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, 2022, 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, 2021. 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 as a result of many factors. See section heading “Cautionary Statement Regarding Forward-Looking Statements,” above.
While the Company has established the existence of multiple Mineral Resources and extracts and processes saleable uranium from these operations, the Company has only established Proven Mineral Reserves or Probable Mineral Reserves, as defined under SEC S-K 1300, at its Sheep Mountain Project. As a result, the Company is a “Development Stage Issuer” as defined by S-K 1300, as it is engaged in the preparation of Mineral Reserves for extraction on at least one material property. Under U.S. 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 share and per share amounts and currency exchange rates unless specified otherwise. References to Cdn$ refer to Canadian currency, and $ to United States currency.
Overview
We responsibly produce several of the raw materials needed for clean energy and advanced technologies, including uranium, rare earth elements and vanadium.
Our primary product is U3O8 (also known as yellowcake), which, when further processed, becomes the fuel for the generation of clean nuclear energy. According to the Nuclear Energy Institute, nuclear energy provides nearly 20% of the total electricity and approximately 50% of the clean, carbon-free electricity generated in the U.S. The Company generates revenues from extracting and processing materials for the recovery of uranium for our own account, as well as from toll processing materials for others.
Our uranium concentrate is produced from multiple sources:
•Conventional recovery operations at the Mill, including:
◦Processing ore from uranium mines; and
◦Recycling of Alternate Feed Materials, which are uranium-bearing materials that are not derived from conventional ore; and
•ISR operations.
The Company also has a long history of conventional vanadium recovery at the Mill when vanadium prices support those activities. From late 2018 to early 2020, the Company completed a campaign to recover vanadium from solutions in the tailings management system at the Mill (“Pond Return”) from which it recovered over 1.8 million pounds of high-purity V2O5. The Company has also recovered uranium from Pond Return since 2015 and continues to evaluate opportunities for copper recovery from our Pinyon Plain Project.
The Company is also currently producing an intermediate REE product called mixed RE Carbonate. In 2020, the Company began evaluating the potential to recover REEs at the Mill. By October 2020, the Company had produced a mixed RE Carbonate, ready for separation, on a pilot scale from natural monazite sands. In December 2020, the Company entered into a contract to acquire natural monazite sands from a heavy mineral sands operation in Georgia, from which it expects to recover uranium and produce a commercially salable mixed RE Carbonate containing approximately 71% total rare earth oxide (“TREO”) on a dry basis. In March 2021, the Company began ramping up commercial-scale production of mixed RE Carbonate from these natural monazite sands. In July 2021, the Company announced the signing of a definitive supply agreement and began commercial shipments of RE Carbonate to a separation facility in Europe, which is the next step in producing usable REE products. The Company is also in discussions with other entities to acquire additional supplies of natural
monazite sands, and is working with U.S. government agencies and national laboratories on various REE initiatives, including having completed work with the U.S. Department of Energy (“DOE”) to evaluate the potential to process other types of REE- and uranium-bearing ores at the Mill produced from coal-based resources. The Company is also evaluating the potential to perform REE separation and other downstream REE activities, including metal-making and alloying, in the future at the Mill or elsewhere in the U.S.
Finally, the Company is evaluating, pursuant to a strategic alliance with RadTran, LLC (“RadTran”), a technology development company focused on closing critical gaps in the procurement of medical isotopes for emerging TAT cancer therapeutics and other applications, the feasibility of recovering Th-232, and Ra-226 from the Company's existing RE Carbonate and uranium process streams at the Mill and, together with RadTran, is evaluating the feasibility of recovering Ra-228 from the Th-232, Th-228 from the Ra-228 and concentrating Ra-226 at the Mill using RadTran technologies. Recovered Ra-228, Th-228 and Ra-226 would then be sold to pharmaceutical companies and others to produce Pb-212, Ac-225, Bi-213, Ra-224 and Ra-223, which are the leading medically attractive TAT isotopes for the treatment of cancer. Existing supplies of these isotopes for TAT applications are in short supply, and methods of production are costly and currently cannot be scaled to meet the demand created as new drugs are developed and approved. This is a major roadblock in the research and development of new TAT drugs as pharmaceutical companies wait for scalable and affordable production technologies to become available. Under this initiative, the Company has the potential to recover valuable isotopes from its existing process streams for use in treating cancer, thereby recycling back into the market material that would otherwise be lost to disposal.
The Mill, 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. The Company has the only operating uranium mill in the United States, which is also the last operating facility left in the U.S. with the ability to recover vanadium from primary ore sources. The Mill is licensed to process an average of 2,000 tons of ore per day and to produce approximately 8.0 million pounds of U3O8 per year. The Mill has separate circuits to process conventional uranium and vanadium ores, as well as Alternate Feed Materials and REEs.
For the last several years, no mines have operated commercially in the vicinity of the Mill due to low uranium prices. As a result, in recent years, Mill activities have focused on processing Alternate Feed Materials for the recovery of uranium under multiple toll processing arrangements, as well as Alternate Feed Materials for our own account. Additionally, in recent years, the Mill has recovered dissolved uranium and vanadium through its Pond Return program from the Mill’s tailings management system that was not fully recovered during the Mill’s prior forty years of operations. During the three months ended March 31, 2022, Mill activities focused primarily on processing monazite sands and producing a mixed RE Carbonate. The Company is actively pursuing additional monazite sands 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 exists for the Company to potentially participate in the clean-up of abandoned uranium mines in the Four Corners Region of the U.S. The U.S. Justice Department and Environmental Protection Agency announced settlements in various forms in excess of $1.5 billion to fund certain cleanup activities on the Navajo Nation. Additional cleanup settlements with other parties are also pending. Our Mill is within economic trucking distance, and is uniquely positioned in this region, to receive uranium-bearing materials from these cleanups and recycle the contained U3O8, while, at the same time, permanently disposing of the cleanup materials outside the boundaries of the Navajo Nation in our licensed tailings management system. There are no other facilities in the U.S capable of providing this service. In addition, as previously announced, beginning in the second quarter of 2019 and continuing through the first quarter of 2022, the Company has been receiving shipments of material generated in the cleanup of a large, historically producing conventional uranium mine located in northwest New Mexico. In addition to generating revenue for the Company, this project demonstrates the ability of the Mill to responsibly clean up projects similar to those requiring cleanup on the Navajo Nation.
The Company’s ISR operations consist of our Nichols Ranch Project and Alta Mesa Project, both of which are on standby at current uranium prices.
While we believe the current spot price of uranium has not supported production for the majority of global uranium producers over the past several years, having resulted in significant production cuts, the spot price of uranium has improved in recent months to levels that could support production if these prices are sustained and result in long-term supply contracts with nuclear utilities. In anticipation of potential price recoveries and contracts, we continue to maintain and advance our resource portfolio. We stand ready to: resume wellfield construction and resume production at our Nichols Ranch Project; resume wellfield construction, perform plant upgrades, conduct exploration, and resume production at our Alta Mesa facility; and mine and process resources from our Pinyon Plain Project, La Sal Project and/or Whirlwind Project. We believe we can bring this new production to the market within approximately six to eighteen months of a positive production decision. Longer term, we expect to develop our large conventional mines at Roca Honda, Henry Mountains, and/or Sheep Mountain.
COVID-19
The Company continues to respond to the effects of the global coronavirus (“COVID-19”) pandemic on the Company’s business objectives, projections and workforce. To date, although the Company has made operational adjustments since the onset of the pandemic to ensure its workforce remains protected, the Company has not been required to shut down any operations as a result of COVID-19. None of these operational adjustments have been material to the Company. The Company has evaluated any potential future shutdown of Company production facilities as a result of COVID-19, and has determined that any such shutdown could be accommodated by the Company in a manner consistent with a typical shutdown of Company production facilities as a result of depressed commodity prices. Management believes the Company is well-capitalized and will be able to withstand facility shutdowns or depressed share prices as a result of COVID-19 for at least the next twelve months.
Update on Rare Earth Element Initiative
On March 1, 2021, the Company and Neo Performance Materials Limited (“Neo”) announced a new REE production initiative spanning European and North American critical material supply chains. Under an agreement in principle signed on March 1, 2021 and finalized into a definitive agreement in July 2021, Energy Fuels will process natural monazite sands, currently being mined in the state of Georgia by The Chemours Company, into an RE Carbonate at the Mill and ship a portion of the produced RE Carbonate to Neo's rare earth separations facility in Sillamäe, Estonia (“Silmet”). Silmet will then process the RE Carbonate into separated REE materials for use in REE permanent magnets and other REE-based advanced materials. On July 7, 2021, the Company announced that the first container (approximately 20 tonnes of product) of an expected 15 containers of mixed RE Carbonate had been successfully produced by Energy Fuels at the Mill and was en route to Silmet. This commercial-scale production of RE Carbonate by Energy Fuels from a U.S. mined REE resource positions Energy Fuels as the only company in North America that currently produces a monazite-derived, enhanced REE material. In addition, since the RE Carbonate has been chemically altered to recover the REEs and remove impurities, thereby rendering it ready for REE separation without further processing, this is currently the most advanced REE material being produced on a commercial scale in the U.S. today. The physical delivery of this product also represents the launch of a new, environmentally responsible REE supply chain that allows for source validation and tracking from mining through to final end-use applications for manufacturers in North America, Europe, Japan, and other nations.
The Company also announced on March 1, 2021 that, in addition to supplying RE Carbonate to Neo, Energy Fuels is evaluating the potential to develop U.S. separation capabilities at the Mill, or nearby, as it works to increase its monazite sand supplies, thereby integrating a U.S. rare earth supply chain in the coming years, in addition to supplying RE Carbonate to European markets. On April 27, 2021, the Company announced it had engaged Carester to prepare a scoping study for the development of a solvent extraction REE separation circuit at the Mill utilizing the Mill's existing equipment and infrastructure to the extent applicable, to create a continuous, integrated and optimized REE production sequence. Based in Lyon, France, Carester is a leading global consultant in the production of separated REE products, with expertise in designing, constructing, operating and optimizing REE production facilities globally. Carester's scoping work included an evaluation of the Mill's current monazite leaching process, preparation of an REE separation flow sheet, capital and operating expense estimates, incorporation of new technologies where applicable, and recommendations on equipment vendors. Based on the results of this scoping work, the Company is evaluating installing a full separation circuit at the Mill to produce both “light” and “heavy” separated REE oxides in the coming years, subject to successful licensing, financing, and commissioning and continued strong market conditions, and has hired Carester to support these REE separation initiatives.
In addition, on April 21, 2021, the Company announced the execution of a non-binding MOU for the supply of natural monazite sands from IperionX Limited's (“IperionX”) Titan Project in Tennessee, if and when the project is developed and mined. IperionX's Titan Project covers a large area of heavy mineral sands properties in Tennessee prospective for titanium, zircon, monazite and other valuable minerals such as high-grade silica sand and other refractory minerals. Thereafter, the Company also announced that the DOE Office of Fossil Energy and National Energy Technology Laboratory had exercised its option to award Energy Fuels, working with a team from Penn State University, an additional $1.75 million to complete a feasibility study on the production of REE products from natural coal-based resources, as well as from other materials such as REE-containing ores like the natural monazite sands the Company is currently processing at the Mill. This award followed the DOE providing Energy Fuels a $150,000 contract in 2020 for the successful completion of a conceptual design for the same initiative, resulting in a total award to Energy Fuels of $1.9 million.
On December 15, 2021, the Company announced the execution of a memorandum of understanding (“MOU”) with Nanoscale Powders LLC (“NSP”) for the development of a novel technology for the potential production of REE metals, subject to the finalization of definitive agreements. We believe this technology, which was initially developed by NSP, and will be advanced by the Company and NSP working together, has the potential to revolutionize the REE metal making industry by reducing costs of production, reducing energy consumption, and significantly reducing greenhouse gas emissions. Producing REE metals and alloys is a key step in a fully integrated REE supply chain, after commercial production of separated REE oxides and before the
manufacture of neodymium iron boron (“NdFeB”) magnets used in electric vehicles, wind generation and other clean energy and advanced technologies.
During the three months ended March 31, 2022, the Company also began commercial-scale partial separation of lanthanum (La) on a small scale from its RE Carbonate using an existing solvent extraction circuit at the Mill. This represents the first commercial level REE separation to occur in the U.S. in many years.
On April 13, 2022, the Company announced its first commercial shipments of three critical mineral products in a single week, having sent U3O8 to a uranium conversion facility in the U.S. to enrich for use in the production of clean, carbon-free nuclear energy, V2O5 to a ferrovanadium (“FeV”) conversion facility in the U.S. to be sold into the steel and specialty alloy industries, and RE Carbonate to the Silmet facility in Estonia for separation into advanced REE products. At the same time, the Company announced that it had begun partial commercial-scale REE separations at the Mill utilizing existing Mill facilities, thereby producing a more advanced RE Carbonate in 2022 than it did in 2021.
Known Trends or Uncertainties
The Company has faced depressed uranium and vanadium prices in previous years which have resulted in the Company having negative cash flows and net losses in previous years. We are not aware at this time of any trends or uncertainties that have had or are reasonably likely to have a material impact on revenues or income of the Company other than (i) continued strengthening of uranium and vanadium prices which could result in the Company selling inventories at increased prices and/or signing contracts with nuclear utilities for the long-term supply of uranium; (ii) the proposed U.S. Uranium Reserve, which, if implemented, could result in improved uranium sales prices; and (iii) the Company’s REE and TAT radioisotope initiatives, which, if successful, could result in improved results from operations in future years. We are not aware at this time of any events that are reasonably likely to cause a material change in the relationship between costs and revenue of the Company.
Uranium Market Update
According to monthly price data from TradeTech LLC (“TradeTech”), uranium spot prices rose significantly during the first quarter 2022 (the “Quarter”), though the spot price dropped moderately following the end of the Quarter. The uranium spot price began the Quarter at $42.00 per pound on December 31, 2021 and rose nearly 40% to $58.20 per pound on March 31, 2022. Subsequent to the end of the Quarter, the price rose further to $63.75 per pound on April 15, 2022 and then dropped to $53.50 per pound during the week of April 22, 2022. During the Quarter, the uranium spot price hit a high of $58.50 per pound on March 11, 2022 and a low of $42.00 per pound at the beginning of the Quarter. TradeTech price data indicates that long-term U3O8 prices rose during the Quarter as well, beginning the Quarter at $45.00 per pound and ending the Quarter at $50.00 per pound. On May 6, 2022, TradeTech reported a spot price of $54.75 per pound and a long-term price of $52.00 per pound U3O8.
The following important developments occurred during the Quarter:
–Political unrest affected Kazakhstan, which is the largest uranium producer in the world, including the resignation of its government, national protests, and a “security clampdown on transport, financial, and communications systems.” (TradeTech, NMR, January 7, 2022). This caused an “extremely volatile price cycle last week [the week of January 7, 2022]” (TradeTech NMR, January 14, 2022);
–Cameco Corporation (“Cameco”) announced the restart of its McArthur River/Key Lake Mill in 2024, ramping up to 15 million pounds per year, which is 40% less than its annual licensed capacity, at which point Cameco will reduce its annual production at Cigar Lake to 13.5 million pounds per year, or 25% below its annual capacity. (TradeTech NMR, February 11, 2022);
–French President Emmanuel Macron, who won re-election in April 2022, announced that he supports the construction of up to 14 new nuclear reactors in France in order to move the country away from fossil fuels. (TradeTech, NMR, February 11, 2022);
–On February 24, 2022, Russia invaded Ukraine, causing world leaders to “place unprecedented sanctions on the Russian state.” (TradeTech, NMR, February 25, 2022). However, the U.S. Treasury Department issued “General Licenses” to authorize certain transactions with Russia to continue, including those related to the nuclear sector (conversion, enrichment, fabrication, transport, of uranium);
–On March 3, 2022, in the midst of escalating aggression in its war against Ukraine, Russian forces attacked the Zaporozhye Nuclear Power Plant located in southeastern Ukraine, causing Energoatom - Ukraine’s nuclear company - to call on “international monitors to intervene to ensure the safety of the country’s 15 commercial reactors.” (TradeTech, NMR, March 4, 2022);
–According to TradeTech, “activity in the spot uranium market was driven by increasing uncertainty as the events in Ukraine continue to unfold.” (TradeTech, NMR, March 4, 2022). Further, “the prospect of widespread restrictions on the import of Russian nuclear fuel have amplified concerns about the availability of uranium to a market that is in a structural supply deficit.” (TradeTech, NMR, March 11, 2022). By mid-March, U.S. leaders were calling for a ban on Russian uranium imports into the U.S. and a ban on Russian companies from participating in U.S. capital markets. (TradeTech, NMR, March 18, 2022); and
–After the end of the Quarter, the spot price rose to $63.75 per pound during the week of April 15, 2022 then dropped back down to $53.50 per pound the following week, “which represents a significant price movement in a period marked by historic volatility.” TradeTech posits that the uranium market has evolved and attracted a wider array of participants, which is believed to mean that “the market has developed deeper ties to the broader financial markets… [and that] the uranium price now exhibits a sensitivity to trends and developments that impact investor sentiment… [which has] translated to greater volatility.” The selloff during the week of April 21, 2022 was attributed to a broader selloff in markets “partially driven by bearish sentiment tied to rising inflation and interest rates.” (TradeTech, NMR, April 21, 2022).
The Company continues to believe that certain uranium supply and demand fundamentals point to higher sustained uranium prices in the future, including significant production cuts in recent years, along with significant increased demand from utilities, financial entities, traders and producers. The Company believes that financial entities purchasing uranium on the spot market for long-term investment represent a fundamental shift in the uranium market by increasing demand and removing readily available material from the market that would otherwise serve as supply to utilities, traders, and others. Further, the Company believes that Russia's invasion of Ukraine has sparked a widespread trend away from Russian-sourced nuclear fuel supply. In response, the Company desires to enter into term contracts with utilities for the sale of uranium at prices that support production. With less uranium available on the spot market and the potential for significant future price volatility, the Company is tracking the potential willingness of utilities to accept higher-term offers. The Company also continues to believe that a large degree of uncertainty exists in the market, primarily due to the size of mobile uranium inventories, transportation issues, premature reactor shutdowns in the U.S., trade issues, the life of a given uranium mine, conversion/enrichment shutdowns, the opaque nature of inventories and secondary supplies, unfilled utility demand, and the market activity of state-owned uranium and nuclear companies.
Therefore, the Company will continue to closely monitor uranium markets and seek opportunities to enter into long-term sales contracts with utilities at prices that sustain production, cover overhead costs, and provide a reasonable rate-of-return to investors while also holding back some production to allow the Company and its shareholders the ability to participate in further upside price movements. The Company will also continue to evaluate the timing and method for the disposition of its existing uranium inventories, including selling into the spot market or as a part of one or more term contracts if procured.
Rare Earth Market Update
REEs are a group of 17 chemical elements (the 15 elements in the lanthanum series, plus yttrium and scandium) that are used in a variety of clean energy and advanced technologies. Monazite, the source of REEs currently utilized by the Company, also contains significant recoverable quantities of uranium, which fuels the production of carbon-free electricity using nuclear technology. According to industry analyst Roskill, most demand for REE’s is in the form of separated REEs, “as most end-use applications require only one or two separated rare earth compounds or products.” (Roskill, Rare Earths, Outlook to 2030, 20th Edition). The main uses for REEs include: (i) battery alloys; (ii) catalysts; (iii) ceramics, pigments and glazes; (iv) glass polishing powders and additives; (v) metallurgy and alloys; (vi) permanent magnets; (vii) phosphors; and (viii) others (Adamas Intelligence). By volume, REEs used for permanent magnets (neodymium (Nd), praseodymium (Pr), dysprosium (Dy), and terbium (Tb)) and catalysts (cerium (Ce) and lanthanum (La)) comprised 60% of total consumption, yet over 90% of the value consumed.
Typical natural monazite sands from the southeast U.S. average about 55% TREO and 0.20% uranium, which is the typical grade of uranium found in uranium mines that have historically fed the Mill. Of the 55% TREO typically found in the monazite sands, the neodymium and praseodymium (“NdPr”) comprise approximately 22% of the TREO. NdPr are among the most valuable of the REEs, as they are the key ingredient in the manufacture of high-strength permanent magnets which are essential to the lightweight and powerful motors required in electric vehicles (“EVs”) and permanent magnet wind turbines used for renewable energy generation, as well as in an array of other modern technologies. Monazite also contains higher concentrations of “heavy” rare earths, including dysprosium (Dy) and terbium (Tb) used in permanent magnets, relative to other common REE ores.
The Company is currently primarily focused on NdPr and, to a lesser extent, La, Ce, Sm, Dy and Tb. The REE supply chain starts at the mine. REEs are mined both as a primary target, like the Mountain Pass REE mine in California, and as a byproduct, which is the case for Chemours’ Offerman Mineral Sand Plant, where the natural monazite sands are physically separated from
the other mined sands. Mining creates an ore, which in the case of the Chemours material is the natural monazite sands that are physically separated from the other mined mineral sands. The ore will then go through a process of cracking and cleaning at the Mill that may include acids or caustic solutions, elevated temperature, and pressure to recover the uranium and free the REEs from the mineral matrix. After removal of the uranium (and other radionuclides), which will be sold into the commercial nuclear fuel cycle for the creation of carbon-free nuclear energy, this solution is cleaned of any remaining deleterious elements (including remaining radioactive elements) and made into an RE Carbonate, which is a form acceptable as a solvent extraction (“SX”) feedstock for REE separation. SX facilities then use solvents and a series of mixer-settlers for the separation of the REEs in the RE Carbonate from each other and to create the desired purified REE products (often as oxides) for the market or particular end user. Separated REE products are typically sold to various markets, depending on the use. Separated REE products can be made into REE metals and metal-alloys, which are used for magnets and other applications.
At this time, the Mill is producing an RE Carbonate, a portion of which has been sold to Neo, and which is expected to be sold, potentially, to other third-party SX separation facilities for separation into individual separated REE products. The Mill is evaluating the potential to perform SX REE separation, and potentially other downstream REE activities, including metal-making and alloying, in the future at the Mill or elsewhere in the U.S.
REEs are commercially transacted in a number of forms and purities. Therefore, there is no single price for REEs collectively, but numerous prices for various REE compounds and materials. The primary value that the Company expects to generate in the short- to medium-term will come from NdPr, Ce, and La, as the price the Company receives from the sale of its RE Carbonate is tied to the prices of those REE oxides. In addition, the Company expects to produce separated REE oxides in the future. According to data from Asian Metal, NdPr Oxide (Pr O 25%; Nd O 75%) mid-point prices in China rose approximately 14% during the Quarter from $848 RMB/kg (about $133/kg) to $965 RMB/kg (about $152/kg). The price for NdPr Oxide at May 13, 2022 was $915 RMB/kg (about $135/kg). The mid-point Ce Oxide (99.9%) price was flat during the Quarter at $1.47/kg. The current price for Ce Oxide is $1.45/kg (Asian Metal). The mid-point La Oxide (99.9%) price was flat during the Quarter at $1.43/kg. The current price for La Oxide is $1.41/kg (Asian Metal).
The REE market is dominated by China, which produces 83% of refined REE products with other Asia Pacific operations providing an additional 15%. According to WoodMacKenzie (formerly Roskill), “Prices for rare earths in the years to come will follow different trajectories based on their involvement with the magnet industry.” WoodMacKenzie forecasts that prices for magnet elements, including neodymium (Nd) and praseodymium (Pr), will remain elevated through 2050, supporting new primary and secondary supply. Prices for elements used as additives or fillers in magnets, namely terbium (Tb) and dysprosium (Dy), will see “short-term price support followed by a steady decline as supply availability improves.” Prices for other non-magnet elements, including cerium (Ce) and lanthanum (La), will remain stable at roughly the cost of production. Adamas Intelligence projects that global demand for magnet REE oxides to increase by five-fold between 2020 and 2030.
Vanadium Market Update
During the Quarter, the mid-point price of vanadium in Europe rose significantly, beginning the Quarter at $8.75 per pound V2O5 as of December 31, 2021 and ending the Quarter at $12.25 per pound V2O5 as of March 25, 2022. The price of vanadium reached a high of $12.25 per pound V2O5 during the week of March 11, 2022 and continuing through the end of the Quarter. The price of vanadium was at its low of $8.75 per pound V2O5 during the first two weeks of the Quarter.
According to Fastmarkets, vanadium prices rose during the beginning of the Quarter “due to fears surrounding possible sanctions against Russia … [which resulted in] end-users in the steel industry, as well as traders, avoiding material with Russian origins and starting to build ‘safety stocks.’” European FeV prices continue to rise, so too the risk to ferro-niobium ‘switch’, Fastmarkets, March 8, 2022. This article also details the potential for substitution of vanadium for niobium at prices much higher than current levels. By the end of the Quarter, prices leveled off and even dropped slightly. According to Fastmarkets, this was due to “weak downstream demand and logistical difficulties” caused by the last outbreak of COVID-19 in China. Chinese vanadium prices slide on weaker demand, Fastmarkets, April 1, 2022. Additional new intermediary demand is possible in the vanadium market with the proposed creation of the new Largo Physical Vanadium Fund, which is an investment vehicle providing investors with exposure to physical vanadium markets. Largo provides update on new physical vanadium holding company, Fastmarkets, April 20, 2022.
Operations Update and Outlook for Period Ending March 31, 2022
Overview
The Company continues to believe that uranium supply and demand fundamentals point to higher sustained uranium prices in the future. In addition, Russia’s recent invasion of Ukraine and the recent entry into the uranium market by financial entities purchasing uranium on the spot market to hold for the long-term has the potential to result in higher sustained spot and term prices and, perhaps, induce utilities to enter into more long-term contracts with non-Russian producers like Energy Fuels to ensure security of supply and more certain pricing. However, the Company has not yet entered into sufficient long-term supply
agreements to justify commencing uranium production at the Company’s mines and in-situ recovery (“ISR”) facilities. As a result, the Company expects to maintain uranium recovery at reduced levels until such time when sustained increased market strength is observed, additional suitable term sales contracts can be procured, or the U.S. government buys uranium from the Company following the establishment of the proposed U.S. Uranium Reserve. The Company also holds significant uranium inventories and is evaluating selling all or a portion of these inventories on the spot market in response to future upside price volatility or for delivery into long-term supply contracts if procured. The Company has also begun selling a portion of its vanadium inventory into strengthening markets.
The Company will also continue to seek new sources of revenue, including through its emerging REE business, as well as new sources of Alternate Feed Materials and new fee processing opportunities at the Mill that can be processed under existing market conditions (i.e., without reliance on current uranium sales prices). The Company is also seeking new sources of natural monazite sands for its emerging REE business, is evaluating the potential to recover radioisotopes for use in the development of TAT medical isotopes for the treatment of cancer, and continues its support of U.S. governmental activities to assist the U.S. uranium mining industry, including the proposed establishment of the U.S. Uranium Reserve.
Extraction and Recovery Activities Overview
During 2022, the Company plans to recover 100,000 to 120,000 pounds of uranium and approximately 650 to 1,000 tonnes of mixed RE Carbonate containing approximately 300 to 450 tonnes of TREO.
No vanadium production is currently planned during 2022, though the Company is currently selling some of its existing vanadium inventory into improving markets and is now evaluating the potential to recommence vanadium production in 2022 or 2023 in light of recent market improvements in vanadium pricing.
The Company has strategically begun to pursue uranium sales commitments with pricing expected to have both fixed and market-related components. The Company believes that recent price increases, volatility and focus on security of supply in light of Russia’s invasion of Ukraine have increased the potential for the Company to make spot sales, and the Company is actively seeking term sales contracts with utilities at pricing that sustains production and covers corporate overhead. Therefore, existing inventories may increase from 692,000 pounds of U3O8 to 792,000 to 812,000 pounds of U3O8 at year-end 2022 or may increase to a lesser extent, or be reduced, in the event the Company sells a portion of its inventory on the spot market or pursuant to term contracts, if procured, in 2022.
ISR Activities
The Company expects to produce insignificant quantities of U3O8 in the year ending December 31, 2022 from Nichols Ranch. Until such time when market conditions improve sufficiently, suitable term sales contracts can be procured, or the proposed U.S. Uranium Reserve is established, the Company expects to maintain the Nichols Ranch Project on standby and defer development of further wellfields and header houses. The Company currently holds 34 fully permitted, undeveloped wellfields at Nichols Ranch, including four additional wellfields at the Nichols Ranch wellfields, 22 wellfields at the adjacent Jane Dough wellfields, and eight wellfields at the Hank Project, which is fully permitted to be constructed as a satellite facility to the Nichols Ranch Plant. The Company expects to continue to keep the Alta Mesa Project on standby until such time that market conditions improve sufficiently, suitable term sales contracts can be procured, or the proposed U.S. Uranium Reserve is established.
Conventional Activities
Conventional Extraction and Recovery Activities
During the three months ended March 31, 2022, the Mill did not package any material quantities of U3O8, focusing instead on developing its REE recovery business. During the three months ended March 31, 2022, the Mill produced approximately 60 tonnes of RE Carbonate, containing approximately 30 tonnes of TREO. The Mill recovered small quantities of uranium in 2021 and during the Quarter, which were retained in circuit. During 2022, the Company expects to recover 100,000 to 120,000 pounds of uranium at the Mill as finished product. The Company expects to recover approximately 650 to 1,000 tonnes of mixed RE Carbonate containing approximately 300 to 450 tonnes of TREO at the Mill. The Company expects to sell all or a portion of its mixed RE Carbonate to Neo or other global separation facilities and/or to stockpile it for future production of separated REE oxides at the Mill or elsewhere. The Company is in advanced discussions with several sources of natural monazite sands, including the Company’s existing supplier, to secure additional supplies of monazite sands, which if successful, would be expected to allow the Company to increase RE Carbonate production.
In addition to its 692,000 pounds of finished uranium inventories currently located at a North American conversion facility and at the Mill, the Company has approximately 389,000 pounds of U3O8 contained in stockpiled Alternate Feed Materials and ore inventory at the Mill that can be recovered relatively quickly in the future, as general market conditions may warrant (totaling
about 1,081,000 pounds of U3O8 of total uranium inventory). The Company is also seeking to acquire additional ore inventory from third party mine cleanup activities that can be recovered relatively quickly in the future.
The Company currently holds 1,397,000 pounds of V2O5 in inventory, and there remains an estimated 1.0 to 3.0 million pounds of additional solubilized recoverable V2O5 remaining in tailings solutions awaiting future recovery, as market conditions may warrant.
The Company currently expects that planned uranium production from Alternate Feed Materials, processing natural monazite sands for the recovery of uranium and REEs, and the receipt of uranium-bearing materials from mine cleanup activities will keep the Mill in operation through and beyond 2022. The Company is also actively pursuing opportunities to process additional sources of natural monazite sands, new and additional Alternate Feed Material sources, and new and additional low-grade mineralized materials from third parties in connection with various uranium clean-up requirements. Successful results from these activities would allow the Mill to extend operations well into and beyond 2023. If, at any time, the Company is unable to justify full operation of the Mill, the Company would place uranium, REE and/or vanadium recovery activities at the Mill on standby. While on standby, the Mill would continue to dry and package material from the Nichols Ranch Plant, if operating, 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 and resulting cash flow that would allow the Company to operate the Mill on a profitable basis or to recover all or a portion of the Mill’s standby costs.
Conventional Standby, Permitting and Evaluation Activities
During the three months ended March 31, 2022, standby and environmental compliance activities continued at the fully permitted and substantially developed Pinyon Plain Project (uranium and, potentially, copper) and the fully permitted and developed La Sal Complex (uranium and vanadium). The Company plans to continue carrying out engineering, metallurgical testing, procurement and construction management activities at its Pinyon Plain Project. The timing of the Company’s plans to extract and process mineralized materials from these Projects will be based on sustained improvements in general market conditions, procurement of suitable sales contracts and/or the establishment of the proposed U.S. Uranium Reserve.
The Company is selectively advancing certain permits at its other major conventional uranium projects, such as the Roca Honda Project, which is a large, high-grade conventional project in New Mexico. The Company is also continuing to maintain required permits at its conventional projects, including the Sheep Mountain Project and Whirlwind Project. In addition, the Company will continue to evaluate the Bullfrog Project. Expenditures for certain of these projects have been adjusted to coincide with expected dates of price recoveries based on the Company’s forecasts. All of these projects serve as important pipeline assets for the Company’s future conventional production capabilities, as market conditions may warrant.
Uranium Sales
During the three months ended March 31, 2022, the Company completed no sales of uranium, at its election. Having observed a marked uptick in interest from nuclear utilities seeking long-term uranium supply, the Company is now actively engaged in pursuing selective long-term uranium sales contracts.
Vanadium Sales
As a result of strengthening vanadium markets, during the three months ended March 31, 2022, the Company sold approximately 150,000 pounds of FeV (converted from the Company’s existing inventory of V2O5) at a gross weighted average price of $20.65 per pound V contained in FeV. The Company expects to sell its remaining finished vanadium product when justified into the metallurgical industry, as well as other markets that demand a higher purity product, including the aerospace, chemical, and potentially the vanadium battery industries. The Company expects to sell to a diverse group of customers in order to maximize revenues and profits. The vanadium produced in the 2018/19 pond return campaign was a high-purity vanadium product of 99.6%-99.7% V2O5. The Company believes there may be opportunities to sell certain quantities of this high-purity material at a premium to reported spot prices. The Company may also retain vanadium product in inventory for future sale, depending on vanadium spot prices and general market conditions.
Rare Earth Sales
The Company commenced its ramp-up to commercial production of a mixed RE Carbonate in March 2021 and has shipped all of its RE Carbonate produced to-date to Silmet, where it is currently being fed into their separation process. All RE Carbonate produced at the Mill in 2022 is expected to be sold to Neo for separation at Silmet. Until such time as the Company expects to permit and construct its own separation circuits at the Mill, production in future years is expected to be sold to Neo for separation at Silmet and, potentially, to other REE separation facilities outside of the U.S. To the extent not sold, the Company expects to stockpile mixed RE Carbonate at the Mill for future separation and other downstream REE processing at the Mill or elsewhere.
As the Company continues to ramp up its mixed RE Carbonate production and additional funds are spent on process enhancements, improving recoveries, product quality and other optimization, profits from this initiative are expected to be minimal until such time when monazite throughput rates are increased and optimized. However, even at the current throughput rates, the Company is recovering most of its direct costs of this growing initiative, with the other costs associated with ramping up production, process enhancements and evaluating future separation capabilities at the Mill being expensed as development expenditures. Throughout this process, the Company is gaining important knowledge, experience and technical information, all of which will be valuable for current and future mixed RE Carbonate production and expected future production of separated REE oxides and other advanced REE materials at the Mill. As discussed above, the Company is evaluating installing a full separation circuit at the Mill to produce both “light” and “heavy” separated REE oxides in the coming years, subject to successful licensing, financing, and commissioning and continued strong market conditions, and has hired Carester to support these REE separation initiatives.
The Company also continues to pursue new sources of revenue, including additional Alternate Feed Materials and other sources of feed for the Mill.
Continued Efforts to Minimize Costs
Although the Company is pursuing two exciting new initiatives — its REE and TAT radioisotope initiatives — in addition to its existing uranium and vanadium lines of business, which will likely require the Company to grow certain of its operations, the Company will continue to seek ways to minimize the costs of all its operations where feasible while maintaining its critical capabilities, manpower, and properties.
Results of Operations
The following table summarizes the results of operations for the three months ended March 31, 2022 and 2021 (in thousands of U.S. dollars):
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
Revenues | | | | | | | |
| | | | | | | |
Vanadium concentrates | | | | | $ | 2,412 | | | $ | — | |
| | | | | | | |
Alternate Feed Materials processing and other | | | | | 525 | | | 353 | |
Total revenues | | | | | 2,937 | | | 353 | |
Costs and expenses applicable to revenues | | | | | | | |
| | | | | | | |
Costs and expenses applicable to vanadium concentrates | | | | | 1,229 | | | — | |
| | | | | | | |
| | | | | | | |
Underutilized capacity production costs applicable to Rare Earth concentrates | | | | | 1,663 | | | — | |
Total costs and expenses applicable to revenues | | | | | 2,892 | | | — | |
| | | | | | | |
Gross margin | | | | | 45 | | | 353 | |
| | | | | | | |
Other operating costs and expenses | | | | | | | |
Development, permitting and land holding | | | | | 1,173 | | | 3,371 | |
Standby costs | | | | | 3,475 | | | 2,135 | |
Accretion of asset retirement obligation | | | | | 394 | | | 321 | |
Total other operating costs and expenses | | | | | 5,042 | | | 5,827 | |
| | | | | | | |
Selling, general and administration | | | | | | | |
Selling costs | | | | | 9 | | | — | |
General and administration | | | | | 5,207 | | | 3,373 | |
Total selling, general and administration | | | | | 5,216 | | | 3,373 | |
| | | | | | | |
Total operating loss | | | | | (10,213) | | | (8,847) | |
| | | | | | | |
Interest expense | | | | | (9) | | | (16) | |
Other loss | | | | | (4,508) | | | (2,047) | |
Net loss | | | | | $ | (14,730) | | | $ | (10,910) | |
| | | | | | | |
Basic and diluted net loss per common share | | | | | $ | (0.09) | | | $ | (0.08) | |
| | | | | | | |
Revenues
Previously, the Company’s revenues from uranium were based on delivery schedules under long-term contracts, which could vary from quarter to quarter. As of December 31, 2018, the Company no longer had any uranium sales contacts. Future sales of uranium may be subject to sale in the spot market if the Company is unable to agree to terms for additional long-term sales contracts or, potentially, pursuant to direct government purchases under the proposed U.S. Uranium Reserve. In the year ended December 31, 2019, the Company initiated the selling of vanadium recovered from pond return at the Mill under a Sales and Agency Agreement appointing an exclusive sales and marketing agent for all V2O5 produced by the Company.
Revenues for the three months ended March 31, 2022 and 2021 totaled $2.94 million and $0.35 million, respectively, which were primarily related to sales of vanadium concentrates and fees for mineralized material received from clean-up of a third-party uranium mine.
Operating Expenses
Uranium, Vanadium, and RE Carbonate recovered and costs and expenses applicable to revenue
During the three months ended March 31, 2022 and 2021 the Company did not recover any material amount of pounds of U3O8 or V2O5 at the White Mesa Mill.
Costs and expenses applicable to revenue for the three months ended March 31, 2022 totaled $1.23 million related to sales of approximately 150,000 pounds of vanadium concentrates and $1.66 million related to underutilized capacity production costs applicable to RE Carbonate processing.
During the three months ended March 31, 2022, the Company began to finalize its second RE Carbonate production run, and recovered 60 tonnes of mixed RE Carbonate, containing approximately 30 tonnes of TREO. To date, the Mill has focused on producing commercially salable RE Carbonate at low throughput rates. The Company has been very pleased with the resulting product it is shipping to Silmet, and has continued to improve the quality of this RE Carbonate product during the quarter. The Mill expects to increase its throughput rates as its supplies of monazite sands increase. The Company is in advanced discussions with several monazite suppliers to secure additional supplies of monazite sands, and once secured, we expect these additional supplies will result in sufficient throughput to reduce underutilized capacity production costs and allow the Company to realize its expected margins on a continuous basis.
Other Operating Costs and Expenses
Development, permitting and land holding
For the three months ended March 31, 2022, the Company spent $1.17 million for the future development of the Company’s properties, primarily related to land holding expenses, compared to $3.37 million for the three months ended March 31, 2021, which were primarily incurred for the first-time development and ramping up of the expected RE Carbonate production program at the Mill.
While we expect the amounts relative to the items listed above have added future value to the Company, the Company expenses these amounts, in part due to the fact that the Company does not have Proven Mineral Reserves or Probable Mineral Reserves at any of the Company’s projects under S-K 1300 or NI 43-101, other than at the Sheep Mountain Project.
Standby costs
The Company’s La Sal Project was placed on standby in 2012 as a result of market conditions. In February 2014, the Company placed its Arizona 1 Project on standby. In the beginning of 2018, as well as the beginning of 2020, the Mill operated at lower levels of uranium recovery, including prolonged periods of standby. The Nichols Ranch Project was also placed on standby in early 2020. Costs related to the care and maintenance of the standby mines, along with standby costs incurred while the Mill is operating at low levels of uranium, vanadium, and RE Carbonate recovery or on standby, are expensed.
For the three months ended March 31, 2022, standby costs totaled $3.48 million, compared with $2.14 million in the prior year. The increase is primarily related to expenses incurred while the Mill was operating at lower levels of uranium, vanadium and RE Carbonate recovery.
Accretion
Accretion related to the asset retirement obligation for the Company’s properties increased slightly for the three months ended March 31, 2022 to $0.39 million compared with the prior year of $0.32 million.
Selling, general and administrative
Selling, general and administrative expenses include costs associated with marketing uranium, corporate, general and administrative costs. Selling, general and administrative expenses consist primarily of payroll and related expenses for personnel, contract and professional services, share-based compensation expense and other overhead expenditures. Selling, general and administrative expenses totaled $5.22 million for the three months ended March 31, 2022 compared to $3.37 million for the three months ended March 31, 2021. The increase is primarily related to public company expenses and corporate efforts to develop our REE programs.
Interest Expense and Other Income and Expenses
Interest expense
Interest expense for the three months ended March 31, 2022 was $0.01 million, compared with $0.02 million for the three months ended March 31, 2021.
Other income and expense
For the three months ended March 31, 2022, other income and expense was $4.51 million expense, net. These amounts primarily consist of a mark-to-market loss on investments accounted for at fair value of $3.42 million and a loss on foreign exchange of $1.21 million, partially offset by other income of $0.11 million and interest income of $0.01 million.
For the three months ended March 31, 2021, other income and expense was $2.05 million expense, net. These amounts primarily consist of a mark-to-market loss on the increase in fair value of warrant liabilities of $3.50 million and a loss on foreign exchange of $0.34 million, partially offset by a $1.46 million mark-to-market gain on investments accounted for at fair value, other income of $0.33 million and interest income of $0.01 million.
LIQUIDITY AND CAPITAL RESOURCES
Shares issued for cash
On November 5, 2018, the Company filed a prospectus supplement to its U.S. registration statement, qualifying for distribution up to $24.50 million in aggregate Common Shares under the ATM. Then, on the same date, the Company filed a base shelf prospectus whereby the Company may sell any combination of the “Securities” as defined thereunder in one or more offerings having an aggregate offering price of up to $150.00 million. On May 5, 2019, the prospectus supplement to its U.S. registration statement expired and was replaced on May 7, 2019 by a new prospectus supplement in the same amount, qualifying for distribution up to $24.50 million in aggregate Common Shares under the ATM. On December 31, 2019 and December 31, 2020, the Company filed prospectus supplements to its U.S. registration statement, qualifying for distribution up to $30.00 million and $35.0 million, respectively, in additional Common Shares under the ATM. On April 8, 2021, the Company filed a prospectus supplement to its U.S. registration statement, qualifying for distribution up to $33.50 million in additional Common Shares under the ATM. The Company filed a base shelf prospectus that went effective on March 18, 2021 whereby the Company may sell any combination of the “Securities” as defined thereunder in one or more offerings having an aggregate offering price of up to $300.00 million. On June 7, 2021, the Company filed a prospectus supplement to its U.S. shelf registration statement, qualifying for distribution up to $50.00 million in additional Common Shares under the ATM. Most recently, on January 3, 2022, the Company filed with the SEC a prospectus supplement to its U.S. shelf registration statement, qualifying for distribution up to $50.00 million in additional Common Shares under the ATM. Sales made pursuant to the above summarized U.S. shelf registration statements and prospectus supplements are made on the NYSE American at then-prevailing market prices, or any other existing trading market of the Common Shares in the United States.
From April 1, 2022 through May 13, 2022, the Company issued 0.36 million Common Shares at a weighted average price of $10.69 for net proceeds of $3.72 million using the ATM.
Working capital at March 31, 2022 and future requirements for funds
At March 31, 2022, the Company had working capital of $136.61 million, including $105.17 million in cash, $0.61 million of marketable securities, approximately 692,000 pounds of uranium finished goods inventory and approximately 1,397,000 pounds of vanadium finished goods inventory. The Company believes it has sufficient cash and resources to carry out its business plan for at least the next twelve months.
The Company manages liquidity risk through the management of its working capital and its capital structure.
Cash and cash flows
Three months ended March 31, 2022
Cash, cash equivalents and restricted cash were $125.49 million at March 31, 2022, compared to $132.82 million at December 31, 2021. The decrease of $7.34 million was due primarily to cash used in operating activities of $10.55 million and cash used in investing activities of $0.40 million, partially offset by cash provided by financing activities of $3.59 million and the impact of foreign exchange rate fluctuations on cash held in foreign currencies of $0.02 million.
Net cash used in operating activities of $10.55 million is comprised of the net loss of $14.73 million for the period adjusted for non-cash items and for changes in working capital items. Significant items not involving cash were $0.81 million of depreciation and amortization of property, plant and equipment, share-based compensation expense of $0.86 million, accretion of asset retirement obligation of $0.39 million, unrealized foreign exchange loss of $1.23 million, revision of asset retirement obligations of $0.10 million and other non-cash expenses, primarily related to the fair market valuation of investments of $3.35 million. Other items include a decrease in inventories of $0.78 million, an increase in trade and other receivables of $1.33 million, an increase in prepaid expenses and other assets of $0.89 million and a decrease in accounts payable and accrued liabilities of $1.12 million.
Net cash used in investing activities was $0.40 million for the purchase of property, plant and equipment, primarily for utilization in RE Carbonate production at the Mill.
Net cash provided by financing activities totaled $3.59 million consisting of $4.16 million net proceeds from the issuance of shares under the Company's ATM facility and cash received from exercise of stock options of $0.32 million, partially offset by $0.89 million cash paid to fund employee income tax withholding due upon vesting of restricted stock units.
Three months ended March 31, 2021
Cash, cash equivalents and restricted cash were $63.53 million at March 31, 2021, compared to $40.99 million at December 31, 2020. The increase of $22.54 million was due primarily to cash provided by financing activities of $30.39 million, cash provided by investing activities of $0.57 million, and the impact of foreign exchange rate fluctuations on cash held in foreign currencies of $0.03 million, offset by cash used in operating activities of $8.45 million.
Net cash used in operating activities of $8.45 million is comprised of the net loss of $10.91 million for the period adjusted for non-cash items and for changes in working capital items. Significant items not involving cash were $0.77 million of depreciation and amortization of property, plant and equipment, share-based compensation expense of $0.70 million, a $3.50 million change in warrant liabilities, accretion of asset retirement obligation of $0.32 million, and unrealized foreign exchange loss of $0.43 million, offset by other non-cash expenses of $1.68 million and a revision of asset retirement obligations of $0.04 million. Other items include an increase in inventories of $0.40 million, a decrease in accounts payable and accrued liabilities of $0.51 million, an increase in prepaid expenses and other assets of $0.63 million and an increase in trade and other receivables of $0.01 million.
Net cash provided by investing activities was $0.57 million comprised of $1.17 million cash received from maturities of marketable securities partially offset by $0.60 million cash used for the purchase of mineral properties and property, plant and equipment.
Net cash provided by financing activities totaled $30.39 million, consisting of $29.91 million net proceeds from the issuance of shares under the Company’s ATM facility, cash received from the exercise of stock options of $0.70 million and cash received from the exercise of warrants of $0.44 million, partially offset by $0.66 million in cash paid to fund employee income tax withholding due upon the vesting of RSUs.
Critical accounting estimates and judgments
The preparation of these consolidated financial statements in accordance with U.S. 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:
a.Development Stage
While the Company has established the existence of multiple Mineral Resources and extracts and processes saleable uranium from these operations, the Company has only established Proven Mineral Reserves or Probable Mineral Reserves, as defined under SEC S-K 1300, at its Sheep Mountain Project. As a result, the Company is a “Development Stage Issuer” as defined by S-K 1300, as it is engaged in the preparation of Mineral Reserves for extraction on at least one material property.
While in the development stage with its material properties having only Mineral Resources, the Company continues to expense most amounts that would normally be capitalized and subsequently depreciated or depleted over the life of Mineral Reserve-based mining operations. Items such as the construction of wellfields and related header houses, additions to recovery facilities and advancement of properties are 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 stage having multiple Mineral Reserves or in the production stage.
b. Resource and reserve estimates utilized
The Company utilizes estimates of its Mineral Resources and Mineral Reserves based on information compiled by appropriately qualified persons. The information relating to the geological data on the size, depth and shape of the deposits requires complex geological judgments to interpret the data. The estimation of future cash flows related to Mineral Resources and Mineral Reserves 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 and Mineral Reserve estimates may impact the carrying value of mining and recovery assets, goodwill, reclamation and remediation obligations and depreciation and impairment.
c. Depreciation of mining and recovery assets acquired
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.
d. Impairment testing of mining and recovery assets
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, forecasted 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 impact on the expected recoverability of the carrying values of mining and recovery assets.
e. Asset retirement obligations
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.
Recently Adopted Accounting Pronouncements
Non-employee Share-Based Payment
In June 2018, the FASB issued ASU 2018-07, which more closely aligns the accounting for non-employee share-based payment transactions to the guidance for awards to employees except for specific guidance on certain inputs to an option-pricing model and the attribution of cost. The Company adopted this standard effective January 1, 2019 and adoption did not have a significant impact on our net earnings
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, which amended the fair value measurement guidance by removing and modifying certain disclosure requirements, while also adding new disclosure requirements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty would be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments would be applied retrospectively to all periods presented upon their effective date. The Company adopted this pronouncement effective January 1, 2020.
Income Taxes - Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, “Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740),” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent
application. ASU 2019-12 will be effective for interim and annual periods beginning after December 15, 2020 (January 1, 2021 for the Company). Early adoption is permitted. The Company has evaluated the impact the of the adoption of ASU 2019-12 and it does not have an impact on its consolidated financial statements, and may not have an impact until such a time that the Company incurs income tax expenses.
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” The standard replaces the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The new standard is effective for non-public companies, and public business entities that meet the definition of a smaller reporting company as defined by the SEC, for interim and annual periods beginning after December 15, 2022. On December 31, 2021, the Company became a large accelerated filer, as defined by the SEC, and, as a result, adopted this guidance effective January 1, 2021. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.