Westwater Resources Inc (WWR) 2008 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Uranium Resources, Inc., second-quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (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, Mr. Pawlowski, you may begin.

Thank you, Claudia, 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, 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 for Q&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&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.

Please review our forward-looking statements in conjunction with these cautionary factors. With that, let me turn it over to Dave to begin the discussion.

Thanks, Debbie. Good morning, everyone. I hope everybody has got a chance to read the release. My intention here is to really add color and give you -- put this all in perspective for you.

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

On May 14 we announced that we raised $14 million in a PIPE transaction. This was for Texas, to increase our exploration and reserve acquisition programs there. Obviously, I think it has put us in a solid position to rebuild our Texas operations, though it certainly was not a popular move at the time.

On June 9 we announced that Rosita was having startup problems. 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.

Certainly 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 a 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 uranium prices are going to recover anytime soon. That is not a forecast; that is just saying that that is what we are doing moving forward.

As far as URI's overall situation, 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 facility in Texas without the reserves to feed them on a long-term basis.

The strategy is pretty simple moving forward from here. It is 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. Third, to accomplish both these we have to do this 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 effort 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 Ambrosia Lake ISR program. Once we get these permits we will be coring 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 10th Circuit Court of Appeals decision, our best guess, that it would be two to six months, that would be the ideal window given past renderings from the Court. Tomorrow marked the third month, so we're onto that period. They generally release their opinions on a Monday; so that is 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 lab permit we need to operate Church Rock. If we were to get that reversal, we could be mining 1 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 when it was operated in the 1990s.

The initial problem we encountered was poor well completions. We went back and worked a lot of those wells, and we have 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 recover the uranium principally using 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 it to go through a cycle to see if you are getting results.

So we are testing different portions of the wellfield with different methods. We have been able to increase the uranium extraction and the uranium level in wells, extraction wells; but we still need to do much more.

We think this testing will take another one to two months. I think what is important for you to know is the capital for this wellfield has already been expended; it is in the ground; and the current costs moving forward are roughly $100,000 a month. So it's not that it's cost-prohibitive from doing this testing. We want to get it right. So we are not in a hurry; we are just trying to get it right.

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

We did acquire two exploration properties last year at Marshall and Mosser. We currently have three rigs operating on Marshall. We have had success. This does look promising.

It will take another several months to finish this program. We expect the drillout to be finished in the fall. At that point in time we will be able to determine whether we have a commercial ore body or not.

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

Now I will explain 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 (technical difficulty) in Texas. We had to build the Company in New Mexico to -- in preparation for acquiring Rio Algom; and we also had data valuation and increased work in New Mexico.

This was all done in a bull market, rapidly increasing prices when we were facing strong competition for all kinds of resources. Of course, that world no longer exists. It is no longer the time to maximize expenditures and risks. It is a time to build strong financial footing.

And that starts with a focus on cost cutting across the board, which we have been doing.

Prior to starting up 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 is certainly not a large capital expense at this point in time. But it will save us that capital and operating costs [at Rosita] in the next year of $1.2 million.

We have also consolidated our operations at Kingsville Dome in South Texas, so we closed our Corpus Christi office. To date, we have eliminated 30 positions, salary and hourly. We have cut significantly use of outside consultants. The bottom line is we're 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. This is particularly important because when you do put out a forecast and we try to work to a forecast, you always try to meet that. And the only way you meet a forecast is by increasing costs. And at this point in time, focus really is on cash flow, not on cost. That will be the objective moving forward, just to maximize cash flow from operations.

Any new oilfield investments are going to be made only if they give us a significant return. That's because there is 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 to bring on a wellfield; and then you have market risk. So wellfields we have been bringing on this year were made in the environment where the prices were $100 and above and moving higher; and now we are bringing 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, 2-to-1, 3-to-1, not just a small return on cash. The objective is not to put capital at risk, again, with geologic and technical risks.

So we need to be prudent moving forward. All our corporate spending must be done to either advance strategy, all operations and decisions will be made on a cash forward basis, to generate positive cash flow.

As far as operations, bottom line and the last thing I'm going to say is the actions we have taken and planned so far we believe we will have a comfortable cash position to get us beyond the end of next year. And that at the same time will be advancing New Mexico and rebuilding Texas. So we think we are already building that strong financial position. With the cost cutting we are doing things smart.

So that is where we stand, and I will turn it over to Tom to review financials for the quarter.

Tom? Dave?

Yes?

Maybe we should just -- I don't know where Tom went.

Okay.

Hello? Am I live? I'm sorry, I had a glitch with my phone. I apologize for that, but thanks, Dave for that.

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 dereciation 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 $6.6 million on 99,400 pounds being sold. We realized an average sales price of $66.41 a pound. So far this quarter we have 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, the 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 88.7% of sales.

Moving down to our corporate expenses, we had total corporate expenses including our general and administrative costs in the second quarter totaling $4.5 million, almost $4.6 million. The major categories for these expenditures in the quarter were the writeoff of cost associated with our proposed Rio Algom acquisition. We wrote those costs off, which were $1.437 million. Our non-cash -- the stock compensation expense for the quarter was $896,000. Other major categories were personnel of $821,000; consulting and professional services of $439,000; legal, accounting, and other public company expenses of $484,000.

Moving on to the cash flow, our sources and uses of cash. Our cash balance at the end of the quarter was about $16 million. Again, as Dave said, a big piece of that was as a result of the PIPE that 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 to wellfield development evaluation at Kingsville of $1 million and development costs at our Rosita properties of 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?

Okay, I think with that we are ready for questions.

(Operator Instructions) [Peter Homans] with [Parkman].

Good morning. I was wondering if you could handicap for the business now in your ability -- if you could handicap the probability of success with your activities at Rosita. 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 fact and what you believe?

Are the efforts that you are making to extract the uranium from the material, is it simply a matter going through the normal procedures then you will arrive at the correct solution? Or is it more vague than that and more and ambivalent than that?

I missed the comparison between Rosita and Kingsville. But with Kingsville you are talking about 800-foot depth. Rosita wellfield 8 you're talking less than 200. Correct, Rick?

That's correct.

So, it is close to the surface, so it is more -- the deeper you go, the more oxygen you can get in solution. And the more oxygen you can get in solution the easier it is to extract the uranium. That is what brings the uranium out of a --

So deeper is better?

Deeper is better. Again, the problem we are having is we are close to the surface so the water when we inject it will not hold as much oxygen.

Okay.

So we're not contacting the uranium with oxygen, so we are going to use other oxidants besides oxygen, which will stay in solution and contact. That is what we are in the process of doing now.

We have had some success with that, and we are trying different oxidants on different parts of the wellfield, just to see which one works right. We're not having circulation problems at this point in time. So it is just finding the right mix to get the job done.

What I had asked about Rosita and Kingsville was that it was my understanding that Rosita, from a geologic standpoint, forgetting the method of production, but from a geologic standpoint, had the ability to produce more per wellfield than Kingsville. Was I -- did I misapprehend that, or is that the case?

I'm not sure what you mean. Do you have an answer for that, Rick?

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 produce well. We expect it to produce well as far as percent recovery on the wellfield. But there is no rule of thumb that says that Rosita wellfields are any better or any worse than Kingsville wellfields.

Okay, then I misunderstood that. In what time frame can you conservatively imagine being able to come upon the correct method for extraction?

Do you want me to handle that one, Dave?

Yes.

We normally use oxygen, as Dave pointed out. Because of the low waterhead over the ore at Rosita we believe that we are not getting as much oxygen in. So we're looking at three other oxidants.

The first one is hydrogen peroxide, 50% hydrogen peroxide, the same stuff you buy in the grocery store, only a lot stronger. A second one is sodium hypochlorite, which is bleach. The third other oxidant is sodium chlorite.

All of these are purchased in liquid form. The advantage of the last two, bleach and sodium chlorite, 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 is not released as easy. And in a low-pressure environment, that is why we are looking at this.

We believe as Dave said it is going to take one to two months before we see any kind of breakthrough on any of these tests. These are being tested on individual laterals, and then compared with the laterals that are still running on oxygen.

So we have four tests that we are running. Obviously the production test with oxygen and then the three oxidant tests at the same time. We are not going to see breakthrough on these until probably five weeks, six weeks after we start the injection.

The probability of breakthrough is -- ? I know mining is not an exact science. But as geologists and producers, how would you handicap the probability of one of the (technical difficulty) bearing fruit and allowing you to begin reasonable production at Rosita?

We are pretty confident that one of these is going to work. All of these have been used at one time or another in carbonate leaching in the in situ history.

Obviously, oxygen is the cheapest; and as you go further up it gets a little more expensive; and that is why we have always gone back to oxygen when we can. But we are seeing breakthrough in wells. We are seeing breakthrough in some of the oxygen wells. It is just that it is not occurring as fast or as complete as we wanted to see it. So that is why we are going with the alternative oxidants.

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 to 800?

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

Okay, thanks very much.

David Snow with Energy Equities.

I am wondering how the progress is going in acquisition of additional properties. In particular there were some larger tracts held by oil companies I thought you were going to try to get in this weaker market.

There's large tracts held by ranches, some of those have leases on them from the oil companies, just to correct what you said.

Okay.

Yes, we are moving on all fronts there. There are several that are in the process of evaluating; and that is about all I can say. It is a competitive environment, but what we have targeted we are confident we can get.

Okay, and the idea is to win, I guess.

Pardon me?

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

Whenever it is possible. We don't dictate the time frame. All we can do is respond to the process.

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?

No, we are bringing on two new wellfields at Kingsville Dome. There will be additional at Rosita. I am just laying out the parameters on how we are bringing on wellfields.

Instead of trying to meet a production forecast, it is all an investment decision on how much cash can we get out of a new investment.

In terms of the -- where do we go from here in New Mexico? Just wait for Court permit issues? Or is there any other initiatives that can be entered? I mean aside from PR, any other initiatives for a regional mill that could be considered, or -- ?

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 is as much a matter of investment and buyer environment conditions as anything else.

Okay, thank you.

(Operator Instructions) [Jimmy Gibbert] with Rice, Voelker.

You guys, it is 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?

Well, we are generating cash from operations.

Right, cash flow from operations.

Our intent is to simply focus on making wise investment decisions; cutting costs as rapidly and as deeply as we can, just to -- all nonessential spending out the door.

Again, I think we will, 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 is just how the business operates.

Right. Also, on the I guess you call them extraction issues at Rosita, you have encountered these type of problems before. Is this a fairly common problem in in situ uranium mines?

Let me take a stab at it first; then I'm going to have Rick answer it. 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 have 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 19 --

Nineties.

Yes, 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 it is unique to shallow deposits -- if the company had shallow deposits, this is where they have used these oxidants in the past. Do you want to expand on that, Rick?

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. 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. So the wells that have 15- 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 these 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. They all work, it is 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 questions or not, Jimmy.

No, no, that's good. Thanks, Rick. Also, Rick or Dave, either of you all may be able to answer this. Obviously, you're involved at Rosita. It has 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? Could you talk a little bit about that timeline?

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

Okay, gents. Thank you very much.

Peter Homans with Parkman.

Dave, a question on the market demand. I may have these numbers wrong, but I (technical difficulty) something like 250 million pounds was contracted in the US last year. Usage was something on the order of 180 to 190 million pounds.

If I understand it correctly, one of the reasons why spot and contract have been weak is because for the moment the utilities have sufficient. But there will come a time (technical difficulty) lead-time of around nine months when they have to begin preparing for another rampup of supply.

Can you talk about that cycle, and how that frankly would affect pricing over the next, say, nine to 18 months?

Given the price run-up last year (technical difficulty) generally happen in the utilities generally make the majority -- make up the majority of demand.

Right.

They were fairly well covered for 2008, 2009. Once you got to 2010, particularly in the US, the uncovered demand rose sharply.

Now there's a couple of things are going to affect that. A, as prices came down, utilities waited. So that is why you had this uncovered demand.

You also have, with the prices coming down and some production problems around the world, 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 or the utility. So there is that; with the drop-off in price you had that dynamic working as well.

But generally speaking, the demand that came and formed a bottom over the last couple months was some of it 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 hear in the marketplace now, there's -- you have long periods of time in this market where nothing happens. And we have not had that for at least (technical difficulty) 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 we said for that uncovered demand to get closer.

Generally, utilities will cover that (technical difficulty) ahead of time. But a lot of that is going to be dependent on what their future price expectations are. As you look forward, the long-term fundamentals of this market remain strong and probably going to get stronger.

So when you are dealing with contracting lead times, it is as much psychology as it is actual fundamentals.

Do you have any sense from talking to your contacts at utilities as to how they are thinking? Are they -- 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?

You probably heard me say this before. 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 is kind of the way it is.

Right.

They want to make the best decisions they can; but if they lock in something low, then they don't really get rewarded for it. If they price something high then they get punished for it. So it is -- that will affect how long forward they go forward, whether it's going to be base escalated, market related. They have just got to make it (technical difficulty) over the life of the contract for them.

Has the recent increase in spot been accompanied by volumes of any increase in volumes?

I think it did in the spot market, because you saw some people back off the spot markets. You had Nufcor come in and by $75 million, something like 1.3 million pounds. My understanding was that basically swept the aggressive pounds off the market. So there (technical difficulty) people needed to place pounds, and that is why you had (technical difficulty).

Okay.

Certainly your follow-up question is probably going to be the increase in spot backing towards $65. I think it takes some of the pressure off the downward pressure on the long-term price.

I promise not to ask a follow-up question.

Good enough.

David Snow with Energy Equities.

Yes, I am wondering, you mention 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?

No, it was oxygen only.

Okay. I am 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. You are being extremely honest modest the way you presented it in the current quarter.

But actually, you had a pretty significant increase in your results relative to the first quarter's margins. Is that right, in costs?

Yes.

Okay, is this 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?

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 that is -- we are not forecasting anything. That is just -- if we missed something I am not sure it was modesty as much as an oversight, and we will consult with you next time.

Is the expectation that you will be showing a lower volume in the third quarter in Texas?

We are not -- again we are focused on -- a lot of it is going to be dependent on what happens with Rosita.

With what?

With Rosita.

I still couldn't hear you.

It depends on what is happening with Rosita.

Okay. I am wondering, what is the fully diluted shares at the June 30 quarter's end?

Can you say that again?

The quarter's end fully diluted shares as opposed to the average.

Do you have that, Tom?

Yes, hold on just a second. Let me turn to that page. Again, it's the same as it was at year-end, it's about 55.6 million.

Fully diluted.

You did a PIPE, I thought.

Right, and that is included in the information that is in there.

But you gave us --

Our outstanding shares are 55.6 million.

Okay. All right. Thank you.

There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Once again, thank you for your time and interest in the Company, and we will talk to you again in three months. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.