Thursday, July 06, 2006

July 6 Uranium Stocks Update: Urasia Energy (CVE:UUU )

Urasia Energy's three and nine-month financial statements came out about a week ago and I thought it might be interesting to see what management had to say in their discussion and analysis. As I have said before, Urasia's performance in this quarter is to my mind very important as a rough barometer of how successful these new uranium producers (Urasia and soon to be Paladin (TSE:PDN), SXR Uranium One (TSE:SXR)) are going to be.

The Akdala planned annual production rate of 2.6 million pounds of U3O8 (1,000 tonnes uranium) was first reached on a monthly basis in April, 2006.

This means that because the three month quarter ended in April, the numbers do not reflect the planned annual production rate yet, whereas the next quarter's financial statements will.

ISL Uranium mine production, development and operations are critically dependent on how many wells can be completed and placed into production in a year. This is the single most important limiting factor in ISL Uranium production.

This is why Urasia Energy spent $13 million to purchase eight drilling rigs. They increased their number of rigs from 4 to 8, completed 39 new wells in this quarter, and increased their flow rates from the wells. All this added up to Urasia reaching their annual production rate in April.

The average unit price obtained for sales in the quarter was $38 per pound of U3O8, which resulted from recently negotiated contracts, as opposed to $17/lb obtained in the previous quarter from deliveries made in terms of older lower priced contracts. The spot price of uranium at April 30, 2006 was $41.50/lb U3O8. During the quarter the average unit cash cost per pound of U3O8 sold (including mining general and administration expenses) was approximately $10.00/lb U3O8, as opposed to approximately $11.00/lb U3O8 in the previous quarter.

Net income from operations from this quarter to April was almost +$4 million. As we all know, since April 30, the uranium oxide spot price is now at $45.50 according to uxc.com. With a higher uranium spot price and increased volume, revenue from uranium sales in this quarter will exceed the $14.38 million of last quarter.

The foreign exchange loss during the three months amounted to $12,403,000. The majority of the loss consists of a non-cash loss of $12,483,000 arising from translation of the future Kazak Income Tax liability in respect of the Company’s investment in Kazakhstan. During the quarter the Tenge strengthened approximately 7% against the US dollar. The translation loss was partially offset by realized gains on holding Canadian dollars which also strengthened against the US dollar.

This is the worrisome part. Urasia ended up with a net loss of $12 million, largely in part of this foreign exchange loss. I'm much less concerned about the size of the tax levy of the Kazakhstan government ($5.4 million) than I am about the Tenge continue to strengthen against the US dollar, which is not at all inconceivable. Taxes are much more predictable (even in a foreign country like Kazakhstan) and reflect the profitability of the Akdala operation for Urasia. Foreign exchange losses, however, essentially reflect nothing of the company's underlying business model or its future viability, yet stain the bottom line nonetheless.
 

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