UR-ENERGY INC quarterly report, Q3 FY2018

UR-Energy Inc. — Q3 2018 Form 10-Q

Reporting period: Three and nine months ended September 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 is classified as an exploration-stage company; it has not established proven and probable reserves.

Financial and operating results

Metric	Q3 2018	Nine months 2018	Comparable 2017
Revenue	$3,000; no uranium sales	$23.482 million	$11.693 million Q3; $38.342 million nine months
Gross profit (loss)	($167,000)	$11.329 million	$536,000 Q3; $14.317 million nine months
Operating income (loss)	($2.574 million)	$3.406 million	($2.683 million) Q3; $4.507 million nine months
Net income (loss)	($2.809 million)	$6.200 million	($3.003 million) Q3; $3.502 million nine months
Operating cash flow	Not separately stated	($1.637 million)	$2.834 million nine months

Nine-month uranium sales were 480,000 pounds at an average $48.86 per pound: 470,000 pounds of purchased inventory under term contracts and 10,000 pounds of produced inventory in a spot sale. Nine-month gross margin was 48.2%.
Q3 had no uranium sales; the $3,000 revenue was disposal-fee income. A $170,000 inventory net-realizable-value adjustment contributed to the quarterly gross loss. Nine-month inventory write-downs were approximately $0.3 million.
Nine-month net income included $3.573 million of other income, largely associated with monetizing future offtake-contract proceeds. The company received $3.540 million in June for portions of agreements covering 165,000 pounds scheduled for delivery in 2021; this non-recurring item is important when assessing earnings quality.
Cash and cash equivalents were $11.621 million at September 30, up from $3.879 million at year-end 2017. Restricted cash was another $7.457 million and collateralized reclamation surety bonds. Cash, cash equivalents and restricted cash totaled $19.078 million.
Inventory was $12.168 million, all classified as long-term; approximately 344,294 pounds were on hand, including 308,762 pounds at the conversion facility at an average carrying cost of $36.09 per pound.
Notes payable were $15.881 million net of deferred financing costs ($4.988 million current and $10.893 million long-term). The underlying Sweetwater County loan bears fixed interest at 5.75% and matures October 1, 2021. The filing’s MD&A separately cites an $18.7 million loan balance; investors should reconcile that figure with the financial-statement debt schedule.
Total asset-retirement obligations were $27.450 million; estimated undiscounted future reclamation cash needs were approximately $27.0 million, with settlement payments extending through 2033.

Changes versus prior periods

Nine-month revenue fell to $23.482 million from $38.342 million, reflecting lower uranium volumes sold. Nine-month gross profit declined to $11.329 million from $14.317 million, while net income increased to $6.200 million from $3.502 million, primarily because of the contract-monetization gain.
Q3 revenue fell from $11.693 million in 2017 to $3,000 in 2018, as the company made no uranium deliveries in the quarter. The quarterly net loss narrowed modestly from $3.003 million to $2.809 million.
Operating expenses were lower year to date, mainly because development activity was reduced; G&A increased, primarily due to consulting and legal costs associated with the trade action. Net interest expense also declined as loan principal was repaid.
Financing activities provided $5.859 million in the first nine months, including the September public offering; the company repaid $3.645 million of debt. Net cash from investing activities was $3.436 million, principally reflecting the $3.540 million contract monetization proceeds.

Operations, outlook and risks

Lost Creek captured 80,604 pounds of U₃O₈ in Q3, drummed 78,441 pounds and shipped 72,902 pounds to the conversion facility. Production was deliberately constrained amid weak uranium-market conditions; management attributed lower costs partly to cost-reduction efforts and the absence of certain non-recurring charges.
Management forecast 2018 production of 250,000–300,000 pounds drummed, including 40,000–60,000 pounds in Q4. It said no new production areas were planned for the rest of 2018 and that market conditions did not justify further development of Mine Unit 2. No further contract sales were scheduled for 2018; inventory might be held for 2020 term contracts or sold earlier if market conditions warranted.
At quarter-end, management cited uranium spot and long-term prices of approximately $27.50 and $31.75 per pound, respectively. It stated that inventory carrying cost exceeded the spot price but expected the inventory to be sold under term contracts at prices above carrying value. Uranium-price volatility, fixed production costs and further inventory valuation adjustments remain relevant risks.
The Section 232 Department of Commerce investigation into uranium imports was ongoing. The company’s petition sought measures reserving a portion of the U.S. market for domestic production. The filing noted the investigation was to be completed by April 15, 2019, with presidential action possible by July 15, 2019; the outcome and market impact were uncertain.
Lost Creek’s LC East permit amendment review continued; management anticipated permits and authorizations in the first half of 2019. Wyoming assumed uranium-recovery regulatory responsibility from the NRC effective September 30, 2018. Shirley Basin permit review and engineering work also continued.
The September offering issued 12,195,122 common shares and 13,062,878 warrants, with approximately $9.2 million net proceeds. The warrants are exercisable two for one at $1.00 per full share and are recorded as a derivative liability because they are U.S.-dollar denominated while the parent’s functional currency is Canadian dollars. Shares outstanding were 159,147,399 as of October 24, 2018.
Management reported $10.7 million of unrestricted cash as of October 24, 2018. It cautioned that additional financing may be needed if operating cash, cash on hand and available sources do not cover major capital needs; financing availability and terms are not assured. Restricted cash is not freely available for general liquidity.

Most important facts for investors to verify

Whether forecast production of 250,000–300,000 pounds was achieved, and the effects of restricted production and fixed costs on unit economics.
Whether existing term contracts support the stated expected realization of inventory carried at $36.09 per pound, given reported spot prices below that level.
The reconciliation of the MD&A’s $18.7 million State Bond Loan balance with the balance-sheet debt schedule and scheduled repayments.
The sustainability of reported nine-month net income excluding the $3.573 million contract-monetization-related other income, and the ability to generate positive operating cash flow.
Progress and outcomes for the LC East and Shirley Basin permits, and any effect of the Section 232 investigation on uranium prices, sales opportunities or operations.
Potential dilution and fair-value volatility from the warrants and outstanding options, as well as future financing needs and availability.