Uranium Resources, Inc. (NASDAQ:URRE)
Q3 2008 Earnings Call
November 10, 2008 11:00 a.m. ET
Deborah Pawlowski – Investor Relations
David Clark – President and Chief Executive Officer
Rick Van Horn – Executive Vice President and Chief Operating Officer
Tom Ehrlich – Chief Financial Officer
David Talbot – Dundee Capital Markets
Paul Stouse – Rice-Voelker
Peter Homans – Parkman
Greetings and welcome to the Uranium Resources, Inc. third quarter 2008 earnings conference call. (Operator Instructions). As a reminder this conference is being recorded. It is now my pleasure to introduce your host Ms. Deborah Pawlowski, Investor Relations for Uranium Resources. Thank you, Ms. Pawlowski, you may begin.
Thank you, Doug, and good morning everyone. We certainly appreciate your time today and your interest in Uranium Resources. On today’s call we have President and CEO, David Clark; Rick Van Horn, Executive Vice President and Chief Operating Officer; and Tom Ehrlich, Chief Financial Officer.
Dave is going to cover some comments regarding the release and the company’s outlook , and Tom Ehrlich will do a brief review of the financials. The we will open it up it for Q&A. If you do not have the release, it can be found at our website which is uraniumresources.com
As you are aware, we may make some forward-looking statements during the formal presentation and the Q&A portion of this teleconference. Those statements apply to future events which are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from where we are today.
These factors are outlined in the release as well as in documents filed by the company with the Securities and Exchange Commission. You can find those at our website where we regularly post information and at the SEC’s website, sec.gov. So please review our forward-looking statements in conjunction with these precautionary factors.
With that, let me turn it over to Dave to begin the discussion. Dave?
Thanks, Debbie. Given all that has happened in the world in the last few weeks, months, not just the world but the uranium market in particular, I’m just going to try to give every of what we have been doing in the past few months and more importantly where we go from here.
As I said on the August call I believe we need to make do with what we have and that includes our cash, our production, out people and our assets. We also said at that time we would only be investing in new wellfields or putting money in the ground if we get (inaudible 00:05:29) significant margin for it given market risk, technical risk and geologic risks.
As far as what we have, obviously we have cash at this point in time. We are doing everything we can to slash all non-essential spending which only makes sense and it is not common to us.
We will make new investments only if they come to advance the company strategy. Our initial goal is to make it through at least the end of 2010 on the cash we have in hand. For production we have been reducing capital expenditure, so we have not been putting money into the ground and taking that market and project risk. In all projects, be it Kingsville Dome or Rosita or Vazquez, you tend to end up with an average recovery of a project, and some of those wellfields are going to end up a average recovery of a project. Some of those wellfields are going to end up being a lot better, some of them end up being worse. At this point in time, you do not know that until you really put the money into the ground. We are not willing to take that risk.
Though we are not going to develop new wellfields, we will continue to produce existing wellfields to the degree that they generate positive cash.
The people of this has always been considered its strength given their expertise. This company has been in business for 31 years. We have very good, young, talented middle managers. Mining uranium is not easy. We have certainly proven that over the last several years as have most other companies. But we need to maintain moving toward that core group of expertise so that we can be a viable company down the line.
This company also has considerable assets. Not only pounds in the ground (ph 00:07:07), 100 million pounds plus in New Mexico and an NRC license, we have licensed plants in Texas, but we also have limited reserves in Texas.
Part of what we need to be doing and we are working on is how do we monetize non-core assets and I think that calls on seeking business solutions, it does not require diluting our shareholders. That is again a guiding principal of this company at this point.
As far as strategy, it remains the same. It is rebuild our resource base in Texas where we can utilize our licensed plants and realize the value of those plants. There are other companies in Texas who are trying to develop resources without licenses plants, I think there needs to be, again, a business solution in Texas where there is a consolidation of business there.
In New Mexico we need to continue advancing towards production in that state. The UR argument from the Tenth Circuit Court were heard on May 12th. The window we were expecting at that time was two to six months. So it has now been six months, we have still not heard word, do not know how long that takes. It is not really indicative of what that means, what the delay means. But certainly is something we are looking to prevailing on as we have discussed on past calls.
We are also still waiting on drill permit to investigate or evaluate whether we have some ISR reserves on non-Indian country. We think we are close to that, we received a draft permit for that and we are expecting that any day.
The election also is going to cause political changes in New Mexico. We do not know if Governor Richardson was a supporter of President Elect Obama. We believe in New Mexico that seems to be his indications of state, that would bring on the Lieutenant Governor who we had seen as far more pro-business. There are also other elected officials in New Mexico who are term limited who could also remove some of the opposition that we have been facing.
We need to continue to look to build political support in New Mexico. One of the biggest issues in New Mexico–like every other state in this economy–is jobs, revenue. I think this an easier time to address uranium because it can be part of the solution, not just part of the problem. And as we have stated in the past part of our strategic plan is to acquire and build our reserves, so to build our 100 million pounds up to 200, 300 million pounds. And that is done in a bear market, not in a bull market.
Obviously the October credit crisis effected the general market, effected the economy. It forced additional uranium sales to drive down spot prices. And that downward price has put downward pressure on long-term prices as well. And the spot and long-term prices are crucial to us. We sell half our production under a spot contract to (inaudible 00:10:01) the other half under long term price indicator to U.G. We are now getting in the mid-to upper 30s from (inaudible 00:10:08). We are getting in the low 60s, low to mid-60s from U.G.
The problem is that it squeezes our margins. We have to make investment decisions 12 to 18 months before we recognize the final production from the wellfield. So wellfields that were brought on line this year had been developed, or the money we starting to be put in the ground way before the market declined. So that is part of the risk we have with the existing mix we have.
So, again, that is one of the reasons why we stopped putting money into the ground. We do expect at some point the uranium market to turn around. I will talk about that a little bit later. But at this point do not put any more money at risk unless we have substantial margin, we can expect substantial margin.
Recent actions taken. We stopped, again, new wellfield development. The existing wellfields that are on will continue to produce as long as they produce cash. If they do not produce cash, if they are near depleted reserves, we will shut them down. If they still have sufficient reserves we will not shut them in, bring them back later.
We are slashing all non-essential costs. We have closed our Corpus office, we closed our Albuquerque office, we have reduces salaried and hourly work force from 190 to 86. We are in the midst of reorganizing senior management. We are going to take this company down to its bare essentials and everything is on the table, including a salary reduction program. Our objective is to maintain the core assets that we have, not just reserves in the ground, licensed facilities, but the core people that we need to move forward so that we can position this company for the next bull market.
As far as the uranium market, the best I can say is the invisible hand is still at work these days. Demand side fundamentals continue to improve even with this economy. And it is certainly in the U.S. where President Elect Obama made the famous statement or revealed last week that if you want to build a coal plant go ahead, but it will bankrupt you. At the same time the supply side of the industry is facing a lot of serious challenges. Not just technically, politically, economically. So as the demand side of the market continues to improve, the supply side of the market appear to be contracting. And I think, at least in my opinion, that sets up the next bull market. It is not a question of if that will happen, it will be when.
From the demand side of the market concerns over the last year or so, maybe longer, initially was the speed of the renaissance, will that be delayed? Will there be regulatory hurdles? There was new construction risk; nobody wanted to be first. There was concerns about infrastructure bottlenecks. And certainly recently and in this economy, what about costs? Are these investments too big to make?
As far as the speed of the renaissance, I will make a couple of comments. What I was sensing from utilities for a long period of time was a reluctance to be the guinea pig. We are going to be building reactors in this country that have never been built. So we need to finish the certification process for the GE and Westinghouse designs and then somebody has to be first. The industry, to its credit, has been addressing–and government as well–has been addressing those issues. New Start is an organization that was organized to work together along with the DOE’s nuclear powered 210 program. To get these two reactor designs certified and to see the construction of the first two plants. So instead of one company taking the risk, all the companies would be involved to get these plants certified and built.
I also sense that the fear is gone and that is giving way to pride. I was at the NEI meeting a couple of weeks ago and I hear anecdotal evidence that instead of people fearing of being first, they want to be leader in the industry. Then the economy has changed. But where everybody was reluctant to be that guinea pig now there seems to be a race to those loan guarantees that the government set up and to bring the plants on line.
Outside the U.S. there was an announcement last week by China, which I think continues to be the driver of this industry. They announced that they now expect to have 70,000 megawatts installed capacity by 2020. This is a further increase of past pronouncements. The last one was 45,000 gigawatts. Now that is a big number compared to the current installed capacity of 8500 megawatts. So by in the next 11 years they expect to raise almost eight, nine-fold their installed capacity. And in part of that announcement they said it is not just a problem they are having with pollution from coal, it is also infrastructure problems. Last winter they had a much colder winter then normal and you have transportation problems with coal and freezing coal piles. And they lost capacity with coal because of cold weather. Interesting in a world of global warming concerns.
India has also announced last week that they plan to have 40,000 megawatts of installed capacity by 2020. And they currently have 6100 megawatts of installed capacity. So that is a substantial increase in both China and India by 2020, in 11 years their fleet will be larger than the current U.S. fleet. And they will not stop there, they will continue to build to 2030.
Now with all those demand requests for reactors, it then becomes a question of infrastructure. I think I announced or discussed on the last call, Mitsubishi heavy metals or its heavy industries doubling the capacity, making the commitment, spending half a billion dollars to increase or double in capacity. There was announcement in the last few weeks that Areva and Northrop Grumman are going to use Northrop Newport’s newest facilities to build a reactor. Heavy equipment in the U.S. So it would not only be additional capacity, but it will be homegrown, so we do not have to import the large components for a new nuclear reactor. And then it is my contention if the demand is there the infrastructure will be built and the supply side of the industry seems to be doing that.
With all that positive on the uranium side it is still a very negative environment for coal, in my opinion. Vice President Elect Biden came out and said there will be no new coal plants built. President Elect Obama said that you can build a coal plant but it will bankrupt you. The problem that utilities face on the coal side is similar to the cost on the nuclear side. The majority of the investment decision for nuclear the rule used to be 80-20, is the upfront capital to build the plant and then 20% of the operating and maintenance and fuel. It is the exact opposite for coal where the 80% of the cost is the operation of the plant and 20% is capital. Moving forward I think that gives nuclear a distinct advantage because it caps off what the capital will be moving forward. It may be expensive up front, but at least you know what your capital investment will be and then you have a much lower operating and maintenance and fuel cost moving forward.
The problem with coal these days is you do not know what that capital investment is going to be if you have to go back and retrofit for clean coal technology. So you have an uncertainty as to the capital investment, and you also have an uncertainty to the cost of the coal. Coal had doubled in price on the spot market over a year. It is also a large part of the cost of coal is the transportation from the mine site to the utility. So there is uncertainty on all sides for coal which again is the advantage of nuclear.
I also think there has been a response to the cost factor from a nuclear development standpoint. There is certainly and economy of scale for people wanting to bring on 1500 megawatt reactors, the largest reactors there are. There has been a significant move also to mid range mid-size reactors, 500, 600, 700 megawatts, not only for developed countries but for developing countries who do not need a large multi-billion dollar reactor.
And that is not the only thing moving forward. There is also mini reactors and the one that gets the most press these days is Hyperion who has a 25 megawatt reactor that cost 25 to $30 million. It operates for like six to 10 years. You can transport on the back of an 18-wheeler. Their intent is to build 4000 of these initially and then in the ultimately long term 400,000. It runs on 10% enriched uranium hydride. So that is something that will address the major cost component of building nuclear power plants which when you build a plant three, four, five billion dollars is a significant investment compared to what utilities have. So these small reactors, new technologies should be a significant player in the future.
Toshiba also has a much smaller reactor which is a 200 kilowatt reactor, which is basically 2000 100-watt light bulbs. Again as the reactor, as the end of life on an industry reactor, manufacturers look at the factors facing nuclear power. Certainly making small reactors with less costly investment is something that will allow nuclear to exploit its advantages over coal.
On the supply side, there remains a lot of technical risk, not just (inaudible 00:19:37) of uranium one, there are certainly technical considerations for Olympic Dam which came out with a new plan with no cost attached to it last week. That would be a five stage development of Olympic Dam starting in 2015 and ending in 2025. Part of their problem is if they buy products. Its not just uranium, it is also copper. The price of copper has come down more than 50% over the last couple of months as well.
Other aspects of the supply side is prices go up, costs go up. So the cost structure of the industry has increased substantially because a lot of it is labor, equipment, supplies, energy cost has gone higher. We see that anecdote evidence is coming out of Kazakhstan where their cost is not in the teens or the 20s anymore, it could be significantly higher than that. Part of that is because of the 700% increase in sulfuric acid last year. Not just the shortage, the cost of sulfuric acid anywhere.
Obviously as the economy slows the prices come down and that helps those factors, but there are certain things that just do not disappear. Costs do remain high.
There is also a heavy debt load by a lot of companies in this industry that they took on the debt to develop projects that could face technical risks. And many of these are companies that are un-hedged. So in a falling market they have to service debt. So there is a lot of problems on the supply side of the industry. Obviously I do not believe it probably will come on as quickly as in the past because of the lower prices and because of these technical risks.
That said, the demand for primary production under the 2007 W&A report, the upper case scenario, I think it was before the Chinese and India additions to their planned capacity, called for three times primary production by 2030. And that is not all that far away and that is a lot of demand in a demand side of the market for increasing not decreasing.
So how do we position URI with all this? I think there’s advantages and disadvantages when markets are in bull market phases and bear market phases. When prices go up costs go up. We were facing–if you listened to these calls over the last couple of years–competition from people. Supply pipe, we deal in Texas where we are dealing with the oil and gas industry. Other competitors where the cost of leases went up, the cost of equipment went up, we had shortage of drill rigs of PFM logging tools. There were shortages everywhere which drove our costs up. And frankly there was few business deals to be had because everybody was trying to advance what they had without very much cooperation in an industry.
When you have a bear market as we have and have had, those shortages are basically eliminated. The costs start to come down. Of course the assets values come down with that also. But I think it improves the environment for lower cost business solutions to advance the company’s strategy. We can acquire assets at lower prices, we can monetize non-core assets to continue our business.
Our objective is ease. We want to position the company the best that we can for the restart that will come with the next bull market. We have remaining wellfields to be developed. We have not talked about Rosita. We obviously had a lot of technical problems with the Rosita wellfield 8. Part of the problem, it is a shallow deposit so we do not get the hydrostatic (inaudible 00:23:22) oxygen solution. We tried various oxidants, we were able to double depart (inaudible 00:23:29) recovery from that. But as prices started to go down and further techniques would have been applied, we did not think it was wise at this point in time to spend cash to continue working with Rosita wellfield 8. There are other technical solutions. You can artificially raise the water table to increase oxygen absorption and uranium recovery. So there are avenues left, but not in this price environment, not with this uncertainty. Again one of the guiding principals is to conserve cash not to use cash to burn it putting it into the ground.
We have limited reserves at Kingsville Dome but a couple of wellfields that can be developed with additional license and permitting activities. We have been drilling at Marshall, we have had promising results there. It will take time to evaluate the ISR ability of that deposit but it is certainly something that we think if it is ISR amenable and technically feasible it is something that we can bring on within a couple of year timeframe.
We are also looking for business solutions, again, in Texas. Either joint venturing or acquiring reserves, utilizing our plants, recognizing the value in those plants. They are licensed facilities that add value. And where parties were less amenable to discuss, again, common solutions in the past, I think we all face the same problems and there will be ways to work together in Texas.
We also need to advance our New Mexico reserves or resources towards development. I do think that is easier in a bad economy. New Mexico has the same problems of everyone else. The number one issue is jobs. The are facing losses of revenues and taxes. The politicians are looking for solutions. The argument against uranium–the argument for uranium is being heard, the argument against it becomes harder to make because people want to know the facts. Is this a possible way to increase jobs, increase revenues to the state? So the arguments are being heard.
There was a workshop a couple of weeks ago at Sandia Labs to look at the reclamation of ISR projects, which is one of the major concerns in New Mexico. It was not only Sandia, but it was Los Alamos Labs which very high integrity in the state of New Mexico amongst the people there. They provide a lot of jobs. They want to and they believe that ISR mining is not only technically and feasibly but environmentally sound. Along the lines we have discussed in the past.
Then we see a lot of movement into Mexico to build the support we need to bring the next of the reserves on line. Bottom line, when the market returns we stand to be ready by continuing our strategy to rebuild Texas reserves and New Mexico.
That is basically where we are and where we are going at this point in time. And at this point I will turn it over to Tom to review the financials.
Thank you, Dave. In going our third quarter 2008 production costs and financial statement information, I will begin with production. We produced 62,700 pounds in the third quarter. The majority of that was produced from the Kingsville Dome project, which is about 45, 200 pounds. We also had just under 10,000 pounds from Vasquez and just under 8000 produced during the quarter from our Rosita project.
Our production costs during the quarter were $68.52 a pound. Operating costs and the G&A were roughly split equally between that. Our operating costs were $34.78 a pound. Our depreciation and depletion were in the $33.74 a pound range.
At the end of the quarter we had 33,600 pounds of inventory. The average cost of that inventory on the books at September 30th was $57.35.
Our sales revenue for the third quarter of ’08 was $4 million on 66,300 pounds. The average sales price of $60.70. As Dave said our most recent sales, we have had sales in the month of October, an average price on those sales was $56.00 in 76 pounds (ph 00:27:54). The sales were 38,700 pounds, generating about $2.2 million of revenue, again which will be recorded in the third quarter.
Looking at our cost of uranium sales for the quarter, our direct cost of uranium sold was $3.6 million, just under $55.00 a pound. Our direct operating cost was $26.42 a pound and our DD&A costs were $28.47.
Also during the quarter we incurred exploration costs of just under a million dollars, specifically 962,000. Again, these activities were primarily related to exploration work done on the Marshall project in South Texas that Dave had mentioned earlier.
The largest component of our cost of sales for the quarter was a $10.9 million expense related to an impairment provision recorded this quarter. The charge resulted from our quarter end determination that our net book value of our uranium properties were in excess of their estimated fair market value at the end of the quarter. Now the fair value of each project was calculated by projecting the estimated future cash flows based upon projections for current and future production cost sales prices and the full cycle economic estimates, taking into consideration the full life of the project. Based on this analysis the net property values at Kingsville Dome and Rosita’s were written down by $4.6 million and $6.3 million respectively at September 30, 2008.
The significant driving factor for the impairment at Kingsville was, as Dave said, the declining uranium prices that occurred between the second and third quarters. Of the 4.6 million of our write-down for Kingsville Dome, around 60% of that was directly attributable to the drop in uranium prices. As uranium prices dropped, obviously the projected cash flows related to the future production drops with that and it resulted in a lower net present value of those cash flows.
The balance of the write down resulted from changes in future production costs in uranium production. The entire provision of Azita resulted primarily from the changes that we saw in production cost estimates from that project based upon the experiences we had to bring that production on during the quarter. Royal season commissions’ expense was $369,000 for the quarter, which equates to a $5.56 a pound charge for approximately 8.7% of sales.
Our corporate expenses including G&A for the third quarter totaled about $2 million. The breakdown of those major categories were non-cash stock compensation expense of about $300,000. Personnel costs, i.e., salary and burden of about $750,000, consulting and professional fees of about $250,000 and then legal, accounting, other public company expenses $250,000.
Moving on to our sources and uses of cash during the quarter, our balance at the end of September was about $13 million. This is down $3 million from what we had at the end of June of ’08. During the quarter, we used cash flow from operations of $1.7 million. We also had capital expenditures of about $1.4 million during the quarter, the majority of these being at Kings Well Dome for well field development evaluations of about $200,000 and again development costs at our Rosita and South Rosita projects of about $870,000.
Finally, our last bit of investing activities were related to the continuing financial (inaudible 00:31:40) obligations that we have at our South Texas projects and that resulted in a cost of about $100,000 during the quarter. Dave?
I think we are ready for questions.
Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. (Operator instructions) Our first question comes from the line of David Talbot with Dundee Securities. Please proceed with your question.
David Talbot – Dundee Capital Markets
Good morning gentlemen. I am just wondering what sort of arrangements you’ve made as far as delivering into contracts at this point?
We have what are basically production based contracts so what we produce, we deliver in a full, there is not a production quantity, limitation or obligation. It is simply whatever we produce is sold.
David Talbot – Dundee Capital Markets
Okay and you talked about monetizing non-core assets, do you have a breakdown of what you would consider a core and non-core asset at this point or are you going to try to keep that close at hand?
I think it’s close at hand. There are multiple, it’s not just from a negotiating standpoint, there’s multiple considerations in there as we constantly monitor the environment moving forward, you know, which was do we want to go. There is going to be certain strategic decisions based on how we want to move forward.
David Talbot – Dundee Capital Markets
Okay. I guess as far as potentially starting up operations again, is there a certain threshold that you are looking for? I imagine you are not going to stir it up again just to break even but you’ll be hoping for significantly higher prices going forward. Can you perhaps comment on that?
I think as mentioned earlier the breakdown of our existing contracts, obviously one is very favorable and one is very not and part of what we need to do I think is get a better contract mix. That is part of it so that we don’t have to produce again for half our production in the substantial discounts of the stock market, so that is a consideration, you know, what to realize prices and this also affects us as far as leasing and buying reserves because generally royalties are based on what your sales contract is. So one of the things we would like to get done in this period is just better our contract base and basically marketing has not been a major factor in this company.
It is simply unhedged. It’s gotten to these contracts to negotiate out of (inaudible 00:34:53) with the contracts but the degree that we can improve ourself and protect ourself through a down market to some degree. We simply take what the market gives us and again that has led to operational decisions that only pan out and you don’t even know how they come out until 12 to 18 months down the line.
Foreign prices were going higher, obviously we were benefitting from higher prices as prices went lower. Decisions we had made all of a sudden looked more risky because of falling prices so the direct answer to your question I think as I said in the August call, we need a significant return, and not just 10 or 20%. I think it’s a multiple to take on the technical, geologic, and market risk, but part of that is also again seeing what we can do with our contract base to remove some of that market risk.
David Talbot – Dundee Capital Markets
Okay, and I guess just this last question, taking a look at Rosita, I guess this is a leach issue thing you’re having and what do you see that you could do to turn that around should you bring it back into production?
Rick would you like to handle that one?
Rick Van Horn
Yes. We have several things we could do. We tested as we’ve said liquid based oxygens. They work; however, they are more expensive. We have looked at well spacing. Obviously, put more wells in to cut the spacing down, that’s going to be an increase in cost, and as Dave mentioned we have the possibility of artificially increasing the water level in the aquifer which will increase the amount of oxygen that could be dissolved in the water, thus increasing the mining rate. All of these take money and increase the costs somewhat.
David Talbot – Dundee Capital Markets
Right. Okay, thank you very much gentlemen. Tough times, hang in there.
Just to add to that, it’s not a question of are the reserves there. It’s a couple hundred thousand pounds or body reserve in the ground and we expect that it’s not that it’s not there. We just have to be able to put it in solution and get it serviced.
David Talbot – Dundee Capital Markets
Right. Okay, great, thank you very much.
Now our next question comes from the line of Paul Strauss, Rice-Voelker. Please proceed with your question.
Paul Stouse – Rice-Voelker
Good morning, guys, Mr. Stouse, I’ll correct the pronunciation.
Thank you very much.
Paul Stouse – Rice-Voelker
I was wondering, can you guys comment on any developments that there are at Ambrosia Lake? I guess last I recall, you guys were waiting on an exploration permit there and given that you do get that permit, is that something that you will proceed with, given the capital constraints and given what you know about the geology there?
I’ll give you an update because I just got the e-mail that we just got the permit this morning. We are heading into the winter months and in New Mexico, it’s already there so it’s something that would be deferred until spring anyway, since we don’t want to be drilling in the snow. It’s difficult enough.
So, I think we need to see what the environment is at that point in time, but again it is something that we’d like, there were several reasons to go after this permit, one because we think it could be ISR amenable so we need to test that. It is on non-Indian countries, that would certainly help. But it’s also an environment where we want to improve the state and work with the state to get this permit. Other companies have applied for permits and not got them. We’ve had a very good relationship with the state so it’s as much an effort to work with the state and educate them, the regulators as well, to move forward on this so it took considerably longer than we were planning. If it happened sooner, we probably would have drilled it before the onset of winter, but the decision we made was fine.
Paul Stouse – Rice-Voelker
Is it a project that you guys would proceed with on your own or would you seek to attract partners to develop it, or to explore it actually, and test it, assuming that you do get that (inaudible 00:38:46)?
It’s something that, it’s not a project that is big enough to bring on its own. It’s one to test ISR amenability on non-Indian country land, so we go into different sections of Ambrosia Lake. It was always seen as a pilot, somehow tied to the Crown Point license. Again, all options are on the table. We need to make an assessment of that is where we want to apply our capital.
Paul Stouse – Rice-Voelker
Very good, thank you very much.
Frankly in New Mexico right now, again the speculation in New Mexico is will, Governor Richardson is there, will he go with the Obama administration if he goes? He has not been a vocal opponent of Uranium mining but he has not come out in support of it either, so it’s basically been a we are going to do nothing approach and we, that gets us nowhere so the changing political environment will also help us in our change in how we might be able to do business in New Mexico.
Paul Stouse – Rice-Voelker
Alright, very good. Thanks a lot and good luck with things.
Our next question comes from the line of Peter Homans with Parkman. Please proceed with your question.
Peter Homans - Parkman
Hello David and Deborah. I know it’s sort of a rough environment. I think you are doing exactly the right thing to make sure that when the market recovers as it 100% will, everybody is going to stop using 199 pounds of uranium a year so I think you are doing a great job. I have three questions. One, was the cash usage this quarter reflective of what it is likely to be in the coming quarter or were you still in the process of cutting so this quarter will be perhaps a half million to a million size less? That’s one question. Second question is if you wait until spring with Ambrosia, does spring mean, I’ve been in Santa Fe in March, are we talking spring March or are we talking spring May?
And from the moment you sort of fit into the ground, how long do you think conservatively it takes your engineers to assess the amenability of that property to (inaudible 00:41:35)? And I guess then the final question and again, this is too many at once, it seems to me that the utility companies and you guys are playing a game of chicken. If I understand correctly, last year there was 230 or 240 million pounds contracted for against a background of 190 million of usage, what do you think the actual if you will overhang that has to clear is, simply is it the difference between 250 and 190 or is it bigger or smaller and how are you looking at, you know, when the national attrition of that access purchasing works itself off?
I’ll go in reverse order here. What I’ve heard from UX and other suppliers who mine far closer than I do, you start getting substantial uncover demand in year 2010, 2011. There’s another caveat to that, a lot of what utilities think is cover demand could be with suppliers who will not be bringing on those mines. So, as part of BHP’s announcement, they said that they are signing ten supply contracts, mostly with European but some U.S. utilities for the initial Phase I expansion of Olympic dams. Since that is delayed then utility thinks they have a supply base and they actually don’t because it’s going to be tied to production. So, there are those kind of considerations but I think certainly all I’ve seen when you get to 2010, 2011, the uncovered supply base is significantly improved.
As far as Chicago and utilities, I’ve been in this business for 31 years and it’s always been the doors opening for one is a slamming in the face of another and what I sense in this industry now is the price is down and I hear a lot of money companies saying if you don’t help us, we are not going to be around for you. That argument just never has worked for me. I think we need to be working together and I sense real supply concerns amongst utilities. We don’t need to tell them. That we don’t need to whine.
There are a number of utilities including some with a larger U.S. utility whose interest and they’ve demonstrated this interest, is to do whatever they can to increase the supply base and that’s an enrichment where you had three utilities step in and get LEX or three or four utilities step in and get LEX off the line to increase the enrichment. I see the same desire in the uranium side of the business so they have the need, they have the money. I think you will see more utility involvement. Obviously, I don’t think it’s the same degree as fell in the 70s when they were buying up properties and they took on all kinds of risks in a business that wasn’t their core business. I think there are business solutions that satisfy their needs and help us bring them the supplies that they need.
I guess from URI standpoints, New Mexico has six to seven million pounds less and it has a great exploration potential still. It has the largest supply base, the largest uranium consuming country in the world. I think it’s in utilities’ interest to get that online, and that is certainly something that we are chasing down.
As far as your second, how long does it, take I can let Rick comment on that. That’s basically the process is the permit is to drill up to 10 holes. We probably won’t need all those holes. You then take core samples, send them to the labs and however long that takes. Rick?
Rick Van Horn
As Dave said, we have a ten hole permit program. It may take less holes than that to do it. We are going to core the holes, send the core to labs and have leech tested (inaudible 00:45:24) leech on the core, do mineralogical work on it. I would estimate somewhere between four to six months of actual testing of the core to get the final answer on where those (inaudible 00:45:36).
As far as your first question, how does the fourth quarter relate to the first, that’s the third quarter, in the third quarter we were still making investments in Rosita, we were still bringing on a couple of oil fields, so we were putting capital in the ground. At this point we are not spending anything as far as new oil field developments and certainly the cost cutting we are doing is going to be more significant in the fourth quarter than in the third because it will be over three months versus a work in progress over the previous three months.
Peter Homans - Parkman
Okay, thanks very much. I apologize for the music. I’m in a Starbucks and I can’t get them to turn the music down, but anyway I think you are doing a great job and making the right decisions.
(Operator Instructions). There are no further questions in the queue at this time.
Dave, do you want to wrap it up?
Thanks for everybody’s interest and listening in this morning. Again, I think that it has been a very challenging year; to be sure in the last three months. We are trying to do everything we can to recognize the value of this company, as too many assets and too many good people do not get it right and as I said earlier uranium mining is not easy but hopefully on the right track and we do appreciate the feedback that we do and we got some investors and the projections they make and hopefully we will continue to have faith in what we do. Thank you very much and hope you have a good day.
Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.
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