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 month period ended
March 31, 2017
, 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, 2016
filed on March 9, 2017. 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.
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.
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
We provide the raw materials for generation of clean nuclear electricity. Our primary product is a uranium concentrate (“U
3
O
8
”), or yellowcake, which when further processed will become the fuel for nuclear energy. According to the Nuclear Energy Institute, nuclear energy provides nearly 20% of the total electricity, and 60% of the clean carbon-free energy, generated in the United States. The Company generates revenues from extracting and processing materials for our own account, as well as from toll processing for others.
Our uranium concentrate is produced from multiple sources:
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Conventional recovery operations at our White Mesa Mill (the "Mill") including:
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◦
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Processing ore from uranium mines;
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Recycling of uranium bearing materials that are not derived from conventional ore, known as alternate feed materials; and
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In-situ recovery (“ISR”) operations.
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In addition, the Company has a long history of conventional vanadium recovery at the Mill, when vanadium prices support those activities, and is evaluating opportunities for copper recovery from our Canyon project.
The Mill, which is located near Blanding Utah, processes ore mined from the Four Corners region of the United States as well as alternate feed materials that can originate worldwide. We have the only operating uranium/vanadium mill in the United States. The Mill is licensed to process an average of 2,000 tons of ore per day and to extract approximately 8.00 million pounds of U
3
O
8
per year. The Mill has separate circuits to process conventional uranium and vanadium ores as well as alternate feed materials.
Currently, there are no mines operating in the vicinity of the Mill, due to uneconomic prices. The Mill is currently processing alternate feed materials under a toll processing arrangement as well as alternate feed materials for our own account. Additionally, the Mill is recovering dissolved uranium from the Mill’s tailings management system that was not recovered in previous processing. The Company is actively pursuing additional toll and alternate feed materials for processing at the Mill.
The Mill also continues to pursue additional sources of feed materials. For example, a significant opportunity has arisen for potential clean-up of abandoned uranium mines on the Navajo Nation that is located in northeastern Arizona as well as parts of Utah and New Mexico and other abandoned uranium mines in the vicinity that are not on the Navajo Nation. Recently, the Justice Department and EPA announced settlements in excess of $1.5 billion to fund these clean-up activities. Additional settlements with other parties are also pending. Our Mill is within close trucking distance and is uniquely positioned in this region to receive uranium bearing materials from these cleanups and thus recycle the contained U
3
O
8
, while at the same time removing such material from the land. There are no other facilities capable of providing this service. Consequently, the Company is actively pursuing these types of opportunities.
The Company’s ISR operations consist of our currently producing Nichols Ranch Project and our standby operation at Alta Mesa. At our Nichols Ranch Project, the Company placed its ninth header house into production in March 2017. In order to save cash
and resources, the Company is deferring additional wellfield development until uranium prices recover. The Alta Mesa Project will remain on standby in the current uranium price environment.
We believe the current spot price of uranium does not support production for the majority of uranium producers and, accordingly, we believe that prices will recover. In anticipation of price recoveries we continue to maintain and advance our resource portfolio. Once prices recover we stand ready to resume wellfield construction at our Nichols Ranch Project, develop wellfields and resume production at our Alta Mesa facility and mine, as well as mine and process ore from our Canyon Project. The Company believes we could start bringing this new production to the market within approximately six months of a positive production decision. Longer term we expect to resume production at our conventional mines on standby and develop our large conventional mines at Roca Honda and Henry Mountains.
In addition to resources controlled by Energy Fuels, there are substantial conventional uranium/vanadium mines/projects in the vicinity of our Mill, which as stated above, is the only operating mill in the United States. We expect that as these mines are brought into production we will be able to generate profitable toll milling contracts to process this third party ore.
Uranium Market Update
According to monthly price data from TradeTech LLC (
“
TradeTech
”
), uranium spot prices increased from $20.25 per pound on December 31, 2016 to $23.25 per pound on March 31, 2017, or 15% for the year-to-date. Weekly spot prices reported by TradeTech reached a high of $26.50 per pound on February 10, 2017, and were at $22.45 on May 4, 2017. According to TradeTech’s March 31, 2017 Nuclear Market Review (“NMR”), the uranium spot price has exhibited volatility during 2017 with “sporadic activity” defining the market, including a greater number of transactions, but lower volumes of material, compared to the same period in 2016. According to data from TradeTech, most spot market activity in 2016 and 2017 has involved traders and intermediaries, with utility spot demand being described as “extremely weak” (NMR, April 7, 2017). TradeTech price data also indicate that long-term
U
3
O
8
prices, which began
2017 at $30.00 per pound, increased to $35.00 per pound by March 31, 2017.
The year-to-date rise in uranium prices is believed to have been primarily caused by the announcement that Kazakhstan, the World’s leading producer of uranium, expects to cut production by 10% in 2017, and the potential for further reductions in production from Cameco and other uranium supply during 2017. In addition on March 28, 2017, a high court in Japan lifted an injunction preventing the restart of the Takahama 3 and 4 reactors clearing the way for these units to restart in May and June. And, on April 26, 2017, the U.S. Department of Energy announced that it was reducing uranium transfers from stockpiles by 1.1 million pounds for each of 2017 and 2018. On March 29, 2017, Toshiba’s Westinghouse nuclear division filed for Chapter 11 protection, creating some uncertainty about the four nuclear reactors currently under construction in the U.S. While spot prices have recovered somewhat from their late-2016 lows, the market remains weak and oversupplied. The Company continues to believe that the continued weak uranium markets are primarily the result of excess uranium supplies caused by large quantities of secondary uranium extraction, excess inventories, and thus far insufficient production cut-backs.
Operations Update and Outlook
The Company plans to extract and/or recover uranium from the following sources in 2017 (each of which is more fully described below):
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1)
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Nichols Ranch ISR Project;
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2)
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Alternate feed materials and pond returns at the Mill.
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Our planned operations are expected to produce finished uranium in excess of our existing requirements under our sales contracts.
Extraction and Recovery Activities - Overview
The Company expects to produce 675,000 pounds in the year ending December 31, 2017 of which 92,000 pounds U
3
O
8
were produced in the first three months of the year. We had previously forecasted total production for the year ending December 31, 2017 of 800,000 pounds of U
3
O
8
. The lower production amount is due to expected lower initial recoveries of pond returns of 25,000 pounds U
3
O
8
, a delay in receipt of certain alternate feed materials of 50,000 pounds U
3
O
8
, which are now expected to be received in 2018, and lower than expected recoveries at our Nichols Ranch Project.
The Company currently has finished goods inventory and uranium extraction and recovery capabilities that exceed the commitments contained in our 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 Operations
We expect to extract and recover approximately 300,000 pounds of U
3
O
8
from our Nichols Ranch Project for the year ending December 31, 2017 of which 58,000 pounds were recovered in the first three months of the year.
At March 31, 2017, the Nichols Ranch wellfields had nine header houses extracting uranium. The ninth header house began extracting uranium in March 2017. 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 further header houses at its Nichols Ranch project.
Extraction and Recovery - Milling Operations
The Company expects to recover approximately 375,000 pounds of U
3
O
8
during the year ending December 31, 2017 at the Mill, including approximately 275,000 pounds of U
3
O
8
from dissolved uranium not recovered from previous processing in the mill tailings management system (“Pond Return”) and approximately 100,000 pounds of U
3
O
8
from alternate feed sources. In the first three months of the year the Mill recovered 34,000 pounds of these amounts.
In addition, during 2017, the Company expects to earn a fee for processing approximately 1.0 million pounds of U
3
O
8
contained in alternate feed materials at the Mill, returning all finished uranium product to the generator of the feed material. During the three months ended March 31, 2017 the Company began the recovery process and completed processing of 39,000 pounds of this material.
The 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. The Company is actively pursuing opportunities to process new and additional alternate feed sources, low grade ore from third parties in connection with various uranium clean-up requirements and further recovery of Pond Return. Successful results from these activities would allow the Mill to extend the current campaign into 2018 and beyond.
In the event we are unable to secure sufficient ore or other feed sources for the Mill into the future, the Company would expect to place uranium recovery activities at the Mill on standby until sufficient mill feed becomes available. While on standby, the Mill would 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 would 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.
Shaft sinking and evaluation of the Canyon Project
The Company substantially completed shaft sinking and underground evaluation drilling activities in March 2017 at the Canyon Project which has resulted in a reduction in the workforce at this project at this time.
The Company is actively processing and reviewing the drilling results in order to define the mineralization, develop mine plans and evaluate the Mill’s ability to recover a salable copper product from the significant copper mineralization the Company has identified. 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 6.0-feet of mineralization with an average grade of 16.99% eU
3
O
8
, 46.0-feet of mineralization with an average grade of 1.37% eU
3
O
8
, and 41-feet of mineralization with an average grade of 1.00% eU
3
O
8
. Nineteen core holes with a total intercept length of 645-feet have averaged 6.63% Cu, with several intercepts over 20% Cu. The Company is evaluating the potential for recovering copper at its White Mesa Mill as a value-added byproduct along with the recovery of uranium. The Company plans to issue an updated NI 43-101 compliant technical report in the second half of 2017, which will address its resource estimation.
The timing of the Company’s plans to extract and process mineralized materials from the Canyon Project will be based on the results of this additional evaluation work, along with market conditions and available financing.
Other operational activities
Permitting of the Jane Dough Property, which is adjacent to Nichols Ranch, was completed in March 2017.
In January 2017, the Company obtained the necessary permits to mine the open pit and underground resources of its Sheep Mountain Project in Wyoming.
The Company is continuing to pursue cost cutting initiatives, including the potential sale or abandonment of certain non-core properties and the sale of excess mining equipment and other assets.
Sales and other revenue update and outlook
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 a contract where the price is based on the average spot price per pound of uranium for the five weeks prior to the dates of delivery. Of these deliveries, 120,000 pounds represent the final deliveries under
one of these contracts. 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.
During the three months ended March 31, 2017, 60,000 pounds of the above amounts were delivered to a customer under one of the long-term contracts.
During the year ending December 31, 2017, the Company expects to earn approximately $6.5 million in toll revenue for processing certain alternate feed materials for a third party of which $0.26 million was earned in the first three months of 2017. The Company also continues to pursue new sources of revenue, including additional alternate feed materials, toll processing of alternate feed materials and other sources of feed for the Mill.
Results of Operations
The following table summarizes the results of operations for the
three
months ended
March 31, 2017
and
2016
(in thousands of US dollars):
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Three Months Ended March 31,
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2017
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2016
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Revenue
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$
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3,756
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$
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17,996
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Costs and expenses applicable to revenue
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2,071
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12,143
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Gross Profit
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1,685
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5,853
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Other operating costs and expenses
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Development, permitting and land holding
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3,323
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7,442
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Standby costs
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1,206
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2,166
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Abandonment of mineral properties
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245
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—
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Accretion of asset retirement obligation
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345
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175
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Total other operating costs and expenses
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5,119
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9,783
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Selling, general & administration
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Selling costs
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70
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74
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Intangible asset amortization
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205
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219
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General and administration
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4,428
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3,828
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Costs directly attributable to acquisitions
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—
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326
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Total selling, general & administration
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4,703
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4,447
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Total Operating Loss
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(8,137
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)
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(8,377
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)
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Interest expense
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(542
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)
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(576
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)
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Other (expense) income
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(1,917
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)
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88
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Net loss
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$
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(10,596
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)
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$
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(8,865
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)
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Basic and diluted loss per share
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$
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(0.15
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)
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$
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(0.19
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)
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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 March 31, 2017
totaled
$3.76 million
, of which
$3.50 million
were sales related to the conventional segment, of 60,000 pounds of U
3
O
8
, pursuant to term contracts at an average price of $58.28 per pound and $0.26 million related to tolling processing of uranium concentrates.
Revenues for the
three months ended March 31, 2016
totaled
$18.00 million
, of which
$17.98 million
were sales of 350,000 pounds of U
3
O
8.
The 350,000 pounds of U
3
O
8
included the sale of 300,000 pounds of U
3
O
8
pursuant to term contracts at an
average price of $54.19 per pound and the sale of 50,000 pounds of U
3
O
8
on the sport market at a price of $34.40 per pound. For the
three months ended March 31, 2016
all of the sales were related to the Conventional Uranium Segment.
Operating Expenses
Uranium recovered and costs and expenses applicable to revenue
In the
three months ended March 31, 2017
, the Company recovered 58,000 pounds of U
3
O
8
from its ISR Uranium Segment and 34,000 pounds of U
3
O
8
from the Company’s conventional operations from alternate feed sources. In addition, the Company recovered 107,000 pounds for the account of a third party under a tolling agreement. In the
three months ended March 31, 2016
, the Company recovered 85,000 pounds of U
3
O
8
from its ISR Uranium Segment. As the Company operates its Conventional Uranium Segment on a campaign basis no uranium concentrates were recovered.
Costs and expenses applicable to revenue for the
three months ended March 31, 2017
totaled
$2.07 million
, compared with
$12.14 million
for the
three months ended March 31, 2016
. 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 $34.52 per pound and $34.69 per pound for the
three months ended March 31, 2017
and 2016, respectively.
Other operating costs and expenses
Development, permitting and land holding
For the
three months ended March 31, 2017
, the Company spent
$3.32 million
for development, permitting, and land holding of which $2.80 million was spent at the Canyon Project completing the sinking of the shaft and completing evaluation drilling. While we believe 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. The Company expects a similar amount of spending at the Canyon Project in the second quarter as the Company is in the process of completing the evaluation of the mine, and repairing and upgrading the hoist and water handling systems. In the second half of the year the Company expects its expenditures for development, permitting and land holding costs will decrease substantially as these activities are completed.
Additionally, in the
three months ended March 31, 2017
, the Company spent $0.52 million completing and putting into production its ninth wellfield at Nichols Ranch, completing the permitting on the Jane Dough Project and the Sheep Mountain Project and for other permitting activities and land holding costs.
For the
three months ended March 31, 2016
, we spent
$7.44 million
of which $4.56 million was related to wellfield construction and partial construction of the elution circuit at the Nichols Ranch Project, $1.32 million was related to the replacement of five leach tanks at the White Mesa Mill in preparation for the upcoming campaign and $1.49 million was related to the sinking of the shaft at the Canyon Project.
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 and 2016, 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 March 31, 2017
, standby costs totaled
$1.21 million
compared with
$2.17 million
in 2016. The decrease is primarily related to decreased standby costs at the White Mesa Mill as it was operating at a level above the threshold for standby costs to be incurred.
Accretion
Accretion related to the asset retirement obligation for the Company’s properties increased for the
three months ended March 31, 2017
to
$0.35 million
compared with
$0.18 million
in 2016. This is primarily due to the increase in the amount of the asset retirement obligation added in connection with the Mesteña transaction.
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 totaled
$4.43 million
for the
three months ended March 31, 2017
compared to
$3.83 million
for the
three months ended March 31, 2016
. The
increase is due to an increase of stock-based compensation to
$1.04 million
from
$0.67 million
in 2016 and severance expense of $0.59 million compared with $0.19 million in 2016.
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 March 31, 2017
intangible asset amortization totaled
$0.21 million
compared with
$0.22 million
for the
three months ended March 31, 2016
. This decrease was due to a timing of contracted sales as discussed above.
Interest Expense and Other Income and Expenses
Interest Expense
Interest expense for the
three months ended March 31, 2017
was
$0.54 million
compared with
$0.58 million
in the prior year.
Other income and expense
For the
three months ended March 31, 2017
, other income and expense totaled
$1.92 million
of expense. These amounts primarily consist of a loss on the increase in warrant liabilities of
$2.19 million
, a loss on the change in the mark-to-market values of the Company's Convertible Debentures (the “Debentures”) of
$0.92 million
and losses on miscellaneous items of
$0.12 million
offset by a gain on the sale of surplus assets of
$0.79 million
, a gain on investments accounted for at fair value of
$0.50 million
and interest income of
$0.03 million
.
For the three months ended March 31, 2016, other income and expense totaled $0.09 million of income. These amounts consist of a gain on a decrease in warrant liabilities of $0.25 million and gains in other miscellaneous items of $0.39 million, partially offset by a loss on the change in the mark-to-market values of the Company's Debentures of $0.56 million.
Liquidity and Capital Resources
Funding of major business and property acquisitions
Over the past five 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.
In October 2013, the Company acquired a 60% interest in Roca Honda. On May 27, 2016, the Company completed the purchase of the remaining 40% interest in Roca Honda from Sumitomo, which is now 100% owned and controlled by the Company. As consideration for the 40% interest, the Company issued 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 asset 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 acquiring the asset.
The Company intends to continue to acquire assets utilizing Common Shares when it can be done under attractive terms.
Cash proceeds received for shares and warrants
In the
three months ended March 31, 2017
, the Company issued 3.16 million shares for net proceeds of $6.97 million under the Company’s ATM Offering.
Working capital at
March 31, 2017
and future requirements for funds
At
March 31, 2017
, the Company had working capital of
$23.82 million
, including
$12.16 million
in cash and cash equivalents and approximately 550,000 pounds of finished goods inventory. The Company believes it has sufficient cash and resources to carry out its base business plan beyond March 31, 2018.
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.
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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•
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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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•
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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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•
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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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•
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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.
|
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 flows
Three months ended March 31, 2017
Cash and cash equivalents were
$12.16 million
at
March 31, 2017
, compared to
$16.90 million
at
December 31, 2016
. The decrease of
$4.74 million
was due primarily to cash provided by financing activities of
$6.18 million
offset by cash used by investing activities of
$1.91 million
and cash used in operations of
$9.08 million
and gain on foreign exchange on cash held in foreign currencies of
$0.08 million
.
Net cash provided by financing activities totaled
$6.18 million
consisting primarily of
$6.97 million
proceeds from the issuance of stock in the ATM Offering partially offset by
$0.79 million
to repay loans and borrowings.
Net cash used by investing activities was
$1.91 million
and was due to cash expenditures related to additional cash deposited with regulatory agencies of
$1.91 million
. This increase is due to the timing of cash inflows and outflow related to the Company's decision to change surety providers. When the change is complete the Company expects to receive additional refunds of approximately $2.00 million.
Net cash used in operating activities of
$9.08 million
is comprised of the net loss of
$10.60 million
for the period adjusted for non-cash items and for changes in working capital items. Significant items not involving cash were
$0.51 million
of depreciation and amortization of property, plant and equipment,
$1.04 million
of stock-based compensation, a change in the value of the convertible debentures of
$0.92 million
, a change in the value of the warrant liabilities of
$2.19 million
, a
$0.24 million
miscellaneous non-cash expense offset by a
$2.42 million
decrease in inventories,
$0.13 million
decrease in trade and other receivables and a
$1.12 million
decrease in accounts payable and accrued liabilities.
Three months ended March 31, 2016
Cash and cash equivalents were $16.50 million at March 31, 2016, compared to $12.97 million at December 31, 2015. The increase of $3.53 million was due primarily to cash provided by financing activities of $10.70 million, cash provided by investing activities of $0.75 million partially offset by cash used in operations of $8.70 million and gain on foreign exchange on cash held in foreign currencies of $0.79 million.
Net cash provided by financing activities totaled $10.70 million consisting primarily of $11.50 million proceeds from the issuance of stock in the March 2016 public offering and the ATM Offering partially offset by $0.81 million to repay loans and borrowings.
Net cash provided by investing activities was $0.75 million, which was primarily related to cash received from the sale of mineral properties held for sale of $0.85 million partially offset by expenditures for mineral properties and property, plant and equipment of $0.09 million.
Net cash used in operating activities of $8.70 million is comprised of the net loss of $8.87 million for the period adjusted for non-cash items and for changes in working capital items.
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.
Recently Adopted Accounting Pronouncements
Fair value measurement
In May 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-07 related to investments for which fair value is measured, or are eligible to be measured, using the net asset value per share practical expedient. This update removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendment also removes certain disclosure requirements for these investments. This
update was effective in fiscal years, including interim periods, beginning after December 15, 2015. Adoption of this guidance effective January 1, 2016 had no impact on the Consolidated Financial Statements.
Debt issuance costs
In April 2015, ASU No. 2015-03 was issued related to debt issuance costs. This update simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability. The update was effective in fiscal years, including interim periods, beginning after December 15, 2015. Adoption of this guidance effective January 1, 2016 had no impact on the Consolidated Financial Statements.
Consolidations
In February 2015, ASU No. 2015-02 was issued related to consolidations. This update makes some targeted changes to current consolidation guidance and impacts both the voting and the variable interest consolidation models. In particular, the update changes how companies determine whether limited partnerships or similar entities are variable interest entities. The update was effective in fiscal years, including interim periods, beginning after December 15, 2015. The adoption of this guidance effective January 1, 2016 had no impact on the Consolidated Financial Statements or disclosures.
Going Concern
In August 2014, ASU No. 2014-15 was issued related to management’s going concern assumption. This update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures. The update is effective for the annual period ending after December 15, 2016. Adoption of this guidance, effective December 31, 2016, had no impact on the Consolidated Financial Statements or disclosures.
Inventory
In July 2015, ASU 2015-11 was issued related to inventory which simplifies the subsequent measurement of inventories by replacing the lower of cost or market test with a lower of cost and net realizable value test. The update is effective in fiscal years, including interim periods, beginning after December 15, 2016, and early adoption is permitted. Adoption of this guidance, effective October 1, 2016, had no impact on the Consolidated Financial Statements or disclosures.
Stock-based compensation
In March 2016, ASU No. 2016-09 was issued related to stock-based compensation. The new guidance simplifies the accounting for stock-based compensation transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This update is effective in fiscal years, including interim periods, beginning after December 15, 2016 and early adoption is permitted. Adoption of this guidance, effective October 1, 2016 had no impact on the Consolidated Financial Statements or disclosures.
Employee benefit plan accounting
In July 2015, ASU 2015-12 was issued related to defined benefit pension plans, defined contribution pension plans, and health and welfare benefit plans. This update designates contract value as the only required measure for fully benefit-responsive investment contracts, simplifies and makes more effective the investment disclosure requirements for employee benefit plans, and provides a simplified method for determining the measurement date for employee benefit plans. Adoption of this guidance, effective January 1, 2016 had no impact on the Consolidated Financial Statements or disclosures.
Business combinations
In September 2015, ASU 2015-16 was issued related to accounting for measurement-period adjustments in a business combination. This update simplifies the measurement-period adjustments by requiring that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, and not retrospectively. This update also requires the separate presentation on the face of the statement of income, or disclosure in the notes to the financial statements, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. Adoption of this guidance, effective January 1, 2016 had no impact on the Consolidated Financial Statements or disclosures.
Recently Issued Accounting Pronouncements not yet adopted
In addition to the new and revised standards and amendments issued prior to 2017 for which the Company is evaluating implementation effects, as disclosed in our annual Consolidated financial statements, the FASB issued the following new and revised standards and amendments, which are not yet effective which may have future applicability to the Company:
Investments
In January 2016, ASU No. 2016-01 was issued related to financial instruments. The new guidance requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. This new guidance also updates certain disclosure requirements for these investments. This update is effective in fiscal years, including interim periods, beginning after December 15, 2017, and early adoption is not permitted. The Company is currently evaluating this guidance and the impact it will have on the financial statements.
Leases
In February 2016, the FASB issued ASU 2016-02 which core principle is that a lessee should recognize the assets and the liabilities that arise from leases, including operating leases. Under the new requirements, a lessee will recognize in the balance sheet a liability to make lease payments (the lease liability) and the right-of-use asset representing the right to the underlying asset for the lease term. For leases with a term of twelve months or less, the lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from the previous GAAP. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within such fiscal year, with early adoption permitted. The ASU requires a modified retrospective transition method with the option to elect a package of practical expedients. The Company is evaluating the effect of this amendment and the impact it will have on the Company’s financial statements.
Financial instruments
In January 2016, ASU 2016-01 was issued related to financial instruments. The update intends to enhance the reporting model for financial instruments to provide users of financial instruments with more decision-useful information and addresses certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The update is effective in fiscal years, including interim periods beginning on or after December 15, 2017. The Company is currently evaluating this guidance and the impact it will have on the financial statements.
Revenue recognition
In May 2014, ASU 2014-09 was issued related to revenue from contracts with customers. The new standard requires revenue to be recognized based on the amount an entity is expected to be entitled to for promised goods or services provided to customers. The standard also requires expanded disclosures regarding contracts with customers. The guidance in this standard supersedes the revenue recognition requirements in Topic 605, "Revenue Recognition", and most industry-specific guidance. formation and addresses certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The update is effective in fiscal years, including interim periods beginning on or after December 15, 2017, and will be applied retrospectively. We are analyzing our sales contracts in order to evaluate the impact on the financial statements.
Deferred Income Taxes
In November 2015, the ASU 2015-17 related to the presentation of deferred income taxes in the statement of financial position by requiring that deferred tax liabilities and assets be classified as noncurrent. The update is effective in fiscal years, including interim periods beginning on or after December 15, 2016. The Company does not expect the updated guidance to have an impact on the Company's financial statements.
Business combinations
In January 2017, ASU No. 2017-01 was issued related to business combinations. The new guidance requires entities to go through a "screen" when determining whether an integrated set of assets and activities constitutes a business.The screen requires entities to compare the fair value of gross assets acquired to the fair value of a single identifiable asset or group of similar identifiable assets. If substantially all of the fair value of the gross assets acquired is concentrated in the single identifiable assets or group of similar identifiable assets, the integrated set of assets and activities is not a business. This update is effective in fiscal years, including interim periods, beginning after December 15, 2017, and early adoption is not permitted. The Company is currently evaluating this guidance and the impact it will have on the financial statements.
Restricted Cash
In November 2016, ASU No. 2016-18 was issued related to the inclusion of restricted cash in the statement of cash flows. This new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. This update is effective in fiscal years, including interim periods, beginning after December 15, 2017 and early adoption is permitted. The adoption of this guidance will result in the inclusion of the restricted cash balances within the overall cash balance and removal of the changes in restricted cash activity, which are currently recognized in Other financing activities, on the Statements of Consolidated Cash Flows. Furthermore, an additional reconciliation will be required to reconcile Cash and cash equivalents and restricted cash reported within the
Consolidated Balance Sheets to sum to the total shown in the Statements of Consolidated Cash Flows. The Company is currently evaluating this guidance and the impact it will have on the financial statements.
Statement of Cash Flows
In August 2016, ASU No. 2016-15 was issued related to the statement of cash flows. This new guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update is effective in fiscal years, including interim periods, beginning after December 15, 2017 and early adoption is permitted. The Company is currently evaluating this guidance and the impact it will have on the financial statements.