Uranium Participation Corporation
TSX : U

Uranium Participation Corporation

October 06, 2010 17:00 ET

Uranium Participation Corporation Reports Financial Results for the Six Months Ended August 31, 2010

TORONTO, ONTARIO--(Marketwire - Oct. 6, 2010) -

THIS NEWS RELEASE IS NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES

Uranium Participation Corporation ("Uranium Corp") (TSX:U) reports results for the six months ended August 31, 2010. All amounts are in Canadian currency unless otherwise noted.

Net assets from operations increased $64.1 million for the six months ended August 31, 2010. This resulted from $73.3 million in unrealized gains due to the rise in value of Uranium Corp's uranium investments, offset by $4.1 million in income tax expense. Additionally, Uranium Corp incurred $3.3 million in transaction fees on the acquisition of Uranium Limited, $1.2 million in storage fees, and earned $0.6 million in income from the lending of its uranium investments. 

This compares to a decrease in net assets from operations of $63.0 million for the six months ended August 31, 2009 resulting from $71.5 million in unrealized losses on uranium investments offset by $8.9 million in income tax recoveries. Additionally, Uranium Corp incurred $0.8 million in transaction fees on the purchases of uranium investments, $0.9 million in storage fees, and earned $1.9 million in income from the lending of its uranium investments.

Net asset value increased from $509.6 million at February 28, 2010 to $696.9 million at August 31, 2010 due to the Uranium Limited acquisition of $123.2 million and the increase in net assets from operations of $64.1 million. This resulted in net asset value per common share increasing from $5.95 to $6.55 over the six month period.

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
Interim Management Report of Fund Performance
August 31, 2010

DISCLOSURE

This Interim Management Report of Fund Performance contains financial highlights but does not contain either interim or annual consolidated financial statements of Uranium Participation Corporation ("Uranium Corp"). You can get a copy of the interim or 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 Uranium Corp's quarterly portfolio disclosure.

Uranium Corp holds physical commodities and not equity security investments. As a result, Uranium Corp does not have an investment proxy voting disclosure record, nor does it have proxy voting policies and procedures. 

This Interim Management Report of Fund Performance is current as of October 6, 2010. All amounts are in Canadian dollars unless otherwise indicated.

CAUTION REGARDING FORWARD LOOKING INFORMATION

This Interim Management Report of Fund Performance contains certain forward looking statements and forward looking information that are based on Uranium Corp'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", "intent", "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 Uranium Corp, 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 Uranium Corp, please refer to the "RISK FACTORS" section of Uranium Corp's Annual Information Form dated May 12, 2010.

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 those expressed or implied by the forward looking statements. Except where required under applicable securities legislation, Uranium Corp does not undertake to update any forward looking information.

RESULTS OF OPERATIONS

Uranium Corp's basic net asset value per common share increased from $5.95 per share at February 28, 2010 to $6.55 at August 31, 2010 representing a basic net asset value return of 10.1%. Over the comparable time period, Uranium Corp's benchmark, the S&P/TSX Composite Index, increased by 2.4%. 

Uranium Corp's net assets at August 31, 2010 were $696,852,000 representing a 36.7% increase from the net assets of $509,592,000 at February 28, 2010. Of the net asset value increase of $187,260,000 over the period, $123,208,000 was attributable to the acquisition of Uranium Limited ("UL") and $64,052,000 was attributable to investment operation performance. 

Equity Financing

In March 2010, Uranium Corp completed the acquisition of UL by issuing 0.50 Uranium Corp shares in exchange for each UL share. A total of 20,624,972 Uranium Corp shares were issued to complete the transaction. As at August 31, 2010, Uranium Corp had 106,322,313 common shares issued and outstanding.

Since inception, Uranium Corp has raised gross proceeds of $647,047,000 through common share and equity unit financings, and received $31,202,000 through warrant exercises. Also, as part of the UL acquisition, Uranium Corp issued 20,624,972 common shares valued at $122,101,000 and assumed the obligation of 2,475,000 UL stock options valued at $1,107,000. $732,493,000 or 91.4% of the above amounts have been invested in uranium.

Investment Portfolio

During the period, Uranium Corp increased its uranium oxide in concentrates ("U3O8") holdings by 1,705,000 pounds through its acquisition of UL, raising its total holdings to 7,250,000 pounds at August 31, 2010. The cost of U3O8 acquired in the period was $74,051,000 or $43.43 per pound, compared to its fair value at August 31, 2010 of $81,628,000 or $47.88(1) per pound.

The total cost of Uranium Corp's U3O8 holdings at August 31, 2010 increased to $342,495,000 or $47.24 per pound, compared to its fair value of $347,097,000 or $47.88(1) per pound. This represents an increase of 1.4% or 4.1% on a U.S. dollar basis.

During the period, Uranium Corp increased its uranium hexafluoride ("UF6") holdings by 412,000 KgU, raising its total holdings to 2,374,230 KgU at August 31, 2010. The cost of UF6 acquired in the period was $48,995,000 or $118.92 per KgU, compared to its fair value at August 31, 2010 of $56,982,000 or $138.31 per KgU.

The total cost of Uranium Corp's UF6 holdings at August 31, 2010 increased to $389,998,000 or $164.26 per KgU, compared to its fair value of $328,373,000 or $138.31(1) per KgU. This represents a decrease of 15.8% or 14.5% on a U.S dollar basis.

Through the acquisition of UL, Uranium Corp assumed a loan agreement to lend 520,000 pounds of U3O8 subject to a loan fee of 3.5% of US$24,180,000 per annum. The agreement expired on July 8, 2010 with the U3O8 returned on that date.

(1) Reflects spot prices published by Ux Consulting Company, LLC on August 30, 2010 of US$45.00 per pound for U3O8 and US$130.00 per KgU for UF6 translated at a foreign exchange rate of 1.0639.

Investment Performance

Investment operation results of $64,052,000 in the six months ended August 31, 2010, were largely driven by unrealized gains on uranium investments of $73,283,000, net of transaction fees from the closing of the UL acquisition of $3,310,000 and tax expense of $4,096,000.

Unrealized gains on investments reflect the strengthening of U3O8 and UF6 spot prices. As reported by the Ux Consulting Company, LLC ("UxCo"), spot prices for U3O8 increased from US$41.75 per pound at February 28, 2010 to US$45.00 per pound at August 31, 2010. UF6 similarly increased from US$114.00 at February 28, 2010 to US$130.00 at August 31, 2010. Prices have continued to climb subsequent to this reporting date (refer to "RECENT DEVELOPMENTS" section below). 

Uranium Corp 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 Uranium Corp's various jurisdictions, range from 3% to 25%. In the six months ended August 31, 2010, Uranium Corp has provided for a current tax expense of $3,000 and a future tax expense of $4,093,000. The combined tax expense for the current period of $4,096,000 reflects an effective tax rate of 6.0% compared to a tax recovery of $8,860,000 and an effective tax rate of 12.3% experienced in the six months ended August 31, 2009. The decline in the effective tax rate is primarily a result of the release of a valuation allowance applied against its future tax asset balance and an increase in the proportion of inventory held in Uranium Corp's wholly owned subsidiary, Uranium Participation Cyprus Limited ("UPCL"). UPCL is taxed at the lowest rate within Uranium Corp's group of companies.

RECENT DEVELOPMENTS

On March 30, 2010, Uranium Corp completed the acquisition of UL pursuant to a scheme of arrangement under the laws of Guernsey. Under the terms of the transaction, Uranium Corp acquired all of the issued and outstanding shares of UL in a share exchange at a ratio of 0.50 common shares of Uranium Corp for each common share of UL. As a result, an aggregate of 20,624,972 common shares were issued to former shareholders of UL. Uranium Corp also assumed outstanding, fully-vested stock options to purchase 2,475,000 common shares of UL at a strike price of GBP£2.05 per option with an expiry date of July 21, 2011. Each option assumed is exercisable for 0.50 shares of Uranium Corp.

Principal assets obtained from the acquisition of UL included 1,705,000 pounds of U3O8, and 412,000 KgU as UF6. 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.

Kelvin Williams replaced Paul Bennett on the Independent Review Committee effective June 22, 2010 to provide for staggered membership terms on the committee.

As reported by UxCo as at October 4, 2010, the spot price of U3O8 has increased to US$48.00 per pound from US$45.00 per pound on August 31, 2010 an increase of 6.7% while the value of UF6 has increased to US$138.42(2) per KgU from US$130.00 per KgU on August 31, 2010, an increase of 6.5%.

(2) UF6 value is obtained by adding (i) the spot price for U3O8 multiplied by 2.61285; and (ii) the spot conversion price.

CHANGEOVER TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

Canadian publicly accountable enterprises, are required to adopt international financial reporting standards ("IFRS"), which will replace Canadian generally accepted accounting principles (GAAP), for fiscal periods beginning on or after January 1, 2011. However, in September 2010, the Canadian Accounting Standards Board ("AcSB") confirmed that entities currently applying Accounting Guideline AcG-18 would be granted the option to defer implementation of IFRS until its fiscal year beginning on or after January 1, 2012 as discussed in the June 2010 Exposure Draft entitled "Adoption of IFRSs by Investment Companies". Uranium Corp has not yet determined whether it will utilize this deferral.

Denison Mines Inc. (the "Manager") has established a project team responsible for the development and implementation of a transition plan to ensure that Uranium Corp is able to meet its reporting requirements. The three main elements of the transition plan include the following activities:

  • identification of the differences between the current accounting policies of Uranium Corp, which reflect current GAAP, and those expected to apply under IFRS and the likely financial statement impact resulting from the adoption of IFRS;
  • analyzing the impact on the business and reporting processes; and
  • implementation of the required changes.

Based on the Manager's analysis of Uranium Corp's current accounting policies and consolidated financial statement presentation under GAAP against IFRS it is not expected that the adoption of IFRS will have a material effect on Uranium Corp's net assets or net asset value per share. The primary impact of IFRS on Uranium Corp's consolidated financial statements will be in the areas of presentation and note disclosure.

However, additional changes to IFRS are expected to be issued throughout the balance of 2010 and 2011 and, as a result there is some uncertainty regarding the expected accounting standards that will be in place at implementation. Accordingly, the Manager is not yet in a position to conclusively determine the impact on Uranium Corp's financial statements upon the adoption of IFRS.

The Manager will continue monitoring new standards and recommendations as they are issued by both the International Accounting Standards Board, who is responsible for the development and publication of IFRS, and the AcSB to update its analysis as appropriate. By 2011, the Manager expects to complete this analysis, determine overall financial statement presentation, including note disclosure, and complete its assessment and initiate any changes required with respect to its business arrangements.

RELATED PARTY TRANSACTIONS

Uranium Corp is a party to a management services agreement with the Manager. Under the terms of the agreement, Uranium Corp 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 Uranium Corp's net asset value between $100,000,000 and $200,000,000 and 0.2% per annum based upon Uranium Corp'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 Uranium Corp 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 Uranium Corp prior to the completion of any acquisition of at least 90% of the common shares of Uranium Corp.

In March 2010, the 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 accordance with the management services agreement, all uranium investments owned by Uranium Corp are held in accounts with conversion facilities in the name of the Manager as manager for and on behalf of Uranium Corp.

In March 2010, transaction fees of $1,000,000 were paid to the Manager on the close of the UL acquisition.

The following outlines the fees paid to the Manager during the six months ended August 31, 2010 and 2009:

(in thousands) 2010 2009
         
Fees incurred with the Manager:        
  Management fees $ 801 $ 764
  Equity financing fees (1)     200
  Transaction fees – uranium purchase commissions   1,000   866
Total fees incurred with the Manager $ 1,801 $ 1,830
   
(1) Equity financing fees incurred with the Manager in the six months ended August 31, 2009 were recorded as share issue costs and are included in the value reported for common shares.

As at August 31, 2010, accounts payable and accrued liabilities included $175,000 due to the Manager with respect to the fees indicated above.

FINANCIAL HIGHLIGHTS

The following tables show selected key financial information about Uranium Corp and are intended to help you understand Uranium Corp's financial performance for the six months ended August 31, 2010 and the past five reporting periods ended February 2006 to 2010. This information is derived from Uranium Corp's unaudited interim and audited annual financial statements.

Net Asset Value per Share

  August 2010 (1)   February 2010 (2)   February 2009 (2)   February 2008 (2)   February 2007 (2)   February 2006 (3)  
                                     
Net Asset Value per Share – Basic:                                    
                                     
Net asset value per share, beginning of period (3) $ 5.95   $ 7.49   $ 8.96   $ 11.95   $ 5.69   $ 4.81  
Increase (decrease) from operations (4):                                    
  Total revenue $ 0.01   $ 0.04   $ 0.07   $ 0.13   $ 0.03   $ 0.03  
  Total expenses before taxes $ (0.06 ) $ (0.06 ) $ (0.08 ) $ (0.16 ) $ (0.15 ) $ (0.22 )
  Income tax recovery (expense) $ (0.04 ) $ 0.18   $ 0.27   $ 0.93   $ (2.06 ) $ (0.38 )
  Realized gains (losses) for the period $ -   $ -   $ -   $ -   $ -   $ -  
  Unrealized gains (losses) for the period $ 0.71   $ (1.77 ) $ (1.83 ) $ (3.81 ) $ 8.45   $ 1.30  
Total increase (decrease) from operations $ 0.62   $ (1.61 ) $ (1.58 ) $ (2.91 ) $ 6.27   $ 0.73  
Net asset value per share, end of period (4) $ 6.55   $ 5.95   $ 7.49   $ 8.96   $ 11.95   $ 5.69  
                                     
Net Asset Value per Share – Diluted:                                    
                                     
Net asset value per share, beginning of period (4) $ 5.95   $ 7.49   $ 8.96   $ 11.43   $ 5.69   $ 4.81  
Increase (decrease) from operations (4):                                    
  Total revenue $ 0.01   $ 0.04   $ 0.07   $ 0.13   $ 0.03   $ 0.03  
  Total expenses (recovery) $ (0.06 ) $ (0.06 ) $ (0.08 ) $ (0.16 ) $ (0.14 ) $ (0.22 )
  Income tax recovery (expense) $ (0.04 ) $ 0.18   $ 0.27   $ 0.93   $ (1.97 ) $ (0.38 )
  Realized gains (losses) for the period $ -   $ -   $ -   $ -   $ -   $ -  
  Unrealized gains (losses) for the period $ 0.71   $ (1.77 ) $ (1.83 ) $ (3.81 ) $ 8.08   $ 1.30  
Total increase (decrease) from operations $ 0.62   $ (1.61 ) $ (1.58 ) $ (2.91 ) $ 6.00   $ 0.73  
Net asset value per share, end of period (4) $ 6.55   $ 5.95   $ 7.49   $ 8.96   $ 11.43   $ 5.69  
(1) For the six months ended August 31, 2010.
(2) For the twelve months ended.
(3) Period from completion of initial public offering on May 10, 2005 through to February 28, 2006.
(4) Net asset values are based on the actual number of shares outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of shares outstanding over the financial period.

Ratios and Supplemental Data

(in millions, except for ratios and TSX market prices) August 2010 (1)   February 2010 (2)   February 2009 (2)   February 2008 (2)   February 2007 (2)   February 2006 (3)  
                                     
Total net assets, end of period $ 696.9   $ 509.6   $ 541.4   $ 582.5   $ 579.4   $ 175.0  
Net asset value per share, end of period $ 6.55   $ 5.95   $ 7.49   $ 8.96   $ 11.95   $ 5.69  
Average net asset value for the period $ 623.9   $ 555.8   $ 585.1   $ 708.5   $ 336.6   $ 116.0  
Number of common shares outstanding   106.3     85.7     72.3     65.0     48.5     30.8  
Management expense (recovery) ratio (4)   1.06 %   (2.06 %)   (2.53 %)   (6.86 %)   26.16 %   9.71 %
Portfolio turnover rate   -     -     -     -     -     -  
Trading expense ratio (5)   0.53 %   0.23 %   0.22 %   0.32 %   0.73 %   1.75 %
Market price per common share (6) $ 5.89   $ 6.16   $ 6.05   $ 11.55   $ 14.15   $ 7.29  
(1) For the six months ended August 31, 2010.
(2) For the twelve months ended.
(3) Period from completion of initial public offering on May 10, 2005 through to February 28, 2006.
(4) The management expense (recovery) ratio represents total expenses (excluding transaction costs) for the period over the average net asset value of the fund for the period.
(5) Represents total transaction costs for the period over the average net asset value of the fund for the period.
(6) Market price per common share is based upon the closing price of the common shares on the last trading day in the applicable period on the TSX.

PAST PERFORMANCE

The following tables and graphs illustrate the past performance of the net asset value per common share ("Net Asset Value Return") and the past performance of the share price ("Market Value Return") of Uranium Corp and will not necessarily indicate how Uranium Corp will perform in the future. Net Asset Value Return is the best representation of the performance of Uranium Corp while Market Value Return is the best representation of the return to a shareholder of Uranium Corp.

Year by Year Returns

The table and graph below show the annual performance and the interim performance, in Net Asset Value Return and Market Value Return of Uranium Corp for each period indicated. The table and graph show, in percentage terms, how much an investment held on the first day of each financial period would have increased or decreased by the last day of each financial period.

  February 2006 (1)   February 2007 (2)   February 2008 (2)   February 2009 (2)   February 2010 (2)   August 2010 (3)  
                         
Net Asset Value Return (Loss) – basic 18.30 % 110.02 % (25.02 %) (16.41 %) (20.56 %) 10.22 %
Net Asset Value Return (Loss) – diluted 18.30 % 100.88 % (21.61 %) (16.41 %) (20.56 %) 10.22 %
Market Value Return (Loss) 40.19 % 94.10 % (18.37 %) (47.62 %) 1.82 % (4.38 %)
(1) Period from completion of initial public offering on May 10, 2005 through to February 28, 2006.
(2) For the twelve months ended.
(3) For the six months ended August 31, 2010.

To view the Graph associated with this press release, please visit the following link: http://media3.marketwire.com/docs/ugraph1.jpg.

SUMMARY OF INVESTMENT PORTFOLIO

Uranium Corp's investment portfolio consists of the following as at August 31, 2010:

(in thousands, except quantity amounts) Quantity of Measure   Cost (1)   Market Value (2)
               
Investments in Uranium:              
    U3O8 7,250,000 lbs   $ 342,495   $ 347,097
    UF6(3) 2,374,230 KgU   $ 389,998   $ 328,373
      $ 732,493   $ 675,470
               
    U3O8 average cost and market value per pound:              
      - In Canadian dollars     $ 47.24   $ 47.88
      - In United States dollars     $ 43.23   $ 45.00
    UF6 average cost and market value per KgU:              
      - In Canadian dollars     $ 164.26   $ 138.31
      - In United States dollars     $ 152.06   $ 130.00
(1) The cost of the portfolio excludes transaction fees incurred since Uranium Corp's inception.
(2) The market values have been translated to Canadian dollars using the August 31, 2010 noon foreign exchange rate of 1.0639.
(3) Uranium Corp has transferred 1,332,230 KgU as UF6 and taken in exchange 3,480,944 pounds of U3O8, effectively lending the conversion component of the UF6.

Due to on-going transactions of Uranium Corp, this summary may be inaccurate after its effective date. Please check Uranium Corp's most recently announced net asset value per common share for updated information on Uranium Corp's holdings.

URANIUM PARTICIPATION CORPORATION
CONSOLIDATED STATEMENTS OF NET ASSETS (Unaudited)
(Expressed in thousands of Canadian dollars, except per share amounts)
  August 31, 2010     February 28, 2010  
Assets              
  Investments at market value (at cost: August-$732,493; February-$609,448) $ 675,470     $ 479,142  
  Cash and cash equivalents   18,478       22,673  
  Sundry receivables and other assets   258       1,098  
  Future income taxes (note 3)   13,576       13,131  
  $ 707,782     $ 516,044  
Liabilities              
  Accounts payable and accrued liabilities   1,178       1,242  
  Income taxes payable   163       159  
  Future income taxes (note 3)   9,589       5,051  
Net assets $ 696,852     $ 509,592  
               
Net assets representing shareholders' equity              
  Share capital (note 4) $ 775,942     $ 653,841  
  Contributed surplus   3,588       2,481  
  Deficit   (82,678 )     (146,730 )
  $ 696,852     $ 509,592  
               
Common shares              
  Issued and outstanding (note 4)   106,322,313       85,697,341  
               
Net asset value per common share              
  Basic and diluted $ 6.55     $ 5.95  
 
The accompanying notes are an integral part of these financial statements.
 
 
URANIUM PARTICIPATION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
SIX MONTHS ENDED AUGUST 31, 2010 AND 2009
(Expressed in thousands of Canadian dollars, except per share amounts)
  2010   2009  
             
Income            
  Interest $ 50   $ 25  
  Income from investment lending (note 6)   610     1,937  
  Change in unrealized gains (losses) on investments   73,283     (71,527 )
    73,943     (69,565 )
Operating expenses            
  Transaction fees (notes 5 and 7)   3,310     866  
  Management fees (note 7)   801     764  
  Storage fees   1,241     862  
  Audit fees   24     22  
  Directors fees   63     69  
  Legal and other professional fees   26     13  
  Shareholder information and other compliance   218     110  
  General office and miscellaneous   150     142  
  Foreign exchange gain   (38 )   (504 )
    5,795     2,344  
Increase (decrease) in net assets from operations before taxes   68,148     (71,909 )
             
  Income tax expense (recovery) (note 3)   4,096     (8,860 )
             
Increase (decrease) in net assets from operations after taxes   64,052     (63,049 )
             
  Opening deficit   (146,730 )   (14,660 )
             
Closing deficit   (82,678 )   (77,709 )
             
Increase (decrease) in net assets from operations after taxes per common share            
  Basic and diluted $ 0.62   $ (0.80 )
             
Weighted average common shares outstanding            
  Basic and diluted   102,884,818     79,012,966  
 
The accompanying notes are an integral part of these financial statements.
 
 
URANIUM PARTICIPATION CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
SIX MONTHS ENDED AUGUST 31, 2010 AND 2009
(Expressed in thousands of Canadian dollars)
 
  2010   2009  
             
Share capital            
  Balance at beginning of period $ 653,841   $ 553,576  
  New shares issued-net of issue costs (note 4)   122,101     100,265  
  Balance at end of period $ 775,942   $ 653,841  
             
Contributed surplus            
  Balance at beginning of period $ 2,481   $ 2,481  
  Stock options assumed on acquisition of Uranium Limited (note 5)   1,107      
  Balance at end of period $ 3,588   $ 2,481  
             
Retained earnings (deficit)            
  Balance at beginning of period $ ( 146,730 ) $ (14,660 )
  Increase (decrease) in net assets from operations after taxes   64,052     (63,049 )
  Balance at end of period $ (82,678 ) $ (77,709 )
             
URANIUM PARTICIPATION CORPORATION
STATEMENTS OF CHANGES IN NET ASSETS (Unaudited)
SIX MONTHS ENDED AUGUST 31, 2010 AND 2009
(Expressed in thousands of Canadian dollars)
 
  2010 2009  
           
Net assets at beginning of period $ 509,592 $ 541,397  
           
  Net proceeds from issue of shares after tax (note 4)     100,265  
  Shares issued on acquisition of Uranium Limited (note 5)   122,101    
  Stock options assumed on acquisition of Uranium Limited (note 5)   1,107    
  Increase (decrease) in net assets from operations after taxes   64,052   (63,049 )
           
Net assets at end of period $ 696,852 $ 578,613  
 
The accompanying notes are an integral part of these financial statements.
 
URANIUM PARTICIPATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED AUGUST 31, 2010 AND 2009
(Expressed in thousands of Canadian dollars)
 
  2010   2009  
             
Operating Activities            
Increase (decrease) in net assets from operations after taxes $ 64,052   $ (63,049 )
Adjustments for non-cash items:            
  Unrealized losses (gains) on investments   (73,283 )   71,527  
  Future income tax recovery (note 3)   4,093     (8,909 )
             
Changes in non-cash working capital:            
  Change in sundry receivables and other assets   1,068     133  
  Change in accounts payable and accrued liabilities   (199 )   (183 )
  Change in income taxes payable   4     47  
Net cash used in operating activities   (4,265 )   (434 )
             
Investing Activities            
  Purchases of uranium investments       (57,712 )
  Cash acquired in Uranium Limited acquisition   70      
Net cash generated (used) in investing activities   70     (57,712 )
             
Financing Activities            
  Share issues net of issue costs (note 4)       98,900  
Net cash generated by financing activities       98,900  
             
Increase (decrease) in cash and cash equivalents   (4,195 )   40,754  
Cash and cash equivalents – beginning of period   22,673     1,057  
Cash and cash equivalents – end of period $ 18,478   $ 41,811  
 
The accompanying notes are an integral part of these financial statements.
 
URANIUM PARTICIPATION CORPORATION
CONSOLIDATED STATEMENT OF INVESTMENT PORTFOLIO
AS AT AUGUST 31, 2010 (Unaudited)
(Expressed in thousands of Canadian dollars, except quantity amounts)
  Quantity of Measure Cost (1)   Market Value (2)
             
Investments in Uranium:            
  Uranium oxide in concentrates ("U3O8") 7,250,000 lbs $ 342,495   $ 347,097
  Uranium hexafluoride ("UF6") (3) 2,374,230 KgU $ 389,998   $ 328,373
    $ 732,493   $ 675,470
             
  U3O8 average cost and market value per pound:            
    - In Canadian dollars   $ 47.24   $ 47.88
    - In United States dollars   $ 43.23   $ 45.00
  UF6 average cost and market value per KgU:            
    - In Canadian dollars   $ 164.26   $ 138.31
    - In United States dollars   $ 152.06   $ 130.00
(1) The cost of the portfolio excludes transaction fees incurred since the Company's inception.
(2) The market values have been translated to Canadian dollars using the August 31, 2010 noon foreign exchange rate of 1.0639.
(3) The Company has transferred 1,332,230 KgU as UF6 and taken in exchange 3,480,944 pounds of U3O8, effectively lending the conversion component of the UF6. See note 6 for further details of this arrangement.
 
The accompanying notes are an integral part of these financial statements.
 
URANIUM PARTICIPATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Expressed in Canadian dollars, unless otherwise noted)

1. URANIUM PARTICIPATION CORPORATION

Uranium Participation Corporation ("Uranium Corp" or the "Company") was established under the Business Corporations Act (Ontario) ("OBCA") on March 15, 2005. Uranium Corp is an investment fund as defined by the Canadian securities regulatory authorities in National Instrument 81-106 "Investment Fund Continuous Disclosure". Uranium Corp was created to invest substantially all of its assets in uranium oxide in concentrates ("U3O8") and uranium hexafloride ("UF6") (collectively "uranium") with the primary investment objective of achieving appreciation in the value of its uranium holdings. Uranium Corp trades publicly on the Toronto Stock Exchange under the symbol U.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the assets, liabilities, revenues and expenses of Uranium Corp and its wholly owned subsidiaries, Uranium Participation Alberta Corp., Uranium Participation Cyprus Limited, and Uranium Limited ("UL"). The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") for interim financial statements.

Certain information and note disclosures normally included in the annual consolidated financial statements prepared in accordance with Canadian GAAP have been condensed or excluded. As a result, these unaudited interim consolidated financial statements do not contain all disclosures required for annual financial statements and should be read in conjunction with Uranium Corp's audited consolidated financial statements and notes thereto for the year ended February 28, 2010.

All material adjustments which, in the opinion of management, are necessary for fair presentation of the results of the interim periods have been reflected in these financial statements. The results of operations for the six months ended August 31, 2010 are not necessarily indicative of the results to be expected for the full year.

These unaudited interim consolidated financial statements are prepared following accounting policies consistent with Uranium Corp's audited consolidated financial statements and notes thereto for the year ended February 28, 2010.

New Accounting Standards

Uranium Corp adopted the following new Canadian Institute of Chartered Accounts ("CICA") Handbook accounting standards effective March 1, 2010:

a) Section 1582 "Business Combinations" replaces Sections 1581 "Business Combinations" which provides the Canadian equivalent to International Financial Reporting Standard ("IFRS") IFRS 3 "Business Combinations". Section 1601 "Consolidated Financial Statements" and Section 1602 "Non-Controlling Interests" replaces Section 1600 "Consolidated Financial Statements" and establishes standards for the preparation of consolidated financial statements. Section 1582 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period after January 1, 2011. Sections 1601 and 1602 are required for interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011. Uranium Corp early adopted these three sections effective March 1, 2010. Adoption of these standards did not have any material effect on the consolidated financial statements.

3. INCOME TAXES

Unlike most investment funds, Uranium Corp is not a mutual fund trust, making it subject to income tax on its taxable income. Uranium Corp is also subject to varying rates of taxation due to its operations in multiple tax jurisdictions. A reconciliation of the combined Canadian federal and Ontario provincial income tax rate to Uranium Corp's effective rate of income tax for the six months ended August 31, 2010 and 2009 is as follows:

(in thousands) 2010   2009  
             
  Increase (decrease) in net assets from operations before income taxes $ 68,148   $ (71,909 )
  Combined federal and Ontario provincial income tax rate   30.42 %   32.83 %
  Computed income tax expense (recovery)   20,731     (23,608 )
               
  Difference in current tax rates applicable in other jurisdictions   (15,330 )   12,477  
  Difference between future and current tax rates   (394 )   1,363  
  Foreign exchange on future tax balances   835     209  
  Change in valuation allowance   (2,267 )   606  
  Taxable permanent differences   509      
  Other   12     93  
  Income tax expense (recovery) $ 4,096   $ (8,860 )
               
  Income tax expense (recovery) comprised of:            
    Current tax expense $ 3   $ 49  
    Future tax expense (recovery)   4,093     (8,909 )
  $ 4,096   $ (8,860 )
 
The components of the Company's future tax balances are as follows:
 
(in thousands) August 31, 2010   February 28, 2010  
             
  Future tax assets:            
    Tax benefit of share issue costs $ 2,010   $ 2,592  
    Tax benefit of loss carryforwards   8,420     7,270  
    Unrealized loss on investments   3,045     5,547  
    Other   112      
      13,587     15,409  
  Valuation allowance   (11 )   (2,278 )
  Future tax assets $ 13,576   $ 13,131  
               
  Future tax liabilities:            
    Unrealized gain on investments $ 10,726   $ 6,005  
    Tax benefit of loss carryforwards   (1,137 )   (954 )
  Future tax liabilities $ 9,589   $ 5,051  

At August 31, 2010, Uranium Corp has unused tax losses in Canada of $37,388,000 which are scheduled to expire between 2026 and 2031.

4. COMMON SHARES

Uranium Corp 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:

(in thousands except common share balances) Number of  
  Common Shares Amount
       
Balance at February 28, 2010 85,697,341 $ 653,841
       
Common share financings      
Shares issued on acquisition of UL (note 5) 20,624,972   122,101
       
Balance at August 31, 2010 106,322,313 $ 775,942

Common share financings

On March 30, 2010, the Company completed the acquisition of UL by issuing 0.50 Uranium Corp shares in exchange for each UL share. 20,624,972 Uranium Corp shares, valued at the acquisition date market price of $5.92 per share, were issued to complete this transaction.

STOCK OPTIONS

On March 30, 2010, Uranium Corp 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.

These options have an exercise price of GBP£2.05 per option and expire on July 21, 2011. Each option assumed is exercisable for 0.50 common shares of Uranium Corp. 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 forfeiture rate    
Expected dividend yield    
Fair value per stock option $ 0.45  

As at August 31, 2010, 2,475,000 stock options remain outstanding.

5. ACQUISITION OF URANIUM LIMITED

On March 30, 2010, Uranium Corp 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, Uranium Corp acquired all of the issued and outstanding shares of UL in a share exchange at a ratio of 0.50 common shares of Uranium Corp for each common share of UL.

Upon the close of the acquisition, 20,624,972 common shares of Uranium Corp were issued to UL shareholders, representing 19.4% of the total issued and outstanding common shares of Uranium Corp. Uranium Corp also assumed outstanding, fully-vested stock options to purchase 2,475,000 common shares of UL at a strike price of GBP£2.05 per option with an expiry date of July 21, 2011. Each option assumed is exercisable for 0.50 shares of Uranium Corp.

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 totalled $3,310,000 of which $1,000,000 was paid to Denison Mines Inc. (the "Manager) on the close of the UL acquisition.

6. INVESTMENTS LENDING

The Company entered into a loan of the conversion component of 1,332,230 KgU as UF6 in December 2009. The conversion component has a market value of $18,426,000 as at August 31, 2010 and 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 Uranium Corp and an irrevocable letter of credit, subject to adjustment quarterly, of US$15,700,000 from a major financial institution received as collateral. This agreement is due to expire in December 2012.

Through the acquisition of UL, the Company assumed a loan agreement to lend 520,000 pounds of U3O8 subject to a loan fee of 3.5% of US$24,180,000 per annum. The agreement expired on July 8, 2010 with the U3O8 returned on that date.

7. RELATED PARTY TRANSACTIONS

Uranium Corp is a party to a management services agreement with the Manager. Under the terms of the agreement, Uranium Corp 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 Uranium Corp's net asset value between $100,000,000 and $200,000,000 and 0.2% per annum based upon Uranium Corp'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 Uranium Corp 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 Uranium Corp prior to the completion of any acquisition of at least 90% of the common shares of the Company.

In March 2010, the 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 accordance with the management services agreement, all uranium investments owned by Uranium Corp are held in accounts with conversion facilities in the name of the Manager as manager for and on behalf of Uranium Corp.

In March 2010, transaction fees of $1,000,000 were paid to the Manager on the close of the UL acquisition.

The following outlines the fees paid to the Manager during the six months ended August 31, 2010 and 2009:

(in thousands) 2010 2009
         
Fees incurred with the Manager:        
Management fees   801   764
Equity financing fees and other fees (1)     200
Transaction fees and uranium purchase commissions   1,000   866
Total fees incurred with the Manager $ 1,801 $ 1,830
(1) Equity financing fees of $200,000 incurred with the Manager in the six months ended August 31, 2009 were recorded as share issue costs and are included in value reported for common shares.

As at August 31, 2010, accounts payable and accrued liabilities included $175,000 (August 31, 2009: $159,000) due to the Manager with respect to the fees indicated above.

8. CAPITAL MANAGEMENT AND FINANCIAL INSTRUMENTS

Capital Management

Uranium Corp's capital structure consists of share capital and contributed surplus. The Company'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 Company can enter into borrowing arrangements for up to 15% of the net assets of Uranium Corp to facilitate the purchases of uranium.

At August 31, 2010, the Company has invested 91.4% of aggregate share offerings in uranium, and has no outstanding borrowing arrangements for the purchase of uranium.

Risks Associated with Financial Instruments

Investment activities of Uranium Corp expose it to some financial instrument risks: credit risk, liquidity risk, and currency risk. The source of risk exposure and how each is managed is outlined below:

Credit Risk

Uranium Corp's primary exposure to credit risk arises from its uranium lending arrangements. The Company lends uranium exclusively to large organizations with strong credit ratings and ensures that adequate security is provided for any loaned uranium (see note 6).

Liquidity Risk

Financial liquidity represents Uranium Corp's ability to fund future operating activities. Uranium Corp may generate cash from the lending or sale of uranium, or the sale of additional equity securities. The Company's current cash on hand is sufficient to meet its operating cash requirements. Although Uranium Corp enters into commitments to purchase uranium periodically, the commitments are normally contingent on the Company's ability to raise funds through the sale of additional equity securities.

Foreign Exchange Risk

Changes in the value of the Canadian dollar compared to foreign currencies will affect the value, as reported, of the Company's foreign denominated cash and cash equivalents, receivables, and accounts payables.

Currently, Uranium Corp does not have any foreign exchange hedge programs in place and manages its operational foreign exchange requirements through spot purchases in the foreign exchange markets.

Contact Information

  • Uranium Participation Corporation
    Ron Hochstein
    President
    (416) 979-1991 Ext. 232
    or
    Uranium Participation Corporation
    James Anderson
    Chief Financial Officer
    (416) 979-1991 Ext. 372
    www.uraniumparticipation.com