Westwater Resources, Inc.
Q3 2007 Earnings Call Transcript

Published: 9 Nov 2007

[Operator:]

Greetings, ladies and gentleman and welcome to the UraniumResources Incorporated Third Quarter Earnings Announcement. At this time, allparticipants are in a listen-only mode. A question-and-answer session willfollow the formal presentation. (Operators Instructions) As a reminder thisconference is being recorded. It is now my pleasure to introduce your host Ms. DeborahPawlowski, Investors Relations for Uranium Resources Incorporated. Thank youMs. Ms. Pawlowski you may begin.

[Deborah Pawlowski:]

Thank you, Claudia, and good morning everyone. We certainlyappreciate your time and your interest in Uranium Resources. On the call today,we have our President and CEO Dave Clark; Tom Erhlich, Chief Financial Officer;and Rick Van Horn, Executive Vice President and Chief Operating Officer. Dave and Tom are going to review the third quarter results,and update you on things with the company will follow the discussion with theQ&A. If you don't have the press release discussing our financialresults, you should be able to get it on our website at uraniumresources.com.As you are aware, we may make some forward-looking statements during the formalpresentation and the Q&A portion of the teleconference. Statements apply to future events, which are subject torisks and uncertainties as well as other factors that could cause the actualresults to differ materially from where we are today. These factors areoutlined in our earnings release as well as in documents filed by the company withthe Securities and Exchange Commission. And you can find them in our website orthe SEC's website, which is sec.gov. So please review our forward-lookingstatements in conjunction with these precautionary factors. With that, let me turn it over to Dave to begin thediscussion. Dave?

[Dave Clark:]

Good morning, everyone. It's a pleasure to speak to you allagain as it has been over last year. I'll leave most of the discussions of the financialsto Tom. I usually view my job of being is, giving you an idea where we are andwhere we're going. And I think today since it's the first anniversary of ourfirst earnings call. We didn't do this before a year ago. I just want to alsolook at where we've come from. I came into this company in October of last year as Presidentand COO. At that time I basically had two observations on the company that, Iwasn't shy about talking about. The first one was that we at that point in timepretty much view ourselves as a producer of pounds and a not a producer ofprofit, that's something I thought we needed to address right away. I also have said often, I thought we were very good atmaking some very bad assumptions early on. So the fact that when lead the shipto be a profit organic company and making a lot better assumptions withenforcements, we have to change if we want to become winners in thismarketplace. Over the past year, we have by drilling out our reservesbefore development in Texasand laying out wellfields on economic basis before development. We have been ableto lower our production cost by $30 a pound. So I think we are clearly on theroad of being a producer of profits more than a producer of pounds and thatwill continue to be our focus. We will bring on wellfields and produce to a levelthat maximizes profits looking less to what production is. Again a year ago the nature of this company was held toproduce as many pounds as we can regardless to what the profitability was. So weare now primarily focused is Texasbeing a place where you can generate cash. Once we turnaround Texasoperations, we then changed our focus and looked at the company as a whole anddevelop a strategic plan. And the first thing we did late last year and earlythis year was look and test every assumption not really looking for what wasprobable or looking more towards what was the problem that was just possible. In March we announced the results of our strategic plan andeverybody knows our company is familiar with those things now that we intend tobe a 10 million pound producer by 2014. We intend to build our reserve base upto 200 million to 300 million pound and we intend to do all that by exploringand developing our own properties in New Mexico principally and through our joint ventures andacquisitions. I would add that dream is one thing of having the capabilityto implement that plan is a real, real challenge. In that respect I think theRio Algom acquisition, which we announced last month is a company transformingevent. Before I came into this company Paul Willmott had assembled very, verygood assets into Mexicoand a very good management team. With that management team, with Paul being involved, withthe Board being involved, with every employee of this company being involvedand from very key outside consultants; we had a very strong team to look atthis Rio Algom acquisition. And I think, we had proven we were able to see anopportunity there that frankly other people in industry missed. I think, that proves that we are growing as a company, that weare now pretty good at making pretty good assumptions. I think, it also proveswe have in middle to take both moves and do whatever we need to do to implementthe plans of this company. Texas, as we've alwaystalked about as being the bridge to New Mexico. We do have profitable operations that havesupported the company and will continue to do so. Weather has been a factor in Texas this year. We have had 43 inches ofrain year-to-date, which ina land where green is not a popular color, is a lot of rain. I am notusing that as an excuse it’s just a reality that we had to deal with. When it rainsdown there, you can't move drill rigs, that delays our drill-out program and delays wellfield development. The next wellfield, weather permitting would come on in mid December.We plan to bring on Rosita in spring; production for this year is currentlyexpected to be 410,000 pounds to 430,000 pounds. We are continuing toaggressively look for and acquire (inaudible) exploration targets. We plan to produce 400,000 to 500,000 pounds in 2007, or 2008,2009. You do it toincrease to extend that, that's going to depend on the success of our explorationprogram, which remains the key. As far as New Mexico, beingable to close the Rio deal is a large priorityon our part. It has been a company transforming, it's also been industrytransforming of that. You simply have to look at a map of the New Mexico, tosee the strategic value of this mill site in relation to all the reservesaround it, not only ours but everybody else in the industry. We have received a lot of interest in people of our othercompanies in New Mexicothat interested in participating in a regional mill. That includes our alreadyexisting strategic partner, Itochu. We continue to develop our relationshipwith them and a key to our future as well. At this point, we are simply lookingat all the options and figuring out what's the best way to structure a regionalmill. You are right, it's simply a matter of making moves and making jointventures in a manner that increases and maximizes shareholder return. I think we are also pretty pleased that the response in New Mexico itself at this point in time its been on thewall and the radar screen, any news around the Mexico was generally negative. Allsudden, we have taken a high profile position in New Mexico. Uranium production is no longeran abstract dream. It's now more of a concrete reality. We have been meeting with elected officials, state andfederal regulatory agencies, implementing our community outreach program. Theresponse has been favorable. People want to see if uranium mining coming backto New Mexico.The main issue moving forward as it had been in the past will be one aboutsafety or is a legacy issue about how uranium mining was done in the past andthat was done before there was an EPA or an NRC or MSHA or state regulationsregulating mining and milling of conventional resources in New Mexico. Our opponents will say that the past is the guide of thefuture. When you look at what modern conventional mining and milling will be inthe future, it's going to look nothing like the past. It will have a highregard for human environmental safety that will be the forefront. That comesfirst, economics comes second. I think the fact that we now help high profiling in NewMexico, we want to use that to our advantage, because there is no better timeto educate the public when they're actually listening, and right now we have alot of interest in what we're doing in New Mexico and we plan to utilize that. Now obviously, the Rioacquisition, the valuation and closing and time of deal took up a lot of ourmore time. The priority moving forward is to close that deal. We want to figureout what is the financial and human resources moving forward to bringproduction into a reality in New Mexico. The first major hurdle is going to be getting an operatinglicense for the NRC mill. We're also going to be moving forward on permittingfor mining at Roca Honda. But it's not the only activities we're evaluatingright now or working on. We are considering a drill-out program in 2008 to test theISR amenability of some sections of land in the Ambrosia Lakearea, a district which we've been talking about over the last several months. These are properties, we have uranium on them that are notincluded on existing 93 million pounds of reserve base, but are not only in anycountry or land, maybe amenable to ISR, may allow us to get into ISR productionsooner than later, so it's something we're going to be looking at. We have currently or up to now digitized 13,000 to 15,000logs we have, so we expect to complete that by the end of the year, andevaluation of that date is also ongoing. We also have other opportunities withthe Rio Algom acquisition. We have other parties interested in developing the 11e.(2)business that we are referring.They have an open cell that can be used for disposal of radioactive waste,which is 11e.(2) material, and again that's something that we can generaterevenue relatively quickly. We also have interested parties who want to talk to us aboutthe Lisbon Valleymill site in Utah.Again, it's not something we looked at when we made this acquisition, but it issomething of value that we need to look at. We have completed an outside consultant (inaudible)in New Mexico,has completed the study for us. This leaves out the roadmaps for licensing andpermitting of conventional mining and milling in New Mexico. We have a framework to follow. As far as other developments in Mexico, Church Rock, we are in theTenth Circuit Court, all the briefs have been filed. We are waiting for thescheduling of oral arguments. We expect that to happen in 2008, and we thinkthat it's quite possible and should get a decision of the Tenth Circuit Courtin 2008. I'll add to that as many of you heard me saying in the past,legal route is something we had to pursue. We think we will prevail on Section8 at the Supreme Court and that allows us to get into mining 18 months afterthat decision. But the fact that there is so much interest now and positiveinterest in mining in New Mexico, we also want to take advantage of thatinterest on a local, state, national level to help us resolve ending countryissue. We continue with our community outreach. We know we have demonstrated safety.We're working with DW Turner in New Mexico to do that and the burden of proof is on us. I'd like to say in closing that based on my remarks a yearago, we raised the effort to increase our investor relations. We hired team whohas done an outstanding job for us. I think prior to that it was hard for youhow to get out and tell the story when they didn't had a clear vision of whatit was. I thing the Kei Advisors and Debbie Pawlowski, in particular, and JimCulligan have been very helpful us getting our message out. As I said year ago, I'll tell you what I can and when I cantell you, and I have no problems telling you what I don't know, if I don't haveany answer for it and I hope I kept that promise. I am getting a lot of questions now on how we plan tofinance the acquisition of Rio Algom and how we plan to finance the developmentof our projects in New Mexico.I can simply tell at this point, everything is on the table. We are going touse and look at every asset we have to implement our plan. That said, I am notgoing to discuss anything that compromises in any fashion any strategically ortactical advantage we have. My job and our job as a company is to maximize shareholder'sreturn and we're going to do that, and at this point in time, its looking atevery option we have and making smart business decisions as we move forward toimplement our plan. So, that said, I'll turn over to Tom to discuss the thirdquarter and nine month financial. Tom?

[Tom Erhlich:]

Thank you, Dave. I'm going to discuss our productions, oursales, costs, financial highlights for Q3 '07 as well as our year-to-date for'07 and starting with production. We produced nearly 104,000 pounds in thethird quarter of 2007, the lions share of which are 98,000 pounds came from KingsvilleDome. The balance of 6,000 was produced at Vasquez. Our total production cost for the quarter, $28.41 a pound,operating cost making up $18 a pound of that and depreciation and depletioncontributing about $10.41. Our production cost for the nine months were roughly$30 a pound, for the roughly 350,000 pounds we produced with operating anddepreciation and depletion contributing about $15 a piece. Of the third quarter Uranium produced 65,800 was held ininventory at the end of September and the average cost of that inventory was$30.60 a pound. Production this past quarter compares to production ofapproximately 136,000 pounds from the second quarter of 2007, 116,000 of whichcame from Kingsvilleand 20,000 from Vasquez. Production cost for the second quarter '07 were just under$28 a pound, with operating costs being roughly $13 of that depreciation anddepletion about $15 The production change, that we saw in the third compared toQ2 '07 can be contributed as based as probably to the weather. But, alsobecause of decline curves that is typical from wellfields that are well intotheir production cycles. Our first wellfield in PA3 Kingsville began producingin February of 2007 and its production rate slowed in the third quartercompared to prior months. Likewise, production from Vasquez, contributed over 20,000pounds in the second quarter of '07 compared to just 6,000 pounds this quarter.On the flip side, we will be brining on our next new wellfield at KingsvilleDome and that we expect to be contributing production in December this year. Looking to sales, our sales and revenues in the thirdquarter were $10.4 million compared to second quarter of '07 of $7.8 million anincrease of about $2.6 million. This increase from last quarter was caused by two things,mainly higher sales volumes as well as higher prices that we foresee. And oursales volumes increased 228,000 pounds from 114,000 pounds in the priorquarter. And our sales prices increased to $81.25 in the third quarter of '07compared to [$69.63] a pound over the second quarter of '07. Looking forward just a bit, the sales we made thus far inthe fourth quarter, i.e. October, We have received an average sales price ofabout $72.55 a pound. This $72.55 for sales that have already been made inOctober compares to an estimate of $73.80 a pound and this estimate reflectsthat the average price of our current contracts. What they would bring if we took today's spot price and longterm contract price and held those steady, throughout and don't make anychanges to that, we'd average again under those two contracts $73.80 a pound. Year-to-date sales for '07 were $22.9 million on volumes ofnearly 322,000 pounds. This compares to the nine-month period in '06 of $5.7million, which resulted from delivers of about 200,000 pounds. Our year-to-date average sales prices for the first threequarters of $71.22 compares to an average price for the same period last yearof $28.41 obviously the change there being the dramatic changes that we've seenin the spot and long-term markets. Moving over to cost of sales, cost of uranium sales. Ourdirect cost, uranium sold during the quarter, which is made up of bothoperating expenses and depreciation and depletion totaled $26.80; $15.63 ofwhich were operating costs and $11.17, which were depreciation and depletion. Cost of sales of $26.80 is an improvement for the directcost of sales of $29.44 that we saw in the second quarter of '07. Year-to-date,our direct cost of uranium sales, totaled $31.28 a pound and was made up ofabout $16.60 from operating and $14.68 from depreciation and depletion.Comparable year-to-date amounts from June 30th were $34.23, so again we broughtcosts down this quarter compared to last quarter. In addition, a big piece of our cost of uranium salesresults from the royalties and commissions that we pay. These are related toour uranium sales obviously, and we incurred about $1.3 million of that in thethird quarter. This breaks down to about $10.14 a pound or approximately 12.5% ofsales, the same category for costs in the second quarter of '07 was $982,000and represented about $860 a pound or again roughly 12.3% of sales. Moving down further on the cost side, the general andadministrative expenses, these costs in the third quarter of '07 totaled $3.6million comparing to $2.5 million in the second quarter of this year, nearlyhalf of this expense that we saw in the third quarter are $1.6 million resultedfrom the non-cash charges relate to the stock compensation expenses requiredunder FASB 123R. This amount (inaudible) to the second quarter where stock compwas 782,000. Other significant increases or big increases changes thatwe’ve had in G&A related to a number of other factors, one higher employeeheadcount. Two increased insurance costs because of higher coverage limit,increased operating activities, increases in employee headcount also drives ourinsurance cost. The listing of our common stock on the NASDAQ Stock Marketagain increases our G&A cost and the contingent associated withSarbanes-Oxley that controls and tests being compliance with that all you knowadds to those G&A costs. Moving over to cash and cash flow, our cash balance atSeptember 30th was $13.9 million. Our cash flow from operations, we generatedpositive cash flow during the quarter of $5.5 million. This compares cash flowfrom ops in the second quarter of this year of $4 million. Year-to-date our cash flow from operations was a positive$10.3 million compared to the nine months ended '06, which actually had cashbeing consumed from operations of about $1.9million. Other sources and uses of cash include our investment andfinancing activities related to our investing activities, which is primarilythe additions that we make to property, plant and equipment in South Texas. During the quarter we spent about $5.7 million on that, andagain these major expenditures were for additional wellfield development atKingsville Dome, land acquisitions, plant upgrades and wellfield development atRosita, cost associated with Rio Algom acquisition, acquisition and evaluationof additional uranium projects and prospects in South Texas, purchase ofadditional equipments including PFN tools in South Texas. Additionally as part of our investing activities, we increasedour restricted cash by about $2.5 million during the quarter for collateral toback financial surety obligations changes that we saw in South Texas during the quarter. These financial surety obligations againcover what we have in the past plus that we have to fund those in advance goingforward and we've covered those costs. This increase in restricted cash roughly nears the change ofour cash balance from the $16.5 million that we have on hand at June to the$13.9 million that we had on hand at the end of September. Final area of the cash flow relates to our financingactivities. During the third quarter of '07, we showed positive cash from thoseactivities and that was comprised primarily from employee stock optionexercises and the proceeds from that. That takes care of the financialhighlights. Dave back to you.

[Dave Clark:]

Debby?

[Debby Pawlowski:]

We're ready Claudia, for your questions.

[Operator:]

Thank you, ladies and gentlemen, at this time we'll beconducting a question-and-answer session. (Operator Instructions) Our first question is coming from [BillGordon] with Gordon Capital. Please state your question.

[Bill Gordon:]

Good morning, Dave.

[Dave Clark:]

Good morning, Bill

[Bill Gordon:]

The slight sense that we are getting for mill, how does thatevolve. In other words, the net page would be getting permitting to do the milland then to build the mill, what type of timeline do we have here?

[Dave Clark:]

Rick, would you like to answer that.

[Rick Horn:]

Yeah. The license we are acquiring is the possession onlylicense, which allows the restoration to (inaudible) at plant. Since we arebuying a 100% of Rio Algom Mining Limited that license will come over to uswithout transferred. The only thing that happens is they verified that we arequalified to hold the license. Over about an 18 months to 2 year period, we aregoing to detailed engineering studies, that we will not only design the millbut also design the tailings, and this is probably the most single importantpart of the putting the new mill on site as getting the tailings there becausethat's where most of the environmental problems came from in past. Our tailing sales will be record compliant, 40 acres orless, double-lined, leak protection, there will be no discharge to the groundwater and there will be no wind blowing tailings problems. We believe that thiswill take again 18 months to 2 years that includes the engineering and thepermitting section activities of the NRC. It will culminate in a constructionand operating license that will then allow us to construct the plant.

[Bill Gordon:]

Okay. One other question. I know going to next year in termsof the Federal District Courtin Denverregarding the Indian issue, and I assume that if we lost, it was going to gothe Supreme Court. I am told by couple of attorneys that the Supreme Courtdoesn't have to take the case, and if we lose, can leave it at the Denver Courtruling. Under those circumstances, I know Roca Honda, and Ambrosia are cleanand have no Indian claims on them. But from what I can put together a good dealon rest of our properties do have either relationships or as far as what I cansee calling it Indian country, approximately about 110 million or so pounds ofuranium, what is our risk here, how much can we negate from this if we lose?

[Dave Clark:]

I think the two areas are clearly Indian country if we werenot to prevail that section would be the Church Rock properties, Crownpointproperties and Nose Rock and they all have different arguments for them. In thecase of Nose Rock, it's one where the land we turned over to Navajo Nation withthe provision from Santa Ferailroad when they turned it over to them. If there was anything elsecommercial on the property that would had to be turned back to Santa Fe. And the factthat they did that once when Phillips Petroleum discovered those rocks and thenwhen Phillips left that, they turned it back in Navajo, so I think that'sanother issue as well. I think Church Rock area is like 19 million pounds(inaudible) the Crownpoint is like 15 and Nose Rock like is 22.

[Bill Gordon:]

Alright. We're talking about 50%, half of our uraniumreserves will be at risk here?

[Dave Clark:]

If you view it that way, then my thoughts are the court isone thing, but it's making movement to resolve the Navajo land itself. And Ithink working now this is an issue in New Mexico, there is a lot of favorable movement on statelocal and federal level to use those interested parties that help us resolvethis issue.

[Bill Gordon:]

I see, okay. Thank you very much.

[Dave Clark:]

Welcome.

[Operator:]

(Operator Instructions) Our next question is coming fromDavid Snow with Energy Equities. Please state your question.

[David Snow:]

Yeah, hi, if you do original mill and other company'sjoined, were there be a promotor or would it be heads-up contribute capital toget that proportional share of the mill or how will that work?

[Dave Clark:]

It will be done in a manner to maximize return to ourshareholders. Right now, we are simply listening, we spent a lot of timeevaluating the state, realizing the strategic value and finding the deal. Right now, we are talking to all interested parties to see whatthe options are, what kind of structure makes most sense to us that brings theindustry together in original mill. So it's early in the game do decide that weare talking to all interested parties. Again, we will do it in manner thatmaximizes return to our shareholders.

[David Snow:]

It was sound like you would have to create a line betweenmaximizing return in terms of just egregiousness versus getting original milland lowering costs and getting the total industry on board, you've had twoobjectives here?

[Dave Clark:]

Yeah, I think it's part of problem in New Mexico as there has been to doublenegatives. One the Indian country issues, the other is that there is no mill.And that left all the companies down there speaking with different voices. Wesee ourselves emerging as a natural leader in New Mexico with a lot of interest there. Weare not looking to shut people out. We are looking to bring the industrytogether to get us over these hurdles. In Uranium development, it's not easyanywhere in the world. More companies we have involved the better. And againthere is 200 million pounds to 300 million pounds (inaudible) to this mill siteand we look to use our position to get our fair share on that.

[David Snow:]

(inaudible) how many million pounds?

[Dave Clark:]

200 million pounds to 300 million pounds that couldpotentially go through this conventional mill.

[David Snow:]

It would seem like if you do emerge as a leader in the stockmarket as you are doing that it would be just natural to stress more in withyou and it would also seem from talking to them that they wouldn't be fightingit other than perhaps spot who owns a big slug of it, and I'm wondering ifthat's something that would logically follow or whether you get too manyJapanese partners involved to do something like that, or any other kind ofa...?

[Dave Clark:]

As I said in my opening comments, I am not going to discussanything that compromises any strategic impact to Rio Algom. I am certainly notgoing to comment on any potential M&A activity.

[David Snow:]

Alright. And I'm just trying to also ask how many ore bodieswere in the 20 million pounds that you are acquiring with this Rio Algom deal?

[David Clark:]

Rick, would like to answer that?

[Rick Horn:]

There was one major ore body that comprises over half of the20 million pounds and then the rest is broken up into six, well, I guess, sixor seven other smaller ore bodies.

[David Snow:]

Any of those could be potentially (inaudible) minimal?

[Rick Horn:]

There may be. We have to do metallurgical testing and checkit out.

[David Snow:]

And those would be outside of the Indian issue ground?

[Rick Horn:]

That is correct.

[David Snow:]

Okay, alright. How deep are they?

[Rick Horn:]

They are in the range of 800 feet t o 12,000 feet deep.

[David Snow:]

Okay. And then just as nitty-gritty. What's the differencebetween cost of sales versus cost of production, any thought, somebody could[enlight] me on that?

[Dave Clark:]

Cost of sales and cost of production; one, the cost ofproduction reflects what we incurred during the quarter to produce material.The cost of sales is what the costs, that were flow through the incomestatement per pounds sold during the and the cost of sales would be comprisedof the prior periods ending inventory plus the current costs, the productioncosts that flow through during the quarter.

[David Snow:]

Okay. So, the more probably representative (inaudible) interms of run rate would be the cost of production?

[Dave Clark:]

Correct.

[David Snow:]

Alright. Also is there any progress in making some of thestrategic acquisitions in Texasthat you need to ramp up or where do you standing at very tedious process?

[Dave Clark:]

We are looking picking up any promising exploration propertywe can. We hire people to do it and that's what we're pursuing with.

[David Snow:]

Okay. You had some oil company deals that you are helping toget done, is that coming along, or how do you see that moving?

[Dave Clark:]

There is an affinity when you are doing Uranium exploration,you are tended to occur right above oil deposits, so talking with oil companiesthat's where the oil is, that's hopefully finding Uranium, that's one of thingswe do.

[Operator:]

Thank you. (Operator Instructions) It appears we have nofurther questions. I would like to turn the floor back over to Debbie Pawlowskifor closing comments.

[Deborah Pawlowski:]

Thank you very much everyone. We appreciated your listeningin today. If you have any questions, don't hesitate to give us a call. As youknow, we do push the transcript once we have it available of the teleconferenceincluding the Q&A. If you are not receiving e-mails from us with thisinformation, please call us and let us know either myself or Jim Culligan. Sowith that, we will say have a good day.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference.We thank you for you participation and you may disconnect your lines at thistime.