Uranium Resources, Inc. Q2 2008 Earnings Call Transcript

Sep.17.08 | About: Uranium Resources, (URRE)

Uranium Resources, Inc. (NASDAQ:URRE)

Q2 2008 Earnings Call

August 11, 2008 11:00 am ET

Executives

Deborah Pawlowski - Investor Relations

Dave Clark - President and Chief Executive Officer

Rick Van Horn - Executive Vice President and Chief Operating Officer

Tom Ehrlich - Chief Financial Officer

Analyst

Peter Homans - Parkman

David Snow - Energy Equities

Jimmy Gilbert - Rice Voelker

Operator

Welcome to the Uranium Resources, Inc. second quarter 2008 earnings conference call. (Operator Instructions). It is now my pleasure to introduce your host Deborah Pawlowski, Investor Relations for Uranium Resources.

Deborah Pawlowski

We certainly appreciate your time today and your interest in Uranium Resources. On today’s call we have President and CEO, Dave Clark; Rick Van Horn, Executive Vice President and Chief Operating Officer; Tom Ehrlich, Chief Financial Officer.

Dave is going to cover some comments regarding the release, Tom will do a brief review of the financials and then we will open it up it for Q-and-A. If you don’t have the release, it can be found at our website uraniumresources.com

As you are aware, we may make some forward-looking statements during the formal presentation and the Q-and-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.

David Clark

I hope everybody’s got a chance to read the release. My intention here is really to add color and put this all in perspective for you.

It’s been a challenging three months, to say the least. We started the quarter at $13,000, went down $11,000. Uranium’s spot prices made a round trip, started at $65, went down to $57 and rebounded to $64.50 lately. The long-term prices dropped from $90 to $80. So it has been a poor investing environment to begin with and not an easy time for UR either.

On May 14, we announced that we raised $14 million in pipe transactions, which was for Texas, to increase our exploration and reserve acquisition program there. I think it’s put us in a solid position to rebuild our Texas operations, though it certainly wasn’t a popular move at that time.

On June 9, we announced that Rosita was having startup problems and then on June 26, we announced the termination of the agreement to acquire Rio Algom. These last two are not entirely unrelated. As the declining markets made the Rio Algom acquisition increasingly more difficult, it took a lot of time and energy to continue that effort and that took away from our focus on Texas operations, including Rosita.

The equity markets remain volatile; investors are skittish. The uranium market, as far as I see it has found a bottom for now. Despite its long-term fundamentals, we are still in that period of seasonal weakness. You can see additional weakness from our URI planning purpose, which is my only interest at this point.

We project forward that we will remain at current prices or possibly lower. We are not going to make a decision to move forward on a prayer that the uranium prices are going to recover anytime soon. That’s not a forecast; that’s just saying that's what we are doing moving forward.

As far as URI's overall situations, it’s this; we have 100 million pounds plus in New Mexico with no legal authority to mine those pounds. We have fully licensed and processing facilities in Texas; we got the resource to feed them on a long-term basis. The strategy is pretty simple moving forward from here; it's basically threefold.

First, we need to advance New Mexico reserves towards production. Second, we need to acquire reserves in Texas so it gives the ability for the company to generate cash moving forward and third, to accomplish both these we have to some in a tough investment environment which to me means we have to make the company work with what we already have.

As far as New Mexico, we are continuing to pursue our public relations efforts to overcome the political hurdles we face there. We are making solid progress, but it does take time.

We are close to obtaining the permits to drill out a test program on the Ambrosia Lake ISR program. Once we get those permits, we will be quarrying in the fall and then we will test the amenability of those reserves for ISR mining. Although there is no guarantee that they are ISR amenable; if they are, it would open the door for early production in New Mexico.

As far as the Tenth Circuit, Court of Appeals decision, our best guess is it would be two to six months; that would be the ideal window given past renderings from the court. Tomorrow will mark the third month, so we are well into that period. They generally release their opinions on Mondays, so that’s when it would come.

Now, if the court does reverse its prior position, we already have a state permit under timely renewal. It's the law or permit we need to operate Church Rock and if we were to get that reversal we could be mining a million pounds a year within 18 months; if not and even if we did get it, we would expect this to go to the Supreme Court.

As far as rebuilding in Texas, it is important for the company because it does give us the ability to generate cash, which gives us the ability to self-finance future developments, but again we are reserve-limited at this point in time, but we are also generating cash from operations.

As far as Rosita, it has been a major problem. The deposit, this wellfield is close to the surface as was wellfield 7 which kind of intermingles with it. That wellfield proved 77% recovery in 1990. The initial problem we encountered was poor well completions. We went back and worked a lot of those wells and we’ve been able to maintain a consistent flow rate, so the initial problem has been overcome.

The problem we have encountered since then has been the inability to dissolve the uranium and recovery the uranium principal using the oxygen. We are testing several alternatives to that using different oxidants. It does take time to figure out what works; it can take three to four weeks for this to go through a cycle to see if we are getting results. So we are testing different portions of the wellfield with different methods.

We have been able to increase the uranium levels in the extraction wells, but we still need to do much more. We think this testing will take another one or two months. I think what’s important for you to know is the capital for this wellfield has already been expended; it's in the ground and the current costs moving forward are roughly $100,000 a month. So it’s not that its cost prohibitive from doing the testing, we want to get it right. So, we're not in a hurry, we are just trying to get it right.

Beyond the wellfields we already have on, we have new wellfields coming on at Rosita and Kingsville Dome, but beyond those wellfields, future production and increased production will be dependent on our ability to build our reserves.

We did acquire two exploration properties last year, Marshall and Moser. We currently have three rigs operating at Marshall. We have had success; it does look promising. It’ll take another several months to finish this program. We expect the drillout to be finished in the fall. At that point in time we’ll be able to determine whether we have a commercial orebody or not.

We are also aggressively working to acquire known reserves and large exploration targets and that was the purpose of the pipe, along with drilling out remaining properties, including Marshall and Moser which we already have and the pipe has put us in a strong position to rebuild our reserves and to acquire these properties.

Finally, for the third piece of our strategy which is the need to build a strong financial position. Over the last couple years we built the company. We increased exploration and development efforts in Texas. We had to build the company in New Mexico in preparation for acquiring Rio Algom and we also had data evaluation and increased work in New Mexico. This was all done in a bull market with rapidly increasing prices when we were facing strong competition for all kinds of resources.

Of course, that world no longer exists. It’s no longer the time to maximize expenditures and risks. It’s the time to build a strong financial footing and that starts with a focus on cost cutting across the board which we have been doing.

Prior to starting up the Rosita Wellfield 8, we already made the decision to process resins from this wellfield and Rosita, at Kingsville Dome. So we did not finish off the final pieces of the Rosita plant, although that’s certainly not a large capital expense at this point in time, but it will save us that capital and operating costs within the next year of $1.2 million.

We’ve also consolidated our operations at the Kingsville Dome in South Texas, so we closed our Corpus Christi office. To date we’ve eliminated 30 positions, salary and hourly. We’ve cut significantly the use of outside consultants. The bottom line is we are looking at every budget item and anything nonessential will be cut.

As far as operations, our focus is to produce cash flow and not pounds and this is particularly important because when you do put out a forecast and we try to work a forecast, you always try to meet that and the only way you meet a forecast is by increasing costs. At this point in time, the focus is on cash flow, not on cost and that will be the objective moving forward, just to maximize cash flow from operations.

Any new wellfield investments are going to be made only if they give us a significant return; that’s because there is a not only geological and technical risk, there is market risk as well. It can take us eight to 12 months forward to do the development drilling and bring on a wellfield when you have market risk. So, the wellfields we’ll be bringing on this year were made in the environment where the prices were $100 and above and moving higher and now we all bring these wellfields on.

We don't have a rule of thumb for what we bring one on for, but it's got to be significant, two-to-one, three-to-one return, not just a small return on cash. The objective is not to put the capital at risk, again with geologic and technical risks.

We need to be prudent moving forward. All our corporate spending must be done to either advance strategy. All operational decisions will be made on a cash flow basis to generate positive cash flow.

Another thing I want to say is, the actions we’ve taken and planned so far, we believe will have a comfortable cash position to get us beyond the end of next year and at the same time will be advancing New Mexico and rebuilding Texas. So, we think we are rebuilding that strong financial position with the cost cuttings, we are doing things smart.

So, that’s where we stand and I'll turn it over to Tom to review the financials for the quarter.

Tom Ehrlich

I’m going to be highlighting our production revenue and cost information for the second quarter of ‘08. Beginning with production, we produced just over 113,500 pounds in the second quarter. The majority of which or 94,000 pounds were from our Kingsville Dome project, with the remaining production being sourced from Vasquez.

Our production costs for the quarter were around $40 a pound. Operating costs made up about $17 a pound of that cost and our depreciation and depletion contributed just under $23 a pound. At the end of the quarter we had 37,200 pounds of inventory at an average per pound cost of $33.81.

Moving on to sales our revenues for the second quarter were at $6.6 million or 99,400 pounds being sold. We realized an average sales price of $66.41 a pound. So far this quarter we’ve made one sale of just over 33,200 pounds and the average price on that is just under $62.

Looking at the cost of uranium sales for the second quarter, our direct costs of uranium sold during Q2 ’08; this costs were comprised of operating expenses and depreciation and depletion, totaling just under $42 a pound, $18.23 of which were operating and $23.29 a pound were depreciation and depletion. Our royalties and commissions expense for the quarter were $576,000 or $5.80 a pound, making up about or comprising approximately 8.7% of sales.

Moving down to our corporate expenses, we had total corporate expenses including our general and administrative costs in the second quarter totaling almost $4.6 million. The major categories for these expenditures in the quarter were the write-off of costs associated with our proposed Rio Algom acquisition; we wrote those costs up which were $1.437 million. Our non-cash stock compensation expense for the quarter was $896,000.

Other major categories were personnel of $821,000, consulting and professional services were $439,000; legal, accounting and other public company expenses of $484,000. Moving on to the cash flow, our sources and uses of cash or cash balance at the end of the quarter was about $16 million. Again as Dave said, the big piece of that was a result of the pipe we closed in May.

Our second quarter capital expenditures on uranium property plant and equipment totaled about $3.7 million. The biggest chunk of those were related or development evaluation at Kingsville of $1 million and development costs at our Rosita properties were up about $2 million during the quarter.

Additionally as part of our investing activities, we increased our restricted cash by about $100,000 during the quarter to support our financial surety obligations for our Texas projects; Dave.

David Clark

We are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Peter Homans - Parkman.

Peter Homans - Parkman

I was sort of curious if you could handicap the probability of success of your activities at Rosita, because my understanding was that Rosita was from a geological standpoint thought to be able to produce wellfields with greater rates than Kingsville, is that still (a) a fact in which you believe? And are the efforts that you’re making to extract the uranium from the material simply a matter of going through the normal procedures than you’ll arrive at the correct solution or is it more vague than that and more ambivalent than that?

David Clark

I missed the comparison between Rosita and Kingsville, but with Kingsville you’re talking about 800 feet depth. Rosita, Wellfield 8, you’re talking less than 200 square feet. So, it’s close to the surface, so the deeper you go the more oxygen you can get in the solution. The more oxygen you get in the solution, the easier it is to extract the uranium and that is what brings the uranium out of that.

Peter Homans - Parkman

So, deeper is better?

David Clark

Deeper is better and again the problem having it is we are close to the surface, so the water when we inject it will not hold as much oxygen. So, we’re not contacting the uranium with oxygen, so we’re going to use other oxidants besides oxygen, which will stay in the solution and contact and that’s what we’re in the process of doing now. We’ve had some success with that. We are trying different oxidants in different parts of the wellfields, just to see which one works right. We are not having circulation problems at this point in time, so it’s just finding the right mix to get the job done.

Peter Homans - Parkman

And what I had asked about Rosita and Kingsville was that it was my understanding that Rosita from a geologic standpoint had the ability to produce more per wellfield than Kingsville; did I misapprehend that or is that the case?

Richard Van Horn

Well each wellfield is on its own. It depends on how many pounds are in there. The Wellfield 8 at Rosita is adjacent to previous wellfields that produced well. We expect it to produce well as far as percent recovery on the wellfield, but there is no rule of thumb that shows that the Rosita wellfields are any better or any worse than Kingsville wellfields.

Peter Homans - Parkman

In what timeframe can you conservatively imagine being able to come upon the correct method for extraction?

Richard Van Horn

We normally use oxygen as Dave pointed out because of the low water head over the ore at Rosita. We believe that we’re not getting as much oxygen in, so we are looking at three other oxidants. First one is hydrogen peroxide; 50% hydrogen peroxide, the same stuff you buy in the grocery store only a lot stronger. Second one is sodium hypochloride, which is bleach and the third other oxidant is sodium chloride.

All of these are purchased in liquid form and the advantage of the last two, bleach and sodium chloride is that they don't release their oxygen as easily as obviously gaseous oxygen and hydrogen peroxide. They have more oxygen per mole, but it's not released as easy in a low-pressure environment, that’s why we’re looking at this.

We believe as Dave said it’s going to take one to two months before we see any kind of breakthrough on any of these tests and these are being tested on individual laterals and then compared to the laterals that are still running on oxygen. So, we have four tests that we’re running; obviously the production test with oxygen and then the three oxidant tests at the same time and we are not going to see breakthrough on these until probably five or six weeks after we start the injection.

Peter Homans - Parkman

I know that mining is not an exact science, but as geologists and producers, how would you handicap the probability of one of them bearing fruit and allowing you to begin reasonable production at Rosita?

Richard Van Horn

We are pretty confident that one of these are going to work. All of these have been used at one time or another in carbonate bleaching and in the in-situ history. Obviously, oxygen is the cheapest and as you go further up it gets a little more expensive and that’s why we’ve always gone back to oxygen when we can, but we are seeing breakthrough in some of the oxygen wells. It’s just that it is not occurring as fast or as complete as we wanted to see it, so that’s why we are going with the alternative oxidants.

Peter Homans - Parkman

Within the entirety of Rosita, are all the reserves 200 or less feet from the surface or do you have any reserves which are at the higher probability depth of 600 feet to 800 feet?

Richard Van Horn

No, most of the reserves at Rosita are 200 feet to 250 feet deep. The controlling factor is how much water or how much head do you have over the ore zone?

Operator

Your next question comes from David Snow - Energy Equities.

David Snow - Energy Equities

I’m wondering how the progress is going in acquisition of additional properties and in particular, there were some larger tracts held by oil companies and I thought you were going to try to get in this weaker market?

David Clark

There is large tracts held by ranchers, some of those have leases on them from the oil companies. Yes, we are moving on all fronts there. There are several bidders that are in the process of evaluating, that’s all I can say. It is a competitive environment, but what we have targeted we are confident we can get.

David Snow - Energy Equities

Do you have any idea when you might land or fish?

David Clark

Whenever it’s possible; we don’t dictate the timeframe. All we can do is respond to the process.

David Snow - Energy Equities

And was it my understanding that you’re not going to do additional wellfields

in Texas until you get results and cash flow from what you have going?

David Clark

No, we are bringing on two new wellfields at the Kingsville Dome. There will be additional at Rosita. I’m just laying out the parameters on how we’re bringing on wellfields. Instead of trying to meet a production forecast, it's an investment decision on how much cash can we get out of a new investment.

David Snow - Energy Equities

In terms of where do we go from here in New Mexico, do you just wait for court and permit issues or is there any other initiatives for a regional mill that could be considered?

David Clark

As I said at the time of the Rio Algom termination I think that remains the best site; there’s other efforts. Strathmore has their effort on their project; GA has a mill site. So there are other sites out there. I think given all the parameters we were interested in, Rio Algom is still the best site and it’s still available. So, it’s as much a matter of investment environment conditions as anything else.

Operator

Your next question comes from Jimmy Gilbert - Rice Voelker.

Jimmy Gilbert - Rice Voelker

It’s certainly encouraging that the company is cash flow positive; how do you see that playing out for the rest of the year; do you anticipate being cash flow positive in the next two quarters?

David Clark

We are generating cash flow from operations and our intent is to simply focus on making wise investment decisions, cutting costs as rapidly and as deeply as we can not all essential spending out the door. I think given current plans, we expect to have a very comfortable cash position by the end of next year, so I really can’t say anything more than that. As you bring on wellfields you are making investments; as those wellfields come on, you get the cash back. That’s just how the business operates.

Jimmy Gilbert - Rice Voelker

But also I guess you’d call them extraction issues at Rosita, you’ve encountered these types of problems before; is this a fairly common problem in in-situ uranium mine?

David Clark

The wellfield we are working on now is wellfield 8. It is close to the outcrop, so it is a different part of the deposit versus other wellfields we’ve mined at Rosita. Because it is close to the outcrop, it is shallow and we have as Rick said the head conditions.

Wellfield 7 which was mined I believe in the late 1990s, it kind of interweaves between wellfield 8 and wellfield 7, so it is also close to the outcrop. They had startup problems which Rick can discuss. So if the company had shallow deposits this is where they’ve used these oxidants in the past. Do you want to expand on that Rick?

Richard Van Horn

Well the Wellfield 8 at Rosita as you said is close to surface. The problem again is not necessarily the depth, but the amount of water that you have over your ore zone, the head and at wellfield 8 we have anywhere from 15 to 50 feet over it. The amount of oxygen you can get dissolved in the water is directly proportional to the head and so the wells that have 15 foot or 30 foot head over it, you can’t get as much oxygen in it as you might at a well in Kingsville.

Have we seen this kind of problems before? Yes. Are they exactly like this? No. Again, all of these oxidants that we are testing have been used at one time or another in South Texas in the 30 year history of in-situ down here and they all work; it’s just a matter of cost and in our case a matter of how much oxygen you can get in there to contact the uranium. I don’t know if that answered the question or not Jimmy.

Jimmy Gilbert - Rice Voelker

Also Rick or Dave, either of you’ll may be able to answer this. I mean obviously you’re involved at Rosita; it’s taken some of your attention away from other things possibly, but has it slowed down the progress towards opening up the in-situ opportunities in New Mexico, maybe like at Ambrosia Lake and could you talk a little bit about that timeline?

Richard Van Horn

I would say it has not slowed that up, but we are proceeding as fast as we can with the state in getting permits and we’re having good success in approaching this.

Operator

Your next question comes from Peter Homans - Parkman.

Peter Homans - Parkman

A question on the market demand; I may have these numbers wrong, but I think that something like 250 million pounds was contracted in the U.S. last year and usage was something in the order of 180 to 190 million pounds and if I understand it correctly, one of the reasons why spot has been still under contract is because for the moment the utilities have sufficient, but there will come a time and say with the lead-time of around nine months when they have to begin preparing for another ramp-up of supply. Can you talk about that cycle and how that's likely to affect pricing over the next nine to 18 months?

David Clark

Given the price run up last year, what generally happens in utilities make up the majority demand. They were fairly well covered for 2008 and 2009 and once you got to 2010, particularly in the U.S., the uncovered demand rose sharply. A couple of things are going to affect that; (a) as prices came down, utilities weighted, so that's why you have this uncovered demand.

You also have the prices coming down and some production problems around the world or changes in production plans, some pounds that were thought to be covered which may have to come back to the market either from the producer of the utility.

So with the drop off in prices you have that point working as well, but generally speaking, the demand that came and formed a bottom over the last couple of months was some of the utility demand anticipation of prices going to the bottom at some point in time. They were waiting for that; when they saw a bottom, everybody stepped in at the same time.

From what I see in the market place that matters, you have long periods of time in this market where nothing happened and we have not had that for a couple years. So, you might even have just a gestation period where not much happens and that would be my guess at this point in time.

You are just reloading the spring again as you said for that uncovered demand to get closer. Generally, utilities will cover that ahead of time, but a lot of that is going to be dependent on what the future price expectations are.

If you look forward, the long-term fundamentals of this market remains strong and are probably getting stronger, but when you’re dealing with contracting lead times, it’s much of psychology as it is actual fundamentals.

Peter Homans - Parkman

Do you have any sense from talking to your contacts at utilities as to how they’re thinking? Do they feel complacent about the marketplace and therefore might let the lead times shorten or do they feel that given the long-term fundamentals they should be conservative and ensure that they make plans in time?

David Clark

From a utility standpoint they get no reward for being late and they get punishment for being wrong, so it shouldn’t be that way, but unfortunately that’s kind of the way it is. They want to make the best decision they can, but if they lock in something lower then they don’t really get rewarded for it; if they price something high then they get punished for it. So, that will affect how long they go forward, whether it’s going to be base escalated or market related; they just got to make it the best deal over the life of the contract for them.

Peter Homans - Parkman

And has the recent increase in spot been accompanied by any increase in volumes?

David Clark

I think it did in the spot market because you saw some people back off the spot markets. You had Nufcor come in and buy $75 million or something like 1.3 million pounds. My understanding was that basically swept the aggressive pounds off the market. So there were some people that needed to place pounds and that’s why you had increase in demand and certainly your follow-up question is probably going to be about the increase in spot backing towards $65. I think it takes some of the pressure off the downward pressure on the long-term price.

Operator

Your next question comes from David Snow - Energy Equities.

David Snow - Energy Equities

You mentioned there was another wellfield adjacent to wellfield 8 that was producing in the 90s; did it use other oxidants or did it have enough water head above it to just use oxygen?

David Clark

No, it was oxygen only.

David Snow - Energy Equities

And I'm surprised you don't show that table that you did in the first quarter because it would have shown a nice progression quarter-to-quarter in your production costs and you’re being modest in the way you’ve presented it in the current quarter. Actually you had a pretty significant increase in your results relative to the first quarter’s margins; is that right, in costs?

David Clark

Yes.

David Snow - Energy Equities

You didn’t want to show it because you don’t think it will continue in the third quarter or what happened here that you got so modest?

David Clark

As we said in the first quarter, it is very volume sensitive, so if volume increases the cost goes down. There is a fixed cost element and we are not forecasting anything. If we missed something, I’m not sure it was modesty as much as an oversight and we’ll consult with you the next time.

David Snow - Energy Equities

Is it the expectation that you’ll be showing a lower volume in the third quarter in Texas?

David Clark

Again we’re focused on and a lot of it’s going to be dependent on what happened with Rosita.

David Snow - Energy Equities

And I’m wondering what’s your fully diluted shares at the June 30 quarter’s end?

Tom Ehrlich

Again it’s the same as it was at year-end; it's about $55.6 million, fully diluted.

David Snow - Energy Equities

You did a pipe, I thought.

Tom Ehrlich

Right, and that’s included in the information that’s in there; our outstanding shares were $55.6 million.

Operator

There are no further questions at this time.

David Clark

Once again thank you for your time and interest in the company and we’ll talk to you again in three months. Thank you.

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