ENERGY FUELS INC annual report, FY2016

Energy Fuels Inc. — FY2016 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing; the filing separately provides unaudited quarterly results. Unless noted, financial amounts below are in U.S. dollars.

Business context

Energy Fuels is a U.S.-focused uranium recovery, processing and exploration company with two operating segments: conventional uranium recovery at the White Mesa Mill in Utah and in-situ recovery (ISR), principally at Nichols Ranch in Wyoming. Alta Mesa in Texas was acquired in June 2016 but remained on standby. The company describes itself as being in the exploration stage under SEC Industry Guide 7 because it has no proven or probable reserves under that standard, despite recovering and selling uranium.

Financial and operating performance

Metric	FY2016	FY2015
Revenue	$54.6 million	$61.4 million
Gross profit	$13.7 million	$23.7 million
Operating loss	$38.8 million	$79.9 million
Net loss	$39.9 million	$82.4 million
Basic and diluted loss per share	$0.70	$2.46
Cash used in operating activities	$12.0 million	$2.1 million

Reported gross margin was approximately 25%. FY2016 included a $5.4 million inventory impairment; excluding that charge, gross profit would have been approximately $19.1 million. FY2015 included $55.9 million of goodwill and property impairments, explaining much of the year-over-year reduction in net loss. The fourth-quarter 2016 net loss was $12.3 million, compared with $71.6 million in fourth-quarter 2015.

• Uranium revenue was $54.4 million, from sales of 1.148 million pounds of U₃O₈: 850,000 pounds under term contracts at an average $56.64 per pound and 297,933 pounds at spot-based prices averaging $21.10.
• Uranium recovered totaled approximately 1.015 million pounds: 335,000 pounds at Nichols Ranch and 680,000 pounds at White Mesa Mill. FY2015 recovery was 468,000 pounds for the company’s account.
• Costs and expenses applicable to revenue were $35.5 million, or approximately $30.88 per pound sold, compared with $34.99 per pound in 2015.
• Development, permitting and land-holding expense rose to $21.1 million from $8.8 million, including Canyon shaft work and Nichols Ranch wellfield development. Standby costs were $10.2 million, broadly similar to 2015.

Balance sheet, liquidity and financing

• At December 31, 2016, cash and cash equivalents were $16.9 million, working capital was $24.0 million, and total assets were $196.5 million. Restricted cash of $23.2 million was posted primarily as reclamation collateral and is not equivalent to freely available cash.
• Loans and borrowings had a carrying amount of $29.6 million, including $6.3 million current. This included the $14.1 million Wyoming bond loan and convertible debentures carried at $15.5 million. The debentures mature December 31, 2020; 20% of principal was classified current under amended terms.
• Cash from financing activities was $22.2 million, largely from $25.3 million of share and warrant issuance proceeds, partly offset by $3.2 million of debt repayments. Shares outstanding increased from 46.5 million to 66.2 million during 2016.
• Contractual obligations totaled $80.4 million, including $43.0 million of undiscounted decommissioning liabilities and $29.6 million of debt principal. The company reported $23.1 million of collateral against the $43.0 million undiscounted reclamation obligation.

Material changes and outlook

• Revenue fell 11% from 2015, while reported net loss narrowed by more than half, principally because 2015 contained substantial impairment charges. Operating loss before impairment widened to $38.8 million from $23.9 million.
• The company acquired Alta Mesa for 4.55 million shares and assumed an $11.0 million reclamation obligation, with approximately $4.4 million of related cash collateral acquired. It also acquired Sumitomo’s remaining 40% interest in Roca Honda for 1.21 million shares and a further $4.5 million payable at first commercial production.
• Management forecast 800,000 pounds of uranium production in 2017: 350,000 pounds at Nichols Ranch and approximately 450,000 pounds at White Mesa Mill. It expected to keep Alta Mesa on standby and defer further Nichols Ranch wellfield development until market conditions or sales opportunities improve.
• Existing contracts required deliveries of 520,000 pounds in 2017 and 400,000 pounds in 2018. Management expected existing inventory and planned recovery to cover commitments. The filing gives inconsistent year-end inventory figures—approximately 488,000 pounds in the sales discussion and 520,000 pounds in the liquidity discussion.
• Management expected White Mesa’s 2017 recovery to include approximately 300,000 pounds from pond returns and 150,000 pounds from alternate feed. Further activity depends on adequate feed availability; mill recovery could be put on standby at year-end if feed is insufficient.
• Management planned to complete Canyon shaft sinking and evaluation in 2017, continue permitting at Roca Honda, and advance selected La Sal and Daneros permits. The Sheep Mountain project received a BLM record of decision in January 2017, but processing options remain unresolved.
• Management stated that cash and resources were sufficient to carry out its business plan beyond 2017, but warned that sustained weak uranium prices could require additional financing or other measures. The company had an ATM equity program of up to $20 million; from January 1 through March 8, 2017, it sold approximately 2.99 million shares for $6.65 million net.

Risks, contingencies and unusual items

• Uranium spot prices fell 41% during 2016, from $34.20 to $20.25 per pound at year-end. Management cited oversupply, secondary supplies, weak contracting and delayed reactor restarts; prices were reported at $25.75 per pound on March 8, 2017. Recovery timing and pricing remain uncertain.
• The company has no SEC Industry Guide 7 reserves. Canadian NI 43-101 resource and reserve disclosures are not equivalent to SEC reserves, and resources do not establish economic viability.
• Reclamation and remediation exposure is significant. White Mesa Mill groundwater issues include chloroform and nitrate/chloride contamination; final cleanup scope and costs are undetermined and could be significant. A surety provider had requested $1.76 million of additional collateral for March 2017, though the company reported an agreement to replace that provider.
• Material legal matters include a Clean Air Act citizen suit concerning White Mesa Mill radon and tailings practices, with summary judgment decisions pending, and an appeal concerning Canyon Project approvals. The Canyon appeal could delay or halt shaft work if plaintiffs prevail. The Bears Ears National Monument designation may also affect Daneros access and related operations.
• Other risks include uranium-price-related inventory write-downs and future asset impairments, permit delays, reclamation bond collateral calls, the secured Nichols Ranch loan, customer and feedstock concentration, dilution from equity financing, and the technical and economic uncertainty of projects in development or on standby.
• The company recorded no impairment of long-lived assets in 2016, but recognized a $5.4 million inventory impairment. It paid no dividends. KPMG issued an unqualified audit opinion; management reported effective disclosure controls and internal control over financial reporting, while the auditor did not provide an internal-control attestation because the company qualified as an emerging growth company.

Important facts for investors to verify

• Reconcile the reported year-end finished uranium inventory of approximately 488,000 versus 520,000 pounds, and confirm its composition, ownership and usability against delivery commitments.
• Assess whether the 2017 production forecast, contract deliveries and White Mesa alternate-feed and pond-return assumptions were achieved, and whether sufficient feed is available to sustain mill operations.
• Review unrestricted liquidity, subsequent ATM issuance and dilution, debt repayment requirements, convertible-debenture terms, and the status of the requested reclamation collateral.
• Check the status and potential financial effects of White Mesa groundwater remediation and litigation, the Canyon appeal, and Bears Ears-related access or permitting changes.
• Distinguish NI 43-101 resources and reserves from SEC-defined reserves, and test project economics against uranium-price assumptions, permitting, capital requirements and processing plans.