Ur-Energy Inc

TSX:URE

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, and welcome to the Ur-Energy Year-End Operational Update Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Penne Goplerud. Please go ahead.

[Penne A. Goplerud, General Counsel and Corporate Secretary]

Thank you, Brian. Thank you, all, for joining us for our Fourth Quarter 2017 Operations Teleconference and Webcast. We're required to draw the attention of all of our participants to the legal disclaimers contained in this morning's slide presentation, which will apply equally to our oral presentation today. At Slide 2, you will find legal disclaimers with regard to forward-looking statements, risk factors and projections as well as other cautionary notes to U.S. investors. We ask that you read and consider these disclaimers carefully before investing in our shares. As well, risk factors inherent in forward-looking statements and projections are set forth and discussed in the company's annual report on Form 10-K filed March 3, 2017, with the U.S. Securities and Exchange on EDGAR and the securities regulatory authorities in Canada and on SEDAR. I would now like to introduce and turn the webcast presentation over to our Chairman and CEO, Jeff Klenda.

[Jeffrey T. Klenda, Co]

Great. Thank you, Penne. And again, welcome, everyone, this morning. I want to personally thank you for taking some time to spend with us this morning to allow us to share with you our operational results for 2017. I think we had a very good year. But in addition to that, we might as well get right to the elephant in the room, and that is everyone knows that we filed a Section 232 petition with the Department of Commerce earlier this week. And that is something that we're going to want to discuss and certainly take questions on in this webcast as well.So with that said, we'll go ahead and get started on Slide #3. As usual, we kind of start with our company at a glance. And here, you see the areas of emphasis for us as we begin our 2018 campaign. But let me say that normally, we would be -- I would be working with Steve Hatten on this to give an operational update. Today, I'm going to be kind of passing the baton back and forth with John Cash, Ur-Energy's Vice President for Regulatory Affairs. Not only is John one of our -- of course, one of our most highly technical people, but John has also been spearheading our initiative on the Section 232 petition in the filing this week. So it's particularly important for John to be on this call today.But as we look at our areas of emphasis for 2018, what I would emphasize here is that we have now exceeded 4 years of consistent production, and I don't want to steal any of John's thunder, so I'll just let him speak to that production. But we have exceeded 2.4 million pounds that we have produced at Lost Creek. And candidly, we'd be higher than that had we not intentionally scaled back production in response to market conditions. But that was the prudent thing to do. Additionally, on the second bullet point, as I have already mentioned, we filed on Wednesday afternoon of this week a Section 232 filing, and that was filed jointly with our friends at Energy Fuels. And this is a petition that falls under the Trade Expansion Act of 1962. And we believe that the uranium industry has fallen to such a low level of operation and such a dire strait that we felt it necessary to initiate this action, and we do believe that it goes right to the heart of the national security of this country. So we felt that it was essential that we do it and that we do it while we still have an industry left to protect. Beyond that, we will -- we'd be talking about also is the fact that we've had a great year this year. Look, our long-term contracts that we have secured over the years and many of them several years ago have given us an amount of strength, a degree of strength in this marketplace that frankly few of our peers enjoy. And we -- what we've tried to do is also utilize those contracts and their flexibility that they provide us to give us stability as a company and to help us maximize our revenues. And we have done that by balancing between the pounds that we produce at Lost Creek and the pounds that we purchase in the market at what are very low, unfortunately, but also very opportune prices for us to deliver into our contract. So in a somewhat perverse way, that actually serves our purposes and has allowed us to maximize our margins. Moving forward into the future, of course, we continue with our expanded licensing at Lost Creek East and the KM amendment that is with the NRC right now. And of course, we have our Shirley Basin project, which we hope to have fully permitted and begin to build out on in 2019.With that said, let's move forward on Slide #4. We have a very -- a slide that I think is well known to anybody that knows our company. But this is something that I believe goes right to the heart of the problems that we're facing here in the United States. We as a country, of course, used to be the largest producer of uranium on the planet, producing in excess of 40 million pounds a year. We, of course, no longer do that. If you take a look at that very colorful bar chart on the bottom, you will see that this is a 20-year depiction of production in the United States broken down by quarter. And the projection would be that we're going to produce in excess of 2 million pounds this year, but that's actually not correct. What's included in there is secondary feed and processing that's being done at the White Mesa plant in Utah by Energy Fuels. And so actually, the number at the top of the slide is correct. This industry will do about 1.5 million pounds of uranium production this year. And yet, while we are no longer even close to being one of the largest producers of uranium in the world, we are still far and away the largest consumer of uranium in the world, consuming nearly 15 million pounds a year. And of course, that bullet point at the bottom of the slide is something that we believe goes right to the heart of the Section 232 petition, and that is the fact that we have now allowed ourselves to become dependent upon Russia, Kazakhstan and Uzbekistan for nearly 40% of the material that we need -- the nuclear fuel that we utilize in this country. And when you consider that we are 20% of the baseload in this country and more than 60% of carbon-free emissions, the idea that we would allow ourselves to become dependent on Vladimir Putin for nearly 40% of our nuclear fuel for such a critical element is not only an unsustainable energy policy, it's insane energy policy. So this is something that absolutely had to be addressed.Moving on to Slide #5. We have the usual UR-Energy share capital and market position. And you will notice in the upper left-hand corner in the box above there that our number of shares issued and outstanding at 146 million have not changed appreciably over the last couple of years. One of the things that we have -- we feel we've done an excellent job of is done a good job of really protecting our shareholders from excess dilution during a time when most of our peers are living equity raise to equity raise. We have been very fortunate, we have been cash flowing, and we've been able to protect our shares from excess -- our shareholders from excessive dilution. We have great distribution of our shares. About 68% are held here in the United States, with Canada and Europe making up the remaining 30-plus percent. But one of the other things that I would mention with respect to the cap table is that while we have stock options and RSUs that are out there to the tune of $9 million, we have found that historically, very few of them tend to get exercised. So they really have not added a great deal to our dilution. And the warrants that we have, $5.8 million, in number actually have a strike price on them of $1.28 to $1.35. And virtually all of them come off in 2018 in this year. So this is something that we do not see as a threat to the shareholders from a dilution standpoint. But the last thing that I would point out on this slide is that the graph that you're looking at on the right-hand side is a graphic depiction of our 2-year trading on the New York Stock Exchange under the symbol, URG. And of course, you see a lot of ups and downs there. But one of the things that I think is noteworthy is that there have been at least 3 and perhaps 4 instances where we have had very significant moves in the stock upward, which have certainly created liquidity events for our shareholders. But I think most notably, since we have been at the end of the year, we saw a number of companies announce that they were going to be shutting in production. And since that time, I think the market has been in a positive upward movement. And what we see here is constructive building of our shares, and I think that we're in a good position to move higher. So moving on to Slide #6. Once again, as I mentioned from the outset, the long-term contracts that we have with our utility partners is something that has served us very well and continue to serve us to this day. And I think that it's very important to mention here, and this slide is as good as any place to introduce the scenarios that the Section 232, while it does call for a percentage of consumption in the United States to be reserved for domestic producers such as ourselves, it is not in any way intended to hurt our utility partners. The simple fact of the matter is, is that we could not be where we are as a company without them, and we are extremely grateful for everything that they have done for us. But as you can imagine, as producers of uranium, we have few options for salvaging this company and our industry in the years ahead, except through higher contracts. And unfortunately, those must come from utilities. So if we had another way of going about this, we would have done it, but it is certainly not our intention to harm our utility customers. But having said that, we are very appreciative of that. We'll move forward now on to Slide #7 and go into our operational results. And here's where I will pass the baton to our always very talented and eloquent Vice President of Regulatory Affairs, John Cash. John?

[John W. Cash, Vice President of Regulatory Affairs]

All right. Thank you, Jeff. Appreciate that. First and foremost, UR-Energy implemented a development schedule in 2017 that allowed us to continue to be ready to respond to positive market developments while maintaining the future value of in-ground resources. This included keeping experienced staff and contractors where possible. By doing so, UR-Energy was able to develop our key development and construction cost as low as possible for the realized production levels.The last of the required wells for the first 3 header houses in Mine Unit 2 were installed in 2017 using updated installation methods. These latest well completion techniques, along with an experienced team, has proven beneficial in that we are experiencing sustained flow rates in our newest areas. That equates to lower maintenance cost, quicker recovery times and potentially lower operating cost. Surface construction of the 2 of the 3 Mine Unit 2 header houses is complete, with the first house starting in late August 2017 and the other in January 2018. Construction of the third house will be complete in 2018 Q1. As with drilling, we have incorporated lessons learned at Lost Creek to date and have been able to increase average flow rates for injection wells, reduce maintenance and operating cost through better filtration and more precise [indiscernible] chemistry maintenance. Result again should be potentially lower operating cost. So on Slide 7, here is a slide summarizing our production, cost and sales for the last few years. As we stated earlier in the webcast, 2017 has been about balancing construction, production and maintaining assets in the ground. The top section of the data again provides more evidence of that. As spot prices have weakened, we have increasingly curtailed pounds captured. Continued excellent recoveries and duration of operations in Mine Unit 1 has allowed for moderate and new construction investment in Mine Unit 2 and has thus kept cash cost reasonable for this production rate. However, the revenues from sales certainly haven't suffered, since our management team has been quick to pick up low-cost pounds to fill out our contracted commitments. This can be seen in the bottom table where you will note over -- $38 million in sales revenue in 2017.And then moving to Slide 8. On the wellfield operations side, we continue to operate a good portion of the wells in Mine Unit 1. Please keep in mind that the first of the wells were started in early August 2013. As of December 31, 2017, we have recovered nearly 89% of the estimated under-pattern resource based on the revised and updated February 2016 PEA. This is compared to an accepted industry standard of 70% to 80%. As part of the normal operating process, many of the flow pads in Mine Unit 1 have been modified to allow for secondary recovery. In other words, we have turned some producers into injectors and vice versa to optimize flowlines and maximize recovery with a limited amount of capital outlay. Wellfield operations in Mine Unit 2 began with the start of Header House 2-2 in late August 2017. To date, we have had a similar response to what was seen in Mine Unit 1 with one exception. We have been able to maintain initial flow rates longer and with less maintenance activities. As previously stated, this can be attributed to modified filtration and well installation techniques. Header House 2-3 recently started last week and appears to be operating in the same manner. We expect to turn on Header House 2-1 during the first quarter as well. Our Lost Creek processing plant continues to operate nicely with normal maintenance occurring as necessary. One of the major operating components at the site is the wastewater treatment and disposal system. While significant recycling efforts continue to occur, we're pleased to say that we have incorporated Class V disposal into our water processing portfolio. Class V is essentially the treatment of bleed water with reverse osmosis, followed by the removal of radium. The water has been reinjected in a shallow aquifer, thus recycling a large portion of bleed for future use. The system is the first of its kind in an ISR facility and has been available for operation since early 2017. In conjunction, we continue to operate 3 deep wells to dispose of that water where that cannot be recycled. So, Jeff, I'll turn it back over to you at that point.

[Jeffrey T. Klenda, Co]

Great. Thanks, John. And I would just make a couple of supplementary comments here. And one is that while John accurately detailed that we have been able to enjoy gross revenues of $38.3 million, that was on 780,000 pounds delivered into the marketplace at an average price of $49.09. And when you consider that throughout 2017, we spent the bulk of the year in between $20 and $24 a pound on spot, to achieve $49 a pound is something that we're very, very proud of. But in addition to that, because we have scaled back production in the manner that we have and strategically purchased pounds when needed, we've been able to preserve our resources in the ground and not lose them to the marketplace during the time of very low prices. But the other thing that I would emphasize that I don't think John really put much emphasis on was the fact that in the first 4 years, we have experienced a recovery of 89%. Remember that our initial PEA stated that we hope to achieve recoveries of 80%. We're already at 89%. And with some of those secondary recoveries, as John put it, in Mine Unit #1, this is one of those forward-looking statements the council so hates. But I do believe that we can actually push 100%, and I think that, that's something that's not only worthwhile, but that's virtually unheard of in our industry or any of the extractive industries. The other thing is that John's very self-deprecating, but one of the things that he didn't mention was the fact that in 2017, we put in place and implemented in our operating, our Class V waste disposal systems. And this is really a game-changer in the ISR industry. This is something that has allowed us to reduce our wastewater, and it has resulted -- it has had great results for us, because every pound -- every gallon of water that you do not have to process as waste is money to the company to the bottom line. And one last comment I would make is that on the heels of these operational results is that this is just really a testament to the hard work and dedication and the innovation of our staff on an ongoing basis. Now moving forward with Slide #9. Let's get to it. Let's talk about the Section 232 filing that was filed with the Department of Commerce on Wednesday of this week. Simple fact of the matter is that this is something that we thought was absolutely necessary. As I mentioned on the prior slide, we have become exceedingly dependent and reliant on foreign sources of material coming into the United States. And unfortunately, in most of those cases, with the exception of, I believe, Australia and Canada, when you're talking about Russia, Kazakhstan and Uzbekistan, you're talking about state-sponsored companies that are heavily subsidized and have also benefited from greatly devalued currency. So this is something that has allowed them to produce at what appears to be a lower and more competitive rate than what we can produce out here in the United States. But nothing could be further from the truth. And I'll let John talk a little bit more about that on a subsequent slide. But this is -- we've got to the point now where we are producing less than 5% of our needs in this country. This is unsustainable. And from a national security standpoint, I cannot imagine that anybody, whether it's our utility customers or anybody else in the fuel cycle believes that it is in this country's best interest to be without the capability of producing our own nuclear fuel. And yet, that is the position that we find ourselves in. And of course, as we all know, nuclear fuel is -- our industry is the starting point of the fuel cycle and we provide not only for the defense programs, our Navy and also for commercial use in our nuclear fuel, electricity generating facilities. So this is something where we feel that as a national security issue that this is something that we have to address and that we must address now.And again, here on slide #10, we detail some of these uses for our material in the marketplace and not only for defense, but tritium for triggers for nuclear weapons. We must maintain a nuclear deterrent. As long as that is a priority here in the United States, we have to have -- we have to maintain this capability. But politically, we believe that there is ulterior motives for the growth of this production coming from these parts of the world. And for us to become dependent on it is unsound foreign policy, particularly when we know that there is a rise of groups like ISIS in countries like Uzbekistan and other problems in some of those parts of the world. And let's face it, we have sanctions against the Russians. And yet, we allow ourselves to become dependent on Vladimir Putin for critical material coming into the United States. And it is projected that right now, the unallocated amount of DOE inventories represent less than 1 year supply to our nuclear utilities here in the United States. So this is something that is becoming critical, and we feel that time is of the essence, and we are asking the Department of Commerce to act on this very quickly. Moving on to Slide #11. I think that this is an instance where a picture speaks a thousand words. And if you take a look at this slide, what you'll notice here is the -- just incredibly rapid ramp up by Kazakhstan really in the post-Fukushima environment. Remember that Fukushima occurred now nearly 7 years ago in -- on March 11, 2011. And so we're coming up on the 7-year anniversary, and yet look at how much these countries have ramped up production here. Normally, if you were any for-profit organization company or any true market-based economy, you would not be ramping up production in the post-Fukushima environment in that -- in an environment that's characterized by massive oversupply and growing inventory, except to execute on what we believe is a geopolitical agenda that the West seems to be blissfully ignorant of. In fact, there was a book written 3, 4 years ago by Marin Katusa called The Colder War. And in that book, he details -- the thrust of the book is that since Vladimir Putin came into power, he charts the growth of the Russian presence in all elements of the fuel cycle in uranium production, enrichment and fabrication and his growing influence and control over the fuel cycle. And this is something he draws some very compelling and very alarming conclusions in that book. And I think that this slide speaks to that very well.Moving on to Slide #12. Here in the domestic industry, we find ourselves in a position where this slide really speaks volumes as well. We find that we are fulfilling less and less of the demand needed in this country. That number up above says less than 5%. We wanted to make sure that it was a reasonably accurate number. But knowing what we know now and once you remove the secondary processing that we know is being done at White Mesa and actually address only primary production, we are actually only satisfying about 3% of the needs in this country, not 5%. So it's even worse than we had anticipated. But moving forward, and speaking further to the Section 232 analysis, I'm going to turn this back over to John Cash. We did some -- in the body of the petition, we did some very interesting analysis. And I think nobody speaks better to it than John does. So John, go ahead and take it away.

[John W. Cash, Vice President of Regulatory Affairs]

Okay. If we could advance to Slide #13. Thank you, Jeff. Appreciate that. Something really interesting that we did is part of the Section 232 petition itself. We took the Preliminary Economic Assessment for Lost Creek and we compared it to some of the things that are going on over in Kazakhstan. And I'll get to that a little bit more in just a second, but it really showed the difference between the 2 sites. And -- but we'll get more into that just a bit. But Kazakhstan and Russia, as you can imagine, they have very different environmental regulations than we do here in the U.S. They mine with sulfuric acid. They don't perform mechanical integrity test on wells. They don't even restore their groundwater when they're done like we do in the U.S. And there are substantial cost differences between operations because of that. And in Kazakhstan and Russia, they benefit from a lot of subsidies and things like faster permitting. Energy subsidies, we know that electricity is subsidized. Currency valuation is also a big issue. If you take a look at the tenge and also the Russian currency, they're very weak compared to the U.S. dollar. So those countries, they produce in their domestic currency and then they sell in U.S. dollars. And that makes it very difficult to compete with them. In fact, at one point, the tenge, the devaluation there was about 87%. And also, there's some significant differences in labor cost.But moving back to the PEA. We took the Lost Creek PEA, which our engineers had put together back in 2016, and we asked them to simply integrate the Kazakh environmental regulations into that. Don't make any other changes, just integrate the Kazakh regulatory regime, their environmental regulations into the PEA, and let's see what the result is. And the results were just staggering. The PEA pretax IRR was 53.7% for Lost Creek. But if you adjust it for the Kazakh standards, it takes it up to 151%. Likewise, the PEA total cost per pound produced at Lost Creek was just shy of $30 a pound. However, if you take that over to Kazakhstan, you have to adjust it to $20.01, so nearly a $10 difference in production cost between the 2 sites simply because of environmental regulation.The PEA life of mine OpEx is $14.58 per pound at Lost Creek, has to be adjusted by $8.97 if you look at the Kazakh benefit. And I want to make sure to point out we're not asking anyone or seeking to reduce our environmental oversight of uranium mining. We believe, at this point, we have very good, strong and sound environmental regulation in the U.S. We would challenge Kazakhstan and Russia to meet our standards here in the U.S.But we're really seeking a level-playing field. The Lost Creek production cost, this is about 50% less results and a lower mining cost in nearly every Kazakh ISR mine. So if you do level that playing field, we can compete with anybody in the world. We can compete even with the lowest cost producers in Kazakhstan, and that's based simply on environmental regulation and also looking at devaluation of currency. So if we could move over to the next slide, please, #14. So another issue that we brought up in the PEA, and this seems to be of great interest here in Washington, the domestic job losses that we've experienced in the industry. At one point in time, we had in excess of 21,000 employees in the mining industry. Now we're estimating that we're about 500, maybe even slightly less employees. We're losing a lot of experienced people. We've lost a lot of geologists, engineers, chemists. One position that's been very difficult to fill are health physicists that help us deal with radiation safety concerns. And once those people leave the industry, it's really tough to get those people back. So there's a chart there from EIA. These are federal government numbers that shows the decline in the industry. It attempts to break it out by the different sectors of uranium mining. And you can see that those job losses are just -- it's on a straight line down, and we don't have any expectation that's going to reverse itself in the foreseeable future.Okay. You can advance to Slide #15, please. So we have 2 proposed remedies that we've included in the petition. First of all, it's a quota that reserves 25% of the market for U.S. producers. The second one is a requirement that federal government utilities and agencies purchasing from U.S. producers in accordance with the President's Buy American policy. That's an executive order. So those are the 2 remedies that we're proposing. And on that second one on the Buy American policy, those agencies would include departments such as the Department of Defense and NSA and any federal utilities out there such as TVA and Bonneville Power Authority (sic) [ Administration ]. We believe that the remedies that we've proposed are sensible and that they're achievable. And we believe they'll result in only minor impact to U.S. utilities and their customers.We provide U.S. utilities and their customers with improved supply diversification that will lessen exposure to the policies of Russian, Kazakhstan, China and Uzbekistan. It'll protect the in-supply shock, price increases and other geopolitically motivated action. So we believe that this action is in the best interest of the utilities in the long term. We believe the remedies will also maintain a high degree of competition that encourages lower prices and innovation and it'll support U.S. clean energy independence [indiscernible] air pollution and also lower carbon emissions. And with that, Jeff, I've got a lot more I could say about Section 232, but I'll turn it back over to you.

[Jeffrey T. Klenda, Co]

That's great. Thank you, John. And let me just follow on by making a couple of comments. And that is that -- again, I will echo what John said and what's in one of the bullet points is that we believe that what we are recommending in terms of a remedy or remedies, because there are 2 parts, are both reasonable and achievable. And I think that this is something where -- I can't emphasize this strongly enough that this is certainly not any 1930s type Smoot-Hawley style protectionism where American industry has been rendered uncompetitive and we are trying to salvage faltering industries in the United States. We have been rendered uncompetitive by state sponsorship and subsidies and currency devaluations that add open markets. And there's a lot to be said for open markets, and this is not intended to be protectionist in any way. But you've got to -- they've got to make sense and particularly when it pertains to national security. When you allow your markets to be flooded with cheap material and to the point where it results in the destruction of critical industries that are allowed to wither and die here in the United States, that absolutely makes no sense and those are broken trade policies. And as is expected, when we dropped this petition, the opposition popped up immediately. The -- one trade magazine brought out -- rolled out no less than the ancient Oracle of the industry, Tom Neff, who within less than 24 hours came out and said that by reserving 25% of utility consumption for domestic producers that it would result in the destruction of the nuclear industry in the United States. I can't help but think that, that's a bit of a hysterical response and a bit of an overreaction. And actually, anybody I think that takes the time to read the petition will come to the conclusion that it's very reasonable, it's very rational, it's well laid out. And I think that it makes it a very compelling case that there needs to be protection of these very critical industries here in this country. One other thing that I would mention is that we also know that we have strong support. We have senators like Senator Barroso that came out with an endorsement of this within 24 hours. And so we expect opposition on this. That's fine. And we certainly expect that the utilities will come out and act in their self-interest, and I would expect them to do nothing less. And we met with most of those utilities while we were at the NEI conference over the last 3 days. And we sat down with them face-to-face after this was dropped and made sure that we let them know how much we appreciate their business and appreciate them as customers and that we seek to do them no harm, but that we have -- that we're doing our best to salvage our industry. So with that said, let's close up our comments and then we'll open it up for the Q&A. And I'd just like to emphasize the takeaway -- takeaways from today's webcast are that we still have emerged as one of the lowest cost producers across all publicly traded companies. And as John just detailed, if we were not competing against entities that are being very heavily subsidized and benefiting from deeply devalued currencies, we might be the lowest cost producer in the world. We've delivered great results since Fukushima. We've derisked the company by having the foresight to put high-priced long-term contracts in place several years ago. This Section 232 is really something that we believe not only serves the interests of national security, but will sustain our domestic industry and preserve what few players we have left. Our evolved strategy of balancing, purchased and produced pounds is something that has resulted in excellent margins for our company. And we are going to continue to believe that cash is king. Look, in the extractive Industries, you're either generating revenues or you're diluting your shareholders. And there is no third alternative. So I think that there are also very good catalysts in this taking place in our industry. And they're -- those are on Slide #17. Those catalysts are supply-demand. I think that if you just look at the supply-demand fundamentals alone, there are more than 1 billion pounds that need to be bought by global utilities over the next 10 years. And if the production cuts are real, that have been detailed by Kazakhstan and Cameco, then I think that it's going to serve us all well and we should see prices make their way higher. Under current market forces, there are a number of things that could bode very well for this industry this year. Kazatomprom is planning an IPO for the third quarter of this year. They've already named JPMorgan in London as their bankers, and they have been engaged in the due diligence for nearly 6 months now. Section 232, let's face it, a successful outcome here under -- our Section 232 filing would do wonders for this industry. And lastly, this is something that we don't like to think about, but these geopolitical threats are very real. If for any reason there is a disruption of the flow of that material that we have become so dependent on coming out of Central Asia from Russia, Kazakhstan and Uzbekistan, now coming to nearly 40% of our fuel needs in the United States, our utilities would be in a crisis overnight. In fact, I asked one of our utilities, how long would it take you to be in crisis. He said, "Well, we wouldn't be in crisis immediately." And I said, "What about 6 months or a year later down the road?" He said, "Yes. We'd have real problems." So okay, maybe, you'd get by on inventories for a short while if this material stopped flooding into the country. But the reality is, is that it would be a much different result in a very short period of time. So with that said, let's move on to Q&A and we'll go from there.

[Operator]

[Operator Instructions] And the first question comes from Michael Wichterle with Cantor Fitzgerald.

[Michael Wichterle]

I just had 2 questions, the first dealing with the petition itself. To get to that proposed 25% quota -- the domestic quota, how do you see that working? I'm assuming this would be a gradual rollout spread over a couple of years, I guess.

[Jeffrey T. Klenda, Co]

It most certainly -- and by the way, John and I are in different locations. So, John, feel free to jump in on any of this anytime you want. But we have taken a look at this, and I'll speak to it on a macro basis, so I'll let John speak to it on a micro level. On a macro level, if you look at EIA numbers from the Department of Energy, they will tell you that we have capacity in this country for 36 million pounds of production. But I think anybody that's actively involved in this industry and owns a red pen, can have at that list pretty readily and whittle that down to where I think that even with a concentrated effort of significant capital infusion and an effort to bring production online, I think that we could probably in 5 years get to about 21 million to 23 million pounds or at least that's my personal assessment. Now your question has to do with how quickly we could ramp up to meet the 25% that we're asking for. John is taking a look at that on a detailed basis, and I'd ask John to weigh in on that. John?

[John W. Cash, Vice President of Regulatory Affairs]

All right. Thanks, Jeff. Actually, if you take a look at the petition, there are 2 exhibits that are dedicated to a discussion of the domestic uranium industry. It includes a table that shows the capacity of each of the facilities that are out there. But on the second what Jeff has said, if you take a look at the EIA numbers and start whittling that down, I think I'll take it a step further, not just 5 years, but if you look at 1 year, I think it would be relatively easy to get up to about 8 million pounds of production if the price were right. Going on from 8 million pounds a year to get up to 11.5 million, which would represent about 25%, which we're seeking in the petition, that might take another year and some good prices to support that. But we could get to that 25%, I believe, quite readily within 2 years with the proper incentive with the respective prices.

[Michael Wichterle]

Great. Got it. And last question, just concerning your header houses. Obviously, you're ramping up Mine Unit 2, but circling back to Mine Unit 1. So you've got 13 in operation right now. Do you see those 13 running over the duration of 2018 or will some be gradually shut off this year? That's it for me.

[Jeffrey T. Klenda, Co]

Right. John?

[John W. Cash, Vice President of Regulatory Affairs]

Yes. We see those continuing to operate through the majority of 2018. Of course, as the head grade continues to decline in that [ mature ] field, we'll continue to reduce the flow rates to turn off some of those wells where the head grades are just becoming uneconomic. But I believe the majority of that flow will continue throughout most of 2018.

[Operator]

And the next question comes from Heiko Ihle with H.C. Wainwright.

[Heiko Felix Ihle, MD and Senior Metals & Mining Analyst]

So on the 232, walking through that time line, I mean, we know the maximum time line with -- once they initiate the investigation, the Secretary's got 270 days. The President's got 90. I did some googling around and besides the aluminum one that's going on right now, there really hasn't been one of those 232s since 2001. I'm just trying to get my hands around what your people have told you on what they -- what time they realistically think it will take to get some sort of feedback on this? Will they max it out or will they try to get this done ASAP?

[Jeffrey T. Klenda, Co]

Yes. Let me make a couple of preliminary comments on this and then, John, jump in with anything that you have. But one of the things that we should emphasize here is that we did, in our petition, ask for an expedited review. So whether or not we get that from Commerce, we simply don't know. From a statutory standpoint, they have 270 days to evaluate, investigate and write their report and send that along to the President, who then has 90 days to determine what remedies are appropriate, if any. And so, I guess, this is as good a time as any to emphasize that the outcome here is anything but certain. This will be a very open and very public process, wherein there will be public comment periods. Certainly, our utility customers and any other parties that have standing in the 232 process will be invited to weigh in their concerns and their criticisms or whatever else they have to offer will be evaluated by Commerce. And that will all be reflected in Commerce's decision to a large extent. Yes, we'll have to deal with this thing over the next year now that it's been filed. But actually, the determination will be in Commerce hands, and ultimately, in the President's hands. John, anything you'd like to add?

[John W. Cash, Vice President of Regulatory Affairs]

No. You're spot on, Jeff. Just would add one thing. Back in 1989, Commerce initiated a Section 232 investigation on uranium imports that was required by statute, because the Atomic Energy Act stated that anytime we exceed more than 37.5% imports of uranium that the federal government would investigate and determine if trade action needed to be taken. Now the results of that are confidential. They're sealed. We're not able to have access to that. But at that time, when it exceeded 37.5%, the government decided not to take any action at that point. We have to recognize, that was a totally different world at that point. Most of the uranium coming into the U.S. was coming in from Canada and Australia and also some from South Africa. So it was coming in from allies. And the situation has dramatically changed. Now we're not at 37.5%, we're at 89%, 90% and growing rapidly. And the longer it is, a lot of that coming out of friendly allies like Canada and Australia, a growing percentage is coming from Russia, Kazakhstan, Uzbekistan. And we believe a growing percentage is going to be coming from China. So keep in mind, too, that Canada now or very soon will only have one operating uranium mine. Cameco has decided to shut down McArthur River. I think that's getting pretty tenuous on the production coming out of Canada to continue to rely on that and say our allies are providing us sufficient quantity, because that number just continues to decline.

[Heiko Felix Ihle, MD and Senior Metals & Mining Analyst]

Okay. And again, my first real-time going through one of these things, and there's 2 questions rolled into one. How often does the government keep you guys updated on what's going on with this and how often do you expect to keep the marketplace updated with what's going on with this? Now that question is especially pertinent since it's right now 2 companies pulling on the same strings of [ AA ]. So you guys need to sort of get together and figure out what you say and when you say it.

[Jeffrey T. Klenda, Co]

Yes. Most certainly, Heiko. That's a good question. And the fact is, is that we are coordinating our efforts as best we can with Energy Fuels. We have designated spokespersons within our respective organizations and the 2 spokespersons for our company are on this call today. And Energy Fuels will select their own and make those known to the marketplace. We will be coordinating our efforts. Really this now is in the hands of Commerce. We would expect to hear from them within the next 2 to 4 weeks. And then as I said, as far as what we report to the marketplace and what we can even say to the marketplace, I'm not -- honestly, I'm not trying to be evasive here, but I really don't know exactly what that's going to be, because it will be in their hands and the process will be theirs. They will share with us what they want to share with us, when they want to share with us. And I'm not sure that we have much, if any, control over that. John, anything else that you would add to that in terms of the process?

[John W. Cash, Vice President of Regulatory Affairs]

Proper characterization of how Commerce is going to handle it.

[Operator]

Next question comes from Joseph Reagor with Roth Capital Partners.

[Joseph George Reagor, MD & Senior Research Analyst]

Most of my questions have already been answered, but just kind of some fine-tuning items. This whole attempt to get the regulators to pay attention better, is there any additional cost you're going to absorb chasing this down or have you guys budgeted for a certain amount of money you're going to throw at it? Or is it simply, you spent a little bit of money on legal writing it up and now, it's in the hand of the regulators?

[Jeffrey T. Klenda, Co]

Okay. Yes. No. Good question. And I wish I could say that it has been a little bit of money. It has not. This type of a filing honestly does not come cheap. We have -- but frankly, the reason that we did this in conjunction with our friends at Energy Fuels was because we want -- we -- between the 2 of us, and this is a sad commentary on the state of our industry, but we represent more than 50% of primary production that remains in the United States. And we felt that, that gave us proper standing to bring this action to begin with, although anybody can bring the action. But the other upside of that has been that we've been able to share costs. They've been great to work with. And so it has helped us to fray the cost so that we haven't had to shoulder it alone as a company. We feel as though the legal costs have been manageable to date and certainly haven't been a hardship for either one of our companies. But moving forward, we will have to deal with this and manage media responses and so on. And so that will be an active ongoing activity of ours throughout 2018. And when you take a look at the timing of when this was filed, this really will play out throughout 2018. John, any comments from you?

[John W. Cash, Vice President of Regulatory Affairs]

No. I think you've hit it real well. It's been submitted. That was the bulk of the effort right there, but we'll continue to respond to Commerce with any questions that they might have and also any items from the media. So there is some effort involved there.

[Joseph George Reagor, MD & Senior Research Analyst]

Okay. But not like a -- there's no set number you could give us as far as like a number to add to G&A for this year and last?

[Jeffrey T. Klenda, Co]

No. You'll see that reflected in our end of year, likely. You'll be able to peel it out of there. And when we come out with end of year numbers, Joe, we'll be happy to have a call and identify those additional costs specifically. But I think that when you see them, you're going to see they're not back-breakers, but we felt critically important.

[Joseph George Reagor, MD & Senior Research Analyst]

Yes. Fair enough. And then on the more positive note, let's dream that you essentially win and we get the 25%. At what price, and how quickly after that price is reached, could you get Shirley Basin into production?

[Jeffrey T. Klenda, Co]

Well, there's 2 different -- there's 2 parts of that. And I think I'll let John speak to both of them, because I think that at Lost Creek, of course, one of the things that we've endeavored to do, the reason we're still producing is because we just are adamant about retaining the quality staff that we have, and that has taken us years to train, and we don't want to lose good people. We've lost enough of them. And that's one of the reasons that we brought this action is because we're just tired of losing critical staff. And the fact is, is that if we get much leaner, the ramp-up, should the market give us proper incentive to ramp up, we won't have the ability to do it. So what you have seen from us over the course of -- throughout 2017 has been an effort to retain critical staff and to give ourselves the ability to respond rapidly to what we hope will be positive changes in market conditions. John, you can speak better to the time it would take to ramp to a full million pounds at Lost Creek. And then would you follow-on with the second half of that question and address Shirley Basin as well?

[John W. Cash, Vice President of Regulatory Affairs]

Yes. Absolutely. And I'm really glad you asked that question. That's an important question, what will the price be going forward. So essentially, what would happen, there would be 2 markets created. There would be a world market for uranium and a price established associated with that. But then there would also be a U.S. produced market. Keep in mind though that, that U.S. market, any time a utility wanted to buy pounds, they would send out an RFP to a number of producers and then we would be competing amongst ourselves to try to win that bid. So to see what those prices would be, I think you only have to look back to a few years ago when we were signing contracts with our utility customers. So if you want to see the range of prices where we think it would be, particularly, I think for Energy Fuels and Lost Creek -- Lost Creek, Ur-Energy, a look back at the prices we've been getting for our uranium here in the last few years. So I think that's kind of where you can bracket it. So probably an increase of price, 20 to 30 pounds or dollars per pound. So with regards to Lost Creek and Shirley Basin, Lost Creek is already permitted. So we've got a number of places we can go there to continue production within Lost Creek. So ramping up to 1 million pounds per year would be a matter of simply additional drilling, getting wells installed in places that are already permitted. We just have to get the infrastructure put in place in the wellfield. The infrastructure in the processing plant is already there. So for Lost Creek to get up to that 1 million pound a year rate, once we see those contracts, I believe it would -- we could do that within a year and get up to 1 million pound per year rate. For Shirley Basin, we're still permitting there, and so that's an ongoing process. But I think that we'll have that completed probably near -- probably first half of 2019. We're waiting on the Agreement State program to be set up in Wyoming, and that's supposed to happen third or fourth quarter of 2018. So once that's established, we'll be supplying them our applications. And have to understand that their group is already partly established within the Land Quality Division. They've already accepted our application. They've already renewed it and deemed that it's adequate, and they've also given us technical questions that we've responded to. So that process is already a long ways along. So I think we can begin construction of that site at some point, maybe as early as mid-2019. I think the build out, I think you can look at Lost Creek to determine how long it's going to take to build out Shirley Basin, see that as an example. So I think 9 months would be about how long it would take us to build out Shirley Basin. So hopefully, that is responsive to your question.

[Joseph George Reagor, MD & Senior Research Analyst]

Yes. It's very helpful.

[Operator]

Next question comes from Ben Atkinson with Gagnon.

[Benjamin Cheever Atkinson, Partner and Portfolio Manager]

My question, just coming back to today's market, Jeff, could you just give us your thoughts on supply -- oversupply -- potential oversupply in 2018? Some of the things that have -- inputs have in the past have been underfeeding and the traders as well as perhaps uranium leaking out of Japan that was supposed to be delivered to utilities there, but they can't use. Could you just kind of give us your thoughts about where that -- what all that looks like over the next year or 2?

[Jeffrey T. Klenda, Co]

Yes. Look, I think you're talking about 2 different things there. And first of all, let me deal with what I think is the first half of the question, and that is global primary production. When you look at primary production, one of the things that we were very, very happy to see last year is that there was a great deal of what we call supply disruption that took place throughout the year. And we had everybody from AREVA to Rio Tinto to Cameco to Kazatomprom, all announce fairly significant reductions in production. And of course, we need to see that. We need to see that supply disruption. Now we attempted to put a total on that -- total amount of primary production that was supposed to -- based on public pronouncements by multiple companies and state-owned entities out there, we put that number somewhere around 36 million pounds of primary production that was being taken out of the market by the first quarter of this year. Now if you translate that into global primary production, it's somewhere in the neighborhood of 24% -- 22% of global primary production. That's significant supply disruption and that helps the situation. The second half of that equation is one that's less transparent. It's certainly more opaque, because you're really talking about underfeeding. And with underfeeding, you're talking about U3O8 equivalent being really produced out of thin air, because those centrifuges just have to keep turning. And so they're going to get more production out of them, and underfeeding is projected to introduce to the market this year, somewhere between 20 to 22 million pounds again this year so that continues to be a problem with -- particularly with enriched product, EUP being at such low prices right now, in fact, at multiyear lows in -- around the $40 range. So that's something that's going to continue. Others, as far as inventories. Inventories are another thing that are very, very difficult to get your arms around. And simply because when you're talking about state players like Russia, like China, like Kazakhstan and others, these are considered to be state secrets. Even here in the United States, our military inventories are closely guarded secrets. This is not something that we make known to the public. And our competitor countries around the world are very much in the same position. So we see that, unfortunately, yes, there are a lot of negatives out there as far as secondary supply. The Japanese are -- secondary supplies in the Japanese are slow, turning on the reactors. These are things that we have been dealing with for some time. Others are -- there are other inventories out there, where we know that the entities holding them are cash strapped. So those become pricing sensitive pounds that must be sold into the market and we see them, unfortunately, often times at month end that are driving down prices. And then, of course, you see other state players like Germany and Korea has kind of vacillated on this. But they are moving away from nuclear and that's not helping us. But then on the positive side, of course, we've still got 61 reactors under construction. And we've seen very positive developments in the fourth quarter of this year like Westinghouse being bought out and being -- and now going to be brought out of bankruptcy. The decision to move forward with the Vogtle plants. These are all positive developments in the uranium space. And so it's a bit of a mixed bag. But as I mentioned, when I was talking about the catalysts, I think that if the Kazakhs do IPO this year and they're very serious about that, that means by definition that they're going to have to cut supply to achieve the pricing that they would want to have a successful IPO. The build out of the plants will increase demand, and we will continue to eat through that overhang that we have. And of course, the geopolitical -- possibility of a geopolitical that is always the black swan that really nobody can count on or discount one way or another.

[Benjamin Cheever Atkinson, Partner and Portfolio Manager]

So I mean, it sounds as if at least entering 2018, there's nothing that's getting substantially worse on the supply side. If anything, it could be getting a bit better, at least as far as we know today.

[Jeffrey T. Klenda, Co]

I would say that this is probably going into 2018, the most positive environment that we've had entering a new year in the last 6 years, at least from my perspective it is. And I think that, that viewpoint is generally shared. And if you take a look at what I've mentioned earlier was the constructive base building that's taken place in the stock, I would have to look at that and say that the market tends to agree.

[Operator]

This will conclude our question-and-answer session. I would like to turn the conference back over to Jeff Klenda for any closing remarks.

[Jeffrey T. Klenda, Co]

Great. Thank you very much. And once again, thank you, everyone, for joining us. And I'd like to -- I really do have, what I think are some important closing comments here that I'd like to make. And first of all, I'd like to say that we -- as a company, we'll continue to do the things that you know characterize us. We will continue to work on our efficiencies and strive to be the lowest-cost producer across all publicly traded companies. And if that playing field ever gets leveled, we just might emerge as the lowest-cost producer in the world. Wherever possible, we will add or grow resources. We will continue to pursue that balanced approach, so that we can maximize our margins. But above all, we will work to make sure that we cash flow properly; and in that process, protect our shareholders. And a couple of last words with respect to the filing of the Section 232. I think that it needs to be stated here that, well, yes, it is Ur-Energy and Energy Fuels that is filing this petition. I think it really speaks to the dire state of the industry that a couple of juniors of our statures have to be the ones to bring this. And as we looked at how the situation in the uranium production industry, you see the number of employees below 500, it became such a -- we see a dire situation developing over the next 2 to 3 years unless we get some love out of the market and we see higher prices, but it really became a question of, if not us, who? If not now, when? And so we felt compelled to act on behalf of the industry. And I think that it deserves to be stated here that it's not just us. We don't act in a vacuum just the 2 of our companies. There are other companies out there that are waiting in the wings that would love to have an excuse to ramp up production, our friends at Peninsula, UEC. And ironically and paradoxically enough, when you think about this, if there is 25% that is preserved for U.S. producers that would mean by definition Willow Creek would come back into production, which is owned by the Russians, that are primarily produced in Kazakhstan. Also Smith Ranch owned by Cameco would be coming back online. So it would give actually foreign owners of U.S. assets the opportunity to come back into production themselves. And finally, I'd like to make a comment and this is a sincere one with respect to our utility customers, and that is that we have watched the events play out in Illinois and New York, and now in other states and we have very much been rooting for the utilities to get the type of legislation they need to be able to keep those merchant plants open. We know that they're hurting. What is needed here is federal legislation. This country needs federal legislation to protect our industry. And I will go on record right now as saying that it is not fair that the utility should have to shoulder this burden alone. They're hurting. They've been hurting for some time. But as I said to many of them personally, while I recognize that they're hurting, if we don't do something over the course of the next 2 to 4 years, we may well be dying and we simply cannot sit around and wait for that contingency to take place. So we did what we felt we had to do. It was not intended to hurt our utility customers. And we hope that the marketplace will look at it as a favorable development and one that they will give us their support on. So with that, I'll close this out. And thank you once again for sharing us time with us this morning. And we'll talk to you on the next conference call.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.