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Paladin Energy’s (PALAF) CEO Alexander Molyneux on Q3 2016 Results – Earnings Call Transcript

Paladin Energy Ltd. ( OTCPK:PALAF ) Q3 2016 Earnings Conference Call May 10, 2016 7:30 PM ET Executives Alexander Molyneux – Interim Chief Executive Officer Craig Barnes – Chief Financial Officer Darryl Butcher – Executive General Manager, Project Development Analysts Adeline Tan – Value Partners Limited Glyn Lawcock – UBS Securities Stefan Hansen – Morgan Stanley Simon Tonkin – Patersons Securities Limited Alexander Molyneux Hi, everybody. I’d like to welcome you to this call. I’m joined with me today in Perth, I have Craig Barnes, our Chief Financial Officer; Darryl Butcher, our EGM of Technical and Project Development, and Andrew Mirco our General Manager of Corporate Development and Investor Relations. We’re going to step through our presentation, which I think could probably take about 20 minutes or so, and then we will open the call up to Q&A. So moving into the presentation, we have a disclaimer regarding some forward-looking statements and notes on our resource and reserve disclosure. Into page two, where we describe Paladin in a nutshell. We confirm that we are a global uranium leader. Langer Heinrich is genuinely a Tier 1 mine in its industry and highly strategic. Optimization is a core competency for us and we provide the best senior leverage to uranium price upside. We are a global uranium leader as defined by Paladin,. being the eighth largest uranium producer in the world by capacity. We also have the second largest pipeline of undeveloped uranium projects and resources. We are the only top 10 player that’s purely focused on upstream uranium and also genuinely independent of state ownership, or being part of a diversified conglomerate. The – when we say Langer Heinrich is a strategic Tier 1 mine, we can really define it by its position in the global uranium industry. That position has only improved over the last 12 months. It was 12 months ago that UxC last assessed Langer Heinrich in the first quartile of global C1 cash cost uranium production. And we have now since that time achieved even lower record low C1 cash costs. We have – also I can point out, we have industry-leading sustaining capital cost, and this is very important when we look at the very different methodologies of mining uranium globally. In particular, in secure recovery mining, which has a much higher sustainable capital cost, or even the mines in Canada that have a much higher sustainable capital cost per pound. When we take that into account, we are indisputably an industry leader in terms of all-in sustaining cost. With that, I’m going to handover to Craig, who is going to highlight some of the features of our results for the March 31. Craig Barnes Thanks, Alex. Good morning, everyone. Highlights of the March quarter presented on the Slide 5 and 6, Uranium production for the quarter 1.3 million pounds increased by 5% compared to the March 2015 quarter. Due to the 14% increase in all process, which was partially offset by lower process grade, and lower recovery. The company’s safety stat continues to improve this quarter with a 12-month average loss time injury frequency rate decreasing to 1.4 from 2.1 last quarter and 2.3 in 2015. The realized uranium sales price for the quarter were $34.67 per pound, a $2 per pound premium for the TradeTech average weekly spot price for the quarter. For the nine months to March 31 2016, the realized uranium price was $39.41 per pound versus the average weekly spot price for the nine months of $35.08 per pound. That was a $4.33 per pound premium. In the June quarter, we expect sales of 1.75 million to 2.1 million pounds, of which approximately 1.55 million pounds, or $55.9 million by value has already been priced and shipped as we speak. So that’s basically a realized price of $36 a pound. C1 cash costs decreased by 18% from $29.42 per pound in 2015, to a new record low, as Alex mentioned, of $24.13 per pound for the quarter. This was also within our March quarter guidance of $23 to $25 per pound. The decrease in cost was mostly driven by a reduction in reagent costs, resulting from the bicarbonate recovery plant, as well as weakening of the Namibian dollar against the U.S. dollar. All-in cash expenditure for the quarter was also at a new record low of $31.60 per pound, which is a decrease of 33% compared to 2015. Cash and cash equivalents at the – at March 31, 2016 of $21.4 million was within our adjusted pro forma guidance of $19 million to $29 million after adjusting for the debt repayments. The company’s cash balance is expected to increase between $45 million and $65 million at the end of June. We expect to receive more than one-third of this financial year’s sales receipts in the June quarter, due to the timing of deliveries and payments from customers. The majority of these sales receipts have already been priced, as I said, at a substantial premium to current spot uranium prices. The company is, therefore, still on track to be cash flow neutral excluding one off items. Sales revenue for the quarter increased about 22% to $20.8 million in the March quarter from $17.1 million in 2015, as a result of a 35% increase in sales volume, which was partially offset by 9% decrease in the realized sales price. Cost of sales also increased as a result of the higher sales volume. The reduction in costs from last year results in operation achieving a 200% increase in gross profit, notwithstanding the 9% decrease in the realized sales price. Underlying EBITDA for the March quarter was negative $0.8 million, an improvement of $5.4 million from the negative underlying EBITDA of $6.2 million in 2015. The company further reduced its debt by approximately $81 million during the quarter, with an additional $25 million repurchase of 2017 convertible bonds and the repayment and termination of the $56.4 million Langer Heinrich’s syndicated facility. The convertible bond repurchase together with earlier repayments of Langer Heinrich syndicated facility will generate cash savings to the company in the form of avoided future interest and also principal repayment and will further reduce the company’s all-in cash expenditure. The Langer Heinrich’s syndicated facility will be replaced by a new $25 million revolving credit facility, which is currently being finalized. Slide 7 has two waterfall charts, which provide a variance analysis of the EBITDA, comparing a March 2016 quarter to both the previous December 2015 quarter and last year’s March 2015 quarter. Comparing to the previous quarter, the chart on the left shows that our EBITDA decreased by $11.4 million from $10.6 million in the December quarter to negative $0.8 million in March – in the March quarter. In the graph, you can see the large variances caused by the decrease in sales volume from 1.7 million pounds in the December quarter to 595,000 pounds in the March quarter. Due to the size of certain sales and also their timing, these large sales volume variances will continue from quarter-to-quarter. In addition to the negative sales volume variance of $38.3 million, there was also a negative sales price variance of $5.5 million. The lower sales volume resulted in lower cost of sales with a positive cost of sales volume variance of $33.9 million, partially offset by a negative cost of sales performance variance of $1.9 million. Admin costs were approximately $500,000 lower than in the previous quarter. Comparing to the previous year’s March 2015 quarter, the chart on the right shows that EBITDA improved from about $5.4 million from a negative $6.2 million in the March 2015 quarter to a negative $0.8 million in the current quarter. The impact of the 35% increase in sales volume on revenue and cost of sales, together with the negative variance caused by the 9% decrease in the realized sales price was more than offset by a positive variance in the cost of sales performance resulting from cost reductions. In addition, exploration, administration, unallocated fixed overheads and Kayelekera care and maintenance costs were approximately $4 million lower than in the March 2015 quarter. Onto Slide 8 which shows how all-in cash expenditures reduced by $15.27 per pound year-on-year from $46.87 per pound in the March 2015 quarter to $31.60 per pound in the March 2016 quarter. The graph on the left compares all-in cash expenditure for the last seven quarters and shows the trend of decreasing expenditure. With the March quarter’s $31.60 per pound significantly lower below the FY16 average of $50.75 per pound. All-in cash expenditure for the year is expected to be within a range of $38 to $40 per pound. That’s the guidance range that we’ve provided for FY16. The waterfall chart on the right provides an analysis of the movements in all-in cash expenditure from the previous year’s March 2015 quarter. The biggest movements as you can see from the graph have been a reduction in reagent costs resulting from the bicarb recovery plant of $5.55 per pound and the weakening of the Namibian dollar against the U.S. dollar of $3.10 per pound. Higher production volumes compared to the March 2015 quarter have also resulted in a $2.44 per pound decrease in costs. Additionally, the reduction in mining costs, capital expenditure, Kayelekera care and maintenance costs, and corporate and exploration costs resulted in a further $4.18 per pound decrease in all-in cash expenditure. In summary $12.17 per pound, or 80% of the $15.27 per pound savings was from cost reduction initiatives and efficiencies. On Slide 9, the table provides a breakdown of Paladin’s debt at face value amounting to $362 million at March 31, 2016. Since June 2012, Paladin’s debt has been reduced by approximately $552 million. The $25 million repurchase of the 2017 convertible bonds and the $56 million repayment of Langer Heinrich’s syndicated facility in the March quarter were the most recent debt reduction. The net debt maturity of the $212 million convertible bonds due in April 2017, strategic initiatives are currently being advanced with a view to refinance or repay the April 2017 convertible bond and due diligence by the various counterparties is ongoing. A new $25 million revolving credit facility is being finalized. Documentation is well advanced and implementation and draw down is expected in June. Based on our latest cash flow forecast, we still see the funding gap required to repay the 2017 convertible bond at between $140 million and $165 million. I’ll now hand you back to Alex to complete the presentation. Thank you. Alexander Molyneux Okay. Let’s just return to our core competency, which is optimization and the key architect of that – Darryl Butcher is in the room with me, but I’m going to do this slide for now. And – but Darryl is here to answer any questions as well. Our reagent cost per pound of finished uranium was a record low in this quarter to March 31. It’s basically running at half the level of financial year 2015 levels, and that’s driven – not driven by currency and those kind of influences, it’s driven by projects that we designed and we built here using our optimization capability. We – you can see now that we are now targeting a further $2 to $3 per pound in processing cost reductions over the next two years or so. We have a number of specific projects behind that targeted cost reduction. And some of those projects will feature in our FY 2015 performance, and others are still through – going through the final design process. But we have more to go on this front, and this is definitely one capability that puts us in a leading position in terms of being able to leverage our costs below current low uranium prices. On Slide 11, we have shown this chart before. It – this particular chart was updated last quarter when we revised our all-in expenditure forecast down. To remind everybody, we define all-in expenditure in a current period basis rather than sort of as a rolling going forward basis. We also include every dollar of spending that leaves our doors. So it’s everything. It includes debt servicing, corporate cost administration, royalties, exploration, the cost of keeping Kayelekera on care and maintenance. When we did revise this, we revised it for – we revised it down to forecast a $38 to $40 all-in range for the full financial year of 2016. This graph is unchanged at that, so we still stand by that guidance. What the graph implies is that, it means that our second-half will have a running rate of $33 to $35 a pound. As you can see, we already have the March quarter in at $31.60, so we have no problem with our guidance in this regard. We can also say that our March quarter selling price was $34.67. We certainly believe our June quarter selling price will be at or above $34 a pound. So you can start to see the leverage we have in our business to move it from cash flow neutral towards even cash flow positive in a low uranium price environment. Moving on to the next slide, we say we have the best leverage to uranium upside, because we are relatively uncontracted going forward, and we also have the ability to increase production through Kayelekera being on care and maintenance and being able to be brought relatively quickly back into production, but also our pipeline of undeveloped projects. Analysts continue to believe that uranium will double from current levels in coming years. In the last few months, we’ve seen further market rebalancing. The second half of 2016 will see around 8 million to 9 million pounds less supply than was being included in typical demand supply models only a few months ago. Sources of the supply cutback include Cameco’s announced production cuts at Rabbit Lake and in the US ISR operations, but also the delayed start-up of Swakop Uranium’s Husab Project in Namibia, which was previously in analysts supply models on average for about 6 million pounds this year, and we believe will produce not more than 1 million pounds or so. The – we also have the interesting feedback from customers who are – who we now have – we believe there are strong intentions for a very busy contracting season in the second half of 2016. When we keep our list of customers that report to us intentions to contract over certain periods, our list has grown with respect to the second half of 2016 period, and it’s longer than it’s been in quite some time. Turning to our strategy; our strategy continues to be very simple in this environment. Number one, we are doing everything we can to maximize operating cash flows at Langer Heinrich Mine through optimization initiatives, whilst preserving the integrity and long-term mine plan. Number two, we continue to maintain Kayelekera and our exploration business on a minimal expenditure care and maintenance basis. Number three, we also continue to drive our corporate and administrative costs lower, and are achieving all our targets in that regard. Number four, we are progressing strategic initiatives with respect to partnerships, strategic investment, funding and corporate transactions as – as our primary method to bring in the capital required to meet the requirements of our stated funding gap to repay the 2017 CBs. Just focusing on that for one second, we can say that we have previously disclosed this point that our primary strategy is to leverage the unique strategic nature of our platform in Langer Heinrich to do a deal at a substantial premium to the current market share price of Paladin with a participant in the nuclear or uranium industry. I can say that Craig touched on that process, saying that we have parties admitted to due diligence, and that process is going very well. In fact, we have multiple parties admitted to do due diligence. Our confidence is quite high with respect to being able to present something interesting to our investors in that regard. Coming back to our guidance, financial year 2016 guidance is summarized as follows. We’re guiding approximately 4.8 million pounds of production on a full year basis. This has changed from what was previously stated, 5 million pounds. We have a short term issue with – associated with the availability of return water from our tailings storage facility number three. That facility – we’ve basically how we use water for our processing water, how it’s gained is around about 60% of it comes from water that is drawn from sumps under the base of tailings storage facility three, and then incremental water is purchased from outside. Those sumps, over the past few weeks have not been operating – providing the water capacity, the amount of water that would usually provide. There’s solids ingress in these pumps and as a result, they’re not pumping at capacity. We have a number of short term solutions that we’ve already partly implemented, and we’ve got a couple of more things going in this week. And we do not expect this to be a very long-term issue – nor an issue that costs as some meaningful amount, a material amount of capital to deal with. Most of the works that we’re doing are small scale earthworks and drilling activity to sort of fix this problem. But as a result of it, we have lost around 100,000 to 150,000 pounds from our quarterly production to June 30. Having said that, the remainder of our guidance is broadly unchanged, so our full-year average selling price premium is still expected to be $4 or more. And as Craig said, our selling price to-date, as of May 10 is $36 for this quarter. We still expect to be cash flow neutral for 2016. With that we would expect our cash balance to be between $45 million and $65 million at the end of the June quarter. We have for the first time, provided some very high level goalposts, if you like for financial year 2017. Our production will be in excess of 5 million pounds. Our Langer Heinrich C1 cash costs will further reduce from FY 2016 into the range of $22.50 to $24.50 and we would expect our all-in company-wide cash expenditure in the range of $29.50 to $31.50 per pound of uranium produced. As we come into our next reporting activity, such as our next quarterly activities report and then our next quarterly financials. We will start to provide a little bit more meat around the bones of our FY 2017 guidance, but we certainly believe that we will continue to achieve positive results in terms of cost reductions and maintaining a consistent level of production. So before we hand over to questions, there’s a couple of points I want to address, in terms of a wrap-up. Number one is, I can see some points showing up in certain analysts’ reports and whatnot and I just want to address those points specifically. I want to ask the market not to be too cynical regarding our company’s goals. Firstly, we see a couple of analysts questioning our sales guidance and even our cash build that we’re expecting – that we’re forecasting for this quarter. I merely want to make out the point – make the point to those people that, number one, since we have been providing quarterly cash guidance, we have never ever missed it, either missed the midpoint of it or exceeded it comfortably. Number two, as Craig has pointed out, when we provide our sales guidance for the June quarter, and our expected cash balance build, our sales guidance is 1.75 million pounds to 2.1 million pounds. As we sit here at 10 of May, we have already sold 1.55 million pounds at an average price of $36 a pound. So we’re confident in achieving our quarterly outcomes and we are also, I can say confident in achieving our strategic refinancing for the 2017 CB. I can say that that CB is still almost 12 months away from being due. And whilst the process that we are running is not likely to result in an announcement before July, we are highly confident. We have competitive tension in the process. We are currently spending significant resources to conduct due diligence on our business, and when we look at valuation none of the counterparties we are working with believe that low uranium prices at these current levels are here to stay, and all attribute a strong strategic premium to our unique platform and our Tier 1 Langer Heinrich Mine. So that’s it for us. And we’d like to find out if there are any questions. So I’ll ask the operator to run a Q&A process for us please. Question-and-Answer Session Operator Certainly, so ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator instructions] The first question comes from the line of Adeline Tan from Value Partners. Please go ahead. Adeline Tan Hi. Good morning, management. Thanks for taking time for the call. I have two questions with regard to Paladin. Thank you for sharing a lot about the strategy initiatives and that you are intending to take. I’d just like to know because you say that the timeline is unlikely to come out before July 2017 – I mean July this year. So I like to know what kind of timeline would be reasonable by December. And is the reasons some kind of a regulatory – is there any regulatory issues with regards to – correct me if I’m wrong, but is it that you are intending to leverage on Langer Heinrich – the LH Mine to – are you intending to sell the whole mine, or are you intending to sell a portion of the mine? Thanks. Alexander Molyneux Okay, thank you, Adeline. I can say on the first point, with respect to the timeline, I think we can say that we would expect to be in a position to announce a deal probably in advance of our next quarterly result, which happen in mid-August, I would imagine. But it’s a little bit difficult to determine because the timeline’s dependant on the performance of various counterparties and how they progress with things. But – so I think we are making progress to be able to announce a solution well in advance of any time that we believe we have any – many sort of pressures or issues with respect to the 2017 CB repayment. We believe that probably not before July, but could be July. But it could be – it’s a little difficult for us to know, but we’re not too far off. Now, on your second point, we can’t – we’re looking at a number of structures. Obviously, we talk to different parties about different kinds of proposals or deal structures, so I don’t want to be specific on the nature of the transaction that the company may enter into. I can say that we only invite parties to commence due diligence if the proposals discussed with them impute a significant premium to the valuation to the market, trading valuation of Paladin. I can also say that various transactions would require various regulatory approvals that would happen probably after an announcement is made. So there is – we’re a public company showing in certain situations, there would be shareholder approvals. There’s also various external regulatory approvals will probably be required when we look at the types of transactions we’re looking at. Adeline Tan Okay. And then one more question that I have is with regards to your cash and your working capital. I mean I expect because given that like – you seem very confident and very comfortable about cash. And in the recent quarter, the cash level is at $21.4, I mean given that you have done your buybacks. I’m just wondering, I mean during that quarter given the stress in the working capital in the sense that the trade receivables hasn’t come in yet and you are still very comfortable to take this – this move of buying back your CBs. So moving forward, are you – are we expecting sort of buybacks of your CBs or how are we seeing your management of the cash? Alexander Molyneux So firstly, yes, I mean we were comfortable repaying – the buying back some CBs last quarter and repaying the Langer Heinrich syndicated loan facility, which was a total of $81 million of debt retirement last quarter. We were comfortable doing that because we have good visibility on our shipping and our sales. So we have a very heavy quarter. So let’s say if at June 30 the cash balance was $20 million, there’s a 10 week period immediately following June 30, where we had – where we received $60 million of sales receipts if you like. So it’s a very, let’s say, in our business, we have a timing of cash receipts issue with respect to the timing of shipping, and we build inventory and then we ship it and then we get paid. But it’s still a very certain process for us once we mine and shipped that uranium we – so we’re quite confident about our cash balance at the June quarter and which we’ve guided to $45 million to $65 million. We also believe that it will continue to build in subsequent quarters. So – and that’s a lot to do with the timing of known sales and what not. We’re always looking at the CBs. The CBs have traded – so the IRR are buying back the CBs sort of has been reducing over time, but we continue to monitor that. We can’t say that we have any specific plan today to buy back more CBs, but we’ve always been opportunistic in that regard and we may continue to be so. Adeline Tan Okay. Thank you. Operator The next question comes from the line of Glenn Wilcock from UBS. Please go ahead. Glyn Lawcock Good morning, Alex. Three quick questions if I can thanks. Quick one, first one, just the Langer Heinrich issues, are they now fully resolved? So you’re comfortable with the guidance or is there still an ongoing issue there? I might have missed that during the call. The second question, your all-in sustaining costs of – I think you’ve put it out to $31 for the quarter, maybe yourself or Craig, so we’re not just simply looking at the cash flow statement, $42.6 million went out the door in the quarter for production of 1.3 million pounds. I know it’s semantics, but if I just divide one into the other, I actually get all-in costs of $32.7. I’m just trying to figure out what you’ve left out or am I doing it wrong? And then the third question is, I’m just interested at a philosophical level, Alex, a little bit. You’ve got a lot of party circling doing due diligence. That’s great. We all think the uranium price is going to go up. And I think I remember the first day you took over last year, you said, I’m a uranium pool, I think it will go up, I just don’t know when, but it will. I think it feels like it’s probably been pushed out a little bit with all the issues in Japan. What’s the background that you guys have that you are sort of saying that you could get – what do you believe your batter, I think, you get a high price well above market value, because I mean, I would have thought potential suit is know the trouble you are in, now that you’ve got a CB due next year. Without a deal the longer it goes on the more, I would have thought you’d find yourself on the back foot, not the front foot trying to negotiate the deal. I’m just trying to sense what do you think the batter is like? Alexander Molyneux So I’m just going to address the first question first. Then I’ll let Craig address the second question. And then I’ll come back to the third question. So Langer Heinrich issues, but we – let’s say the issues, we have immediate solution, medium-term solution, and longer-term solutions to these issues, okay? So we have, let’s say, a short-term band aide fix. And we can say that for the last 10 days, our production has been on budget. We – look, we’re not entirely comfortable with that fix and we’re making some additional short-term changes right now to try and access – to try and give ourselves some more buffer to give ourselves some more comfort around our numbers. But right now we’re running it at – we run – the plant is actually running very, very well as we sit here today. So we could say, we’re not experiencing a short fall today, but we need to do a bit more work to make sure, our short-term solution is sustainable. So when we’ve talked about the production losses, we’ve actually put some buffer in there as well. So it may not be that we actually lose 150,000 pounds. We are just trying to be conservative with our guidance. So anyway I hope that answers that question. But on all-in sustaining costs, I’ll let Craig answer that question. Craig Barnes Thanks, Alex. Yes, I think the biggest difference from the cash flow statement that you mentioned there, Glyn, was – is working capital movement. So the all-in cash expenditure wouldn’t take into account any working capital movements. We’re also not including any, because it’s an underlying all-in cash expenditure number, wouldn’t include any one-off items, for instance, any of the restructuring costs that we had previously with some of the retrenchments, et cetera, happened during the year. So it wouldn’t include those. That’s the biggest difference would be working capital movement. So that would be, for instance, sales that we’ve recorded for which we’ve got receivables, which will – the cash flows will only come through the next quarter, as well as the movements on creditors. Glyn Lawcock Okay. Craig Barnes Okay. Alexander Molyneux Okay. So on your question – on your philosophical question regarding sort of the process of a deal, there is a few elements there. You can say that when we say that we’ll do a deal with a premium to our current market valuation, I think it’s broadly accepted among, let’s say the consensus view in the market is that, our share price reflects a discount to the theoretical value of our business already. And that discount in pricing is pricing in some balance sheet risk. Even, I think according, let’s say to your own model, Glyn, we – let’s say, we’re trading at whatever 30% to 40% discount to NPV right? Glyn Lawcock Yes. Alexander Molyneux And the assumptions that a number of analysts would use to assess NPV are not too dissimilar to the kind of assumptions that strategic parties would be using, everybody is using rising uranium prices and what not. So you can see that, let’s say in a theoretical valuation sense, there’s room to pay a significant premium to our share price, yet still be getting a reasonable deal on a theoretical value basis. So that’s one element. The second element is, there is limited opportunities in the global uranium space to acquire a platform of our quality or scale. There is no – or even put it this way, even in a low, let’s say, in a low uranium price environment, our business becomes almost more strategically interesting, because we have a lot of levers to survive that. We can – we even have levers that if we had to return, we could radically restructure the way we run Langer Heinrich. We’d have to cutback production to about [indiscernible] but we can break push the cash cost below $20 a pound to do that, right. So we have a lot leverage where absolutely one of the lowest cost sources of supply and we have scales. So if you are of a nature that you want to have more or you want – or a nuclear participant that you want to be vertically integrated, we literally are the only game in town. So there is some strategic value in our business. If you miss the boat to do something interesting with Paladin, then it’s not going to be something of an interesting nature like ours coming up any time elsewhere soon. And then thirdly, I’d say, we generally have competitive tension, right? So we have a number of alternatives that are all very live at this time. And I think that gives us – so I can say, we’re certainly not on the back foot in anyway. Glyn Lawcock Okay. That’s great. Thanks very much Alex. Alexander Molyneux Thanks. Operator The next question comes from the line of Stefan Hansen from Morgan Stanley. Please go ahead. Stefan Hansen Good morning everyone. Just a couple from me actually following up on Langer Heinrich production, and then all-in sustaining costs. Just on Langer Heinrich, I’m just wondering how the recoveries are going now. Now are they back to normal where you’d expect them? Alexander Molyneux Darryl, do you want to answer that one? Darryl Butcher Yes, they are. Yes, the prior issues we had with chloride and sulphate incursion into the process have been overcome and recoveries have consequently come back. There was also an issue, with it and I think reported in the last quarterly with some tight or difficult ore. Now we’re through that area now back into a more typical ore source and yes, the recoveries are back where we would expect them to be. Stefan Hansen Okay. Good stuff. Just another one, Alex, you mentioned earlier on in the call talking about your sustaining capital cost for the business. And just looking at the underlying analysis of all-in cash expenditure, it looks like – I mean CapEx for Langer Heinrich has come from say the nine months to-date from $2.38 pound down to just under $0.60 a pound. I mean is most of that sustaining capital? And I guess is that sustainable going forward without impacting the mine plan, the long-term mine plan? I just mentioned, because a couple of years ago, I guess the sustaining capital number that was out there for Langer Heinrich, it was around $8 million a year, obviously you’ve done well to bring costs down across the business and it wouldn’t be that right now, but even $0.60 a pound seems pretty low. Is that sort of the number that we should think about going forward? Alexander Molyneux I think let’s say our budget for the full-year was more in the order of around $1 pound. Stefan Hansen Yes. Alexander Molyneux And we’ve actually frankly that there might be some timing issue going on. It’s still a bit unclear to us. We certainly expect our quarter to June 30 to have a higher CapEx spend than the previous quarters in this financial year. Stefan Hansen Yes Alexander Molyneux But it might be that it’s actually – they set out to spend more around $5 million, $6 million, but as things get delayed during the year. So that wasn’t a specific, let’s say, a specific cost saving that we tried to push through is just in terms of getting things done, design ordering things and whatnot. But they haven’t spent on time if you like, but we’ve got – we’ve actually got $2.9 million in the budget for the quarter to June 30. We don’t believe that will be spent based on the spending as we are by almost half way through the quarter. But on a full year basis it would be closer to about $1 pound would be what we’re expecting. Stefan Hansen So excellent, thank you very much. Operator [Operator instructions] The next question comes from the line of Simon Tonkin from Patersons. Please go ahead. Simon Tonkin Good morning guys. I’ve just got a question on your capital going forward with the TSF1 and TSF – is it 6? Alexander Molyneux Actually what we’re going to do is we’ve got TSF1 moved. And I’m just looking at the numbers in front of me, but what’s happening with our capital is our development of TSF5 and then TSF movement, we start to have an increase in capital for that specific works really in FY 2018 – is that correct? Craig Barnes Yes. Simon Tonkin Okay. Alexander Molyneux Yes, TSF1 sort of mostly that’s about $3.5 million Simon Tonkin Yes. Alexander Molyneux That will take place in FY 2018 and then TSF6 – okay, sorry, let me – sorry Darryl and Craig, these people keep these numbers. Let me change that. TSF5 we actually do – we budget for most of those works in FY 2017. That will be $3.5 million worth of CapEx. TSF6 and then the TSF1 movement will take place in FY 2018, and those two combined to around $11 million, okay. Simon Tonkin Okay. Alexander Molyneux So you see our total CapEx – basically our total CapEx though, in 2017 won’t be more than around about $7 million to $7.5 million. But in FY 2018 it will start to – we start to have higher than typical periods of CapEx in FY 2018 and FY 2019 whilst more of this TSF activity is going on. Simon Tonkin Okay, no worries. Thanks. Operator We have no further questions in the queue. [Operator instructions] There appears to be no further questions, so I’ll hand back to yourself, Mr. Molyneux and Mr. Barnes for any closing comments. Alexander Molyneux Okay. I’d like to thank everybody for their time and interest in Paladin today. And as always both Andrew and myself, and Craig and Darryl are available should you have follow-up questions, please call Andrew, email him. He’ll coordinate the rest of us and we’re definitely available during the course of the day to continue to answer questions people might have. So thanks very much and thanks operator. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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US Geothermal’s (HTM) CEO Dennis Gilles on Q1 2016 Results – Earnings Call Transcript

US Geothermal Inc (NYSEMKT: HTM ) Q1 2016 Earnings Conference Call May 11, 2016 13:00 ET Executives Dennis Gilles – Chief Executive Officer Doug Glaspey – President and Chief Operating Officer Kerry Hawkley – Chief Financial Officer Analysts Jim McIlree – Chardan Capital Gerry Sweeney – ROTH Capital Markets Jonathan Lo – Raymond James Chip Richardson – Wedbush Securities Operator Greetings and welcome to the U.S. Geothermal 2016 First Quarter Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. Dennis Gilles, Chief Executive Officer. Thank you. Dennis, you may begin. Dennis Gilles Thanks, Chris. Good day, everyone and welcome to our first quarter 2016 earnings call. Today, I am joined by our President and Chief Operating Officer, Doug Glaspey; and our Chief Financial Officer, Kerry Hawkley. Our earnings release was issued yesterday and can be found on our website, usgeothermal.com. under the tab News. U.S. Geothermal’s three operating plants performed very well during the third quarter and generated availabilities ranging from 96% to 100% of the power output. However, our financial performance fell slightly short of our expectations due primarily to a one-time fee for engagement of financial advisors, plus higher than projected weather temperatures for the quarter and the breakdown of one of the production pumps at our Raft River project. In spite of those impacts, we produced our 14th straight quarter of positive EBITDA and cash flow, with both revenues and cash flows from operation exceeding those of the prior year. I am pleased with the steps we have taken to announce our 96 megawatts of advanced stage development projects. The pipeline of opportunities we have built provides us with a very strong platform for growth. Doug will provide more details on the operations and the development shortly, but first I would like to turn the meeting over to our CFO, Kerry Hawkley for an update on our financials. Kerry? Kerry Hawkley Thank you, Dennis and good morning to our listeners on the call. Before beginning, we would like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company’s plans, objectives and expectations for future operations and are based on management’s current estimates and projections of future results or trends. Actual future results may differ materially from those projected as a result of certain risks and uncertainties. During the call, we will present non-GAAP financial measures, such as EBITDA, adjusted EBITDA and adjusted net income. Reconciliation to the most directly comparable GAAP measures and management’s reason for presenting such information is set forth in the press release that was issued last night. Because these measures are not calculated in accordance with GAAP – U.S. GAAP, it should not be considered in isolation from our financial statements prepared in accordance with GAAP. I will now discuss the financial statements of U.S. Geothermal for the quarter ended March 31, 2016. Our financial statements and MD&A were prepared in a condensed format. Our balance sheet at March 31, 2016 total assets are $224.7 million. Total liabilities are $96.0 million. Non-controlling interests have been reduced to $26.2 million. Net stockholders’ equity has increased to $102.5 million. Cash and cash equivalents and restricted cash and bonds decreased in the first quarter as the company paid down notes payable and non-controlling interest. Our results of operation for the past quarter were consistent with our expectations. Revenues for the quarter were $8.5 million, up $29,000 from 2015 a one-time charge of $750,000 for the financial advisors and legal costs related to the investigation of strategic alternatives affects both professional and the management fees and travel and promotions. Annual bonuses paid to employees of $281,000 in the first quarter affects both plant production expense and employee compensation. These costs were recorded and paid in the second quarter in 2015. Net income before tax of $1.3 million in 2016 was down from $2.2 million for last year. Without the one-time charge for the review of strategic alternatives, 2016 would have been consistent with 2015. Net income attributable to the U.S. Geothermal was $150,000 in 2016 compared to $730,000 in 2015 again reflecting the effect of the one-time adjustment for cost of evaluating the strategic alternatives. Our statement of cash flows. We began the year with cash and cash equivalents of $8.7 million. Cash generated by operations was $5.0 million. Issuance of common stock generated $1.2 million. Though payments reduced our total debt by $1.8 million, payments to non-controlling interests were $2.5 million and the purchase of additional interest at Raft River energy was $1.6 million. Capitalized development costs at WGP geysers in El Ceibillo totaled $1.6 million for the quarter. We ended the quarter with cash and cash equivalents of $7.4 million. Our statement of changes in stockholders’ equity, we added net income attributable to U.S. Geothermal of $150,000 during the quarter. The accumulated deficit net of tax is now $17.3 million, down from a high of $32.8 million on December 31, 2012. Shares of common stock issued upon exercise of stock options were 225,000 shares. Another 2.5 million shares were issued under the ATM. Cash of $2.5 million was distributed to our non-controlling interest partner, Enbridge and common stock issued an outstanding at March 31, 2016 totaled 110.3 million shares. Please review the disclosure on Page 37 in the MD&A section regarding the net income attributable to the non-controlling interest and the net income attributable to U.S. Geothermal and its shareholders. For the first quarter of 2016, Neal Hot Springs contributed $1.2 million, San Emidio contributed $265,000 and Raft River contributed $53,000 for a total net income attributable to U.S. Geothermal and shareholders of $1.52 million. From that exploration activities and corporate overhead cost $1.37 million, all of these figures are net of tax. The company is well-positioned to act on any future opportunities resulting from our organic growth or potential M&A activities. I would like to thank you for your continued interest in U.S. Geothermal. I will turn the call over to Doug Glaspey, our President and Chief Operating Officer. Doug Glaspey Thank you, Kerry. Good day, everybody and we appreciate you being on the call today and your interest in the company. Our total generation for the first quarter from all three facilities was 93,788 megawatt hours. At Neal Hot Springs, the generation for the first quarter was 53,671 megawatt hours, with an average generation of 25.4 net megawatts per hour of operation. Neal operated at 96.7% availability for the quarter. We are planning at Neal to drill the freshwater well. During the second quarter to support our hybrid cooling system and as soon as we get our final approvals will be ready to go on that. At San Emidio, we had generation of 20,433 megawatt hours for the quarter, with an average generation of 9.4 net megawatts per hour. San Emidio operated at 99.4% availability for the quarter. At Raft River, we had generation of 19,684 megawatt-hours, with average hourly generation of 9.4 net megawatts per hour. Raft operated at 100% availability for the quarter. As Dennis mentioned earlier, we took production well RRG-2 offline in February on the pump failed. We pull that pump in March and they kept the well offline in preparation for drilling operations to add a second production leg to increase our overall production. That drilling is expected to be completed during the second quarter, with a total cost of the project estimated at approximately $3 million, which also includes a new pump cooling water well improvements and a few other ancillary upgrades needed to handle higher flow into the plant. Our operations team continues to ensure strong, stable performance at each of our power plants. On the development side, at WGP Geysers, we continue to move that project forward in preparation for start of construction. On March 6, we received the approved transmission interconnection agreement with the California Independent System Operator and Pacific Gas and Electric. With that approval, we made an initial payment of $1 million on a total estimated cost of $1.9 million for the cost of the grid operators’ portion of the work in the substation. We are also well on our way to getting our updated divisional use permit from Sonoma County, which is still expected to be issued in the second quarter of 2016. The conditional use permit again is required before we can start construction on the project. We are continuing our discussions for a power purchase agreement with a number of interested parties. On March 1, we mentioned earlier, we submitted a PPA proposal under a request for proposals from one of the new community choice aggregators in the San Francisco Bay Area, but we did not make initial shortlist, though the discussions with them are continuing. We will be submitting another proposal within the next couple of weeks and additional RFPs are expected to be issued yet in 2016. Bilateral negotiations or direct negotiations are also possible, but many of these folks require RFP type systems. At El Ceibillo, in Guatemala we have retained Mandeep [ph] Engineering from Iceland to advise the company on development of the well field and to construct the reservoir model for the project. El Ceibillo was located within a large volcanic complex, and Mandeep has specific expertise in volcanic host of geothermal systems and they worked for us on this project in the past. We have identified the location for a large diameter well, which will intersect the production zone. Preparations are being made to start drilling during the second quarter, followed by a flow test of the reservoir to provide modeling data for the reservoir model. The Guatemala government through the national electrical energy commission or CNEE has announced that its preparing to issue a 40-megawatt RFP exclusively for geothermal power. The CNEE is acting on the request of two of the large power distributors in Guatemala and has retained a large U.S. based consulting firm to prepare that RFP, the RFP is expected to be released during the second quarter. At San Emidio Phase 2, as part of the permitting process to deepen our two wells, additional plant and migratory bird surveys are being required by the Bureau of Land Management before drilling operations can commence. These are time of the year surveys, so cannot be done prior to May to ensure that the plants are actively growing. Plans have been made to complete these two wells early in the third quarter. The final interconnection study process was started by NV Energy in February. This facility study is expected to be completed during the second quarter of 2016 and would allow an additional 3.9 megawatts of transmission bringing our total transmission capacity to 19.9 megawatts to cover the Phase 2 plant requirements. In mergers and acquisitions, I will make a note that at Raft River, we completed the acquisition of Goldman Sachs interest in the project with the final payment of $1.635 million on March 31. This acquisition gives us the increased cash flow from the property and the new ownership structure allows the U.S. Geothermal to invest in new drilling to improve the plants generation output and can increase its contribution to your company. And in April, we received our first cash distribution from Raft River of $1.145 million. As noted previously, we have plans to drill a new leg on production well RRG-2. If that drilling is successful, we hope to increase the plant output by up to 3 megawatts annual average, which allows us to take advantage of the full 13-megawatt output allowed under the PPA. In regard to the power plant equipment we purchased in December, all of the major and long lead equipment for the construction of three binary geothermal plants was acquired for a total purchase price of $1.5 million, which is approximately 5% of the equipment’s estimated original cost of $28 million. The first payment of $750,000 was made upon signing the agreement and the final payment of $750,000 was made in January 2016. The components for the three units being purchased as we have said are all new and unused and represent approximately 70% of the components needed for a full plan. The equipment is from the same manufacturers and is of the similar size and design to the equipment that the company has installed at Neal Hot Springs and either San Emidio power plants. The design output of the acquired units is approximately 35 megawatts, but the actual output of these units will ultimately be determined by the resource conditions found at the site where we are installing. The three equipment packages meet the major long lead equipment requirements for the company’s proposed San Emidio 2 power plant 10 megawatts and Crescent Valley 1 power plant at 25 megawatts or alternatively it could be used in El Ceibillo, Guatemala. This equipment gives us the ability to expand our megawatt output at our existing advanced stage development projects, at significantly lower cost and in a much shorter construction timeframe. Since we have entered the second quarter, I want to remind everyone that we scheduled our annual plant maintenance outages during this period. At Raft River and Neal, the PPA price for March through May is approximately 73% of the yearly average price, due to the spring runoff or high generation conditions in the Idaho Power hydro power system. Taking advantage of this low-price period reduces the impact to our revenue for these maintenance outages. To-date, we have completed the annual outages at San Emidio and at Neal Hot Springs unit 1. Raft River’s outage starts next week, and the remainder of Neal Hot Springs will follow. It’s a very busy time of year for our operations team. In summary, we have 45 megawatts of power in production, and another 96 megawatts in advance development. We are very focused on bringing these projects forward as quickly as possible and growing value for all of our shareholders. And now, I will turn the call back over to Dennis. Dennis Gilles Thank you, Doug. Firstly, we would like to reaffirm our 2016 consolidated guidance that we had previously provided. Based on our current operations only, we expect operating revenues between $29 million and $34 million, adjusted EBITDA between $15 million and $19 million, EBITDA between $14 million and $18 million and net income as adjusted of $4 million to $8 million. Also, we wish to reaffirm our guidance for U.S. Geothermal only, which is less minority interest, of which we expect adjusted EBITDA of $9 million to $12 million and net income as adjusted of $1 million to $4 million. We have a number of development opportunities that can improve this performance, such as the well drilling plan at Raft River later this spring, the projected benefits from that drilling have not been included in our current guidance forecast. And as the year progresses we will be updating and tightening the range on all of our guidance This past fall, our Board of Directors undertook a review of strategic alternatives with the assistance of Marathon Capital. That process was concluded this quarter, when after reviewing the various alternatives available, the special committee of the Board, which was made up exclusively of independent directors concluded that the greatest long-term value for our shareholders would be obtained by staying in the current course. Our mission is to become the largest pure play geothermal independent power producer, providing renewable power 24/7 with a consolidated portfolio of 45 megawatts under operations and management. The acquisition of the majority of Goldman Sachs’ ownership interest at Raft River project at year end allowed us to successfully increase our shareholder portion of that portfolio by 20% going from 30 megawatts to now 36 megawatts. Additionally, we continue to advance our 96 megawatts of project in our advanced stage pipeline. We are very focused on obtaining a power purchase agreement for those projects, which is where we contract with a buyer for all of the output generated by that project for the next 20 to 25 years at a fixed price. On the legislative front, I am pleased to note that the U.S. government has extended the start of construction date that geothermal projects can qualify for the 30% investment tax credit. Any geothermal project that has begun construction, begun construction that is by December 31, 2016 now qualifies for that tax credit. And I want to point out that’s a tax credit, not a deduction. That investment tax credit allows 30% of the project’s cost to be taken as a credit against any tax payments in the year the project goes into operation. And basically to utilize that credit, we would bring a tax partner into our project similar to what we had done on Raft River with Goldman Sachs. There is a growing interest in the market for baseload renewable electricity to replace the phasing out coal, nuclear and once through cool plants along the California coast. All of which have historically provided firm predictable baseload generation. While solar and wind power will continue as sources of renewable energy, it should be noted that they supply intermittent power and not baseload power. The issue of climate change has grown tremendously over the last few years and shows no sign of abating. Government industries are increasingly favoring renewable energy over fossil fuels. Geothermal is the best form of renewable energy and we intend to work hard to ensure we can grow this company for the benefit of our stockholders and to make our contribution to favorably impact climate change. Now operator, I would like to open the call for questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] And our first question comes from the line of Jim McIlree from Chardan Capital. Please proceed with your question. Jim McIlree Thank you. Doug, can you tell us why you didn’t make the shortlist for the choice aggregator RFP? Doug Glaspey That’s a good question, Jim. No, my guess would be its all based on price. So, we don’t know what the other folks bid. We only know what we bid. There hasn’t been a – they don’t come back and tell you why you didn’t make the short list. So, it’s really just a guess at this point. Dennis, I don’t know if you have another view of that? Dennis Gilles No, we do know that late in their bid process, they modified their bid conditions and opened up their bidding to existing renewables in addition to just new renewables. Initially, they had stated it was going to be for new renewables only and they opened it to existing. Existing renewables as they have been fully, the project is fully paid off are able to offer their product to try to get it re-contracted at a very competitive cost. And that’s what we believe happened, but we don’t know that for sure. Jim McIlree Okay. And then Doug, you implied that maybe it’s not over, you are going to resubmit. I was confused by that or where you saying that you are going to resubmit for different RFPs that are out there? Doug Glaspey Well, both Jim. They ask us the initial submittal. They ask for some additional information, which I believe we have provided now. Jim McIlree Yes. Doug Glaspey So, it’s not a bid issue. And in addition, there are new RFPs coming out, not from the same entity, but from several other entities in California. Jim McIlree Okay, that’s great. Thank you. And then on El Ceibillo, I think I heard you say that there is – you are expecting a government RFP for 40 megawatts, that’s dedicated to geothermal. What kind of competition do you have down there for geothermal supply? Doug Glaspey Well, we are waiting to see what the exact requirements are. They have come out of the RFP process. But our expectation is similar to what’s been happening in the U.S. now, they want – they will only accept bids from people that have a reservoir – a defined reservoir. They will want people that have development experience. Of cause, they want reservoirs in the country and that’s a very shortlist in Guatemala right now. We only know of maybe one or two others that might be able to qualify under those conditions. And we are probably as advanced or more advanced than most. So, we see our chances of being very good for that RFP and hopefully it’s slated to come out in May. If it lags a little bit, that won’t surprise me since it is the new – first time they have gone through this process, but we have high hopes under the process and having at the geothermal specific is just a reflection at the offtakers, which are brokers in the area are looking for reliable baseload power rather than an intermittent resource. Jim McIlree And assuming that it all went according to schedule, which I know it’s a dangerous assumption, when would that RFP be decided and the contracts left? Doug Glaspey Our hope is that it will be done before the end of the year if they get it out in May. Dennis Gilles Yes, we don’t know how aggressive their schedule is, because the RFP hasn’t serviced yet. Jim McIlree Alright, okay. Doug Glaspey We know the tetra-tech guys that are putting us together. So, we know they are on the job. They are in the country right now working on it. It’s been actively pursued. So, all we can do at this point is wait to see and hit the street. Jim McIlree Okay. And Kerry, can you just give us a summary of what the cash needs are and the cash availability is to fund those needs. I know that there is a lot of – it seems like a lot of things are going on and I am just having trouble tracking this on all of the cash requirements for the year? Kerry Hawkley Well, you do realize we do have about 10 million plus that’s generated internally by our three projects. There is a good possibility that we will evaluate other opportunities for funding. There is Raft River that’s not levered at all. If we wanted to go that way, there is also the possibility of some options and warrants that we have outstanding being exercised. We have seen some renewed interest in that. It’s generated probably a $1 million in the last quarter. So, I would expect we would have just from internal and issuance of options and warrants will have probably $12 million to $13 million generated there before we have to tap any type of debt and/or equity raise. We haven’t done an equity raise since December of ‘12. And of course, we do have the Raft project un-levered. So, those would be our sources, our uses over the next year. We are talking $3 million at Raft. We are talking probably another $3 million at El Ceibillo, but we would target those based on cash available and how we perceive or how we progress I guess on the PPA front. On WGP Geysers, we feel like we already have all the equity requirements already invested in that. And so if we go forward on that project, that would be potentially a tax equity investor and some project level debt that we would go there. Does that give you a flavor? Jim McIlree That does. Thank you. And if I can just ask on that same thing, the Neal project for the water cooling, Doug you might have said how much that’s going to cost, but that’s not a lot, correct? Doug Glaspey For the water well drilling that’s not a lot. And what our plan will be there Jim is if we find the water we need, of course we will do the final engineering on the project and then we have to go to our joint venture partner, look at the total dollars and we are expecting it to be in the $7 million to $10 million range for a full installation. And decide how we want to fund that. There are reserves at the project level that maybe – we may be able to use. And as a matter of fact, as far as additional income, we have some short-term well reserves that come out of reserve later this year. So there will be several million dollars that come out of the reserves at Neal, if you don’t consume them in any upgrades at the project. Jim McIlree Got it. Okay, that’s very helpful. Thank you very much. Operator And our next question comes from the Gerry Sweeney from ROTH Capital Markets. Please proceed with your question. Gerry Sweeney Hey, good morning guys. Thank you for taking my call. Dennis Gilles Good morning Gerry. Gerry Sweeney Question on Raft River, it sounds like the well went down because of the pump, curious of the impact on the power generation, it sounded like it was running at 100%, but also any commentary also it sounded like it did have some type of impact, so curious on that front. Also, the timing of the well work, we work at Raft River and how long it will be out of service and general impact and how we should look at it for the quarter? Doug Glaspey Our expectation to have that – to keep the well down as you said the pump went down anyway and it’s normally, it took us several weeks to get a pump rig on the site to pull it. And then it’s normally a 10 day to 15 day evolution after that to either rebuild or replace the pump and get it back in the hole. We decided to keep that well down, since we are planning in the short-term to drill that second leg. The economic hit because we are in the 73% period, it was about $40,000 to $50,000. So it’s not a huge amount, it’s not enough to put a pump back in the well until we drill. My expectation is that we will be drilling within the next 30 days, if all goes well. We have bids in from contractors. They are ready to go. So it really just becomes a timing matter at this point. I want to have that well back online no later than mid-June, I would say, because in July, August of course we go into our 120% pay period and we don’t want to miss that with the whatever additional production we get out of that well. Gerry Sweeney Got it. And then swinging back to the Geysers project, I understand that PPA was cumulative choice organization, how many other PPAs are floating around out there and are they similar in structure and style or are they looking for just new renewable generation, just a little bit of thoughts, comments on that, just to get a better sense or view of the opportunity that’s pending? Dennis Gilles Well, there are a number of opportunities pretty much, pretty much every community choice aggregator and utility in the state is looking for renewables. They continue to do that to meet the ever increasing Renewable Portfolio Standard in California that was recently raised from 33% up to 50%. So they need to and most of them are contracted up to the 20% level already. So they need to continue to acquire by legislative requirements, additional renewables. Now having said that though, we are currently in a period of low price natural gas, because of that low price natural gas there is the ability to buy power in the very near-term, in the next – the belief is in the next 1 year or 2 years at very low prices and so that’s cause them to not be as anxious or in a rush. Now having said that though, not all of them are taking that same approach, we are in active discussions with many of them. Some of them have formal bid solicitation processes where they go out like the recent one did, with a request for bid. We respond to it, you wait and then you are advised whether or not you have been selected. Others allow bilateral negotiations where they will sit down at the table with you and just negotiate the terms of the agreement. So it really depends on the entity and it really depends on their timing. Unfortunately, we are not in the driver seat on the timing they are. And they do it as their needs or their procurement cycle allows. Gerry Sweeney Got it, that’s helpful. I appreciate it. And then just one more question on the Geysers, assuming you get the conditional use permit, you won’t start construction until you have a PPA in hand, is that correct, is that the right way to look at that? Dennis Gilles That’s correct. Construction will not start, really than three key critical items for starting the construction on the project. One of them was the transmission interconnection agreement, which could have taken anywhere from 2 years to 5 years to obtain. So having that out of the way is a very critical element. The next key element is the conditional use permit and that depending on public opposition, depending on need, depending on community views and depending on environmental impacts and whatnot, could never occur or could occur over a period of say 2 years or to 4 years. And we are right at the dotting the Is and crossing the Ts on that, that as Doug mentioned, we expect to hear definitely this quarter. So at least that our belief, it’s that this quarter that’s what we are being told. So the third piece, the third leg of the stool then is the power purchase agreement. And we really couldn’t provide at a firm date and tell you, have the transmission interconnection, so we could have initial discussions, but we weren’t able to have detailed discussions or provide detailed pricing until we had that out of the way. So those discussions are ongoing now. So all three need to be done before construction can start. Gerry Sweeney Got it. So the transmission interconnection agreement really opened open up the negotiation of bidding process? Dennis Gilles That’s correct. Gerry Sweeney Okay. Thank you very much. Dennis Gilles Thanks Gerry. Operator And our next question comes from the line of Jonathan Lo from Raymond James. Please proceed with your question. Jonathan Lo Actually most of my questions have been answered. But just on a potential dividend, how are you guys looking at that in the future? Dennis Gilles Dividend is something that we have looked at and continued to look at. One of the things that would probably need to occur given our share price at some point, before we would consider a dividend is a share consolidation and we would probably do that in concert with a significant event, we just put the current share price that we have any dividend that would be offered in order to do a dividend with the income that the company has, it would be a small fraction of a cent, which is just I don’t know, I think it’s too complicated. So in that’s a down the road item, it’s not something that’s immediately envisioned, but it is something as long as we continue, which we don’t see any reason why wouldn’t to be a profitable company than that something that is out in the future. Right now our primary focus though with the cash that we are generating though is reinvesting it into the growth opportunities. Jonathan Lo And then similar to earlier question, on the PPA opportunities in California, are there many of them there? Dennis Gilles Yes. We are in discussion with the numerous companies. I can’t give the names of the companies or the exact number, but it’s not just a single company, it’s multiple companies. Jonathan Lo That’s all for me. Thanks. Dennis Gilles And something to point out to Jonathan, in California, while California is a market for our – clearly, a market for our Geysers project, which is located in California, it’s also a market for our other projects. California is in the process of changing its independent system operator from a single state to basically the Western United States and that’s forecast to occur over the next several years and be in place I think by the end of 2018. Our anticipated online date for many of our projects is out there in that same timeframe. So, projects in Nevada, Oregon, Idaho would all be then eligible to generate to meet the requirements of that broader electric grid, which is not – which currently is the California grid, but it would be expanded to the Western United States. So, when we have discussions with these counterparties, we are not just discussing our Geysers opportunity is my point. Operator And our final question comes from the line of Chip Richardson from Wedbush Securities. Please proceed. Chip Richardson Hello. I was just wondering it seems like you spent quite a bit of money on Marathon exploration. Can you give us any kind of color on how that went? It seems like it was awfully expensive for the periods of time involved? Dennis Gilles Yes, it was expensive. But the information that we received, we found to be very beneficial at least the board yet in assessing what they believed to be the value of the company. With that information in hand and looking at what opportunities we had available to us, the special committee concluded that staying the course was in fact the best grout. But the view of the special committee was it was a valuable exercise and worth the cost that was expanded in order to do the exercise. Chip Richardson Okay. Also, we have a big new shareholder who is acquired I guess in the neighborhood of 12 million shares, can you characterize the company’s relationship with the investor and how that’s going? Dennis Gilles Yes. And Chip, I do want to point out besides that one, we also have another, we have – that was James Atlas, we also have Bradley Radoff, who has accumulated 5.6 million shares. And so collectively between them, you have got almost 18 million shares held out of our 111 million. So, a pretty good portion of the company. They have been – they both share the same address in Houston. So, I am not sure what their affiliation with each other is, but we do know that, that is a minimum. Now, having said that, both of them in any calls that they had with us have been very cordial, they like the company, they like its direction, they like its management, they like the opportunities that they see ahead. Again, what’s their specific motive, what’s their specific interest beyond that, we have no idea. All we know is they like what they have seen and they are very supportive in their discussions. Chip Richardson Anything to add to that? Dennis Gilles No, I think it’s at least what we have heard is they saw the company has been undervalued when they first started buying and then they kept flying. And they like the long-term strategy that the company has. So, short of that, we have got a good relationship with them. And at this point, we look forward to having them as shareholders. Chip Richardson Great. I certainly concur that the stock continues to be undervalued. And now that what you guys are doing has been very positive and just hopefully can keep going and accelerate the growth? Dennis Gilles Well, that’s our hope as well, Chip. Doug Glaspey Yes, thanks Chip. Chip Richardson You are welcome. Thank you. Operator Gentlemen, there no further questions at this time. I will turn the conference back over to you for any closing remarks. Dennis Gilles Well, great. I want to thank everybody for your continued support of the company. As Chip noted, we wished these opportunities would happen more quickly, but we don’t see the opportunities falling away. They continue to be there. We are excited about those opportunities and the growth that they bring for the company. Similar to our Goldman acquisition, we are looking for in the short-term ways of increasing near-term value. We spent a considerable amount of time and attention trying to increase the visibility of the company. We are often told as we meet with perspective shareholders and they look at our company and they look at the long-term contracted cash flows that they see very minimal downside exposure and they see very large upside potential. That’s how we consider ourselves and we look forward to what lies ahead for the company. And thank you for your continued support. And with that, we will bring the call to an end. Thanks, operator. Operator Thank you everyone. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your time and participation today. You may disconnect your lines at this time and have a wonderful rest of your day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. 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