ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements for the three and nine month periods ended
September 30, 2016
, and the related notes thereto, which have been prepared in accordance with U.S. GAAP. Additionally, the following discussion and analysis should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements included in Part II of our Annual Report on Form 10-K for the year ended
December 31, 2015
filed on March 15, 2016. This discussion and analysis contains forward-looking statements and forward-looking information that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements and information as a result of many factors. See section “Cautionary Statement Regarding Forward-Looking Statements” Above.
All dollar amounts stated herein are in U.S. dollars, except per share amounts and currency exchange rates unless specified otherwise. References to Cdn$ refer to Canadian currency, and $ to United States currency.
Overview
All activities of the Company prior to the June 18, 2015 acquisition of Uranerz Energy Corporation (“Uranerz”) concerned the Conventional Uranium Segment.
On June 18, 2015, Energy Fuels acquired all of the outstanding shares of Uranerz which had, among other properties, an active
in situ
(“ISR”) uranium extraction and recovery facility. These operations acquired from Uranerz are included in the consolidated financial statements as of June 18, 2015.
On June 16, 2016, Energy Fuels acquired all the outstanding shares of Mesteña Uranium, LLC (“Mesteña”), and on July 8, 2016 changed the name of Mesteña to “EFR Alta Mesa LLC” (“Alta Mesa”). Alta Mesa’s primary asset is the Alta Mesa Project (the “Alta Mesa Project”), a fully-licensed ISR uranium production facility located in South Texas. In order for the Alta Mesa Project to be capable of uranium production, the Company will need to incur capital expenditures to develop wellfields. A decision to commence development will be made once uranium prices improve to a point where economic feasibility of the Alta Mesa Project is established.
The operations of Uranerz and assets acquired in the Alta Mesa acquisition represent the Company’s ISR Uranium Segment.
While the Company has uranium extraction and recovery activities and generates revenue, it is considered to be in the Exploration Stage (as defined by SEC Industry Guide 7) as it has no Proven or Probable Reserves within the meaning of SEC Industry Guide 7. Under US GAAP, for a property that has no Proven or Probable Reserves, the Company capitalizes the cost of acquiring the property (including mineral properties and rights) and expenses all costs related to the property incurred subsequent to the acquisition of such property. Acquisition costs of a property are depreciated over its estimated useful life for a revenue generating property or expensed if the property is sold or abandoned. Acquisition costs are subject to impairment if so indicated.
Outlook
Uranium Market Update
According to price data from TradeTech LLC (“TradeTech”), uranium spot prices are down from $34.20 per pound on December 31, 2015 to $22.25 per pound on September 30, 2016, or 35% for the year-to-date. Weekly spot prices reported by TradeTech reached a low of $18.75 per pound on October 31, 2016, which was the lowest value observed by TradeTech since August 2004. TradeTech price data also indicate that long-term
U
3
O
8
prices, which began
2016 at $44.00 per pound, dropped to $35.00 per pound by October 31, 2016.
The drop in uranium prices is believed to be caused by continued weak demand by utilities and persistent over-supply. Most transactions on the spot market in 2016 have involved traders and intermediaries, though certain utilities have entered the market to opportunistically buy inexpensive material. The Company continues to believe the weak uranium markets are the result of excess uranium supplies caused by large quantities of secondary uranium extraction, excess inventories and insufficient production cut-backs. The oversupply situation is further exacerbated by reduced demand due to the continued delays in the restart of Japanese reactors, premature reactor closures in the US, and general weakness in the global economy and energy sector. However, since the beginning of the year, certain announcements have been made which may lessen some of the oversupply now burdening the market, including Cameco Corporation’s April 21, 2016 announcement that it is reducing production by approximately 4 million pounds per year in 2016, Paladin’s announcement that it is implementing a reduced mining plan at its Langer Heinrich mine in Namibia, and Kazakhstan’s statement at the World Nuclear Association Conference in London on September 15, 2016 that it does not expect to expand uranium production under current market conditions.
As a result of the expected global growth of nuclear energy, the Company continues to believe the long-term fundamentals of the uranium industry remain positive. The Company believes prices must rise to higher levels to support new primary production that will be required to meet the increasing demand we expect to see as more nuclear units are constructed around the world. According to TradeTech, world uranium requirements continue to exceed primary mine production, with the gap being bridged by secondary supplies and excess uranium inventories in various forms that have already been mined. As excess inventories are drawn down and as production from existing mines declines, the Company believes primary mine production will be required to meet demand over the long-term.
Despite current market uncertainty and recently falling prices, the Company continues to believe it has begun to see certain events which must occur for a market recovery to materialize, as previously described in the Company’s Form 10-K for the fiscal year ended December 31, 2015. Of note, China finalized its 13
th
Five-Year Plan, including a commitment to install 58 GW of nuclear capacity by 2020 (versus today’s 27 GW in installed capacity). In addition, China connected eight reactors to the grid in 2015 (World Nuclear News, January 4, 2016). According to the World Nuclear Association, five new units have commenced operations in China in 2016 and two more are expected to commence operations by year end. Japanese utilities are making slow progress in restarting their nuclear fleet. Three reactors have restarted (Sendai 1 and 2 and Ikata 3, though Sendai 1 was shut-down in early-October for inspections and maintenance), and two more units are approved to restart pending resolution of an injunction (Takahama 3 and 4). It is worth noting that 42 reactors in Japan are operable according to the World Nuclear Association, and, in addition to the five mentioned above, 24 have applied for approvals to restart. And, the Company expects to see additional utilities come to the market later in the final quarter of 2016 to take advantage of current low prices through spot and mid-term purchases. However, these positive developments have not yet been sufficient to offset the downward pressure currently being observed in uranium markets.
Acquisition of Alta Mesa
On June 16, 2016, the Company completed the acquisition of Alta Mesa (previously named “Mesteña Uranium, LLC”) which included the Alta Mesa Project. The Alta Mesa Project has a fully-licensed and constructed ISR uranium recovery plant, with a design capacity of 1.5 million pounds of uranium concentrate per year. In order for Alta Mesa to be capable of uranium production, the Company will need to incur capital expenditures to develop wellfields. A decision to commence development will be made once uranium prices improve to a point where economic feasibility of the Alta Mesa Project is established. The consideration paid by the Company for Alta Mesa was 4,551,284 common shares, which were issued at the closing of the transaction.
Operations and Sales Outlook
With the June 2016 acquisition of Alta Mesa, which includes the Alta Mesa ISR Project, and the June 2015 acquisition of Uranerz, which includes the Nichols Ranch ISR Project, Energy Fuels has increased its flexibility to adjust its uranium production levels to respond to market conditions and to meet the requirements of its existing sales contracts. This allows the Company to fulfill its existing commitments and commit to new spot and term sales that will be sourced from uranium recovered from the Company’s facilities.
The Company plans to extract and/or recover uranium from the following sources in the remainder of 2016 and in 2017 (each of which is more fully described below):
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|
|
|
|
|
|
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1)
|
Nichols Ranch ISR Project;
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|
|
2)
|
Alternate feed materials;
|
|
|
3)
|
Remaining Pinenut Project material available for milling; and
|
|
|
4)
|
Pond Returns at the White Mesa Mill.
|
Our planned operations are expected to produce finished uranium in excess of our existing requirements under our sales contracts.
In response to continued uranium price weakness and market uncertainty and, until such time that improvement in uranium market conditions is observed or suitable sales contracts can be entered into, the Company expects to defer further development of its Nichols Ranch project beyond its ninth header house and keep the Alta Mesa Project on care and maintenance. The Company is also seeking new sources of revenue, including new sources of alternate feed materials and new fee processing opportunities at the White Mesa Mill that can be processed under existing market conditions.
The Company will complete its evaluation of the Canyon Project as discussed below.
In addition, the Company is continuing to manage its activities and assets conservatively, maintaining its substantial uranium resource base and its ISR and conventional uranium extraction and recovery capabilities.
The Company will continue to evaluate additional acquisition opportunities that may arise.
Extraction and Recovery Activities - Overview
The Company has recovered approximately 630,000 pounds of U
3
O
8
during the nine months ended September 30, 2016 and expects to recover approximately 405,000 pounds of U
3
O
8
for the final three months of the year, as further described below. Additionally, the Company expects to produce 800,000 pounds in the year ending December 31, 2017.
The Company currently has finished goods inventory and uranium extraction and recovery capabilities that exceed the commitments contained in its existing sales contracts. As a result, both ISR and conventional uranium extraction and/or recovery have been, and are expected to continue to be, maintained at conservative levels until such time as market conditions improve sufficiently.
Extraction and Recovery - ISR Uranium Segment
We have extracted and recovered approximately 265,000 pounds of U
3
O
8
from our Nichols Ranch Project for the nine months ended September 30, 2016 and expect to extract and recover approximately 70,000 pounds of U
3
O
8
from our ISR segment for the final three months of the year. Additionally, the Company expects to produce 350,000 pounds in the year ending December 31, 2017 from Nichols Ranch.
In February 2016, the Company completed construction of the elution circuit and began the elution process at the Nichols Ranch Plant. Yellowcake slurry from this circuit is being shipped to our White Mesa Mill for final yellowcake drying, packaging, and shipment to a conversion facility.
At September 30, 2016, the Nichols Ranch wellfields had eight header houses extracting uranium. The Company plans to complete a ninth header house by the end of 2016. However, until such time that improvement in uranium market conditions is observed or suitable sales contracts can be entered into, the Company intends to defer development of the tenth header house at its Nichols Ranch project and to keep the Alta Mesa Project on care and maintenance.
Permitting of the Jane Dough Property, which is adjacent to Nichols Ranch, is continuing and is expected to be completed in advance of our need to begin wellfield construction. Also, the Hank Project is fully permitted to be constructed as a satellite facility to the Nichols Ranch Plant.
Extraction and Recovery - Conventional Uranium Segment
The White Mesa Mill has recovered approximately 365,000 pounds of U
3
O
8
during the nine months ended September 30, 2016 primarily from alternate feed materials and milling of previously mined ore from the Pinenut Mine. The Company expects to complete milling the previously mined ore from the Pinenut Mine and certain alternate feed sources during the final three months of the year, producing an additional 335,000 pounds of U
3
O
8
by year-end.
The Company expects to recover approximately 450,000 pounds of U
3
O
8
during the year ending December 31, 2017 at the White Mesa Mill, including approximately 300,000 pounds of U
3
O
8
from dissolved uranium not recovered from previous processing in the mill tailings management system (“Pond Return”) and approximately 150,000 pounds of U
3
O
8
from alternate feed sources. In addition, during 2017, the Company expects to earn a fee for processing additional quantities of alternate feed material at the White Mesa Mill, returning all finished uranium product to the generator of the feed material. The processing fee earned by the Company is expected to cover the Company's processing cost and provide the Company with a reasonable margin.
The White Mesa Mill has historically operated on a campaign basis, whereby uranium recovery is scheduled as mill feed, cash needs, contract requirements, and/or market conditions may warrant. Once the recovery activities discussed above are concluded (expected to be in the second half of 2017), the Company expects to place uranium recovery activities at the Mill on standby until additional mill feed becomes available. The Mill will continue to dry and package material from the Nichols Ranch Plant and continue to receive and stockpile alternate feed materials for future milling campaigns. Each future milling campaign will be subject to receipt of sufficient mill feed that would allow the Company to operate the Mill on a profitable basis and/or recover a portion of its standby costs.
Evaluation, permitting and standby activities - Conventional Uranium Segment
The Company is continuing shaft sinking activities at the Canyon Project, along with underground drilling to further evaluate the deposit. Through evaluation activities completed to date, the Company has identified zones of high-grade uranium and copper mineralization within the deposit. The best uranium intercepts include 8.5-feet of mineralization with an average grade of 6.88% eU
3
O
8
, 48.0-feet of mineralization with an average grade of 1.02% eU
3
O
8
, and 35-feet of mineralization with an average grade of 1.39% eU
3
O
8
. Five core holes with a total intercept length of 313-feet have averaged 8.75% Cu, with one intercept hitting 5-feet of 31.69% Cu. In addition, analytical results demonstrate the existence of silver, zinc, and other minerals in the deposit. The Company is evaluating the potential for recovering copper and other minerals at its White Mesa Mill as value-added byproducts along with the recovery of uranium. The timing of the Company’s plans to extract and process mineralized materials from this project will be based on the results of this additional evaluation work, along with market conditions and available financing.
The Company is selectively advancing certain permits at other of the Company’s major conventional uranium projects. The Company plans to continue the licensing and permitting of the Roca Honda Project, a large, high-grade conventional project in New Mexico, maintain required permits at the Company’s conventional standby projects including the La Sal Project, and the
Daneros Project and complete certain other well-advanced permits on the Sheep Mountain Project in Wyoming, the Daneros Project expansion, and the La Sal Project expansion. All of these projects serve as important pipeline assets for the Company’s future conventional production capabilities, as market conditions warrant. The Company will also continue to evaluate the Bullfrog Property at its Henry Mountains Project. Expenditures for certain of these projects have been adjusted to coincide with expected dates of price recoveries based on our forecasts.
Other
The Company is continuing to pursue significant cost cutting initiatives, including a reduction in scope of certain development initiatives, the sale or abandonment of certain non-core properties and the sale of excess mining equipment and other assets. In addition, at its meeting on November 3, 2016, the Board of Directors decided to reduce their total compensation by 20% and receive one-third of their compensation in cash and two-thirds in restricted share units, thereby resulting in a 33% total reduction in cash compensation.
Sales
During the nine months ended September 30, 2016, the Company has completed sales under its existing contracts of 550,000 pounds of U
3
O
8.
The Company also sold 50,000 pounds of U
3
O
8
to a utility based on spot prices at the time of the contract.
The Company is expecting to complete additional sales of 550,000 pounds of U
3
O
8
during the three months ending December 31, 2016. We had previously forecasted total sales for the year ending December 31, 2016 of 800,000 pounds of U
3
O
8
. The additional 350,000 pounds of sales are expected to result from moving 300,000 pounds of deliveries under one of our contracts from the year ending December 31, 2017 to the three months ending December 31, 2016 (representing the final delivery under this contract). In consideration for moving these contract deliveries, the Company provided the customer with a small discount, which will be satisfied by the Company delivering additional uranium to this customer priced at the published October 2016 month-end spot uranium price. The Company also contracted to sell 200,000 pounds of U
3
O
8
on December 1, 2016 and 200,000 pounds in each of the years ending December 31, 2017 and 2018, with each delivery being priced based on the average spot price per pound of uranium for the five weeks prior to the date of delivery. The Company expects to complete these sales from U
3
O
8
already in inventory or expected to be recovered from its planned activities discussed above.
The Company is currently monitoring market conditions for additional sales opportunities. Selective additional spot sales may be made as necessary to generate cash for operations and development activities.
In 2017, the Company expects to complete deliveries of 520,000 pounds of U
3
O
8
under four contracts, including 320,000 pounds under three long-term contracts and 200,000 pounds under the spot contract discussed above. Of these deliveries, 120,000 pounds represent the final deliveries under one of these contracts. The 2017 deliveries under our contracts are 100,000 pounds lower than previous guidance, as we accelerated the delivery of 300,000 pounds from 2017 to the three months ending December 31, 2016 and added 200,000 pounds of sales under the spot contract, all as discussed above. Selective additional spot sales may be made as necessary to generate cash for operations and development activities.
The Company also continues to pursue new sources of revenue, including expansion of its alternate feed business.
Results of Operations
The following table summarizes the results of operations for the
three and nine
months ended
September 30, 2016
and
2015
(in thousands of dollars):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2016
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2015
|
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2016
|
|
2015
|
|
Revenue
|
$
|
8,702
|
|
|
$
|
19,159
|
|
|
$
|
33,704
|
|
|
$
|
50,464
|
|
|
Costs and expenses applicable to revenue
|
4,341
|
|
|
11,786
|
|
|
20,583
|
|
|
29,012
|
|
|
Impairment of inventories
|
1,379
|
|
|
—
|
|
|
2,998
|
|
|
—
|
|
|
Gross Profit
|
2,982
|
|
|
7,373
|
|
|
10,123
|
|
|
21,452
|
|
|
|
|
|
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|
Other operating costs and expenses
|
|
|
|
|
|
|
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|
Development, permitting and land holding
|
6,252
|
|
|
3,934
|
|
|
17,138
|
|
|
4,636
|
|
|
Standby costs
|
647
|
|
|
1,015
|
|
|
4,178
|
|
|
4,335
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|
|
Abandonment of mineral properties
|
1,005
|
|
|
—
|
|
|
1,036
|
|
|
—
|
|
|
Impairment of assets held for sale
|
—
|
|
|
2,000
|
|
|
—
|
|
|
2,000
|
|
|
Accretion of asset retirement obligation
|
175
|
|
|
143
|
|
|
526
|
|
|
350
|
|
|
Total other operating costs and expenses
|
8,079
|
|
|
7,092
|
|
|
22,878
|
|
|
11,321
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administration
|
|
|
|
|
|
|
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|
Selling costs
|
47
|
|
|
40
|
|
|
216
|
|
|
199
|
|
|
Intangible asset amortization
|
583
|
|
|
1,772
|
|
|
3,021
|
|
|
3,572
|
|
|
General and administration
|
3,815
|
|
|
3,887
|
|
|
11,928
|
|
|
9,223
|
|
|
Costs directly attributable to acquisitions
|
—
|
|
|
190
|
|
|
—
|
|
|
6,777
|
|
|
Total selling, general & administration
|
4,445
|
|
|
5,889
|
|
|
15,165
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|
|
19,771
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|
|
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|
|
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Total Operating Loss
|
(9,542
|
)
|
|
(5,608
|
)
|
|
(27,920
|
)
|
|
(9,640
|
)
|
|
Interest expense
|
(573
|
)
|
|
(625
|
)
|
|
(1,734
|
)
|
|
(1,391
|
)
|
|
Other (expense) income
|
1,870
|
|
|
838
|
|
|
2,103
|
|
|
373
|
|
|
Net loss
|
$
|
(8,245
|
)
|
|
$
|
(5,395
|
)
|
|
$
|
(27,551
|
)
|
|
$
|
(10,658
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
$
|
(0.14
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.36
|
)
|
For the
three months ended September 30, 2016
the Company recorded a net loss of
$8.25 million
or
$0.14
per share compared with a loss of
$5.40 million
or
$0.12
per share for the
three months ended September 30, 2015
. For the
nine months ended September 30, 2016
the Company recorded a net loss of
$27.55 million
or
$0.51
per share compared with a loss of
$10.66 million
or
$0.36
per share for the
nine months ended September 30, 2015
.
Revenues
The Company’s revenues from uranium are largely based on delivery schedules under long-term contracts, and selective spot sales, which can vary from quarter to quarter.
Revenues for the
three months ended September 30, 2016
totaled
$8.70 million
, of which
$8.69 million
were sales related to the conventional segment, of 150,000 pounds of U
3
O
8
, pursuant to term contracts at an average price of $58.00 per pound.
Revenues for the
three months ended September 30, 2015
totaled
$19.16 million
, of which
$19.16 million
were sales of 341,667 pounds of U
3
O
8.
The 341,667 pounds of U
3
O
8
included the sale of 266,667 pounds of U
3
O
8
pursuant to term contracts at an average price of $57.34 per pound and the sale of 75,000 pounds of U
3
O
8
pursuant to term contracts at an average price of $52.00 per pound. For the
three months ended September 30, 2015
sales related to the Conventional Uranium Segment were $15.26 million while sales related to the ISR segment were $3.90 million.
Revenues for the
nine months ended September 30, 2016
totaled
$33.70 million
, of which
$33.66 million
were sales of 600,000 pounds of U
3
O
8
. The 600,000 pounds of U
3
O
8
included the sale of 450,000 pounds of U
3
O
8
pursuant to term contracts at an average price of $55.43 per pound, the sale of 100,000 pounds of U
3
O
8
pursuant to term contracts at an average price of $70.00 per pound and the sale of 50,000 pounds of U
3
O
8
on the spot market at a price of $34.40 per pound. For the
nine months ended September 30, 2016
sales related to the Conventional Uranium Segment were
$26.70 million
while sales related to the ISR segment were
$7.00 million
.
Revenues for the
nine months ended September 30, 2015
totaled
$50.46 million
, of which
$49.80 million
were sales of 875,000 pounds of U
3
O
8
. The 875,000 pounds of U
3
O
8
included the sale of 875,000 pounds of U
3
O
8
pursuant to term contracts at an average price of $56.94 per pound. For the
nine months ended September 30, 2015
sales related to the Conventional Uranium Segment were $46.56 million while sales related to the ISR segment were $3.90 million.
Operating Expenses
Uranium recovered and costs and expenses applicable to revenue
In the
three months ended September 30, 2016
, the Company recovered 90,000 pounds of U
3
O
8
from its ISR Uranium Segment and 260,000 pounds of U
3
O
8
from the Company’s conventional operations including 195,000 pounds from conventional ore and 65,000 pounds from alternate feed materials. In the
three months ended September 30, 2015
, the Company recovered 75,000 pounds of U
3
O
8
from its ISR Uranium Segment and 100,000 pounds of U
3
O
8
from the Company’s conventional operations all from alternate feed materials.
Costs and expenses applicable to revenue for the
three months ended September 30, 2016
totaled
$4.34 million
, compared with
$11.79 million
for the
three months ended September 30, 2015
. The decrease in the cost of sales was primarily attributable to the decrease in the quantity of U
3
O
8
sold year over year as discussed above. Costs of goods sold averaged $28.93 per pound and $34.51 per pound for the
three months ended September 30, 2016
and 2015, respectively. Additionally, the Company recorded an impairment loss of
$1.38 million
in profit and loss related to concentrates and work in progress inventories in the ISR segment during the
three months ended September 30, 2016
.
In the
nine months ended September 30, 2016
, the Company recovered 265,000 pounds of U
3
O
8
from its ISR Uranium Segment and 365,000 pounds of U
3
O
8
from the Company’s conventional operations including 195,000 pounds from conventional ore and 170,000 pounds from alternate feed materials. In the
nine months ended September 30, 2015
, the Company recovered 85,000 pounds of U
3
O
8
from its ISR Uranium Segment and approximately 300,000 pounds of U
3
O
8
, of which 210,000 pounds were from alternate feed materials and other processing and 30,000 pounds were from conventional ore, and 60,000 pounds of U
3
O
8
were processed under a tolling arrangement for the account of a third party.
Costs and expenses applicable to revenue for the
nine months ended September 30, 2016
totaled
$20.58 million
, compared with
$29.01 million
for the
nine months ended September 30, 2015
. The decrease in the cost of sales was primarily attributable to the decrease in the quantity of U
3
O
8
sold year over year as discussed above. Costs of goods sold averaged $34.30 per pound and $33.15 per pound for the
nine months ended September 30, 2016
and 2015, respectively. Additionally, the Company recorded an impairment loss of
$3.00 million
in profit and loss related to concentrates and work in progress inventories in the ISR segment during the
nine months ended September 30, 2016
.
Other operating costs and expenses
Development, permitting and land holding
For the
three months ended September 30, 2016
, the Company spent
$6.25 million
for development, permitting, and land holding primarily related to wellfield construction at Nichols Ranch and shaft sinking at the Canyon Project. While we expect the amounts expensed will add value to the Company, we expense these amounts as we do not have proven or probable reserves at the Nichols Ranch Project or the White Mesa asset group under SEC Industry Guide 7. For the
three months ended September 30, 2015
, we spent
$3.93 million
primarily on permitting and land holding for our conventional assets.
For the
nine months ended September 30, 2016
, the Company spent
$17.14 million
for development, permitting, and land holding primarily related to wellfield construction and completion of the elution circuit at the Nichols Ranch Project, shaft sinking at the Canyon Project and for the replacement of five leach tanks at the White Mesa Mill in preparation for the milling campaign. While we expect the amounts expensed will add value to the Company, we expense these amounts as we do not have proven or probable reserves at the Nichols Ranch Project or the White Mesa asset group under SEC Industry Guide 7. For the
nine months ended September 30, 2015
, we spent
$4.64 million
primarily on permitting and land holding for our conventional assets.
Standby expense
The Company’s La Sal and Daneros Projects were placed on standby in the last quarter of calendar year 2012 as a result of market conditions. In February 2014, the Company placed its Arizona 1 Project on standby. In 2015, the White Mesa Mill was operated at lower levels of uranium recovery, including prolonged periods of standby. Costs related to the care and maintenance of the standby mines, along with standby costs incurred while the White Mesa Mill was operating at low levels of uranium recovery or on standby, are expensed.
For the
three months ended September 30, 2016
, standby costs totaled
$0.65 million
compared with
$1.02 million
in 2015. The decrease is primarily related to decreased standby costs at the White Mesa Mill as it was operating a conventional ore campaign during the quarter.
For the
nine months ended September 30, 2016
, standby costs totaled
$4.18 million
compared with
$4.34 million
in 2015. The standby costs remained approximately the same for each period.
Accretion
Accretion related to the asset retirement obligation for the Company’s properties increased for the
three months ended September 30, 2016
to
$0.18 million
compared with
$0.14 million
in 2015. This is primarily due to the increase in the amount of the asset retirement obligation added in connection with the Uranerz acquisition.
Accretion related to the asset retirement obligation for the Company’s properties increased for the
nine months ended September 30, 2016
to
$0.53 million
compared with the
$0.35 million
in 2015. This is primarily due to the increase in the amount of the asset retirement obligation added in connection with the Uranerz acquisition.
General and Administrative
General and administrative expense includes costs associated with marketing uranium, corporate and general and administrative costs. General and administrative expenses consist primarily of payroll and related expenses for personnel, contract and professional services, stock-based compensation expense and other overhead expenditures. General and administrative expenses remained approximately the same for each period and totaled
$3.82 million
for the
three months ended September 30, 2016
compared to
$3.89 million
for the
three months ended September 30, 2015
.
General and administrative expenses totaled
$11.93 million
for the
nine months ended September 30, 2016
compared to
$9.22 million
for the
nine months ended September 30, 2015
. This increase is due to additional general and administrative expenses related to the acquired ISR uranium segment which was completed in June 2015.
Intangible asset amortization
Intangible asset amortization are non-cash costs of amortization of above-market sales contract value associated with the acquisition of Denison’s US Mining Division in June 2012 and the Uranerz acquisition in June 2015. During the
three months ended September 30, 2016
intangible asset amortization totaled
$0.58 million
compared with
$1.77 million
for the
three months ended September 30, 2015
. This decrease was due to a decrease in contracted sales from 341,667 pounds in 2015 to 150,000 pounds in 2016 as discussed above, causing less contract amortization to be recorded.
During the
nine months ended September 30, 2016
intangible asset amortization totaled
$3.02 million
compared with
$3.57 million
for the
nine months ended September 30, 2015
. This decrease was due to a decrease in contracted sales from 875,000 pounds in 2015 to 550,000 pounds in 2016 as discussed above, causing less contract amortization to be recorded.
Interest Expense and Other Income and Expenses
Interest Expense
Interest expense for the
three months ended September 30, 2016
was
$0.57 million
compared with
$0.63 million
in the prior year.
Interest expense for the
nine months ended September 30, 2016
was
$1.73 million
compared with
$1.39 million
in the prior year. The increase is primarily due to interest on the $18.81 million in debt assumed from the June 2015 Uranerz acquisition.
Other income and expense
For the
three months ended September 30, 2016
, other income and expense totaled
$1.87 million
of income. These amounts primarily consist of a gain on warrant liabilities of
$1.18 million
, gains in miscellaneous items of
$0.33 million
, a gain on the change in the mark-to-market values of the Company's Convertible Debentures (the “Debentures”) of
$0.32 million
and interest income of
$0.04 million
.
For the
three months ended September 30, 2015
, other income and expense totaled
$0.84 million
of income. These amounts primarily consist of a gain on warrant liabilities of
$0.71 million
, a gain on the change in the mark-to-market values of the Debentures of
$0.02 million
, a gain on the change in value of investments at fair value of
$0.15 million
and interest income of
$0.02 million
partially offset by a loss in miscellaneous items of
$0.06 million
For the
nine months ended September 30, 2016
, other income and expense totaled
$2.10 million
of income. These amounts primarily consist of a gain on warrant liabilities of
$1.88 million
, gains in miscellaneous items of
$0.81 million
and interest income of
$0.08 million
. partially offset by a loss on the change in the mark-to-market values of the Debentures of
$0.67 million
.
For the
nine months ended September 30, 2015
, other income and expense totaled
$0.37 million
of income. These amounts primarily consist of a gain on warrant liabilities of
$0.71 million
, gains in miscellaneous items of
$0.38 million
, a gain on the change in value of investments at fair value of
$0.11 million
and interest income of
$0.06 million
. partially offset by a loss on the change in the mark-to-market values of the Debentures of
$0.89 million
.
Liquidity and Capital Resources
Funding of major business and property acquisitions
Over the past four years the Company has funded major business and property acquisitions with capital provided by issuance of its Common Shares. In 2012 Titan Uranium Inc. and the US Mining Division of Denison were acquired, in 2013 Strathmore Minerals Corp. was acquired and in 2015 Uranerz was acquired, each in exchange for newly issued shares. The Company intends to continue to acquire assets utilizing Common Shares when it can be done under attractive terms.
On May 27, 2016, the Company completed the purchase of the 40% interest in Roca Honda from Sumitomo through the issuance of 1.21 million shares as well as an additional $4.5 million of cash payable upon first commencement of commercial mining extraction.
Additionally, on June 16, 2016, the Company completed the acquisition of Alta Mesa through the issuance of 4.55 million shares. The total transaction costs incurred through June 30, 2016 by the Company were $1.29 million, which were capitalized as part of the purchase consideration.
Cash proceeds received for shares and warrants
In the
nine months ended September 30, 2016
, the Company issued 0.20 million shares for net proceeds of $0.53 million under the Company’s ATM Offering.
On March 14, 2016 an equity offering of 5.03 million units (each unit consisting of one common share and one half of one common share purchase warrant) was closed for net proceeds of $10.98 million after commissions and estimated expenses of the offering.
Additionally, on September 20, 2016 an equity offering of 8,337,500 units (each unit consisting of one common share and one half of one common share purchase warrant) was closed for net proceeds of $13.79 million after commissions and estimated expenses of the offering.
Working capital at
September 30, 2016
and future requirements for funds
At
September 30, 2016
, the Company had working capital of
$30.64 million
, including
$17.53 million
in cash and cash equivalents and approximately 570,000 pounds of finished goods inventory. The Company believes it has sufficient cash and resources to carry out its base business plan beyond Q3 2017.
The Company is actively focused on its forward looking liquidity needs, especially in light of the current depressed uranium markets. The Company is evaluating its ongoing fixed cost structure as well as decisions related to project retention, advancement and development. If current uranium prices persist for any extended period of time, the Company will likely be required to raise capital or take other measures to fund its ongoing operations. Significant development activities, if warranted, will require that we arrange for financing in advance of planned expenditures. In addition, we expect to continue to augment our current financial resources with external financing as our long term business needs require.
The Company manages liquidity risk through the management of its capital structure.
Additional Collateral to be Deposited as Collateral for Surety Bonds
During the three months ended June 30, 2016, one of the Company’s surety bond providers requested additional collateral to support surety bonds held in favor of our White Mesa Mill totaling $5.28 million to be deposited $1.76 million by July 31, 2016 (which was deposited on July 29, 2016), $1.76 million by November 30, 2016 and $1.76 million by February 28, 2017.
Debenture Maturity
The Company currently has 22,000 floating-rate convertible unsecured subordinated debentures originally maturing June 30, 2017 (the “Debentures”) (each Debenture having a principal amount of Cdn$1,000). On August 4, 2016, the following amendments were made to the Debentures:
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the maturity date of the Debentures was extended from June 30, 2017 to December 31, 2020;
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the conversion price of the Debentures was reduced from Cdn$15.00 to Cdn$4.15 per Common Share of the Company;
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a redemption provision was added that enables the Company to redeem the Debentures, in cash, in whole or in part, at any time after June 30, 2019, but prior to maturity, at a price of 101% of the aggregate principal amount redeemed;
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a right in favor of each Debentureholder was added to enable the Debentureholder to require the Company to purchase, for cash, on June 30, 2017 (the original maturity date) up to 20% of the Debentures held by the Debentureholder at a price equal to 100% of the principal amount tendered; and
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certain other amendments were made to the Debenture Indenture as required by the U.S. Trust Indenture Act of 1939, along with certain other amendments to remove provisions of the Indenture that no longer apply.
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Subject to any required regulatory approval and provided no event of default has occurred and is continuing, the Company has the option to satisfy its obligation to repay the Debentures, in whole or in part, at maturity, upon at least 40 days and not more than 60 days prior notice, by delivering that number of Common Shares obtained by dividing the principal amount of the Debentures maturing by 95% of the volume-weighted average trading price of the common shares on the TSX during the 20 consecutive trading days ending five trading days preceding the maturity date.
Cash and cash flow
Nine months ended September 30, 2016
Cash and cash equivalents were
$17.53 million
at
September 30, 2016
, compared to
$12.97 million
at
December 31, 2015
. The increase of
$4.56 million
was due primarily to cash provided by financing activities of
$22.96 million
partially offset by cash used by investing activities of
$4.52 million
and cash used in operations of
$13.97 million
and gain on foreign exchange on cash held in foreign currencies of
$0.10 million
.
Net cash provided by financing activities totaled
$22.96 million
consisting primarily of
$25.29 million
proceeds from the issuance of stock in the March 2016 and September 2016 public offerings and the ATM Offering partially offset by
$2.39 million
to repay loans and borrowings.
Net cash used by investing activities was
$4.52 million
, which was primarily related to expenditures for the Alta Mesa acquisition net of cash acquired of
$1.29 million
and cash expenditures related to additional cash deposited with regulatory agencies of
$4.12 million
and related reclamation costs offset by cash received from the sale of mineral properties held for sale of
$0.85 million
.
Net cash used in operating activities of
$13.97 million
is comprised of the net loss of
$27.55 million
for the period adjusted for non-cash items and for changes in working capital items. Significant items not involving cash were
$3.65 million
of depreciation and amortization of property, plant and equipment,
$3.00 million
impairment on inventory, a
$4.42 million
decrease in inventories,
$2.22 million
decrease in trade and other receivables offset by a
$1.06 million
decrease in accounts payable and accrued liabilities and a
$1.82 million
miscellaneous non-cash income.
Nine months ended September 30, 2015
Cash and cash equivalents were
$17.74 million
at
September 30, 2015
, compared to
$10.41 million
at
December 31, 2014
. The increase of
$7.47 million
was due primarily to cash from operations of
$4.78 million
and cash from investing activities of
$3.11 million
partially offset by cash from financing activities of
$0.41 million
and loss on foreign exchange on cash held of
$0.14 million
.
Net cash used in investing activities was
$3.11 million
, which was primarily related to the release of cash deposited with regulatory agencies of
$5.27 million
, the
$2.46 million
cash acquired in the acquisition of Uranerz offset by expenditures for property, plant and equipment of
$4.62 million
.
Net cash from financing activities was
$0.41 million
, which primarily consisted of payments on loans and borrowings of
$0.78 million
partially offset with
$0.18 million
of proceeds from the issue of shares for options and warrant exercised.
Net cash from operating activities of
$4.78 million
is comprised of the net loss of
$10.66 million
for the period adjusted for non-cash items and for changes in working capital items. Significant items not involving cash were
$3.65 million
of depreciation and amortization of property, plant and equipment,
$2.98 million
miscellaneous non-cash expenses primarily related to the Uranerz acquisition completed in 2015,
$3.57 million
decrease in inventories, offset by a
$0.11 million
increase in trade and other receivables.
Critical accounting estimates and judgments
The preparation of these consolidated financial statements in accordance with US GAAP requires the use of certain critical accounting estimates and judgments that affect the amounts reported. It also requires management to exercise judgment in applying the Company’s accounting policies. These judgments and estimates are based on management’s best knowledge of the relevant facts and circumstances taking into account previous experience. Although the Company regularly reviews the estimates and judgments made that affect these financial statements, actual results may be materially different.
Significant estimates made by management include:
SEC Industry Guide 7 defines a reserve as “that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination”. The classification of a reserve must be evidenced by a bankable feasibility study using the latest three-year price average. While the Company has established the existence of mineral resources and has successfully extracted and recovered saleable uranium from certain of these resources, the Company has not established proven or probable reserves, as defined under SEC Industry Guide 7, for these operations or any of its uranium projects. As a result, the Company is in the Exploration Stage as defined under Industry Guide 7. Furthermore, the Company has no plans to establish proven or probable reserves for any of its uranium projects.
While in the Exploration Stage, among other things, the Company must expense all amounts that would normally be capitalized and subsequently depreciated or depleted over the life of the mining operation on properties that have proven or probable reserves. Items such as the construction of wellfields and related header houses, additions to our recovery facilities and advancement of properties will all be expensed in the period incurred. As a result, the Company’s consolidated financial statements may not be directly comparable to the financial statements of mining companies in the development or production stages.
The Company utilizes estimates of its mineral resources based on information compiled by appropriately qualified persons. The information relating to the geological data on the size, depth and shape of the ore body requires complex geological judgments to interpret the data. The estimation of future cash flows related to resources is based upon factors such as estimates of future uranium prices, future construction and operating costs along with geological assumptions and judgments made in estimating the size and grade of the resource. Changes in the mineral resource estimates may impact the carrying value of mining and recovery assets, goodwill, reclamation and remediation obligations and depreciation and impairment.
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c.
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Valuation of mining and recovery assets in a business combination
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We value assets in a business combination based on our estimates of the fair value of the mining and recovery assets acquired.
For mining and recovery assets actively extracting and recovering uranium as well as those assets that we expect to extract uranium from, we value the assets based on the income approach. As we have not acquired proven or probable reserves, as defined by SEC Industry Guide 7, in our business combinations, the value ascribed to these assets is based on our estimates of value beyond proven and probable reserves. The value is calculated based, in part, on technical reports prepared under NI 43-101. Our estimates of extraction and recovery activities and related timing of extraction and recovery as well as the costs involved are demonstrated by at least a preliminary economic assessment. We then adjust the results of the technical reports to include the effects of anticipated fluctuations in the future market price of uranium consistent with what we believe to be the expectations of other market participants as well as any expected operational or cost changes that we expect in the future operations of these mining assets. These cash flow estimates include the estimated cash outflows to develop, extract and recover the estimated saleable U
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from these operations.
For mining assets that will be held for further evaluation or for sale, we use the market approach utilizing implied transaction multiples from historical uranium transactions.
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d.
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Valuation of mining assets acquired other than in a business combination
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The costs of mining assets that are acquired in an asset purchase transaction are recorded as plant and equipment on the date of purchase based on the consideration given up for the assets. If multiple assets are involved in a transaction, the consideration is allocated based on the relative values of the properties acquired.
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e.
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Depreciation of mining and recovery assets acquired
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For mining and recovery assets actively extracting and recovering uranium we depreciate the acquisition costs of the mining and recovery assets on a straight line basis over our estimated lives of the mining and recovery assets. The process of estimating the useful life of the mining and recovery assets requires significant judgment in evaluating and assessing available geological, geophysical, engineering and economic data, projected rates of extraction and recovery, estimated commodity price forecasts and the timing of future expenditures, all of which are, by their very nature, subject to interpretation and uncertainty.
Changes in these estimates may materially impact the carrying value of the Company’s mining and recovery assets and the recorded amount of depreciation.
Management uses judgment in applying the acquisition method of accounting for business combinations and in determining fair values of the identifiable assets and liabilities acquired. The value placed on the acquired assets and liabilities, including identifiable intangible assets, will have an effect on the amount of goodwill or bargain purchase gain that the Company may record on an
acquisition. Changes in economic conditions, commodity prices and other factors between the date that an acquisition is announced and when it finally is consummated can have a material difference on the allocation used to record a preliminary purchase price allocation versus the final purchase price allocation which can take up to one year after acquisition to complete. See
b.
above for information related to the valuation of mining and recovery assets in this process.
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g.
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Impairment testing of mining and recovery assets
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The Company undertakes a review of the carrying values of its mining and recovery assets whenever events or changes in circumstances indicate that their carrying values may exceed their estimated net recoverable amounts determined by reference to estimated future operating results and net cash flows. An impairment loss is recognized when the carrying value of a mining or recovery asset is not recoverable based on this analysis. In undertaking this review, the management of the Company is required to make significant estimates of, among other things, future production and sale volumes, forecast commodity prices, future operating and capital costs and reclamation costs to the end of the mining asset’s life. These estimates are subject to various risks and uncertainties, which may ultimately have an effect on the expected recoverability of the carrying values of mining and recovery assets.
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h.
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Asset retirement obligations
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Asset retirement obligations are recorded as a liability when an asset that will require reclamation and remediation is initially acquired. For disturbances created on a property owned that will require future reclamation and remediation the Company records asset retirement obligations for such disturbance when occurred. The Company has accrued its best estimate of its share of the cost to decommission its mining and milling properties in accordance with existing laws, contracts and other policies. The estimate of future costs involves a number of estimates relating to timing, type of costs, mine closure plans, and review of potential methods and technical advancements. Furthermore, due to uncertainties concerning environmental remediation, the ultimate cost of the Company’s decommissioning liability could differ from amounts provided. The estimate of the Company’s obligation is subject to change due to amendments to applicable laws and regulations and as new information concerning the Company’s operations becomes available. The Company is not able to determine the impact on its financial position, if any, of environmental laws and regulations that may be enacted in the future. Additionally, the expected cash flows in the future are discounted at the Company’s estimated cost of capital based on the periods the Company expects to complete the reclamation and remediation activities. Differences in the expected periods of reclamation or in the discount rates used could have a material difference in the actual settlement of the obligations compared with the amounts provided.
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i.
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Determination whether an acquisition represents a business combination or asset purchase
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Management determines whether an acquisition represent a business combination or asset purchase by considering the stage of exploration and development and status of an acquired operation. Consideration is given to whether the acquired properties include mineral reserves or mineral resources, in addition to the permitting required and results of economic assessments.