ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements for the three-month period ended March 31, 2021, and the related notes thereto, which have been prepared in accordance with U.S. GAAP. Additionally, the following discussion and analysis should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements included in Part II of our Annual Report on Form 10-K for the year ended December 31, 2020. This Discussion and Analysis contains forward-looking statements and forward-looking information that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors. See section heading “Cautionary Statement Regarding Forward-Looking Statements,” above.
While the Company has uranium extraction and recovery activities and generates revenue, it is considered to be in the Exploration Stage (as defined by SEC Industry Guide 7), as it has no Proven or Probable Reserves within the meaning of SEC Industry Guide 7. Under U.S. GAAP, for a property that has no Proven or Probable Reserves, the Company capitalizes the cost of acquiring the property (including mineral properties and rights), and expenses all costs related to the property incurred subsequent to the acquisition of such property. Acquisition costs of a property are depreciated over its estimated useful life for a revenue generating property or expensed if the property is sold or abandoned. Acquisition costs are subject to impairment if so indicated.
All dollar amounts stated herein are in U.S. dollars, except share and per share amounts and currency exchange rates unless specified otherwise. References to Cdn$ refer to Canadian currency, and $ to United States currency.
Overview
We provide the raw materials for the generation of clean nuclear electricity. Our primary product is U3O8, or yellowcake, which when further processed becomes the fuel for nuclear energy. According to the Nuclear Energy Institute, nuclear energy provides nearly 20% of the total electricity, and 55% of the clean, carbon-free electricity, generated in the United States. The Company generates revenues from extracting and processing materials for our own account, as well as from toll processing materials for others.
Our uranium concentrate is produced from multiple sources:
•Conventional recovery operations at our White Mesa Mill (the “Mill”) including:
◦Processing ore from uranium mines; and
◦Recycling of uranium bearing materials that are not derived from conventional ore (“Alternate Feed Materials”); and
•In-situ recovery (“ISR”) operations.
In addition, the Company has a long history of conventional vanadium recovery at the Mill, when vanadium prices support those activities. In early 2020, the Company completed a campaign to recover vanadium from solutions in the tailings management system at the Mill (“Pond Return”) from which it recovered over 1.8 million pounds of high-purity vanadium. The Company is also evaluating opportunities for copper recovery from our Pinyon Plain Project.
Also in 2020, the Company began evaluating the potential to process REEs at the White Mesa Mill. By October 2020, the Company had produced a mixed REE carbonate, ready for separation, on a pilot scale from natural monazite ore. In December 2020, the Company entered into a contract to acquire natural monazite sands from a heavy metal sands operation in Georgia, from which it expects to recover uranium and produce a commercially salable mixed REE carbonate containing approximately 71% total rare earth oxide (“TREO”) on a dry basis. In March 2021, the Company began ramping up commercial production of mixed REE carbonate. In March 2021, the Company entered into an agreement in principle, subject to the completion of definitive agreements, to supply its REE carbonate to a separation facility in Europe, which is the next step in producing usable REE products. The Company is also in discussions with other entities to acquire additional supplies of natural monazite sands and is working with the U.S. Department of Energy to evaluate the potential to process other types of REE- and uranium-bearing ores at the Mill produced from coal-based resources. The Company is also evaluating the potential to perform REE separation and other downstream REE activities, including metal-making and alloying, in the future at the Mill or elsewhere in the U.S.
The Mill, located near Blanding, Utah, processes ore mined from the Four Corners region of the United States, as well as Alternate Feed Materials that can originate worldwide. We have the only operating uranium mill in the United States, which is also the last operating facility left in the U.S. with the ability to recover vanadium from primary ore sources. The Mill is
licensed to process an average of 2,000 tons of ore per day and to produce approximately 8.0 million pounds of U3O8 per year. The Mill has separate circuits to process conventional uranium and vanadium ores, as well as Alternate Feed Materials and REEs.
For the last several years, no mines have operated commercially in the vicinity of the Mill due to low uranium prices. As a result, in recent years, Mill activities have focused on processing Alternate Feed Materials for the recovery of uranium under multiple toll processing arrangements, as well as Alternate Feed Materials for our own account. Additionally, in recent years, the Mill has recovered dissolved uranium and vanadium from the Mill’s tailings management system that was not fully recovered during the Mill’s prior forty years of operations through its Pond Return program. During the three months ended March 31, 2021, Mill activities focused primarily on the recovery of uranium from Alternate Feed Materials and preparing the Mill to process REE monazite sands. The Company is actively pursuing additional Alternate Feed Materials for processing at the Mill.
The Mill also continues to pursue additional sources of feed materials. For example, a significant opportunity exists for the Company to potentially participate in the clean-up of abandoned uranium mines in the Four Corners Region of the U.S. The U.S. Justice Department and Environmental Protection Agency have announced settlements in various forms in excess of $1.5 billion to fund certain clean-up activities on the Navajo Nation. Additional cleanup settlements with other parties are also pending. Our Mill is within economic trucking distance and is uniquely positioned in this region to receive uranium-bearing materials from these cleanups and thus recycle the contained U3O8, while, at the same time, permanently disposing of the cleanup materials outside the boundaries of the Navajo Nation in our licensed tailing management system. There are no other facilities in the U.S capable of providing this service. In addition, as previously announced, during the second quarter of 2019, the Company began receiving shipments of material generated in the cleanup of a large, historically producing conventional uranium mine located in northwest New Mexico. In addition to generating revenue for the Company, this project also demonstrates the ability of the Mill to responsibly cleanup projects similar to those required on the Navajo Nation.
The Company’s ISR operations consist of our recently producing Nichols Ranch Project and our standby operation at the Alta Mesa Project. At our Nichols Ranch Project, the Company placed its ninth header house into production in March 2017. In order to save cash and resources, the Company is deferring additional wellfield development until uranium prices recover. The Project is now on standby. The Alta Mesa Project will remain on standby in the current uranium price environment.
We believe the current spot price of uranium does not support production for the majority of global uranium producers and, accordingly, we believe that prices will recover at some point in the future, either as a result of improving market fundamentals or in response to U.S. government action to support domestic uranium production. In anticipation of potential price recoveries or other actions that could support increased U.S. uranium mining, we continue to maintain and advance our resource portfolio. Once prices recover or other supportive actions are taken, we stand ready to resume wellfield construction at our Nichols Ranch Project; resume wellfield construction, perform plant upgrades, conduct exploration, and resume production at our Alta Mesa facility; and mine and process resources from our Pinyon Plain Project, Daneros Project, La Sal Project and/or Whirlwind Project. The Company believes we can bring this new production to the market within approximately six to eighteen months of a positive production decision. Longer term, we expect to resume production at our other conventional mines on standby and develop our large conventional mines at Roca Honda, Henry Mountains, and/or Sheep Mountain.
COVID-19
The Company continues to respond to the effects of the global, novel coronavirus (“COVID-19”) pandemic on the Company’s business objectives, projections and workforce. Due to current uncertainties, the Company is continuing its cost-cutting measures while retaining the operational readiness of the Company’s core production assets. The Company is also continuing to work to secure U.S. government support for U.S. uranium miners. To date, although the Company has made operational adjustments since the onset of the pandemic to ensure its workforce remains protected, the Company has not been required to shut down any operations as a result of COVID-19. None of these operational adjustments have been material to the Company. The Company has evaluated any potential future shutdown of Company production facilities as a result of COVID-19, and has determined that any such shutdown could be accommodated by the Company in a manner consistent with a typical shutdown of Company production facilities as a result of depressed commodity prices. Management believes the Company is well-capitalized and will be able to withstand facility shutdowns or depressed share prices as a result of COVID-19 for at least the next twelve months.
Update on Rare Earth Element Initiative
On March 1, 2021, the Company and Neo Performance Materials (“Neo”) jointly announced that they had entered into an agreement in principle, subject to completion of definitive agreements, under which Energy Fuels will process natural monazite sands into an REE Carbonate and ship a portion of that production to Neo’s rare earth separations facility in Sillamäe, Estonia (“Silmet”). Neo will then process the REE Carbonate into separated rare earth materials for use in rare earth permanent magnets and other rare earth-based advanced materials. Silmet is the only operational rare earth separations facility in Europe and has
been separating rare earths into commercial value-added products for more than 50 years. Implementation of this initiative is subject to successful ramp-up to commercial-scale operations, execution of definitive agreements, and optimization of the companies’ production processes.
In early March 2021, the Company began receiving shipments of natural monazite ore from Chemours’ Offerman Plant in Georgia. In late March 2021, the Company began ramping up to commercial production of a mixed REE carbonate, along with uranium, from processing this ore.
Upon a successful ramp-up of this program, the Company will be the first U.S. company in several years to produce a marketable mixed REE concentrate ready for separation on a commercial scale.
Removal and recovery of the uranium and other radionuclides from rare earth ores is a key aspect of EFI’s value proposition, as many REE separation and recovery facilities are not able to handle those radionuclides from a technical or regulatory standpoint. The White Mesa Mill has a 40-year history of responsibly handling, processing and recycling uranium bearing materials. Therefore, it has the potential to provide a crucial link in a commercially viable U.S. REE supply chain.
On April 21, 2021, the Company and Hyperion Metals announced the signing of a non-binding Memorandum of Understanding (“MOU”) for the future supply of monazite from Hyperion’s Titan heavy mineral sand project in Tennessee to the White Mesa Mill. EFI is actively seeking new sources of monazite to supply the Company’s emerging U.S. REE business.
On April 23, 2021, the Company announced that it had been awarded an additional $1.75 million by the U.S. Department of Energy (“DOE”) to complete a feasibility study on the production of REE products from natural coal-based resources, as well as from other materials such as REE-bearing ores like the natural monazite ore the Company is currently processing at the White Mesa Mill. The Company’s work on the DOE feasibility study is expected to complement the Company’s efforts to develop commercial REE separation, metals, alloys, and other downstream REE capabilities at the White Mesa Mill.
On April 27, 2021, the Company announced that it had engaged Carester SAS (“Carester”) to prepare a scoping study for the development of a solvent extraction (“SX”) REE separation circuit at the White Mesa Mill in Utah. Based in Lyons, France, Carester is one of the world’s leading global consultants on REE supply chains, with expertise in designing, constructing, operating, and optimizing REE production facilities globally. Carester has been engaged to support EFI’s planned development of REE separation capabilities at the White Mesa Mill, utilizing the Mill’s existing equipment and infrastructure to the extent applicable, to create a continuous, integrated and optimized rare earth production sequence. Carester’s scoping work will include an evaluation of the Mill's current monazite leaching process, preparation of an REE separation flow sheet, capital and operating expense estimates, incorporation of new technologies where applicable, and recommendations on equipment vendors.
Proposed Establishment of a U.S. Uranium Reserve
On December 27, 2020, Congress passed the COVID-Relief and Omnibus Spending Bill, which includes $75 million for the proposed establishment of a strategic U.S. Uranium Reserve, and was signed into law by the President then serving. This key funding opens the door for the U.S. government to purchase domestically-produced uranium to guard against potential commercial and national security risks presented by the country’s near-total reliance on foreign imports of uranium. The Company stands ready to benefit from this program through sales out of its existing uranium inventories and future production from its mines and facilities. However, because the U.S. Uranium Reserve has yet to be established at this time, the details of implementation of activities pursuant to the new law have not yet been defined. As a result, there can be no certainty as to the outcome of a U.S. Uranium Reserve, if any, including the process for and details of its development, and any resulting support for the Company’s ongoing and planned activities, or for any further evaluations of the Working Group.
The Company’s Plans in Response to the Proposed U.S. Uranium Reserve
In response to the proposed establishment of a U.S. Uranium Reserve, the Company is evaluating activities aimed towards increasing uranium production at all or some of its production facilities, subject to general market conditions. No decisions on any project-specific actions to be taken in response to the proposed establishment of a U.S. Uranium Reserve have been made at this time. If the uranium and vanadium markets or general market conditions do not improve, whether as a result of the establishment of a U.S. Uranium Reserve or otherwise, the Company may further reduce its operational activities as required in order to minimize its cash expenditures while preserving its core asset base for increased production in the future, as market conditions may warrant.
Uranium Market Update
According to monthly price data from TradeTech LLC (“TradeTech”), uranium spot prices rose slightly during the first quarter of 2021. The uranium spot price began the quarter at $30.40 per pound on December 31, 2020 and rose 3% to $31.25 per pound on March 31, 2021. The uranium spot price was at its high of $31.25 per pound at the end of the quarter on March 31, 2021, and a low of $27.40 per pound during the weeks ended March 5, 2021 and March 12, 2021. TradeTech price data also indicates
that long-term U3O8 prices fell $2.00 per pound during the quarter, beginning the quarter at $37.00 per pound and ending the quarter at $35.00 per pound. On May 7, 2021, TradeTech reported a spot price of $30.25 per pound.
There were a number of important developments in the uranium market during Q1-2021. On January 8, 2021, Rio Tinto subsidiary Energy Resources of Australia announced that the Ranger mine was ending 40 years of operation, during which time it produced more than 290 million pounds of U3O8 (TradeTech, NMR, January 8, 2021). Spot market activity during January was “especially muted” as prices fell $0.65 per pound during the month (TradeTech, NMR, January 31, 2021). In February, market activity heated up, as 8.3 million pounds of material transacted in the spot market, despite the price falling $2.00 per pound (TradeTech, NMR, February 28, 2021). Of note, Honeywell’s Metropolis Conversion Facility announced that it was resuming operations, and physical uranium fund, YellowCake, plc, exercised an option to purchase 4.5 million pounds of uranium from Kazatomprom (TradeTech, NMR, February 12, 2021). Market activity increased further in March 2021, with 10 million pounds of volume, or 48% of all buying in 2020 (TradeTech, NMR, March 31, 2021). In March, China announced its 14th 5-year plan in which the country set a goal for carbon neutrality and continued growth in nuclear to 40 GW of generating capacity by 2025 (compared to 48 GW at the end of 2020) (TradeTech, NMR, March 5, 2021). Also during March, a “major shift” began to emerge in uranium markets with uranium producers, including Denison Mines, Uranium Energy Corp, and Boss Resources, buying significant quantities of uranium as an investment strategy (TradeTech, NMR, March 19, 2021). This caused Kazatomprom to announce that it would also look at purchases to fulfill its delivery commitments (TradeTech, NMR, March 19, 2021). Finally, more primary production was lost, as Orano announced that it was stopping mining at Akouta in Niger (TradeTech, NMR, March 19, 2021).
During the quarter, progress was made on restarting nuclear units in Japan. In January, TradeTech reported that Kyushu Electric had restarted Sendai Unit 2, and that TEPCO had completed safety upgrades at Kashiwazaki-Kariwa Unit 7 (TradeTech, NMR, January 15, 2021). In February, TradeTech reported that Kansai Electric received local approval to restart the Mihama and Takahama units (TradeTech, NMR, February 19, 2021). In March, a Japanese court rejected calls to suspend Kyushu Electric’s Genkai Units 3 and 4. (TradeTech, NMR, March 12, 2021). And a Japanese court overturned a lower court’s decision to prevent the restart of Shikoku Electric’s Ikata Unit 3 (TradeTech, NMR, March 19, 2021).
The Company believes that certain uranium supply and demand fundamentals continue to point to higher uranium prices in the future, including significant production cuts in recent years and sharply reduced production in 2020 due to COVID-19 and increased demand from utilities, financial entities (including YellowCake, plc), traders and producers (including Kazatomprom, Cameco, Denison Mines, Uranium Energy Corp., Boss Resources, and potentially others). The Company also continues to believe a large degree of uncertainty exists in the market, primarily due to the size of mobile uranium inventories, transportation issues, premature reactor shutdowns in the U.S., trade issues, and the length of time of any uranium mine, conversion or enrichment shutdowns. However, the Company believes that there also exists considerable uncertainty as to the timing of a recovery in uranium markets due to the opaque nature of inventories, secondary supplies, unfilled utility demand, and the market activity of state-owned uranium and nuclear companies.
Vanadium Market Update
During the quarter, the mid-point price of vanadium in Europe rose significantly from $5.40 per pound as of December 25, 2020 to $8.25 per pound as of March 26, 2021. According to Metal Bulletin, vanadium prices in Europe rose through mid-February due to “tightening prompt inventories and better-than-expected end-user demand.” Prices for vanadium during 2020 trended lower for most of the year due to steel mill shutdowns caused by COVID-19 (Metal Bulletin, Ferro-vanadium climbs to near two-year high; V2O5 nears one-year high on tight supply, good demand, February 17, 2021).
Rare Earth Market Update
In 2020, the Company began evaluating the potential to process REEs at the White Mesa Mill. By October, the Company had produced a mixed REE carbonate, ready for separation, on a pilot scale from natural monazite ore. In December 2020, the Company announced that it had entered into an agreement with Chemours to acquire a minimum quantity of 2,500 tons of natural monazite ore per year for three years starting in 2021. On March 1, 2021, the Company announced an agreement in principle to sell approximately 80% of the REE carbonate produced from the Chemours monazite to Neo Performance Materials’ Silmet Facility in Estonia, while stockpiling the rest for future separation at the Mill. In late-March, the Company began ramping-up production of REE carbonate.
REEs are used in a variety of clean energy and advanced technologies. According to Roskill, most demand for REE’s is in the form of separated REEs, “as most end-use applications require only one or two separated rare earth compounds or products.” (Roskill, Rare Earths, Outlook to 2030, 20 Edition). The REE market is dominated by China and, according to 2018 data, China controlled 68% of global primary production, 100% of global secondary production, and nearly all production of the “heavy” REEs, including terbium and dysprosium (Adames Intelligence).
The main uses for REEs include: (i) battery alloys; (ii) catalysts; (iii) ceramics, pigments and glazes; (iv) glass polishing powders and additives; (v) metallurgy and alloys; (vi) permanent magnets; (vii) phosphors; and (viii) others (Adames Intelligence). By volume, REEs permanent magnets (neodymium (Nd), praseodymium (Pr), dysprosium (Dy), and terbium (Tb)) and catalysts (cerium (Ce) and lanthanum (La)) comprised 60% of total consumption yet over 90% of the value consumed.
REEs are comprised of 15 chemical elements, plus scandium (Sc) and yttrium (Y). Each individual REE may transact in a number of forms. Therefore, there is no single price for REEs, but numerous prices for individual REE oxides and compounds. The primary value that the Company expects to generate in the short- to medium-term will come from NdPr, Ce, and La. According to data from Asian Metal, NdPr oxide mid-point prices in China rose approximately 41% during Q1-2021 from 411,500 RMB per metric tonne to 581,500 RMB per metric tonne. Mid-point Ce oxide prices in Europe rose approximately 12% from $2.10/kg to $2.35/kg. Mid-point La oxide prices in China were flat all quarter at $1,495 per metric tonne.
As demand for clean energy technologies, including electric vehicles, renewable energy systems and batteries, along with other advanced technologies, increases in the coming years, the Company expects demand and prices for REEs, particularly the ones mentioned above, to increase. Increases in supply sources for REEs are expected in conjunction with anticipated rising REE prices, which are expected to have a moderating impact on price increases.
Operations Update and Outlook for Period Ending March 31, 2021
Overview
In response to the proposed establishment of a strategic national U.S. Uranium Reserve program, the Company is evaluating activities aimed towards increasing uranium production at all or some of our production facilities, including the currently operating White Mesa Mill, as well as the Alta Mesa ISR Facility, the Nichols Ranch ISR Facility, the La Sal Complex and Pinyon Plain Mine, which are currently on standby. The Company may commence such activities prior to the implementation of all program details, recognizing that there can be no guarantee that the program details will be satisfactory and that the timing and outcome of this process is therefore uncertain. Alternatively, the Company may defer commencing any such activities until further clarification is obtained, or as market conditions warrant. No decisions on any project-specific actions have been made at this time.
During 2021, uranium recovery is expected to be maintained at reduced levels, as a result of current uranium market conditions, until such time when market conditions improve sufficiently, though the Company expects to recover uranium at the White Mesa Mill from Pond Returns, Alternate Feed Materials, and natural monazite ore processing. The Company also expects to produce mixed REE carbonate from natural monazite ore during 2021, subject to successful ramp-up. The Company does not plan to extract and/or recover any amounts of uranium of any significance from its Nichols Ranch Project in 2021, which was placed on standby in the second quarter of 2020 due to the depletion of its existing wellfields. Until such time that improvement in uranium market conditions is observed or suitable sales contracts can be entered into, the Company expects to defer further wellfield development at its Nichols Ranch Project and maintain that project on standby. In addition, the Company expects to keep the Alta Mesa Project and its conventional mining properties on standby.
The Company is also seeking new sources of revenue, including its emerging REE business, as well as new sources of Alternate Feed Materials and new fee processing opportunities at the White Mesa Mill that can be processed under existing market conditions (i.e., without reliance on current uranium sales prices). The Company will also continue its support of U.S. governmental activities to support the U.S. uranium mining industry, including the proposed establishment of a U.S. Uranium Reserve. In addition, the Company is in discussions to potentially sell certain of its non-core conventional uranium assets, although there can be no assurance that a sale will be completed or that we will be successful in completing a sale on acceptable terms. The Company will evaluate additional acquisition and disposition opportunities that may arise.
Extraction and Recovery Activities Overview
During the three months ended March 31, 2021, the Company did not recover significant quantities of U3O8. As previously announced, the Company expects to recover approximately 30,000 to 60,000 pounds of U3O8 in the year ending December 31, 2021 for its own account. The Company expects to produce no vanadium during the 2021 year. Also in 2021, the Company expects to produce approximately 2,000 to 3,000 tons of mixed REE carbonate at the Mill, containing approximately 1,000 to 1,600 tons of TREO.
The Company has strategically opted not to enter into any uranium sales commitments for 2021. Therefore, subject to the proposed establishment of a U.S. Uranium Reserve and general market conditions, all 2021 uranium production is expected to be added to existing inventories, which inventories are expected to total approximately 720,000 to 750,000 pounds of U3O8 at year-end. Subject to any actions the Company may take in response to the proposed establishment of a U.S. Uranium Reserve or improvements in general market conditions, both ISR and conventional uranium extraction and/or recovery is expected to continue to be maintained at reduced levels until such time that improvements in uranium market conditions are observed or
suitable sales contracts can be entered into. All V2O5 inventory is expected to be sold on the spot market if prices rise sufficiently above current levels, but otherwise maintained in inventory. The Company expects to sell all or a portion of its mixed REE carbonate to global separation facilities and/or to stockpile it for future separation at the Mill or elsewhere.
ISR Activities
The Company expects to produce insignificant quantities of U3O8 in the year ending December 31, 2021 from Nichols Ranch.
Until such time as improvement in uranium market conditions is observed, the proposed U.S. Uranium Reserve is established, and/or suitable sales contracts can be procured, the Company expects to maintain the Nichols Ranch Project on standby and defer development of further wellfields and header houses. The Company currently holds 34 fully-permitted, undeveloped wellfields at Nichols Ranch, including four additional wellfields at the Nichols Ranch wellfields, 22 wellfields at the adjacent Jane Dough wellfields, and eight wellfields at the Hank Project, which is fully permitted to be constructed as a satellite facility to the Nichols Ranch Plant.
The Company expects to continue to keep the Alta Mesa Project on standby until such time as improvements in uranium market conditions are observed, the proposed U.S. Uranium Reserve is established, and/or suitable sales contracts can be procured.
Conventional Activities
Conventional Extraction and Recovery Activities
During the three months ended March 31, 2021, the White Mesa Mill did not recover any quantities of U3O8, focusing instead on developing its REE recovery business. During 2021, the Company expects to recover approximately 30,000 to 60,000 pounds of U3O8 at the Mill, including uranium recovered through the processing of REE- and uranium-bearing natural monazite ore. The Company also expects to produce approximately 2,000 to 3,000 tons of mixed REE carbonate at the Mill, containing approximately 1,000 to 1,600 tons of TREO. The Company currently has approximately 150,000 pounds of U3O8 contained in stockpiled alternate feed material and ore inventory that can be recovered in the future for the U.S. uranium reserve or as general market conditions warrant. In addition, there remains an estimated 1.5-3 million pounds of solubilized recoverable V2O5 inventory remaining in the tailings facility awaiting future recovery, as market conditions may warrant.
The White Mesa Mill has historically operated on a campaign basis whereby uranium and/or vanadium recovery is scheduled as mill feed, cash needs, contract requirements, and/or market conditions may warrant. The Company currently expects that planned uranium production from Alternate Feed Materials, processing natural monazite ore for the recovery of uranium and REEs, and receipt of uranium-bearing materials from mine cleanup activities will keep the Mill in operation through 2021 and beyond. The Company is also actively pursuing opportunities to process additional sources of natural monazite ore, new and additional Alternate Feed Material sources, and new and additional low-grade ore from third parties in connection with various uranium clean-up requirements. Successful results from these activities would allow the Mill to extend operations well into 2022 and beyond.
However, if at any time the Company is unable to justify full operation of the Mill, the Company would place uranium, REE and/or vanadium recovery activities at the Mill on standby at that time. While on standby, the Mill would continue to dry and package material from the Nichols Ranch Plant, if operating, and continue to receive and stockpile Alternate Feed Materials for future milling campaigns. Each future milling campaign would be subject to receipt of sufficient mill feed and resulting cash flow that would allow the Company to operate the Mill on a profitable basis or to recover all or a portion of the Mill's standby costs.
Conventional Standby, Permitting and Evaluation Activities
During the three months ended March 31, 2021, standby and environmental compliance activities occurred at the Pinyon Plain Project. Subject to any actions the Company may take in response to the proposed establishment of a U.S. Uranium Reserve and general market conditions, during 2021, the Company plans to continue carrying out engineering, metallurgical testing, procurement and construction management activities at its Pinyon Plain Project. The timing of the Company’s plans to extract and process mineralized materials from this Project will be based on the results of this additional evaluation work, along with market conditions, available financing, sales requirements, and/or permits required for copper recovery at the Mill.
The Company is selectively advancing certain permits at its other major conventional uranium projects, such as the Roca Honda Project, a large, high-grade conventional project in New Mexico. The Company will also maintain required permits at the Company’s conventional projects, including the Sheep Mountain Project, La Sal Complex, and the Whirlwind mines. In addition, the Company will continue to evaluate the Bullfrog Property at its Henry Mountains Project. Expenditures for certain of these projects have been adjusted to coincide with expected dates of price recoveries based on the Company’s forecasts. All of these projects serve as important pipeline assets for the Company’s future conventional production capabilities, as market conditions warrant. As more generally referenced, above, the Company is also in discussions to potentially sell the Tony M, Daneros, Rim and certain other non-core conventional uranium assets.
Uranium Sales
During the three months ended March 31, 2021, the Company completed no sales of uranium. The Company currently has no remaining contracts, and therefore all existing uranium inventory and future production is fully unhedged to future uranium price changes.
Vanadium Sales
During the three months ended March 31, 2021, the Company completed no sales of vanadium. The Company expects to sell finished vanadium product when justified into the metallurgical industry, as well as other markets that demand a higher purity product, including the aerospace, chemical, and potentially the vanadium battery industries. The Company expects to sell to a diverse group of customers in order to maximize revenues and profits. The vanadium produced in the 2019/2020 pond return campaign was a high-purity vanadium product of 99.6%-99.7% V2O5. The Company believes there may be opportunities to sell certain quantities of this high-purity material at a premium to reported spot prices. The Company may also retain vanadium product in inventory for future sale, depending on vanadium spot prices and general market conditions.
Rare Earth Sales
The Company commenced ramping-up commercial production of a mixed REE carbonate in March 2021. Subject to successful ramp-up of production of a salable product during 2021, the Company expects to sell some or all of this intermediate REE product to Neo’s Silmet separation facility in Europe and potentially to other REE separation facilities outside the U.S. To the extent not sold, the Company expects to stockpile mixed REE carbonate at the Mill for future separation and other downstream REE processing at the Mill or elsewhere.
The Company also continues to pursue new sources of revenue, including additional Alternate Feed Materials and other sources of feed for the White Mesa Mill.
Continued Efforts to Minimize Costs
The Company will continue to seek ways to minimize the costs of maintaining its critical properties in a state of readiness for potential improvements in market conditions, and is evaluating whether additional cost-cutting measures may be warranted at this time as a result of general market conditions, such as the possibility of monetizing non-core conventional assets of the Company.
Results of Operations
The following table summarizes the results of operations for the three months ended March 31, 2021 and 2020 (in thousands of U.S. dollars):
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Three months ended
March 31,
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2021
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2020
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Revenues
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Alternate feed materials processing and other
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$
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353
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$
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393
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Total revenues
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353
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393
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Impairment of inventories
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—
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1,078
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Gross margin (loss)
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353
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(685)
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Other operating costs and expenses
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Development, permitting and land holding
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3,371
|
|
|
677
|
|
Standby costs
|
|
|
|
|
2,135
|
|
|
1,924
|
|
Accretion of asset retirement obligation
|
|
|
|
|
321
|
|
|
478
|
|
Total other operating costs and expenses
|
|
|
|
|
5,827
|
|
|
3,079
|
|
|
|
|
|
|
|
|
|
Selling, general and administration
|
|
|
|
|
|
|
|
Selling costs
|
|
|
|
|
—
|
|
|
12
|
|
General and administration
|
|
|
|
|
3,373
|
|
|
4,030
|
|
Total selling, general and administration
|
|
|
|
|
3,373
|
|
|
4,042
|
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
|
|
|
(8,847)
|
|
|
(7,806)
|
|
Interest expense
|
|
|
|
|
(16)
|
|
|
(350)
|
|
Other income (loss)
|
|
|
|
|
(2,047)
|
|
|
2,492
|
|
Net loss
|
|
|
|
|
$
|
(10,910)
|
|
|
$
|
(5,664)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
|
|
|
$
|
(0.08)
|
|
|
$
|
(0.05)
|
|
|
|
|
|
|
|
|
|
Revenues
Previously, the Company’s revenues from uranium were based on delivery schedules under long-term contracts, which could vary from quarter to quarter. As of December 31, 2018, the Company no longer has any uranium sales contacts. Any future sales of uranium will be subject to sale in the spot market until a time when the Company can agree to terms for long-term sales contracts or potentially pursuant to direct government purchases. In the year ended December 31, 2019, the Company initiated the selling of vanadium recovered from Pond Return at the White Mesa Mill under a Sales and Agency Agreement appointing an exclusive sales and marketing agent for all vanadium pentoxide produced by the Company.
Revenues for the three months ended March 31, 2021 and 2020 totaled $0.35 million and $0.39 million, respectively, which was primarily related to fees for ore received from a third-party uranium mine.
Operating Expenses
Uranium and Vanadium recovered and costs and expenses applicable to revenue
In the three months ended March 31, 2021, the Company did not recover any material amount of pounds of U3O8 from ISR recovery activities or from Alternate Feed Materials at White Mesa Mill. In the three months ended March 31, 2020, the Company recovered 5,900 pounds of U3O8 from ISR recovery activities for the Company’s own account and 67,000 pounds of V2O5 from Pond Return.
There are no costs and expenses applicable to revenue for the three months ended March 31, 2021 and 2020, as the Company did not make any concentrate sales of U3O8 or V2O5 and only collected a fee to receive ore from a third-party uranium mine for which the Company incurred de minimis costs.
Other Operating Costs and Expenses
Development, permitting and land holding
For the three months ended March 31, 2021, the Company spent $3.37 million for development of the Company’s properties, primarily due to the development and ramping up of the expected REE carbonate production program at the White Mesa Mill, compared to $0.68 million for the three months ended March 31, 2020 for the development of the Company’s properties.
While we expect the amounts relative to the items listed above have added future value to the Company, we expense these amounts, as we do not have proven or probable reserves at any of the Company’s projects under SEC Industry Guide 7.
Standby costs
The Company’s La Sal and Daneros Projects were placed on standby in 2012 as a result of market conditions. In February 2014, the Company placed its Arizona 1 Project on standby. In the beginning of 2018, as well as the beginning of 2020, the White Mesa Mill operated at lower levels of uranium recovery, including prolonged periods of standby. The Nichols Ranch Project was also placed on standby in early 2020. Costs related to the care and maintenance of the standby mines, along with standby costs incurred while the White Mesa Mill was operating at low levels of uranium recovery or on standby, are expensed.
For the three months ended March 31, 2021, standby costs totaled $2.14 million, compared with $1.92 million in the prior year. The increase is primarily related to a reduction in recovery activities at the Nichols Ranch and increased project standby activities at the Mill.
Accretion
Accretion related to the asset retirement obligation for the Company’s properties was $0.32 million for the three months ended March 31, 2021 compared with $0.48 million for the three months ended March 31, 2020. This decrease is primarily due to the Company delaying the timing of estimated reclamation activities at some of its projects.
Selling, general and administrative
Selling, general and administrative expenses include costs associated with marketing uranium, corporate, general and administrative costs and intangible asset amortization from favorable contracts. Selling, general and administrative expenses consist primarily of payroll and related expenses for personnel, contract and professional services, share-based compensation expense and other overhead expenditures. Selling, general and administrative expenses totaled $3.37 million for the three months ended March 31, 2021 compared to $4.04 million for the three months ended March 31, 2020.
Impairment of Inventories
For the three months ended March 31, 2021, the Company recognized no impairment charges related to inventory. For the three months ended March 31, 2020, the Company recognized $1.08 million in inventory impairment. The impairment of inventories was due to continued lower uranium prices versus our cost to produce at the Nichols Ranch Project.
Interest Expense and Other Income and Expenses
Interest expense
Interest expense for the three months ended March 31, 2021 was $0.02 million, compared with $0.35 million for the three months ended March 31, 2020, respectively. The decrease is primarily related to the full redemption of Convertible Debentures.
Other income and expense
For the three months ended March 31, 2021, other income and expense was $2.05 million expense, net. These amounts primarily consist of a mark-to-market loss on the increase in fair value of warrant liabilities of $3.50 million and a loss on foreign exchange of $0.34 million, partially offset by a $1.46 million mark-to-market gain on investments accounted for at fair value, other income of $0.33 million and interest income of $0.01 million.
For the three months ended March 31, 2020, other income and expense was $2.49 million income, net. These amounts primarily consist of a mark-to-market gain on the change in fair value of the Convertible Debentures of $0.47 million, a mark-to-market gain on the decrease in fair value of warrant liabilities of $1.15 million, a gain on foreign exchange of $1.24 million, and interest income of $0.07 million, mostly offset by a $0.39 million mark-to-market loss on investments accounted for at fair value.
Net Loss
During the quarter ended March 31, 2021, the Company incurred a net loss of $10.91 million compared to a net loss of $5.66 million for the quarter ended March 31, 2020. An increase in the Company’s share price resulted in a non-cash mark-to-market increase in warrant liabilities of $3.50 million during the quarter ended March 31, 2021 compared to a decrease of warrant liabilities of $1.15 million during the quarter ended March 31, 2020. Further contributing to the Company’s increased net loss, during the quarter ended March 31, 2021, and as compared to March 31, 2020, the Company spent an additional $2.69 million in development expenditures, primarily related to the development and ramping up of the expected REE carbonate production program at the Mill.
LIQUIDITY AND CAPITAL RESOURCES
Shares issued for cash
On November 5, 2018, the Company filed a prospectus supplement to its U.S. registration statement, qualifying for distribution up to $24.50 million in aggregate Common Shares under the ATM. Then, on the same date, the Company filed a base shelf prospectus whereby the Company may sell any combination of the “Securities” as defined thereunder in one or more offerings having an aggregate offering price of up to $150.00 million. On May 5, 2019, the prospectus supplement to its U.S. registration statement expired and was replaced on May 7, 2019 by a new prospectus supplement in the same amount, qualifying for distribution up to $24.50 million in aggregate Common Shares under the ATM. On December 31, 2019 and December 31, 2020, the Company filed prospectus supplements to its U.S. registration statement, qualifying for distribution up to $30.00 million and $35.0 million, respectively, in additional Common Shares under the ATM. On April 8, 2021, the Company filed a prospectus supplement to its U.S. registration statement, qualifying for distribution up to $33.50 million in additional Common Shares under the ATM. The Company filed a base shelf prospectus that went effective on March 18, 2021 whereby the Company may sell any combination of the “Securities” as defined thereunder in one or more offerings having an aggregate offering price of up to $300.00 million.
From April 1, 2021 through May 12, 2021, the Company issued 2.16 million Common Shares at a weighted average price of $6.01 for net proceeds of $12.70 million using the ATM.
Working capital at March 31, 2021 and future requirements for funds
At March 31, 2021, the Company had net working capital of $60.37 million, including $42.70 million in cash, $1.41 million of marketable securities, approximately 690,800 pounds of uranium finished goods inventory and approximately 1,672,000 pounds of vanadium finished goods inventory. The Company believes it has sufficient cash and resources to carry out its business plan for at least the next twelve months.
The Company is actively focused on its forward-looking liquidity needs, especially in light of the current depressed uranium markets. The Company is evaluating its ongoing fixed cost structure as well as decisions related to project retention, advancement and development. If current uranium prices persist for any extended period of time, the Company will likely be required to raise capital or take other measures to fund its ongoing operations. Significant development activities, if warranted, will require that we arrange for financing in advance of planned expenditures. In addition, we expect to continue to augment our current financial resources with external financing as our long-term business needs require. We cannot provide any assurance that we will pursue any of these transactions or that we will be successful in completing them on acceptable terms or at all.
The Company manages liquidity risk through the management of its working capital and its capital structure.
Cash and cash flows
Three months ended March 31, 2021
Cash, cash equivalents and restricted cash were $63.53 million at March 31, 2021, compared to $40.99 million at December 31, 2020. The increase of $22.54 million was due primarily to cash provided by financing activities of $30.39 million, cash provided by investing activities of $0.57 million, and the impact of foreign exchange rate fluctuations on cash held in foreign currencies of $0.03 million, offset by cash used in operating activities of $8.45 million.
Net cash used in operating activities of $8.45 million is comprised of the net loss of $10.91 million for the period adjusted for non-cash items and for changes in working capital items. Significant items not involving cash were $0.77 million of depreciation and amortization of property, plant and equipment, share-based compensation expense of $0.70 million, a $3.50 million change in warrant liabilities, accretion of asset retirement obligation of $0.32 million, and unrealized foreign exchange loss of $0.43 million, offset by other non-cash expenses of $1.68 million and a revision of asset retirement obligations of $0.04 million. Other items include an increase in inventories of $0.40 million, a decrease in accounts payable and accrued liabilities of
$0.51 million, an increase in prepaid expenses and other assets of $0.63 million and an increase in trade and other receivables of $0.01 million.
Net cash provided by investing activities was $0.57 million comprised of $1.17 million cash received from maturities of marketable securities partially offset by $0.60 million cash used for the purchase of mineral properties and property, plant and equipment.
Net cash provided by financing activities totaled $30.39 million consisting of $29.91 million net proceeds from the issuance of shares under the Company's ATM facility, cash received from exercise of stock options of $0.70 million, and cash received from exercise of warrants of $0.44 million, partially offset by $0.66 million cash paid to fund employee income tax withholding due upon vesting of restricted stock units.
Three months ended March 31, 2020
Cash, cash equivalents and restricted cash were $43.66 million at March 31, 2020, compared to $32.89 million at December 31, 2019. The increase of $10.77 million was due primarily to cash provided by financing activities of $18.57 million, cash provided by investing activities of $2.20 million, offset by cash used in operating activities of $8.32 million and loss on foreign exchange on cash held in foreign currencies of $1.68 million.
Net cash used in operating activities of $8.32 million is comprised of the net loss of $5.66 million for the period adjusted for non-cash items and for changes in working capital items. Significant items not involving cash were $0.30 million of depreciation and amortization of property, plant and equipment, $1.08 million impairment on inventory, share-based compensation expense of $1.00 million, accretion of asset retirement obligation of $0.48 million, other non-cash expenses of $0.80 million, unrealized foreign exchange loss of $0.39 million, a decrease in trade and other receivables of $0.04 million, offset by an increase in inventories of $2.12 million, an increase in prepaid expenses and other assets of $0.50 million, a decrease in accounts payable and accrued liabilities of $2.51 million, $1.15 million change in warrant liabilities, and a $0.47 million change in the value of Convertible Debentures.
Net cash provided by investing activities was $2.20 million, related to cash received from maturities of marketable securities.
Net cash provided by financing activities totaled $18.57 million consisting of $19.10 million net proceeds from the issuance of common shares from public offerings and $0.13 million cash received from non-controlling interest partially offset by $0.42 million cash paid to fund employee income tax withholding due upon vesting of restricted stock units and $0.24 million to repay loans and borrowings.
Critical accounting estimates and judgments
The preparation of these consolidated financial statements in accordance with U.S. GAAP requires the use of certain critical accounting estimates and judgments that affect the amounts reported. It also requires management to exercise judgment in applying the Company’s accounting policies. These judgments and estimates are based on management’s best knowledge of the relevant facts and circumstances taking into account previous experience. Although the Company regularly reviews the estimates and judgments made that affect these financial statements, actual results may be materially different.
Significant estimates made by management include:
a. Exploration Stage
SEC Industry Guide 7 defines a reserve as “that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination.” The classification of a reserve must be evidenced by a bankable feasibility study using the latest three-year price average. While the Company has established the existence of mineral resources and has successfully extracted and recovered saleable uranium from certain of these resources, the Company has not established proven or probable reserves, as defined under SEC Industry Guide 7, for these operations or any of its uranium projects. As a result, the Company is in the Exploration Stage as defined under Industry Guide 7. Furthermore, the Company has no plans to establish proven or probable reserves for any of its uranium projects.
While in the Exploration Stage, among other things, the Company must expense all amounts that would normally be capitalized and subsequently depreciated or depleted over the life of the mining operation on properties that have proven or probable reserves.
Items such as the construction of wellfields and related header houses, additions to our recovery facilities and advancement of properties will all be expensed in the period incurred. As a result, the Company’s consolidated financial statements may not be directly comparable to the financial statements of mining companies in the development or production stages.
b. Resource estimates utilized
The Company utilizes estimates of its mineral resources based on information compiled by appropriately qualified persons. The information relating to the geological data on the size, depth and shape of the deposits requires complex geological judgments to interpret the data. The estimation of future cash flows related to resources is based upon factors such as estimates of future uranium prices, future construction and operating costs along with geological assumptions and judgments made in estimating the size and grade of the resource. Changes in the mineral resource estimates may impact the carrying value of mining and recovery assets, goodwill, reclamation and remediation obligations and depreciation and impairment.
c. Depreciation of mining and recovery assets acquired
For mining and recovery assets actively extracting and recovering uranium we depreciate the acquisition costs of the mining and recovery assets on a straight-line basis over our estimated lives of the mining and recovery assets. The process of estimating the useful life of the mining and recovery assets requires significant judgment in evaluating and assessing available geological, geophysical, engineering and economic data, projected rates of extraction and recovery, estimated commodity price forecasts and the timing of future expenditures, all of which are, by their very nature, subject to interpretation and uncertainty.
Changes in these estimates may materially impact the carrying value of the Company’s mining and recovery assets and the recorded amount of depreciation.
d. Impairment testing of mining and recovery assets
The Company undertakes a review of the carrying values of its mining and recovery assets whenever events or changes in circumstances indicate that their carrying values may exceed their estimated net recoverable amounts determined by reference to estimated future operating results and net cash flows. An impairment loss is recognized when the carrying value of a mining or recovery asset is not recoverable based on this analysis. In undertaking this review, the management of the Company is required to make significant estimates of, among other things, future production and sale volumes, forecast commodity prices, future operating and capital costs and reclamation costs to the end of the mining asset’s life. These estimates are subject to various risks and uncertainties, which may ultimately have an effect on the expected recoverability of the carrying values of mining and recovery assets.
e. Asset retirement obligations
Asset retirement obligations are recorded as a liability when an asset that will require reclamation and remediation is initially acquired. For disturbances created on a property owned that will require future reclamation and remediation the Company records asset retirement obligations for such disturbance when occurred. The Company has accrued its best estimate of its share of the cost to decommission its mining and milling properties in accordance with existing laws, contracts and other policies. The estimate of future costs involves a number of estimates relating to timing, type of costs, mine closure plans, and review of potential methods and technical advancements. Furthermore, due to uncertainties concerning environmental remediation, the ultimate cost of the Company’s decommissioning liability could differ from amounts provided. The estimate of the Company’s obligation is subject to change due to amendments to applicable laws and regulations and as new information concerning the Company’s operations becomes available. The Company is not able to determine the impact on its financial position, if any, of environmental laws and regulations that may be enacted in the future. Additionally, the expected cash flows in the future are discounted at the Company’s estimated cost of capital based on the periods the Company expects to complete the reclamation and remediation activities. Differences in the expected periods of reclamation or in the discount rates used could have a material difference in the actual settlement of the obligations compared with the amounts provided.
Recently Adopted Accounting Pronouncements
Fair Value Measurement
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, which amended the fair value measurement guidance by removing and modifying certain disclosure requirements, while also adding new disclosure requirements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty would be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments would be applied retrospectively to all periods presented upon their effective date. The Company adopted this pronouncement effective January 1, 2020.
Recently Issued Accounting Pronouncements Not Yet Adopted
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” The new standard is effective for reporting periods beginning after December 15, 2022 (January 1, 2023 for the Company) for Smaller Reporting Companies. The standard replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements.
Income Taxes - Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, “Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740),” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 will be effective for interim and annual periods beginning after December 15, 2020 (January 1, 2021 for the Company). Early adoption is permitted. The Company has evaluated the impact of the adoption of ASU 2019-12 which does not currently have an impact on its consolidated financial statements.