Ur-Energy Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in U.S. dollars unless otherwise noted. Ur-Energy operates the Lost Creek in-situ recovery uranium mine in Wyoming and describes itself as an exploration-stage company; it has not established proven and probable mineral reserves.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales | $3.807 million | $11.821 million | $23.479 million | $26.649 million |
| Gross profit | $1.582 million | $5.248 million | $11.496 million | $13.781 million |
| Operating income (loss) | $(0.688) million | $1.631 million | $5.980 million | $7.190 million |
| Net income | $2.591 million | $1.316 million | $9.009 million | $6.505 million |
| Operating cash flow | Not provided separately | Not provided separately | $2.413 million | $6.737 million |
- Q2 gross margin was approximately 42%; the six-month margin was approximately 49%. Reported Q2 net income included $3.540 million of other income from monetizing portions of a customer contract for 165,000 pounds deliverable in 2021. This is an unusual, non-operating item, not recurring uranium-sales profit.
- Q2 uranium sales were 100,000 pounds of purchased product at an average $37.90 per pound. Uranium sales gross profit was $1.565 million, or 41.3%. For the first half, 480,000 pounds were sold; the filing reports an average price of $48.86 per pound.
- Cash and cash equivalents were $7.530 million at June 30, versus $3.879 million at year-end 2017. Restricted cash was $7.459 million, making cash, cash equivalents and restricted cash $14.989 million combined. Operating cash flow was lower year over year, partly reflecting a $5.289 million increase in inventory.
- Inventory was $9.804 million, classified as long-term; conversion-facility inventory included 233,712 pounds at an average carrying cost of $37.39 per pound. Inventory increased from $4.515 million at year-end.
- Notes payable were reported net of financing costs at $17.083 million ($4.916 million current and $12.167 million long-term); scheduled principal was $17.478 million, with maturity on October 1, 2021. The loan bears 5.75% interest and is secured by Lost Creek assets. Asset-retirement obligations were $27.322 million; estimated undiscounted reclamation cash needs were $27.0 million, extending through 2033.
Material changes and operating performance
- Q2 sales fell to $3.807 million from $11.821 million a year earlier, while six-month sales declined approximately 12%. The filing attributes the change in part to timing and volume of deliveries; 2018 sales relied heavily on purchased uranium delivered under term contracts.
- Q2 production captured at Lost Creek was 89,209 pounds; first-half production captured was 173,256 pounds. The third of three planned Mine Unit 2 header houses began operating in May. Production costs declined sequentially amid cost reductions and higher output, although plant maintenance reduced pounds drummed in Q2.
- Operating results weakened in Q2 to a loss, despite positive net income, principally because of lower sales and the contract-monetization gain reported below operations. For the first half, net income rose year over year even as operating income and gross profit declined.
- The company repaid $2.413 million of debt principal during the first half. Outstanding common shares were 146,715,824 at July 26, 2018; the filing also reports 8,954,902 options outstanding.
Outlook, commentary and risks
- Management forecast 250,000–300,000 pounds of uranium produced, dried and drummed in 2018, with Q3 guidance of 70,000–80,000 pounds. Production could be adjusted for operating conditions and uranium-market indicators. No further contract sales were scheduled for 2018.
- Management expected inventory to increase as it purchased uranium for 2019 contract deliveries. It said inventory could be held for later term deliveries or sold in the spot market if conditions were favorable. Management noted that inventory carrying costs exceeded the then-current spot price but expected sales under existing term contracts to exceed carrying costs.
- The reported spot price was approximately $22.65 per pound at quarter-end and $25.75 on July 26. Weak uranium-market conditions and imports continued to constrain production and development plans.
- The Department of Commerce initiated a Section 232 investigation into uranium imports in July 2018. The company and Energy Fuels had petitioned for import remedies, including a proposed quota. The outcome and effect on the market were uncertain.
- Amendments for uranium recovery at Lost Creek’s LC East area remained under regulatory review; management anticipated approvals in 2018 or early 2019. Shirley Basin permit and authorization work was ongoing. Delays, financing availability, uranium prices, production execution, environmental obligations and the absence of established reserves remain material risks.
- At July 26, unrestricted cash was $6.3 million. Management said major projects could require operating cash, existing cash or additional financing; financing may not be available on acceptable terms. The company had not used its at-the-market share facility in 2018.
Important facts for investors to verify
- Reconcile the $3.540 million contract-monetization gain and cash proceeds with the customer’s remaining 2021 delivery obligations and related economics.
- Check uranium delivery volumes, contract prices, timing of 2019 and later commitments, and the assumptions supporting the inventory valuation and expected realization above carrying cost.
- Track actual production against the 250,000–300,000-pound annual guidance and assess unit costs as production and sales volumes change.
- Monitor unrestricted liquidity, scheduled debt principal and interest payments, and funding needs for planned development and reclamation obligations.
- Follow Section 232 proceedings and the LC East and Shirley Basin permitting timelines; neither trade remedies nor regulatory approvals were assured.