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, 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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•
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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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•
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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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•
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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 campaigns. 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 the Company to potentially participate in the clean-up of abandoned uranium mines in the Four Corners Region of the U.S. Recently, the Justice Department and EPA announced settlements in various forms in excess of $1.5 billion to fund certain clean-up activities on the Navajo Nation. 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 in the U.S. 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 global uranium producers and, accordingly, we believe that prices will recover at some point in the future. 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 resources from our Canyon Project. The Company believes we could start bringing this new production to the market within approximately six to twelve 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.
According to monthly price data from TradeTech LLC (
“
TradeTech
”
), uranium spot prices were $20.25 per pound on December 31, 2016 and $20.40 per pound on September 30, 2017. During the quarter, weekly spot prices reported by TradeTech reached a high of $20.75 per pound on August 11 and September 15, 2017, and a low of $19.85 per pound on September 22, 2017. TradeTech price data also indicate that long-term
U
3
O
8
prices, which began
2017 at $30.00 per pound, remained at $30.00 per pound on September 30, 2017. According to TradeTech’s September 30, 2017 Nuclear Market Review, year-to-date spot sales and volume appear to be about average for the same period in recent years. Spot prices have been range bound between about $20.00 and $21.00 per pound in a market that has not seen any major news recently.
While general industry sentiment remains bearish in the short term, some positive developments supported the uranium market in Q3-2017. In the U.S., following the Westinghouse bankruptcy, a U.S. Department of Energy loan guarantee was approved to support the completion of the two Vogtle units in Georgia. Certain U.S. utilities have also expressed an interest in acquiring and completing the two V.C. Summer units in South Carolina. Entergy announced that they would defer the shut down of the Palisades unit in Michigan until 2022. Furthermore, U.S. Energy Secretary Rick Perry has formally proposed that the Federal Energy Regulatory Commission (FERC) take action to support grid resiliency and reliability, an action expected to support baseload energy sources such as nuclear. Japan is continuing to make progress toward more reactor restarts. That nation now has five units back in operation and 21 more units in the process of restarting (World Nuclear Association). Three more units (Ohi 3 & 4 and Genkai 3) are expected to restart as early as late-2017 (World Nuclear Association). In addition, although TEPCO, the owner of the destroyed Fukushima plant, is expected to have the most difficult path toward restart approval, they are making progress toward restarting units at the Kashiwazaki Kariwa plant as early as 2020.
While spot prices have recovered somewhat from their late-2016 lows, the market remains weak and oversupplied, sellers are aggressively competing for business, uncertainty regarding future demand continues, and additional production cuts have not yet materialized as expected. South Korea has announced a new policy of no new reactor builds and the closure of all plants after their 40 year operating life. In addition, some concerns have been raised about the viability of the Westinghouse AP1000 reactor design, which is expected to play a major role in new builds globally. 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 supplies, excess inventories, and thus far insufficient primary production cut-backs.
Operations Update and Outlook year ending December 31, 2017
The Company expects to produce a total of 640,000 to 665,000 pounds in the year ending December 31, 2017 of which 374,000 pounds U
3
O
8
were produced in the first nine months of the year.
We expect production at Nichols Ranch to total 260,000 to 270,000 pounds in the year ending December 31, 2017 of which we recovered 204,000 pounds during the first nine months of 2017. In September 2017, the Nichols Ranch Project surpassed the 1.00 million pound mark for uranium captured at the plant from its start of operations in April 2014.
We expect to recover 380,000 to 395,000 pounds of uranium at the Mill in the year ending December 31, 2017 of which we recovered 170,000 pounds of uranium at the Mill for our own account in the first nine months of 2017. In addition, during 2017, the Company expects to earn a fee for processing approximately 950,000 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 nine months ended September 30, 2017 the Company completed the processing of 763,000 pounds of this material.
Sales and other revenue update and outlook year ending December 31, 2017
In the nine months ended September 30, 2017, the Company completed deliveries of 420,000 pounds of U
3
O
8
under four contracts, including 320,000 pounds under three long-term contracts and 100,000 pounds under a contract where the price was based on spot prices.
In the final three months of the year, the Company expects to complete one delivery of 100,000 pounds of U
3
O
8
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.
During the year ending December 31, 2017, the Company expects to earn approximately $6.3 million in toll revenue for processing certain alternate feed materials for a third party of which $5.1 million was earned in the first nine months of 2017.
Operations Update and Outlook for the year ending December 31, 2018
The Company is continuing to adjust its operations in response to current uranium prices and market conditions.
The Company does not plan to develop any wellfields at Nichols Ranch until the price of uranium improves. As a result, production at Nichols Ranch will continue to decline as current wellfields are depleted. With no new wellfields, we expect Nichols Ranch will produce approximately 140,000 to 160,000 pounds of uranium in 2018. Alta Mesa will remain on standby until prices improve.
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. Although, primary mine production is expected to fall while uranium prices remain low, the Company is actively pursuing other revenue generating opportunities, including processing new and additional alternate feed sources, processing 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 will allow the Mill to extend the current processing 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 a reduced status until sufficient mill feed becomes available. Even on a reduced status, 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.
We plan to complete minor underground work including certain permeability testing at the Canyon Mine by the end of the first quarter of 2018. The timing of the Company’s plans to extract and process mineralized materials from the Canyon project will be based on the results of mine planning, market conditions and available financing.
Our existing inventory of U
3
O
8
along with the expected production at Nichols Ranch is expected to provide more U
3
O
8
than is required for our current sales contracts. Such excess inventory will be sold in the spot market as uranium prices increase and/or cash requirements arise. In the year ending December 31, 2018, we expect to deliver 200,000 pounds of U
3
O
8
under a long term contract and 200,000 pounds of U
3
O
8
under a contract where the price will be based on then-prevailing spot prices.
Land holding, maintenance, support and administrative expenses will be reviewed in detail to determine cost cutting opportunities.
Results of Operations
The following table summarizes the results of operations for the
three and nine
months ended
September 30, 2017
and
2016
(in thousands of US dollars):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2017
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2016
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2017
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2016
|
Revenues
|
|
|
|
|
|
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|
Uranium concentrates
|
$
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3,497
|
|
|
$
|
8,687
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|
|
$
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22,037
|
|
|
$
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33,664
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Alternate feed materials processing and other
|
2,002
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|
|
15
|
|
|
5,101
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|
40
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|
Total revenues
|
5,499
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|
|
8,702
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|
|
27,138
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|
|
33,704
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Costs and expenses applicable to revenue
|
|
|
|
|
|
|
|
|
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Costs and expenses applicable to uranium concentrates
|
1,010
|
|
|
4,334
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|
|
12,122
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20,563
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Costs and expenses applicable to alternate feed materials and other
|
1,694
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|
7
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|
3,724
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|
|
20
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|
Total costs and expenses applicable to revenue
|
2,704
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|
|
4,341
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|
15,846
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|
|
20,583
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Impairment of inventories
|
864
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|
|
1,379
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|
|
2,821
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|
|
2,998
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|
Gross Profit
|
1,931
|
|
|
2,982
|
|
|
8,471
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|
|
10,123
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|
|
|
|
|
|
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|
|
Other operating costs and expenses
|
|
|
|
|
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|
Development, permitting and land holding
|
2,471
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|
|
6,252
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|
|
6,980
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|
17,138
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|
Standby costs
|
743
|
|
|
647
|
|
|
2,978
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|
|
4,178
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Abandonment of mineral properties
|
—
|
|
|
1,005
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|
|
287
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|
|
1,036
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Impairment of assets held for sale
|
200
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|
|
—
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3,799
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|
|
—
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Accretion of asset retirement obligation
|
345
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|
|
175
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|
1,036
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|
526
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Total other operating costs and expenses
|
3,759
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|
|
8,079
|
|
|
15,080
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|
|
22,878
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|
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Selling, general & administration
|
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Selling costs
|
32
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|
|
47
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|
|
147
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|
|
216
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Intangible asset amortization
|
205
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|
|
583
|
|
|
3,297
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|
|
3,021
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General and administration
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2,946
|
|
|
3,815
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|
|
10,752
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|
|
11,928
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Total selling, general & administration
|
3,183
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|
4,445
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|
|
14,196
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|
15,165
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|
|
|
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Total Operating Loss
|
(5,011
|
)
|
|
(9,542
|
)
|
|
(20,805
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)
|
|
(27,920
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)
|
Interest expense
|
(562
|
)
|
|
(573
|
)
|
|
(1,607
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)
|
|
(1,734
|
)
|
Other income
|
689
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|
|
1,870
|
|
|
2,452
|
|
|
2,103
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Net loss
|
$
|
(4,884
|
)
|
|
$
|
(8,245
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)
|
|
$
|
(19,960
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)
|
|
$
|
(27,551
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)
|
|
|
|
|
|
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Basic and diluted loss per share
|
$
|
(0.07
|
)
|
|
$
|
(0.14
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)
|
|
$
|
(0.28
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)
|
|
$
|
(0.51
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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 September 30, 2017
totaled
$5.50 million
, of which
$3.50 million
were from sales of 60,000 pounds of U
3
O
8
, pursuant to term contracts at an average price of $58.28 per pound and
$2.00 million
related to toll processing of uranium concentrates.
Revenues for the
three months ended September 30, 2016
totaled
$8.70 million
, of which
$8.69 million
were sales of 150,000 pounds of U
3
O
8
, pursuant to a term contract at an average price of $58.00 per pound.
Revenues for the
nine months ended September 30, 2017
totaled
$27.14 million
, of which
$22.04 million
consisted of sales of 320,000 pounds of U
3
O
8
, pursuant to term contracts at an average price of $62.72 per pound, 100,000 pounds of U
3
O
8
pursuant to a contract where the price is based on the spot market at a price of $19.67 per pound and
$5.10 million
related to toll processing of uranium concentrates.
Revenues for the nine months ended September 30, 2016 totaled
$33.70 million
, of which
$33.66 million
consisted of 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.
Operating Expenses
Uranium recovered and costs and expenses applicable to revenue
In the
three months ended September 30, 2017
, the Company recovered 66,000 pounds of U
3
O
8
from the Nichols Ranch Project and 104,000 pounds of U
3
O
8
from the Company’s alternate feed sources. In addition, the Company recovered 295,000 pounds for the account of a third party under a tolling agreement. In the
three months ended September 30, 2016
, the Company recovered 90,000 pounds of U
3
O
8
from the Nichols Ranch Project and 260,000 pounds of U
3
O
8
from the White Mesa Mill including 195,000 pounds from conventional ore and 65,000 pounds from alternate feed materials.
Costs and expenses applicable to revenue from sales for the
three months ended September 30, 2017
totaled
$1.01 million
, compared with
$4.33 million
for the
three months ended September 30, 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 related to sales revenue averaged $16.83 per pound and $28.93 per pound for the
three months ended September 30, 2017
and 2016, respectively. For the three months ended September 30, 2017, cost of sales related to tolling and other revenue totaled
$1.69 million
compared to
$0.01 million
for the three months ended September 30, 2016.
In the
nine months ended September 30, 2017
, the Company recovered 204,000 pounds of U
3
O
8
from the Nichols Ranch Project and 170,000 pounds of U
3
O
8
from the Company’s alternate feed sources. In addition, the Company recovered 761,000 pounds for the account of a third party under a tolling agreement. In the
nine months ended September 30, 2016
, the Company recovered 265,000 pounds of U
3
O
8
from the Nichols Ranch Project and 365,000 pounds of U
3
O
8
from the White Mesa Mill including 195,000 pounds from conventional ore and 170,000 pounds from alternate feed materials.
Costs and expenses applicable to revenue from sales for the
nine months ended September 30, 2017
totaled
$12.12 million
, compared with
$20.56 million
for the
nine months ended September 30, 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 $28.86 per pound and $34.30 per pound for the nine months ended
September 30, 2017
and
2016
, respectively. For the nine months ended September 30, 2017, cost of sales related to tolling and other revenue totaled
$3.72 million
compared to
$0.02 million
for the nine months ended September 30, 2016.
Impairment of Inventories
For the three and nine months ended September 30, 2017, the Company recognized
$0.86 million
and
$2.82 million
in impairment charges related to inventory. For the same periods ended September 30, 2016, the Company recognized
$1.38 million
and
$3.00 million
in inventory impairment. The impairment of inventories is due to declining Uranium prices and lower amounts of contract sales due to expiring sales contracts.
Other operating costs and expenses
Development, permitting and land holding
For the
three months ended September 30, 2017
, the Company spent
$2.47 million
for development, permitting, and land holding including completing the sinking of the shaft, completing evaluation drilling and finalizing development of the Canyon Project as well as the annual land payments for other properties. 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.
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 the Nichols Ranch Project and shaft sinking at the Canyon Project.
For the
nine months ended September 30, 2017
, the Company spent
$6.98 million
for development, permitting, and land holding of which $4.80 million was spent at the Canyon Project completing the sinking of the shaft, completing evaluation drilling and finalizing development of the site. Additionally, the Company spent $0.70 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 in the nine months ended September 30, 2017. 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, 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 campaign.
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. 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 been on standby since acquisition and will continue until uranium prices improve to a point where economic feasibility of the Alta Mesa Project is established. 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, 2017
, standby costs totaled
$0.74 million
compared with
$0.65 million
in 2016. For the
nine months ended September 30, 2017
, standby costs totaled
$2.98 million
compared with
$4.18 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.
Abandonment of mineral properties
The Company has allocated value to mineral properties upon their acquisition. From time to time, the Company may choose to abandon these mineral properties by not paying the required renewal fees. For the three and nine months ended September 30, 2017 the Company did not renew certain mineral leases and recorded abandonment expense of $Nil and $0.29 million compared with $1.00 and $1.04 million in 2016.
Impairment of asset held for sale
The Company made the decision to sell certain non-core mineral resource properties that it felt were not essential to its future operations in order to save costs and/or receive value for these properties. A definitive agreement to sell these properties was signed on November 1, 2017 and we expect the sale to be completed in Q4 2017 or Q1 2018. A total of $0.20 million for the three months and a total of $3.79 million for the nine months ended September 30, 2017 of our mineral resource properties were impaired based on our review of the properties and their associated carrying values (2016 - Nil, Nil).
Accretion
Accretion related to the asset retirement obligation for the Company’s properties increased for the
three months ended September 30, 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.
Accretion related to the asset retirement obligation for the Company’s properties increased for the
nine months ended September 30, 2017
by
$1.04 million
compared with the 2016
$0.53 million
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
$2.95 million
for the
three months ended September 30, 2017
compared to
$3.82 million
for the
three months ended September 30, 2016
. The decrease is primarily due to a lower head count in 2017.
General and administrative expenses totaled
$10.75 million
for the
nine months ended September 30, 2017
compared to
$11.93 million
for the
nine months ended September 30, 2016
. This decrease is due to lower headcount in 2017.
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, 2017
intangible asset amortization totaled
$0.21 million
compared with
$0.58 million
for the
three months ended September 30, 2016
. For the
nine months ended September 30, 2017
intangible asset amortization totaled
$3.30 million
compared with the
$3.02 million
for the
nine months ended September 30, 2016
. This differences for both the three and nine months was due to the timing of contracted sales as discussed above.
Interest Expense and Other Income and Expenses
Interest Expense
Interest expense for the
three months ended September 30, 2017
was
$0.56 million
compared with
$0.57 million
in the prior year.
Interest expense for the
nine months ended September 30, 2017
was
$1.61 million
compared with
$1.73 million
in the prior year.
Other income and expense
For the
three months ended September 30, 2017
, other income and expense totaled
$0.69 million
of income. These amounts primarily consist of a gain on the increase in warrant liabilities of
$0.57 million
, a gain on the change in the mark-to-market values of the Company's Convertible Debentures (the “Debentures”) of
$0.16 million
, a loss investments accounted for at fair value of
$0.11 million
and interest income of
$0.06 million
.
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
, a gain of
$0.33 million
of gains in miscellaneous items, a gain on the change in the mark-to-market values of the Company's Debentures of
$0.32 million
and interest income of
$0.04 million
.
For the
nine months ended September 30, 2017
, other income and expense totaled
$2.45 million
of income. These amounts mainly consist of a gain on warrant liabilities of
$1.42 million
,
$0.51 million
gain in fair value of investments, gain on sale of surplus assets of
$1.14 million
and interest income of
$0.12 million
partially offset by a loss on the change in the mark-to-market values of the Company's Debentures of
$0.62 million
.
For the
nine months ended September 30, 2016
, other income and expense totaled
$2.10 million
of income. These amounts mainly consist of a gain on warrant liabilities of
$1.88 million
, a gain in other 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 Company's Debentures of
$0.67 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
nine months ended September 30, 2017
, the Company issued 4.80 million shares for net proceeds of $9.80 million under the Company’s ATM Offering.
Working capital at
September 30, 2017
and future requirements for funds
At
September 30, 2017
, the Company had working capital of
$32.68 million
, including
$19.45 million
in cash and cash equivalents and approximately 470,000 pounds of finished goods inventory. The Company believes it has sufficient cash and resources to carry out its base business plan beyond November 2, 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 none of which can be assured.
The Company manages liquidity risk through the management of its capital structure.
Debenture Maturity
The Company currently has 20,870 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.
In the nine months ended September 30, 2017, the Debentureholders elected to redeem Cdn$1.13 million ($0.87 million) under this right, and the Company has completed the buy back. No additional purchases are allowed under this right.
Cash and cash flows
Nine months ended September 30, 2017
Cash and cash equivalents were
$19.45 million
at
September 30, 2017
, compared to
$16.90 million
at
December 31, 2016
. The increase of
$2.55 million
was due primarily to cash provided by financing activities of
$6.89 million
, cash provided by investing activities of
$0.82 million
and gain on foreign exchange on cash held in foreign currencies of
$0.31 million
partially offset by cash used in operations of
$5.47 million
.
Net cash provided by financing activities totaled
$6.89 million
consisting primarily of
$9.80 million
proceeds from the issuance of stock in the ATM Offering and
$0.37 million
in cash received from non-controlling interest partially offset by
$3.27 million
to repay loans and borrowings.
Net cash provided by investing activities of
$0.82 million
consisted of
$14.44 million
release of collateral offset by
$13.62 million
of additional collateral posted. This refund was a result of the Company's restructuring of surety providers.
Net cash used in operating activities of
$5.47 million
is comprised of the net loss of
$19.96 million
for the period adjusted for non-cash items and for changes in working capital items. Significant items not involving cash were
$4.31 million
of depreciation and amortization of property, plant and equipment,
$2.62 million
of stock-based compensation,
$2.82 million
impairment in inventories,
$3.80 million
impairment of assets held for sale, a change in the value of the convertible debentures of
$0.62 million
, a
$1.44 million
miscellaneous non-cash expense,
$1.04 million
accretion of asset retirement obligation,
$0.29
abandonment of mineral properties, a
$1.70 million
decrease in inventories, a
$0.53 million
decrease in prepaid expenses and other assets and changes in deferred revenue of
$0.14
offset by a
$0.04 million
increase in trade and other receivables and a
$2.19 million
decrease in accounts payable and accrued liabilities, a gain on the change in value of the warrant liabilities of
$1.42 million
, an unrealized foreign exchange loss of
$0.49 million
and
$0.73 million
in cash paid for reclamation and remediation activities.
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 gain on the change in value of the warrant liabilities of
$1.88 million
, 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
$0.06 million
miscellaneous non-cash expense.
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
3
O
8
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
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.
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. Adoption of this guidance, effective January 1, 2017 had no impact on the Consolidated Financial Statements or disclosures as the Company has a full valuation allowance posted against the deferred tax assets as of June 30, 2017 and December 31, 2016.
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.
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.
Stock compensation
In May 2017, ASU No. 2017-09 was issued related to share-based payment award modifications. This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. 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.