Energy Fuels Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited financial statements are presented in U.S. dollars; amounts below are in millions unless otherwise stated. Energy Fuels produces and sells uranium and processes uranium-bearing materials. It reported that it had no proven or probable reserves under SEC Industry Guide 7 and therefore remained an exploration-stage company for SEC purposes.
Financial performance
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Revenue | $7.0 | $23.7 | $25.0 | $31.3 |
| Gross profit | $1.3 | $10.3 | $7.1 | $14.1 |
| Operating loss | $(10.3) | $(2.2) | $(18.4) | $(4.0) |
| Net loss | $(10.4) | $(4.1) | $(19.3) | $(5.3) |
| Loss per share | $(0.20) | $(0.18) | $(0.38) | $(0.25) |
Revenue fell about 70% in Q2 and 20% in H1 year over year. Q2 gross margin was approximately 18%, compared with 44% in Q2 2015; H1 gross margin was approximately 29%, compared with 45%. The filing attributes lower revenue mainly to fewer pounds sold. Q2 2016 sales included 100,000 pounds under term contracts at an average $70 per pound; H1 sales were 450,000 pounds, including 50,000 spot pounds at $34.40 per pound. H1 cost of sales averaged $36.09 per pound, versus $32.30 a year earlier. A $1.62 million inventory impairment reduced gross profit.
Liquidity, cash flow and debt
- At June 30, cash and cash equivalents were $14.4 million, versus $13.0 million at year-end 2015. Working capital was $24.6 million. Restricted cash was a further $19.6 million and was pledged principally for reclamation-related bonding.
- H1 operating cash use was $6.2 million; investing cash use was $2.5 million; financing provided $9.9 million. Financing included share issuance, while operating cash use reflected the loss, partly offset by inventory and receivables reductions.
- Total loans and borrowings were $32.2 million: $6.5 million current and $25.7 million long-term. These included convertible debentures and a Wyoming industrial development bond loan. Interest expense was $1.2 million in H1.
- Asset retirement obligations were $13.7 million, with an estimated undiscounted obligation of $41.2 million. The company had posted $19.6 million of collateral against reclamation obligations.
- Shares outstanding increased from 46.5 million at December 31, 2015 to 57.7 million at June 30, 2016, primarily reflecting equity offerings and shares issued for acquisitions.
Material changes and unusual items
- In June, the company acquired Alta Mesa, a fully licensed but non-operating Texas ISR facility, for approximately 4.55 million shares plus transaction costs. The facility requires wellfield development before production; management said development depends on improved uranium prices and demonstrated economic feasibility.
- The company acquired the remaining 40% of the Roca Honda project for approximately 1.21 million shares, with an additional $4.5 million cash payment due upon first commencement of commercial mineral extraction.
- H1 development, permitting and land-holding costs rose to $10.9 million from $0.7 million, primarily reflecting Nichols Ranch wellfield and elution work, Canyon Project shaft sinking, and White Mesa Mill work. These costs were expensed because the company lacked SEC-defined proven or probable reserves.
- G&A increased to $8.1 million in H1 from $5.3 million, reflecting the acquired ISR business, higher share-based compensation and one-time expenses. The prior-year comparison included $6.6 million of acquisition costs, absent in 2016.
- On August 4, 2016, after quarter-end, debentureholders approved extending the debentures’ maturity from June 2017 to December 2020 and reducing the conversion price from Cdn$15.00 to Cdn$4.15. Holders may require cash purchase of up to 20% of their debentures on the original June 2017 maturity date; the company classified that portion as current.
Outlook, management commentary and risks
- Management expected 2016 uranium recovery of approximately 950,000 pounds: 300,000 pounds from ISR operations and 650,000 pounds from conventional operations. It forecast about 550,000 pounds of sales under existing long-term contracts in 2016, of which 400,000 pounds had been delivered by June 30, and expected an additional 200,000 pounds of spot sales in the second half.
- For 2017, management expected to meet 620,000 pounds of existing contract commitments from inventory or planned production, at average prices higher than in 2016. These are forecasts, not guarantees.
- Management said it would conserve cash and keep production and development measured amid weak uranium markets. TradeTech spot prices declined from $34.20 per pound at year-end 2015 to $25.90 on July 28, 2016; the long-term price was $38.00 per pound at July 31. Management cited oversupply and weak demand, while maintaining a positive long-term industry view.
- Management stated that available cash and resources were sufficient to carry out its base business plan beyond Q2 2017, while noting that additional financing may be needed for longer-term business needs or significant development.
- A surety provider requested $5.28 million of additional collateral in three installments. The first $1.76 million was deposited July 29, 2016; further installments were due in November 2016 and February 2017.
- Disclosed contingencies include litigation concerning White Mesa Mill environmental matters and an appeal concerning the Canyon Project. The company disputed the claims; potential remediation costs and the outcome of litigation were uncertain. A successful Canyon Project appeal could require a prolonged project stoppage. Uranium prices, permitting, operating costs, reclamation obligations, financing access and dilution are material risks.
Most important facts for investors to verify
- Whether uranium sales, recovery volumes and realized prices meet management’s 2016 and 2017 forecasts, especially expected second-half spot sales.
- Cash burn, working capital and access to financing; distinguish unrestricted cash from restricted reclamation collateral.
- The debenture amendments, including the potential June 2017 cash put, interest terms, conversion dilution and revised maturity.
- Additional surety collateral requirements and changes in reclamation estimates or obligations.
- Alta Mesa’s development costs, economic feasibility and timing, along with progress and expenditures at Nichols Ranch, Canyon and other projects.
- Developments in the White Mesa and Canyon legal matters, and the effect of uranium prices on inventory valuation and project economics.