Fiscal 2000 was a watershed year for U.S. Energy Corp. and its subsidiary, Crested Corp. (d/b/a "USECC"). This letter will focus on recent events which have streamlined and will shape your Company's future.
We believe that decisions made and actions taken during the past few months should substantially benefit long-term shareholder values.
NUKEM LITIGATION UPDATE
But before I discuss the Company's current corporate activities, you should know that the 10th Circuit Court of Appeals (10th CCA) has ruled in our favor in the case against Nukem, Inc., for the second time.
The 10th CCA recently affirmed the July 16, 1999 Order of the U.S. District Court of Colorado, which denied Nukem's motion for full satisfaction of judgment following its payment of approximately $6.1 million to USECC in February 1999 (the balance due on $15.3 million, being the monetary portion of the judgment only).
The equitable portion of the judgment was the constructive trust impressed by the Court in favor of Sheep Mountain Partners (SMP) on 4 contracts Nukem entered into with three republics of the Commonwealth of Independent States (CIS).
The 10th CCA found that Nukem failed to furnish USECC with an accounting of the status of SMP's rights to purchase CIS uranium, the whereabouts of any uranium and profits from Nukem's use of SMP's properties.
Although we expect Nukem to comply with court orders and fully account to USECC for all past and future profits derived from the purchase rights for CIS uranium, we anticipate further court proceedings.
Until we get a complete and accurate accounting, management cannot estimate the financial implications of the 10th CCA's recent decision, but we believe USECC is entitled to significant additional compensation from Nukem.
U.S. ENERGY TO FOCUS ON COALBED METHANE
On September 20, 2000, U.S. Energy Corp. and Crested Corp. announced a strategic decision to focus their corporate energies on natural gas exploration and development involving the Companies' various coalbed methane prospects in Wyoming and Montana.
In pursuit of this objective, the Company announced a significant downsizing of its workforce, corporate overhead and expense structure in all other USECC divisions.
These corporate decisions were difficult, in many respects, because of our long history in the uranium and gold industries. We are, however, confident that the decisions made are in the best interests of our shareholders.
Actions which were generally implemented in August and September of 2000 are detailed as follows:We significantly downsized our workforce. U.S. Energy Corp.'s management has reduced the number of employees in those areas of the Company's operations which were unprofitable or were deemed unlikely to provide an adequate return on investment in the foreseeable future.
We exited the Green Mountain Mining Venture (GMMV). A settlement was reached with Kennecott Uranium Company which provided for USECC to receive cash, equipment, a royalty and, most importantly, a release of over $13 million in environmental liabilities involving the GMMV mining and milling properties.
USECC was also granted ownership of substantial equipment and inventories formerly held by the GMMV. We are in the process of selling such assets.
We stopped all drilling and construction operations for third parties. We reduced and will continue to reduce our vehicle and equipment fleet.
We ceased tour operations at the Sutter Creek Gold Mine in California. We ceased most operations at the Sheep Mountain uranium properties in Wyoming.
Ongoing activities will be limited to the reclamation of some mining properties and the salvage and/or sale of all surplus surface and underground equipment.
We commissioned an evaluation of the Ticaboo Townsite and the possible sale and/or reclamation of the Shootaring Mill and Mine properties.
We further curtailed commercial and tourist-related operations for the winter, "off season", at Ticaboo. We decided to sell Crested Corp's Peanut Mill property near Crested Butte, Colorado.
While a significant near-term benefit from these actions will include a much smaller expense structure and reduced operating losses, the long-term implications of our new corporate focus are even more significant.
During the past year, natural gas prices have increased dramatically, while market prices for uranium and gold have continued to decline.
When adjusted for inflation, prices for uranium concentrates are at an all-time low, even though worldwide production has fallen far short of current consumption of uranium fuel by nuclear power utilities worldwide.
The production/consumption gap has been filled from supplies unrelated to the mining and production of uranium.
The production shortfall has been offset by the Department of Energy's transfer of +80 million pounds of U3O8 to USEC Inc. (formerly the "U.S. Enrichment Corporation") to be sold starting in 1998; the adoption of "just-in-time" inventory management procedures by Japanese and European nuclear power utilities; the reversal of anti-dumping tariffs on uranium concentrates shipped to the U.S. from various CIS republics;
and the continued blending of weapons grade material from the former Soviet Union into fuel for consumption in our domestic nuclear energy plants.
While the fuel supplies available from these sources is finite, it may be a number of years before consumption must again rely on mine production to satisfy utility requirements.
The supply and demand dynamics for gold are somewhat similar (as reflected in gold's depressed price).
Weak foreign economies, central bank selling and a strong dollar represent a few of the factors that have kept average gold prices below $300 per ounce for the last several years.
Meanwhile, the involvement of U.S. Energy and Crested Corp. in natural gas exploration and production has advanced significantly during the past year.
On January 5, 2000, USECC's subsidiary, Rocky Mountain Gas, Inc. ("RMG") completed the acquisition of a 50 percent working interest, 40 percent net revenue interest in approximately 185,000 acres of coalbed methane (CBM) leases in the Powder River Basin of Montana.
These leases are operated through a joint venture with Quaneco, L.L.C., an Oklahoma company.
Our joint efforts are designed to maximize the value of the Montana properties and to bring CBM production on line as soon as possible.
CBM is a form of natural gas that is found in underground coal beds and was generated during the conversion of organic material to coal over millions of years.
Our properties cover some of the thickest coals in the Montana portion of the Powder River Basin, which compare favorably with the coals underlying acreage acquired or purchased by CMS Energy, Phillips Petroleum and Montana Dakota Utilities on properties that adjoin or are near the acreage of RMG.
The Powder River Basin is currently the hottest onshore natural gas play in the U.S., with recoverable reserves estimated by some industry analysts at between 25 and 40 trillion cubic feet.
Further acquisitions have brought RMG's acreage position in western coal basins to approximately 270,000 gross acres (170,000 net acres).
Additionally, USECC, acting as a contractor, has drilled or completed approximately 300 coalbed methane gas wells in basins in Montana, Wyoming and Colorado during the past year.
USECC used formerly idled drilling and construction equipment from its uranium operations on these CBM projects and has gained valuable expertise in the drilling, testing and completion of CBM wells.
USECC ceased these operations on a contract basis with third parties, but will resume operations on its own account.
Management looks towards the future with great optimism. We are now focused on growth opportunities provided by the record demand for natural gas as an environmentally friendly source of power.
Natural gas is the fuel of choice for 90 percent of the electric power plants being built today in the U.S., and the Department of Energy forecasts that demand for natural gas will rise by 40 percent in the next 20 years.
Natural gas prices have more than doubled during the past year to approximately $5.00 per million Btu.
As the winter approaches, some analysts expect the price to rise further, and we believe the era of "cheap" natural gas is over.
RMG seeks to become a major player in the coalbed methane industry, and our operations are well-positioned to benefit from low exploration, development and completion costs.
Industry-wide, more than 90 percent of the CBM wells in the Powder River Basin have been successful.
We plan to proceed aggressively with permitting activities, property acquisitions, and exploration/ development to realize the full potential of our coalbed methane operations.
With a large acreage position that could require the drilling of several thousand wells, USECC and RMG are currently negotiating with major industry operators regarding potential strategic partnerships.
Additionally, several tiers of financing may be required to fully develop our large acreage position.
A number of well-capitalized companies operating in the Powder River Basin have been able to reach production levels of 100 million cubic feet of gas per day in less than two years. Our goal for the year ahead is to add proven reserves and develop production.
© 2001 Mena Report (www.menareport.com)
