purchase up to 7,886,393 of its own common shares during the
12-month period commencing June 14, 2011 and ending June 13, 2012 or on such
earlier date as the Corporation completes its purchases. In the year ended
February 29, 2012, UPC purchased an aggregate 1,209,400 common shares for
cancellation directly under the NCIB at a cost of $6,743,000.
As at February 29, 2012, UPC had 106,350,413 common shares issued and outstanding.
Since inception, UPC has raised gross proceeds of $647,047,000 through common
share and equity unit financings, received $39,153,000 through warrant and stock
option exercises, and repurchased 1,209,400 of its own shares at a cost of
$6,743,000. Also, as part of the UL acquisition, UPC issued 20,624,972 common
shares valued at $122,101,000. A total of $732,493,000 or 91.4% of the above
amounts have been invested in uranium.
Investment Portfolio
UPC did not acquire any additional U3O8 or UF6 in the year.
The total cost of UPC's U3O8holdings at February 29, 2012 was $342,495,000 or
$47.24 per pound, compared to its fair value of $371,948,000 or $51.30(1) per
pound. This represents an increase of 8.6% or 20.3% on a U.S. dollar basis.
The total cost of UPC's UF6 holdings at February 29, 2012 was $389,998,000 or
$164.26 per KgU, compared to its fair value of $330,281,000 or $139.11(1) per
KgU. This represents a decrease of 15.3% or 7.3% on a U.S. dollar basis.
UPC entered into a loan of the conversion component of 1,332,230 KgU as UF6 in
December 2009. The conversion component is subject to a loan fee of 4.5% per
annum based on the greater of the adjusted monthly value and US$15,654,000. To
facilitate the loan of the conversion component, 1,332,230 KgU as UF6 was
transferred to the borrower with 3,480,944 pounds of U3O8 transferred to UPC and
an irrevocable letter of credit received as collateral. In addition to
generating loan fees, the agreement will effectively reduce some of UPC's
storage costs. This agreement is due to expire in December 2012.
Through the acquisition of UL, UPC assumed a loan agreement to lend 520,000
pounds of U3O8 subject to a loan fee of 3.5% per annum of the material's value,
fixed at US$46.50 per pound or US$24,180,000. The agreement expired on July 8,
2010 with the U3O8 returned on that date.
In January 2011, an affiliate of the Manager borrowed 150,000 pounds of U3O8
from UPC subject to a loan fee of 3.5% per annum based upon the material's value
on the borrowing date. The loan was repayable in February 2011, or such later
date agreed to by both parties. In February 2011, the repayment date was amended
to April 4, 2011 with the loan fee amended to 3.5% per annum of the material's
value on the amendment date. Collateral of US$12,045,000 was held in the form of
an irrevocable letter of credit. The loan was repaid in full on March 30, 2011.
Investment Performance
Investment operation losses of $223,503,000 for the year ended February 29, 2012
have been largely driven by the change in unrealized losses on uranium
investments of $238,839,000, offset by tax recoveries of $18,997,000.
The change in unrealized losses on investments reflect the weakening U3O8 and
UF6 spot prices. As reported by UxCo, spot prices for U3O8 decreased from
US$69.75 per pound at February 28, 2011 to US$52.00 per pound at February 29,
2012. UF6 similarly decreased from US$194.00 at February 28, 2011 to US$141.00
at February 29, 2012.
UPC is not a mutual fund trust. Therefore, it is subject to income tax on its
taxable income, computed in accordance with the ordinary rules and at rates
ordinarily applicable to public corporations in its various jurisdictions. The
substantively enacted future tax rates, in UPC's various jurisdictions, range
from 3% to 25%. In the current year, UPC has provided for current tax expense of
nil and future tax recoveries of $18,997,000. The combined tax recoveries for
the current year of $18,997,000 reflects an effective tax rate of approximately
7.8% compared to a tax expense of $30,098,000 and an effective tax rate of 9.0%
in the prior year. The decline in the effective tax rate is primarily a result
of an increase in the proportion of inventory held in UPC's wholly owned
subsidiary, UPCL.
ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
UPC adopted IFRS for its fiscal year ended February 29, 2012, electing not to
utilize the deferral offered to investment funds applying Accounting Guideline
AcG-18 Investment Companies. Therefore, UPC's consolidated financial report for
the year ended February 29, 2012, including comparative amounts for fiscal 2011
are the Corporation's first annual consolidated financial statements prepared in
accordance with IFRS.
The adoption of IFRS did not impact UPC's net asset value, with the main
differences being additional note disclosure for its uranium investments and
deferred income taxes. Further details of the limited impact the adoption of
IFRS had on UPC's consolidated financial statements can be found in note 3 of
the annual consolidated financial statements.
(1) Reflects spot prices published by UxCo on February 29, 2012 of US$52.00 per
pound for U3O8 and US$141.00 per KgU for UF6 translated at a foreign exchange
rate of 0.9866.
RELATED PARTY TRANSACTIONS
UPC is a party to a Management Services Agreement with its Manager. Under the
terms of the agreement, UPC will pay the following fees to the Manager: a) a
commission of 1.5% of the gross value of any purchases or sales of uranium
completed at the request of the Board of Directors; b) a minimum annual
management fee of $400,000 (plus reasonable out-of-pocket expenses) plus an
additional fee of 0.3% per annum based upon UPC's net asset value between
$100,000,000 and $200,000,000 and 0.2% per annum based upon UPC's net asset
value in excess of $200,000,000; c) a fee of $200,000 upon the completion of
each equity financing where proceeds payable to UPC exceed $20,000,000; d) a fee
of $200,000 for each transaction or arrangement (other than the purchase or sale
of uranium) of business where the gross value of such transaction exceeds
$20,000,000 ("an initiative"); e) an annual fee up to a maximum of $200,000, at
the discretion of the Board, for on-going maintenance or work associated with an
initiative; and f) a fee equal to 1.5% of the gross value of any uranium held by
UPC prior to the completion of any transaction under which at least 90% of the
Corporation's common shares are acquired.
In accordance with the Management Services Agreement, all uranium investments
owned by UPC are held in accounts with conversion and enrichment facilities in
the name of Denison Mines Inc. as manager for and on behalf of UPC.
In March 2010, the initial term of the Management Services Agreement was
extended to March 30, 2013, following which, the agreement may be terminated by
either party upon the provision of 180 days written notice.
In January 2011, an affiliate of the Manager borrowed 150,000 pounds of U3O8
from UPC subject to a loan fee of 3.5% per annum based upon the material's value
on the borrowing date. The loan was repayable in February 2011 or such later
date agreed to by both parties. In February 2011, the repayment date was amended
to April 4, 2011 with the loan fee amended to 3.5% per annum of the material's
value on the amendment date. Collateral was held in the form of an irrevocable
letter of credit from a major financial institution in the amount of
US$12,045,000. The borrowed U3O8 was returned on March 30, 2011.
The following outlines the income earned and fees paid to the Manager in the
years ended February 29, 2012 and February 28, 2011:
----------------------------------------------------------------------------
(in thousands) 2012 2011
----------------------------------------------------------------------------
Income from investment lending with the Manager $ 35 $ 53
Fees incurred with the Manager:
Management fees $ 1,808 $ 1,813
Transaction fees and uranium purchase commissions - 1,000
----------------------------------------------------------------------------
Net fees incurred with the Manager $ 1,773 $ 2,760
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at February 29, 2012, accounts payable and accrued liabilities included
$172,000 (February 28, 2011: $232,000) due to the Manager with respect to the
fees indicated above. At February 28, 2012, nil (February 28, 2011: $53,000) in
accrued loan interest was receivable from an affiliate of the Manager.
FINANCIAL HIGHLIGHTS
The following tables show selected key financial information about UPC and is
intended to help you understand UPC's financial performance for the last five
years. This information is derived from the Corporation's audited annual
consolidated financial statements.
Net Asset Value per Share
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2012 2011 2010 2009 2008
----------------------------------------------------------------------------
Net asset value per share - basic:
Net asset value, beginning
of year (1) $ 8.79 $ 5.95 $ 7.49 $ 8.96 $ 11.95
----------------------------------------------------------------------------
Increase (decrease) from
operations (1):
Total revenue $ 0.01 $ 0.01 $ 0.04 $ 0.07 $ 0.13
Total expenses before
taxes $ (0.04) $ (0.08) $ (0.06) $ (0.08) $ (0.16)
Income tax recovery
(provision) $ 0.17 $ (0.29) $ 0.18 $ 0.27 $ 0.93
Realized gains (losses)
for the year $ - $ - $ - $ - $ -
Unrealized gains
(losses) for the year $ (2.23) $ 3.24 $ (1.77) $ (1.83) $ (3.81)
----------------------------------------------------------------------------
Total increase (decrease)
from operations $ (2.09) $ 2.88 $ (1.61) $ (1.58) $ (2.91)
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Net asset value, end of
year (1) $ 6.70 $ 8.79 $ 5.95 $ 7.49 $ 8.96
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Net asset value per share
- diluted:
Net asset value, beginning
of year (1) $ 8.76 $ 5.95 $ 7.49 $ 8.96 $ 11.43
----------------------------------------------------------------------------
Increase (decrease) from
operations (1):
Total revenue $ 0.01 $ 0.01 $ 0.04 $ 0.07 $ 0.13
Total expenses before
taxes $ (0.04) $ (0.08) $ (0.06) $ (0.08) $ (0.16)
Income tax recovery
(provision) $ 0.17 $ (0.29) $ 0.18 $ 0.27 $ 0.93
Realized gains (losses)
for the year $ - $ - $ - $ - $ -
Unrealized gains
(losses) for the year $ (2.23) $ 3.24 $ (1.77) $ (1.83) $ (3.81)
----------------------------------------------------------------------------
Total increase (decrease)
from operations $ (2.09) $ 2.88 $ (1.61) $ (1.58) $ (2.91)
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Net asset value, end of
year (1) $ 6.70 $ 8.76 $ 5.95 $ 7.49 $ 8.96
----------------------------------------------------------------------------
(1) Net asset values are based on the actual number of common shares
outstanding at the relevant time. The increase (decrease) from
operations is based on the weighted average number of common shares
outstanding over the financial period.
Ratios and Supplemental Data
----------------------------------------------------------------------------
(in millions, except for
ratios and TSX
market prices) 2012 2011 2010 2009 2008
----------------------------------------------------------------------------
Total net asset value, end
of year (1) $ 712.2 $ 934.5 $ 509.6 $ 541.4 $ 582.5
Number of common shares
outstanding (1) 106.4 106.3 85.7 72.3 65.0
Average net asset value
for the year $ 760.7 $ 729.5 $ 555.8 $ 585.1 $ 708.5
Management expense ratio
(2)
Excluding income tax
expense (recovery) 0.61% 0.68% 0.61% 0.79% 1.01%
Including income tax
expense (recovery) (1.89%) 4.81% (2.06%) (2.53%) (6.86%)
Trading expense ratio (3) - 0.46% 0.23% 0.22% 0.32%
Portfolio turnover rate - - - - -
Net asset value per share,
end of year (1) $ 6.70 $ 8.79 $ 5.95 $ 7.49 $ 8.96
Closing TSX market price
per common share $ 6.03 $ 9.03 $ 6.16 $ 6.05 $ 11.55
----------------------------------------------------------------------------
(1) This information is provided as at February 28/29 of the year shown.
(2) The management expense ratio is based on total expenses (excluding
commissions and other portfolio transaction costs) for the stated period
and is expressed as an annualized percentage of the average net asset
value during the period.
(3) The trading expense ratio represents total commissions and other
portfolio transaction costs expressed as an annualized percentage of the
average net asset value during the period.
PAST PERFORMANCE
The following tables show the past performances of the NAV Return (Loss) and the
share price ("Market Value Return (Loss)") of UPC and will not necessarily
indicate how UPC will perform in the future. NAV Return (Loss) is the best
representation of the performance of UPC while Market Value Return (Loss) is the
best representation of the return to a shareholder of UPC.
Year-by-Year Returns
The table and graph below shows the annual performance in NAV Return (Loss) and
Market Value Return (Loss) of UPC for each period indicated. The table and graph
shows, in percentage terms, how much an investment made on the first day of each
financial period would have increased or decreased by February 28/29 of the
period ended:
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2006 2007 2008 2009 2010 2011 2012
(1) (2) (2) (2) (2) (2) (2)
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NAV Return (Loss) -
basic 18.3% 110.0% (25.0%) (16.4%) (20.6%) 47.7% (23.8%)
NAV Return (Loss) -
diluted 18.3% 100.9% (21.6%) (16.4%) (20.6%) 47.2% (23.5%)
Market Value Return
(Loss) 40.2% 94.1% (18.4%) (47.6%) 1.8% 46.6% (33.2%)
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(1) Period from completion of initial public offering on May 10, 2005
through to February 28, 2006.
(2) For the twelve months ended.
To view the graph associated with this press release, please visit the following
link: http://media3.marketwire.com/docs/Uchart.pdf.
Annual Compound Returns
The table below shows the annual compounded return in NAV Return (Loss) and
Market Value Return (Loss) of UPC from inception through to the end of the
indicated period, compared with the S&P/TSX Composite Index calculated on the
same compounded basis.
----------------------------------------------------------------------------
Since
1 Year 3 Years 5 Years Inception(1)
----------------------------------------------------------------------------
NAV Return (Loss) - basic (23.8%) (3.7%) (10.9%) 4.9%
NAV Return (Loss) - diluted (23.5%) (3.7%) (10.1%) 4.9%
Market Value Return (Loss) (33.2%) (0.1%) (15.7%) 2.1%
S&P / TSX Composite Index (2) (10.6%) 15.9% (0.6%) 4.2%
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(1) Period from completion of initial public offering on May 10, 2005
through to February 29, 2012.
(2) The S&P / TSX Composite Index is a market capitalization-weighted index
that provides a broad measure of the performance of the Canadian equity
market.
SUMMARY OF INVESTMENT PORTFOLIO
UPC's investment portfolio consists of the following as at February 29, 2012:
----------------------------------------------------------------------------
(in thousands, except Market
quantity amounts) Quantity of Measure Cost (1) Value (2)
----------------------------------------------------------------------------
Investments in Uranium:
U3O8 7,250,000 lbs $ 342,495 $ 371,948
UF6(3) 2,374,230 KgU $ 389,998 $ 330,281
----------------------------------------------------------------------------
$ 732,493 $ 702,229
----------------------------------------------------------------------------
----------------------------------------------------------------------------
U3O8 average cost and
market value per pound:
- In Canadian dollars $ 47.24 $ 51.30
- In United States
dollars $ 43.23 $ 52.00
UF6 average cost and market
value per KgU:
- In Canadian dollars $ 164.26 $ 139.11
- In United States
dollars $ 152.06 $ 141.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The cost of the portfolio excludes transaction fees incurred.
(2) The market values have been translated to Canadian dollars using the
February 29, 2012 noon foreign exchange rate of 0.9866.
(3) The Corporation has transferred 1,332,230 KgU as UF6 to a third party
and taken in exchange 3,480,944 pounds of U3O8, effectively lending the
conversion component of the UF6.
Responsibility for Financial Reporting
----------------------------------------------------------------------------
Uranium Participation Corporation's (the "Corporation") management is
responsible for the integrity and fairness of presentation of these consolidated
financial statements. The consolidated financial statements have been prepared
by management, in accordance with International Financial Reporting Standards
for review by the Audit Committee and approval by the Board of Directors.
The preparation of consolidated financial statements requires the selection of
appropriate accounting policies in accordance with generally accepted accounting
principles and the use of estimates and judgments by management to present
fairly and consistently the consolidated financial position of the Corporation.
Estimates are necessary when transactions affecting the current period cannot be
finalized with certainty until future information becomes available.
Management is also responsible for establishing and maintaining adequate systems
of internal control over financial reporting. Such systems are designed to
provide reasonable assurance that the financial information is relevant,
accurate and reliable and that the Corporation's assets are appropriately
accounted for and adequately safeguarded. The Corporation's management believes
that such systems are operating effectively and has relied on these systems of
internal control in preparing these consolidated financial statements.
The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, Chartered Accountants, our independent auditor.
Their audit report outlines the extent and nature of their examination and
expresses their opinion on the consolidated financial statements.
The Board of Directors annually appoints an Audit Committee comprised of four
directors, none of whom are members of management. This committee meets at least
twice per year with management and the independent auditors to review
significant accounting, reporting and internal control matters. The independent
auditor has full access to the Audit Committee with or without management
present. The Audit Committee reviews the consolidated financial statements, the
independent auditor's report, and the accompanying annual management report of
fund performance and reports its findings to the Board of Directors for formal
approval.
Ron Hochstein James R. Anderson
President Chief Financial Officer
April 26, 2012
Independent Auditor's Report
----------------------------------------------------------------------------
To the Shareholders of Uranium Participation Corporation
We have audited the accompanying consolidated financial statements of Uranium
Participation Corporation and its subsidiaries, which comprise the consolidated
statements of financial position as at February 29, 2012, February 28, 2011 and
March 1, 2010, the consolidated statements of comprehensive income, consolidated
statements of changes in equity, and consolidated statements of cash flow for
the years ended February 29, 2012 and February 28, 2011, the consolidated
statement of investment portfolio as at February 29, 2012, and the related
notes, which comprise a summary of significant accounting policies and other
explanatory information.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these
consolidated financial statements in accordance with International Financial
Reporting Standards, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.
Auditor's responsibility
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance with
Canadian generally accepted auditing standards. Those standards require that we
comply with ethical requirements and plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the consolidated financial statements. The procedures
selected depend on the auditor's judgment, including the assessment of the risks
of material misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entity's preparation and fair presentation of
the consolidated financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity's internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient
and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Uranium Participation Corporation
and its subsidiaries as at February 29, 2012, February 28, 2011 and March 1,
2010 and its financial performance and cash flows for the years ended February
29, 2012 and February 28, 2011 in accordance with International Financial
Reporting Standards.
PricewaterhouseCoopers LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
April 26, 2012
URANIUM PARTICIPATION CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
----------------------------------------------------------------------------
(in thousands of Canadian
dollars, except per At February At February At March 1,
share amounts) 29, 2012 28, 2011 2010
----------------------------------------------------------------------------
Assets
Investments at market
value (note 4) $ 702,229 $ 941,068 $ 479,142
Cash and cash
equivalents 14,321 16,659 22,673
Sundry receivables and
other assets 294 346 1,098
Deferred tax assets
(note 5) - 10,806 13,131
----------------------------------------------------------------------------
Total assets $ 716,844 $ 968,879 $ 516,044
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Accounts payable and
accrued liabilities 1,529 1,441 1,242
Income taxes payable 134 159 159
Deferred tax
liabilities (note 5) 3,021 32,824 5,051
----------------------------------------------------------------------------
Total liabilities $ 4,684 $ 34,424 $ 6,452
----------------------------------------------------------------------------
Equity - Net assets
represented by:
Share capital (note 6) $ 776,174 $ 775,942 $ 653,841
Contributed surplus 4,564 3,588 2,481
Retained earnings
(deficit) (68,578) 154,925 (146,730)
----------------------------------------------------------------------------
Total equity 712,160 934,455 509,592
----------------------------------------------------------------------------
Total liabilities and
equity $ 716,844 $ 968,879 $ 516,044
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Common shares
Issued and outstanding
(note 6) 106,350,413 106,322,313 85,697,341
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net asset value per
common share
Basic $ 6.70 $ 8.79 $ 5.95
Diluted $ 6.70 $ 8.76 $ 5.95
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
ON BEHALF OF THE BOARD OF URANIUM PARTICIPATION CORPORATION
Richard H. McCoy Garth A. C. MacRae
Director Director
URANIUM PARTICIPATION CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED FEBRUARY 29, 2012 and FEBRUARY 28, 2011
----------------------------------------------------------------------------
(in thousands of Canadian dollars, except
per share amounts) 2012 2011
----------------------------------------------------------------------------
Income
Change in unrealized gains (losses) on
investments (note 4) $ (238,839) $ 338,881
Income from investment lending (note 9) 734 1,055
Interest 209 136
----------------------------------------------------------------------------
(237,896) 340,072
----------------------------------------------------------------------------
Expenses
Transaction fees (notes 7 and 8) - 3,354
Management fees (note 8) 1,808 1,813
Storage fees 2,032 2,391
Audit fees 90 69
Directors' fees 161 134
Independent review committee fees and
expenses - 3
Legal and other professional fees 96 40
Shareholder information and other
compliance 260 218
General office and miscellaneous 258 277
Foreign exchange loss (gain) (101) 20
----------------------------------------------------------------------------
4,604 8,319
----------------------------------------------------------------------------
Increase (decrease) in net assets from
operations before taxes (242,500) 331,753
Income tax expense (recovery) (note 5) (18,997) 30,098
----------------------------------------------------------------------------
Increase (decrease) in net assets from
operations after taxes (223,503) 301,655
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increase (decrease) in net assets from
operations after taxes per common share
Basic and diluted $ (2.09) $ 2.88
Weighted average common shares
outstanding
Basic 107,151,851 104,603,565
Diluted 107,151,851 104,665,566
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
URANIUM PARTICIPATION CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED FEBRUARY 29, 2012 and FEBRUARY 28, 2011
----------------------------------------------------------------------------
Retained
(in thousands of Canadian Share Contributed earnings Total
dollars) capital surplus (deficit) equity
----------------------------------------------------------------------------
Balance at March 1, 2010 $ 653,841 $ 2,481 $(146,730) $ 509,592
----------------------------------------------------------------------------
New shares issued - net of
issue costs (note 6) 122,101 - - 122,101
Stock options assumed
(notes 6 and 7) - 1,107 - 1,107
Increase in net assets
from operations after
taxes - - 301,655 301,655
----------------------------------------------------------------------------
Balance at February 28,
2011 $ 775,942 $ 3,588 $ 154,925 $ 934,455
----------------------------------------------------------------------------
Stock options exercised
(note 6) 9,058 (1,107) - 7,951
Repurchase of common
shares (note 6) (8,826) 2,083 - (6,743)
Decrease in net assets
from operations after
taxes - - (223,503) (223,503)
----------------------------------------------------------------------------
Balance at February 29,
2012 $ 776,174 $ 4,564 $ (68,578) $ 712,160
----------------------------------------------------------------------------
----------------------------------------------------------------------------
URANIUM PARTICIPATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED FEBRUARY 29, 2012 and FEBRUARY 28, 2011
----------------------------------------------------------------------------
(in thousands of Canadian dollars) 2012 2011
----------------------------------------------------------------------------
Operating Activities
Increase (decrease) in net assets from operations
after taxes $(223,503) $ 301,655
Adjustments for non-cash items:
Change in unrealized losses (gains) on investments
(note 4) 238,839 (338,881)
Deferred income tax expense (recovery) (note 5) (18,997) 30,098
Changes in non-cash working capital:
Change in sundry receivables and other assets 52 979
Change in accounts payable and accrued liabilities 88 65
Change in income taxes payable (25) -
----------------------------------------------------------------------------
Net cash used in operating activities (3,546) (6,084)
----------------------------------------------------------------------------
Investing Activities
Cash acquired in UL acquisition - 70
----------------------------------------------------------------------------
Net cash generated by investing activities - 70
----------------------------------------------------------------------------
Financing Activities
Repurchase of common shares (note 6) (6,743) -
Stock option exercises (note 6) 7,951 -
----------------------------------------------------------------------------
Net cash generated by financing activities 1,208 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Decrease in cash and cash equivalents (2,338) (6,014)
----------------------------------------------------------------------------
Cash and cash equivalents - beginning of year 16,659 22,673
----------------------------------------------------------------------------
Cash and cash equivalents - end of year $ 14,321 $ 16,659
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
URANIUM PARTICIPATION CORPORATION
CONSOLIDATED STATEMENT OF INVESTMENT PORTFOLIO
AS AT FEBRUARY 29, 2012
----------------------------------------------------------------------------
(in thousands of Canadian dollars, Quantity of Market
except quantity amounts) Measure Cost (1) Value (2)
----------------------------------------------------------------------------
Investments in Uranium:
Uranium oxide in concentrates
("U3O8") 7,250,000 lbs $ 342,495 $ 371,948
Uranium hexafluoride ("UF6") (3) 2,374,230 KgU $ 389,998 $ 330,281
----------------------------------------------------------------------------
$ 732,493 $ 702,229
----------------------------------------------------------------------------
----------------------------------------------------------------------------
U3O8 average cost and market value
per pound:
- In Canadian dollars $ 47.24 $ 51.30
- In United States dollars $ 43.23 $ 52.00
UF6 average cost and market value
per KgU:
- In Canadian dollars $ 164.26 $ 139.11
- In United States dollars $ 152.06 $ 141.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The cost of the portfolio excludes transaction fees incurred.
(2) The market values have been translated to Canadian dollars using the
February 29, 2012 noon foreign exchange rate of 0.9866.
(3) The Corporation has transferred 1,332,230 KgU as UF6 to a third party
and taken in exchange 3,480,944 pounds of U3O8, effectively lending the
conversion component of the UF6.See note 9 for further details of this
arrangement.
The accompanying notes are an integral part of these consolidated financial
statements.
URANIUM PARTICIPATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars, unless otherwise noted)
1. URANIUM PARTICIPATION CORPORATION
Uranium Participation Corporation ("UPC") was established under the Business
Corporations Act (Ontario) ("OBCA") on March 15, 2005. The address of its
registered head office is 595 Bay Street, Suite 402, Toronto, Ontario, Canada,
M5G 2C2.
UPC and its subsidiaries (collectively, the "Corporation") is a non-redeemable
investment fund as defined by the Canadian securities regulatory authorities in
National Instrument 81-106-Investment Fund Continuous Disclosure. The
Corporation was created to invest substantially all of its assets in U3O8 and
UF6 (collectively, "investments in uranium") with the primary investment
objective of achieving appreciation in the value of its uranium holdings. The
Corporation's affairs are managed by Denison Mines Inc. (the "Manager"). The
common shares of the Corporation trade publicly on the Toronto Stock Exchange
under the symbol U.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation and Adoption of IFRS
These consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") as issued by the
International Accounting Standards Board ("IASB"). These are the Corporation's
first annual consolidated financial statements prepared under IFRS; therefore,
IFRS 1 First-time Adoption of International Financial Reporting Standards has
been applied.
The Corporation has consistently applied the same accounting policies in its
opening IFRS statement of financial position as at March 1, 2010 and throughout
all periods presented, as if these policies had always been in effect. In these
consolidated financial statements, the term "CGAAP" refers to Canadian GAAP
before the adoption of IFRS.
These consolidated financial statements were authorized for issue by the
Corporation's Board of Directors on April 26, 2012.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the assets,
liabilities, income and expenses of UPC and its wholly owned subsidiaries.
Subsidiaries are all entities over which UPC has the power to govern the
financial and operating policies. Subsidiaries are fully consolidated from the
date control is obtained by the Corporation and de-consolidated from the date
control ceases. All intercompany balances and transactions have been eliminated
on consolidation.
(c) Accounting Estimates and Judgments
The preparation of consolidated financial statements in conformity with IFRS
requires management to make accounting estimates and judgments that affect the
reported amounts of assets and liabilities as of the date of the consolidated
financial statements and income and expenses during the reporting period. Actual
results could differ materially from these estimates. Significant estimates and
judgments made by management include:
(i) Deferred Income Taxes
Deferred income taxes are based on temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted or
substantively enacted tax rates expected to apply when the differences are
anticipated to be recovered or settled. Management is also required to limit the
amount of deferred tax assets recognized based on expectations of future taxable
income.
(ii) Functional Currency
Functional currencies are determined based on the currency of the primary
economic environment for UPC and its subsidiaries. Where the assessment of
functional currency under IFRS provides mixed indicators for an entity,
management uses judgment in the ultimate determination of that entity's
functional currency.
(d) Investments
Investments in uranium are initially recorded at cost, on the date that
significant risks and rewards of ownership of the uranium passes to the
Corporation. Cost is calculated as the purchase price excluding transaction
fees, which are expensed as incurred. Subsequent to initial recognition,
investments in uranium are measured at fair value at each reporting period-end
based on the most recent spot prices for uranium published by Ux Consulting
Company, LLC ("UxCo") and converted to Canadian dollars using the month-end
foreign exchange rate. Related fair value increment gains and losses are
recorded in the consolidated statement of comprehensive income as "Change in
unrealized gains (losses) on investments" in the period in which they arise.
Due to the lack of specific IFRS guidance on accounting for investments in
uranium, the Corporation considered IAS 1 Presentation of Financial Statements
and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, to
develop and apply an accounting policy that would result in information that is
most relevant to the economic decision-making needs of users within the overall
IFRS accounting framework. Consequently, the uranium investments are presented
at fair value based on the application of IAS 40 Investment Property, which
allows the use of a fair value model for assets held for long-term capital
appreciation.
(e) Investments Lending
Investments on loan remain part of the Corporation's investment portfolio, and
are carried at fair value at each reporting date. Income earned from investments
lending is included in the consolidated statement of comprehensive income and is
recognized when earned.
(f) Foreign Exchange Translation
Items included in the consolidated financial statements of UPC and its
subsidiaries are measured using their functional currency, which is the currency
of the primary economic environment in which the entity operates. The
Corporation's consolidated financial statements are presented in Canadian
dollars, which is UPC and its subsidiaries' functional and presentation
currency.
Foreign currency monetary assets and liabilities are translated into the
respective functional currency of the Corporation's entities at the prevailing
exchange rate on the reporting date. Foreign currency income and expense
transactions are translated to the functional currency at the prevailing
exchange rate on the transaction date. Changes in the foreign exchange rates
between the transaction date and the applicable reporting period date used to
value monetary assets and liabilities are reflected in the statement of
comprehensive income as foreign exchange gain or loss.
(g) Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with a
maturity of three months or less at the date of acquisition.
(h) Income Taxes
The Corporation follows the liability method of accounting for income taxes.
Current income taxes are the expected taxes payable on the taxable income for
the period, calculated at tax rates enacted or substantively enacted by the
reporting date, and adjusted for taxes payable in respect of prior periods.
Deferred income tax assets and liabilities are determined based on temporary
differences between the financial reporting and tax bases of assets and
liabilities, and are measured using the enacted or substantively enacted tax
rates and laws that are expected to apply when the differences are expected to
reverse. The benefit of tax losses and credits which are available to be carried
forward are recognized as assets to the extent that they are probable to be
utilized against future taxable income.
Tax assets and liabilities are offset if there is a legally enforceable right to
offset the assets and liabilities, and they relate to income taxes levied by the
same tax authority on either the same tax entity or different taxable entities
where there is an intention to settle the balance on a net basis.
(i) Increase (Decrease) in Net Assets from Operations per Common Share
Increase (decrease) in net assets from operations per common share is calculated
by dividing the increase (decrease) in net assets from operations for the period
attributable to equity holders of the Corporation by the weighted average number
of common shares outstanding.
Diluted increase (decrease) in net assets from operations per share is
calculated by adjusting the weighted average number of common shares outstanding
to include all dilutive potential common shares. All outstanding options and
warrants which are dilutive are assumed exercised with the proceeds used to
repurchase the Corporation's shares at the average market price of the shares
for the period. The effect is to increase the number of shares used to calculate
diluted increase (decrease) in net assets from operations per common share.
Recent Accounting Pronouncements
The following new standards and amendments or interpretations to existing
standards have been published but not yet applied by the Corporation. The
Corporation has not yet assessed the impact nor determined whether it will early
adopt any of the following standards:
IFRS 7 Financial Instruments: Disclosures
In May 2011, IFRS 7 was amended to require additional disclosures with respect
to risk exposures arising from transferred financial assets. The amendments are
effective for annual periods beginning on or after July 1, 2011, with earlier
application permitted.
IFRS 9 Financial Instruments
IFRS 9 as issued in November 2009 and expanded and amended in October 2010, will
ultimately replace IAS 39 Financial Instruments: Recognition and Measurement.
IFRS 9 replaces the multiple classifications for financial assets in IAS 39 with
two measurement categories, amortized cost and fair value, which are based on
how an entity manages its financial instruments in the context of its business
model and the contractual cash flow characteristics of the financial assets. The
new standard also requires a single impairment method to be used, replacing the
multiple impairment methods in IAS 39. This standard is required to be applied
retrospectively for accounting periods beginning on or after January 1, 2015,
with earlier application permitted.
IFRS 10 Consolidated Financial Statements
In May 2011, IFRS 10 was issued, establishing principles for the presentation
and preparation of consolidated financial statements when an entity controls one
or more other entities. IFRS 10 replaces the consolidation requirements in
SIC-12 Consolidation-Special Purpose Entities and IAS 27 Consolidated and
Separate Financial Statements. This standard is effective for annual periods
beginning on or after January 1, 2013, with earlier application permitted.
IFRS 12 Disclosure of Interest in Other Entities
IFRS 12 was issued in May 2011 and is a new and comprehensive standard on
disclosure requirements for all forms of interests in other entities, including
subsidiaries, joint arrangements, associates and unconsolidated structured
entities. The standard is to be applied prospectively and is effective for
annual periods beginning on or after January 1, 2013, with earlier application
permitted.
IFRS 13 Fair Value Measurement
IFRS 13 was issued in May 2011 and establishes a single set of requirements for
all fair value measurements. IFRS 13 defines fair value, sets out a framework to
measure fair value and introduces consistent requirements for disclosures on
fair value measurements. The standard is to be applied prospectively and is
effective for annual periods beginning on or after January 1, 2013, with earlier
application permitted.
IAS 1 Presentation of Financial Statements
In June 2011, IAS 1 was amended requiring items within Other Comprehensive
Income be grouped based on whether the items may be reclassified to profit or
loss in the future. The standard is to be applied retrospectively and is
effective for annual periods beginning on or after July 1, 2012, with earlier
application permitted.
3. TRANSITION TO IFRS
In September 2010, the Canadian Accounting Standards Board ("AcSB") confirmed
that entities applying Accounting Guideline AcG-18 Investment Companies
("AcG-18") would be granted the option to defer implementation of IFRS until its
fiscal year beginning on or after January 1, 2012. The AcSB has since deferred
the implementation date an additional two years due to delays experienced in
finalizing the new consolidation standard. Therefore investment funds applying
AcG-18 could defer its adoption of IFRS to fiscal periods beginning on or after
January 1, 2014.
The Corporation decided not to utilize this deferral and elected to early adopt
IFRS for its fiscal year ending February 29, 2012. Therefore, as stated in Note
2(a), these are the Corporation's first annual consolidated financial statements
prepared in accordance with IFRS, with a transition date of March 1, 2010. The
accounting policies set out in Note 2 have been applied in preparing the
consolidated financial statements for the years ended February 29, 2012 and
February 28, 2011 and the opening IFRS balances at March 1, 2010.
Reconciliation of Consolidated Financial Statements from CGAAP to IFRS
There were no adjustments made to the Corporation's net asset balance,
comprehensive income or its cash flows due to the adoption of IFRS, therefore no
reconciliations are required.
Additional Annual Disclosures under IFRS
Certain disclosures are required in annual financial statements under IFRS that
were not required under CGAAP. Such disclosures include continuity schedules for
the Corporation's investments in uranium (note 4) and increased disclosure
regarding the activity and details of deferred income tax balances (note 5).
Mandatory Exceptions and Optional Exemptions
The Corporation's estimates in accordance with IFRS at the date of transition to
IFRS were consistent with estimates made for the same date in accordance with
CGAAP.
The Corporation did not elect to utilize any optional exemptions.
4. INVESTMENTS IN URANIUM
The investments continuity summary is as follows:
----------------------------------------------------------------------------
(in thousands) Fair Value Market
Cost Increment Value
----------------------------------------------------------------------------
Balance at March 1, 2010 $ 609,448 $ (130,306) $ 479,142
----------------------------------------------------------------------------
Uranium purchases 123,045 - 123,045
Change in unrealized gains
(losses) on investments - 338,881 338,881
----------------------------------------------------------------------------
Balance at February 28, 2011 $ 732,493 $ 208,575 $ 941,068
----------------------------------------------------------------------------
Change in unrealized gains
(losses) on investments - (238,839) (238,839)
----------------------------------------------------------------------------
Balance at February 29, 2012 $ 732,493 $ (30,264) $ 702,229
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. INCOME TAXES
Unlike most investment funds, the Corporation is not a mutual fund trust, making
it subject to income tax on its taxable income. The Corporation is also subject
to varying rates of taxation due to its operations in multiple tax
jurisdictions. Reconciliations of the income tax expense (recovery) for the
years ended February 29, 2012 and February 28, 2011 are as follows:
----------------------------------------------------------------------------
(in thousands) 2012 2011
----------------------------------------------------------------------------
Current tax expense $ - $ 3
Deferred tax expense (recovery) (18,997) 30,226
Adjustments in respect of prior periods -
deferred tax expense (recovery) - (131)
----------------------------------------------------------------------------
Total income tax expense (recovery) $ (18,997) $ 30,098
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliations of the combined Canadian federal and Ontario provincial income
tax rate to the Corporation's effective rate of income tax for the years ended
February 29, 2012 and February 28, 2011 are as follows:
----------------------------------------------------------------------------
(in thousands) 2012 2011
----------------------------------------------------------------------------
Increase (decrease) in net assets from
operations, before income taxes $(242,500) $ 331,753
Combined federal and Ontario provincial income
tax rate (1) 27.92% 30.42%
----------------------------------------------------------------------------
Computed income tax expense (recovery) (67,706) 100,919
Difference in current tax rates applicable in
other jurisdictions 43,564 (65,652)
Difference between deferred and current tax
rates 942 (2,768)
Change in deferred tax assets not recognized 4,455 (2,263)
Taxable permanent differences - 431
Other (252) (569)
----------------------------------------------------------------------------
Income tax expense (recovery) $ (18,997) $ 30,098
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The combined federal and Ontario provincial income tax rate for the year
ended February 29, 2012 declined due to: 1) federal tax rate decreases
from 18.0% to 16.5% effective January 1, 2011, and from 16.5% to 15.0%
effective January 1, 2012; and 2) Ontario tax rate decreases from 14.0%
to 12.0% effective July 1, 2010, and from 12.0% to 11.5% effective July
1, 2011.
The components of the Corporation's deferred tax balances at February 29, 2012,
February 28, 2011, and March 1, 2010 are comprised of temporary differences as
presented below:
----------------------------------------------------------------------------
(in thousands) 2012 2011 2010
----------------------------------------------------------------------------
Deferred tax assets:
Tax benefit of share issue costs $ 662 $ 1,429 $ 2,592
Tax benefit of operating loss
carryforwards 2,780 10,435 8,224
Unrealized loss on investments - - 3,269
Other 73 266 -
----------------------------------------------------------------------------
Gross deferred tax assets 3,515 12,130 14,085
Deferred tax assets set off against
deferred tax liabilities (3,515) (1,324) (954)
----------------------------------------------------------------------------
Deferred tax assets (1) (2) $ - $ 10,806 $ 13,131
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on investments $ 6,536 $ 34,148 $ 6,005
----------------------------------------------------------------------------
Gross deferred tax liabilities 6,536 34,148 6,005
Deferred tax assets set off against
deferred tax liabilities (3,515) (1,324) (954)
----------------------------------------------------------------------------
Deferred tax liabilities (2) $ 3,021 $ 32,824 $ 5,051
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Deferred tax assets relate to UPC's tax assets in Ontario. The
recognition of these deferred tax assets, in excess of existing
temporary differences, is supported by UPC's ability to generate taxable
income through its inter-company financing arrangements.
(2) Deferred tax assets and liabilities relate to temporary differences
expected to reverse more than twelve months after the respective
reporting date.
The Corporation believes that it is not probable that sufficient taxable income
will be available in future years to allow the benefit of the following deferred
tax assets to be utilized:
----------------------------------------------------------------------------
(in thousands) Expiry Date 2012 2011 2010
----------------------------------------------------------------------------
Deductible temporary
differences Unlimited $ 4,431 $ - $ 2,278
Income tax losses Unlimited 39 15 -
----------------------------------------------------------------------------
Total deferred tax
assets not recognized $ 4,470 $ 15 $ 2,278
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. COMMON SHARES
The Corporation is authorized to issue an unlimited number of common shares
without par value. A continuity schedule of the issued and outstanding common
shares and the associated dollar amounts is as follows:
----------------------------------------------------------------------------
Number of
(in thousands except common share balances) Common Shares Amount
----------------------------------------------------------------------------
Balance at March 1, 2010 85,697,341 $ 653,841
----------------------------------------------------------------------------
Common share issuances
Shares issued on acquisition of UL (note 7) 20,624,972 122,101
----------------------------------------------------------------------------
Balance at February 28, 2011 106,322,313 $ 775,942
----------------------------------------------------------------------------
Common share issuances
Stock option exercises 1,237,500 7,951
Fair value of stock options exercised - 1,107
Repurchase of common shares (1,209,400) (8,826)
----------------------------------------------------------------------------
Balance at February 29, 2012 106,350,413 $ 776,174
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Common Share Issuances
On March 30, 2010, the Corporation completed the acquisition of UL by issuing
0.50 of its shares in exchange for each UL share. An aggregate of 20,624,972 of
the Corporation's shares, valued at the acquisition date market price of $5.92
per share, were issued to complete this transaction.
Normal Course Issuer Bid
In June 2011, the Corporation filed a normal course issuer bid ("NCIB") with the
Toronto Stock Exchange authorizing the Corporation to purchase up to 7,886,393
of its own common shares during the 12-month period commencing June 14, 2011 and
ending June 13, 2012 or on such earlier date as the Corporation completes its
purchases. The purpose of the NCIB is to provide the Corporation with a
mechanism to decrease the potential spread between the net asset value per
common share and the market price of the shares.
In the year ended February 29, 2012, the Corporation purchased an aggregate
1,209,400 common shares for cancellation under the NCIB, at a cost of
$6,743,000. This resulted in a reduction to share capital of $8,826,000 and an
increase to contributed surplus of $2,083,000.
Stock Options
On March 30, 2010, the Corporation assumed the obligation to issue its common
shares in satisfaction of the exercise of the outstanding, fully-vested stock
options to purchase 2,475,000 common shares of UL. See note 7 for further
details of this transaction.
These options had an exercise price of GBPGBP 2.05 per option and an expiry date
of July 21, 2011. Each option assumed was exercisable for 0.50 of the
Corporation's common shares. The fair value of these options of $1,107,000 was
estimated using the Black-Scholes option pricing model on the acquisition date.
The assumptions used in the model are as follows:
----------------------------------------------------------------------------
Assumptions
----------------------------------------------------------------------------
Risk-free interest rate 1.6%
Expected volatility 36.0%
Expected option life in years 1.4
Expected dividend yield -
Fair value per stock option $0.45
----------------------------------------------------------------------------
A continuity schedule of the issued and outstanding stock options and the
associated dollar amounts is as follows:
----------------------------------------------------------------------------
Fair Value
Number of Dollar
(in thousands except common share balances) Options Amount
----------------------------------------------------------------------------
Balance at March 1, 2010 - $ -
----------------------------------------------------------------------------
Stock options assumed 2,475,000 1,107
----------------------------------------------------------------------------
Balance at February 28, 2011 2,475,000 $ 1,107
----------------------------------------------------------------------------
Stock option exercises (2,475,000) (1,107)
----------------------------------------------------------------------------
Balance at February 29, 2012 - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. ACQUISITION OF URANIUM LIMITED
On March 30, 2010, the Corporation completed the acquisition of UL pursuant to a
scheme of arrangement under the laws of Guernsey. The transaction was accounted
for as an asset acquisition. Under the terms of the transaction, the Corporation
acquired all of the issued and outstanding shares of UL in a share exchange at a
ratio of 0.50 of the Corporation's common shares for each common share of UL.
Upon the close of the acquisition, 20,624,972 of the Corporation's common shares
were issued to UL shareholders, representing 19.4% of the total issued and
outstanding common shares of the Corporation. The Corporation also assumed
outstanding, fully-vested stock options to purchase 2,475,000 common shares of
UL at a strike price of GBPGBP 2.05 per option with an expiry date of July 21,
2011. Each option assumed was exercisable for 0.50 of the Corporation's shares.
All of these options were exercised by the end of March 2011.
Principal assets obtained from the acquisition of UL included 1,705,000 pounds
of U3O8, valued at $74,051,000, and 412,000 KgU as UF6, valued at $48,995,000.
Of the U3O8 acquired, 520,000 pounds were subject to a loan agreement at a loan
rate of 3.5%. The agreement expired on July 8, 2010 with the U3O8 returned on
that date. Transaction costs incurred for the acquisition of UL totalled
$3,354,000, $1,000,000 of which was paid to the Manager on closing pursuant to
the management services agreement.
8. RELATED PARTY TRANSACTIONS
The Corporation is a party to a management services agreement with the Manager.
Under the terms of the agreement, the Corporation pays the following fees to the
Manager: a) a commission of 1.5% of the gross value of any purchases or sales of
uranium completed at the request of the Board of Directors; b) a minimum annual
management fee of $400,000 (plus reasonable out-of-pocket expenses) plus an
additional fee of 0.3% per annum based upon the Corporation's net asset value
between $100,000,000 and $200,000,000 and 0.2% per annum based upon the
Corporation's net asset value in excess of $200,000,000; c) a fee of $200,000
upon the completion of each equity financing where proceeds payable to the
Corporation exceed $20,000,000; d) a fee of $200,000 for each transaction or
arrangement (other than the purchase or sale of uranium) of business where the
gross value of such transaction exceeds $20,000,000 ("an initiative"); e) an
annual fee up to a maximum of $200,000, at the discretion of the Board, for
on-going maintenance or work associated with an initiative; and f) a fee equal
to 1.5% of the gross value of any uranium held by the Corporation prior to the
completion of any transaction under which at least 90% of the Corporation's
common shares are acquired.
In accordance with the management services agreement, all uranium investments
owned by the Corporation are held in accounts with conversion and enrichment
facilities in the name of Denison Mines Inc. as manager for and on behalf of the
Corporation.
In March 2010, the initial term of the management services agreement was
extended to March 30, 2013, following which, the agreement may be terminated by
either party upon the provision of 180 days written notice.
In January 2011, an affiliate of the Manager borrowed 150,000 pounds of U3O8
from the Corporation subject to a loan fee of 3.5% per annum based upon the
material's value on the borrowing date. The loan was repayable in February 2011
or such later date agreed to by both parties. In February 2011, the repayment
date was amended to April 4, 2011, with the loan fee amended to 3.5% per annum
of the material's value on the amendment date. Collateral was held in the form
of an irrevocable letter of credit from a major financial institution in the
amount of US$12,045,000. The borrowed U3O8 was returned on March 30, 2011. See
note 9 for further details of this transaction.
The following outlines the income earned and fees paid to the Manager in the
years ended February 29, 2012 and February 28, 2011:
----------------------------------------------------------------------------
(in thousands) 2012 2011
----------------------------------------------------------------------------
Income from investment lending with the Manager $ 35 $ 53
Fees incurred with the Manager:
Management fees $ 1,808 $ 1,813
Transaction fees and uranium purchase - 1,000
commissions
----------------------------------------------------------------------------
Net fees incurred with the Manager $ 1,773 $ 2,760
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at February 29, 2012, accounts payable and accrued liabilities included
$172,000 (February 28, 2011: $232,000, March 1, 2010: $103,000) due to the
Manager with respect to the fees indicated above. At February 28, 2012, nil
(February 28, 2011: $53,000, March 1, 2010: nil) in accrued loan interest was
receivable from an affiliate of the Manager.
The Corporation does not employ any personnel, as its affairs are administered
by the Manager's personnel.
9. INVESTMENTS LENDING
The Corporation entered into a loan of the conversion component of 1,332,230 KgU
as UF6 in December 2009. The conversion component loaned is subject to a loan
fee of 4.5% per annum based on the greater of the adjusted monthly value and
US$15,654,000. To facilitate the loan of the conversion component, 1,332,230 KgU
as UF6 was transferred to the borrower with 3,480,944 pounds of U3O8 and an
irrevocable letter of credit of US$15,700,000 from a major financial institution
sent to the Corporation as collateral. In November 2010, the irrevocable letter
of credit was increased to US$17,835,000. Investment lending income for the year
ended February 29, 2012 totalled $699,000 (2011: $760,000). At February 29,
2012, the conversion component loaned had a market value of $8,543,000
(US$8,659,000). This agreement is due to expire in December 2012.
Pursuant to a loan agreement dated November 24, 2010, an affiliate of the
Manager borrowed 150,000 pounds of U3O8, subject to a loan fee of 3.5% per annum
of the material's value on the borrowing date. The loan was repayable on
February 3, 2011, or such later date agreed to by both parties. Collateral was
provided in the form of an irrevocable letter of credit from a major financial
institution in the amount of US$10,065,000. In February 2011, the repayment date
for the U3O8 loan was amended to April 4, 2011, the loan fee was amended to 3.5%
per annum of the material's value on the amendment date, and the collateral
increased to US$12,045,000. Investment lending income for the year ended
February 29, 2012 totalled $35,000 (2011: $53,000). The borrowed U3O8 was
returned on March 30, 2011.
Through the acquisition of UL, the Corporation assumed a loan agreement to lend
520,000 pounds of U3O8 subject to a loan fee of 3.5% per annum of the material's
value, fixed at US$46.50 per pound or US$24,180,000. Investment lending income
for the year ended February 29, 2012 totalled nil (2011: $242,000). The
agreement expired on July 8, 2010 with the U3O8 returned on that date.
10. CAPITAL MANAGEMENT AND FINANCIAL RISK
Capital Management
The Corporation's capital structure consists of share capital and contributed
surplus. The Corporation's primary objective is to achieve long-term
appreciation in the value of its uranium holdings through a buy and hold
investment strategy and not actively speculate with regard to short-term changes
in uranium prices. Uranium purchases are normally funded through common share
offerings with at least 85% of the gross proceeds of aggregate share offerings
invested in, or set aside for future purchases of uranium. In strictly limited
circumstances, the Corporation can enter into borrowing arrangements for up to
15% of its net asset value to facilitate the purchases of uranium.
At February 29, 2012, the Corporation has invested 91.4% of aggregate share
offerings in uranium, and had no outstanding borrowing arrangements for the
purchase of uranium.
Financial Risk
Investment activities of the Corporation expose it to some financial risks:
commodity price risk, currency risk, credit risk, and liquidity risk. The source
of risk exposure and how each is managed is outlined below:
(a) Commodity Price Risk
The Corporation's net asset value is directly tied to the spot price of uranium
published by UxCo. At February 29, 2012, a 10% increase (decrease) in the
uranium spot price would have increased (decreased) the Corporation's net asset
value by approximately $65,596,000.
(b) Currency Risk
Changes in the value of the Canadian dollar compared to foreign currencies will
affect the value, as reported, of the Corporation's foreign denominated
investments, cash and cash equivalents, sundry receivables and other assets, and
accounts payable and accrued liabilities.
As the prices of uranium are quoted in U.S. currency, fluctuations in the
Canadian dollar relative to the U.S. dollar can significantly impact the
valuation of uranium from a Canadian dollar perspective. At February 29, 2012, a
10% increase (decrease) in the Canadian dollar to U.S. dollar exchange rate
would have decreased (increased) the Corporation's net asset value by
approximately $65,582,000.
(c) Credit Risk
The Corporation's primary exposure to credit risk arises from its lending
arrangements. The Corporation lends uranium exclusively to large organizations
and ensures that adequate security is provided for any loaned uranium (see note
9).
(d) Liquidity Risk
Financial liquidity represents the Corporation's ability to fund future
operating activities. The Corporation may generate cash from the lending or sale
of uranium, or the sale of additional equity securities. The Corporation's
current cash balance is sufficient to meet its operating cash requirements.
Although the Corporation enters into commitments to purchase uranium
periodically, the commitments are normally contingent on its ability to raise
funds through the sale of additional equity securities.
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