"Going concern." This is the last thing an investor wants to see in financial statements. But there it was in the latest quarterly report from UR-Energy (NYSEMKT:URG) (MD & A page 13). For those not familiar with the term it means there is a significant risk that the company may not be around in the near future. When auditors conclude that the party could soon be over, they insist that a "going concern" warning be included in the financial statements. Otherwise, they won't sign the audit as it wouldn't be a true and accurate representation of the company.
Easy Come, Even Easier Going
Since the company began in March 2004, it has lost over $129 million. Cash flow over that period was a negative $95 million. This is understandable when you're building a mine and have no revenue. But now, with the firm announcing on August 2 that "production activities" have begun, this should have been the start of the company coming to life, not the start of life support. The June 30 balance sheet shows the following:
- Cash and short-term investments $ 12,435,020
- Current ratio .96
The current ratio is low because the $5 million bridge loan secured on May 13 is categorized as a current liability. This is to be paid from the proceeds of the longer-term loan facility of $20 million entered into on June 24. As of June 30 the facility was fully drawn. The nominal interest rate on this loan is 7.77% for the quarter ended September 2013. The effective interest rate, taking into account the fees paid and warrants issued, is 18.2%. A Visa-like rate indeed. The funder is saying this deal is high risk. The loan is secured by the assets of the Lost Creek property, i.e., mining equipment, buildings, mineral claims, etc. And, the assets of Pathfinder Mines are also pledged once that deal is completed. Completion, however, looks more and more unlikely.
The total purchase price for Pathfinder in July 2012 was $13,250,000 with a deposit of $1,325,000. The balance is due upon completion of all the regulatory and legal requirements. An historical estimate for Pathfinder is 15 million pounds of uranium. This is only an estimate, not NI 43-101 reserves. So, if the reserves come close to the estimate, this was quite a bargain at $1.00/lb. Now comes the hard part: paying for it.
There are other bills coming due, as well. There's the $5 million due on the bridge loan plus over $9 million of other current liabilities, all to be paid within one year at most. The $5 million will be paid soon if it has not already been retired. Then, there's the interest and principal payments on the $20 million loan facility. These commence at the end of September amounting to approximately $385,000 per quarter. Principal installments of $2.5 million start March 31, 2014. And, of course, there are operating expenses to be taken care of. A rough calculation of the cash needed to keep the ship afloat:
- $5 million (bridge loan)
- $385,000 interest x 3 quarters = $1,155,000
- $2.5 million principal x 3 quarters (to Sept 30/14) = $7.5 million
- $11.9 million for Pathfinder
- Total cash required before working capital through Sep 30, 2014 is approximately $25 million minus the $12 million they have on hand leaves about a $13 million deficit.
- $9.6 million in Accounts Payable, increasing the cash deficit to $22.6 million
- General & Admin cost of approximately $1.4 million per quarter for 5 quarters through Sept 30/14. Deficit then becomes $29.6 million. This is the amount of additional cash required to remain solvent.
These are only rough numbers, of course. And there will be some revenue flowing starting in the Fall. David Talbot of Dundee Capital Markets estimates sales of about 200,000 pounds for this year. Using a spot price of $40/lb and operating cost of $20/lb, that's only $8 million operating profit. Not enough to keep the doors open. Mr. Talbot estimates 800,000 pounds for 2014. If URG gets that far, of course. Depending on the price at which the uranium is delivered (spot versus contract) the revenue could be higher but still fall short of being enough to let the company stand on its own.
"Show me the money"
As the company states in its 2013 second quarter MD&A regarding two potential sources of debt financing (the Wyoming Industrial Bond application for approximately $34 million and an expansion of its existing $20 million loan facility): "The uncertainty of being able to close these financial arrangements casts substantial doubt as to the Company's ability to continue as a going concern."
It appears that management got a little too ambitious back in 2012 when they agreed to acquire Pathfinder. Now they are in a position of being desperate to borrow enough money to both complete the purchase and keep the Lost Creek project running until it becomes self-sustaining. That probably won't happen until next year, at the earliest. One has to question management's judgment in committing to an acquisition that was unaffordable.
If URG is unable to complete the Pathfinder purchase it will forfeit the deposit of $1,325,000. Being unable to close the deal may also have consequences for the $20 million loan facility, as the assets of Pathfinder form part of the collateral pledged against the loan.
David Talbot believes that the financing risk will "be largely sorted out" and has a price target of $2.30, over $1.00 higher than the current price. That would certainly be a tidy gain but the risk that the stock goes to zero is extremely high. The surprising thing is how well the stock has held up since the release of the financials. I may be missing something that these other investors are aware of, but a "going concern" statement is a huge red flag. Anyone considering purchasing URG would be well advised to wait until solid financing is announced. This event will drive the stock higher but also ensure a possibility of capital gains as the company removes that one foot that's currently in its grave.
Additional disclosure: As always, investing in small cap resource stocks entails extreme risks including losing your entire investment.