ENERGY FUELS INC quarterly report, Q1 FY2017

Energy Fuels Inc. — Q1 2017 Form 10-Q

Reporting period: Three months ended March 31, 2017. Unaudited U.S. GAAP financial statements; amounts below are U.S. dollars. Energy Fuels extracts and processes uranium, sells uranium concentrates, and toll-processes uranium-bearing materials. It reports conventional uranium and in-situ recovery (ISR) segments and states it has no proven or probable reserves under SEC Industry Guide 7.

Financial results and liquidity

Metric	Q1 2017	Q1 2016 / comparison
Revenue	$3.76 million	$18.00 million
Gross profit and margin	$1.69 million; 44.9%	$5.85 million; 32.5%
Operating loss	$8.14 million	$8.38 million
Net loss	$10.60 million; $0.15 per share	$8.87 million; $0.19 per share
Cash used in operating activities	$9.08 million	$8.70 million

Revenue was primarily from 60,000 pounds of uranium sold under term contracts for $3.50 million, plus $0.26 million of toll-processing revenue. In Q1 2016, the company sold 350,000 pounds. The 2017 term-contract sales averaged $58.28 per pound; the prior-year sales included term and spot deliveries.

At March 31, 2017, cash and cash equivalents were $12.16 million, down from $16.90 million at year-end 2016. Working capital was $23.82 million. Restricted cash was a further $25.09 million, principally collateral for reclamation obligations, and is not freely available for general operations. Total loans and borrowings were $29.80 million, including $6.57 million current. The balance sheet also included a $17.28 million asset retirement obligation (ARO); its estimated undiscounted amount was $43.00 million. Cash provided by financing was $6.18 million, mainly from $6.97 million of net ATM share proceeds, partly offset by $0.79 million of debt repayments.

Material changes and unusual items

• Revenue fell sharply year over year as uranium deliveries declined to 60,000 pounds from 350,000 pounds. Cost of sales fell correspondingly, while reported gross margin increased to 44.9% from 32.5%.
• Other expense was $1.92 million, versus $0.09 million of other income in Q1 2016. Q1 2017 included $2.19 million of warrant-liability revaluation loss and $0.92 million of convertible-debenture revaluation loss, partly offset by a $0.79 million gain on surplus-asset sales and a $0.50 million investment fair-value gain. These revaluation items were non-cash.
• General and administrative expense rose to $4.43 million from $3.83 million, including higher share-based compensation ($1.04 million versus $0.67 million) and severance expense ($0.59 million versus $0.19 million).
• The company issued 3.16 million shares through its at-the-market offering for $6.97 million net proceeds. Shares outstanding increased to 70.22 million from 66.21 million at December 31, 2016.

Outlook, management commentary, and risks

• Management expected 2017 production of 675,000 pounds of U₃O₈, revised down from 800,000 pounds. It attributed the reduction to lower expected pond-return recoveries, delayed alternate-feed material, and lower-than-expected Nichols Ranch recoveries. The company had produced 92,000 pounds in Q1.
• Expected 2017 production comprised approximately 300,000 pounds from Nichols Ranch ISR and 375,000 pounds at the White Mesa Mill, including pond returns and alternate-feed sources. Nichols Ranch had nine producing header houses; further wellfield development was deferred pending improved uranium prices or suitable sales contracts. Alta Mesa remained on standby.
• Management expected to deliver 520,000 pounds under four contracts during 2017 and earn approximately $6.5 million in toll-processing revenue. It said existing inventory and recovery capacity exceeded commitments under current sales contracts, and operations would remain conservative until market conditions improved.
• Management stated that existing cash and resources were expected to fund the base business plan beyond March 31, 2018. It also warned that sustained depressed uranium prices could require additional capital or other measures; substantial development would require financing in advance.
• The convertible debentures were extended to December 31, 2020, with an 8.5%–13.5% floating interest rate linked to uranium prices. Holders had a right to require cash repurchase on June 30, 2017 of up to 20% of their holdings. The filing also describes repayment-in-shares as an option subject to conditions and approvals.
• Market risks include weak and oversupplied uranium markets, commodity-price volatility, limited contract coverage, and dependence on future sales and financing. Reclamation estimates are uncertain; $25.09 million of restricted cash collateral supported $43.00 million of undiscounted ARO.
• Disclosed proceedings included challenges involving White Mesa Mill environmental matters and an appeal concerning the Canyon Project; the relevant court decisions were pending. The company said a successful Canyon appeal could require prolonged standby, with significant potential operational impact. It also noted remediation costs under a potentially revised White Mesa corrective-action plan were undetermined and could be significant.

Most important facts for investors to verify

• Whether the revised 675,000-pound production plan and 520,000-pound delivery schedule were achieved, and whether planned toll-processing revenue materialized.
• Cash burn, working-capital trends, access to external capital, and the June 30, 2017 debenture holder repurchase right and related funding implications.
• Uranium market prices, contract coverage, and the assumptions supporting management’s expectation that cash and resources would fund the base plan beyond March 31, 2018.
• Reclamation collateral requirements and updates to the $43.00 million undiscounted ARO, along with outcomes and potential costs of the disclosed legal and environmental matters.
• Potential dilution from ATM share issuance, equity awards, warrants, and any share-based debenture repayment.