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Disposal of Hydro Resources, Inc.

3 Months Ended

Mar. 31, 2017

3. DISPOSAL OF HYDRO RESOURCES, INC.

On January 5, 2017, Laramide and the Company closed the sale of the Company’s wholly-owned subsidiary HRI, which holds the Churchrock and Crownpoint projects, pursuant to a Share Purchase Agreement (the “Laramide SPA”). Under the terms of the Laramide SPA, as amended on December 5, 2016, the Company received the following consideration:

$2.5 million in cash, of which $250,000 was paid in advance on October 21, 2016;

2,218,333 each of shares of Laramide common stock and Laramide common stock purchase warrants. Each common stock purchase warrant entitles the Company to purchase one share of common stock of Laramide at a price of CDN$0.45 for a period of 60 months from the date of closing;

a $5.0 million promissory note, secured by a mortgage over the projects. The note has a three-year term and carries an initial interest rate of 5% which then increases to 10% upon Laramide’s decision regarding commercial production at the Churchrock project. Principal payments of approximately $1.5 million are due and payable on January 5 in each of 2018 and 2019, with the balance of $2.0 million due and payable on January 5, 2020. Interest is payable on a quarterly basis, provided however that no interest will be payable until March 31, 2018. Laramide will have the right to satisfy up to half of each of these principal payments by delivering shares of its common stock to the Company, which shares will be valued by reference to the volume weighted average price (“VWAP”) for Laramide’s common stock for the 20 trading days before the respective anniversary of January 5, on which each payment is due;

a retained 4.0% Net Smelter Returns Royalty (“NSR Royalty”) on the Churchrock project, which royalty may be repurchased by Laramide by January 5, 2018 for $4.95 million; and

an option to purchase Laramide’s La Sal project for $3.0 million and an option to purchase its La Jara Mesa project for $5.0 million, both of which expire on January 5, 2018. Any such exercise by the Company will first result in a reduction of the principal amount due under the promissory note with any remaining portions of the purchase price to be paid in cash by the Company.

The divestiture of HRI was accounted for as an asset disposal and the non-cash consideration received from Laramide was recorded at fair value. The fair value of the shares of Laramide common stock received was determined using the closing share price of Laramide’s stock on January 5, 2017. The Company did not record a value for the warrants received as these were considered contingent consideration until the receipt of approval by Laramide’s stockholders which was obtained at a meeting held on April 27, 2017. Upon stockholder approval, the Company recorded additional gain of $0.5 million, which was the fair value of the warrants using the black-scholes method on that date. The fair value of the notes receivable was determined using the present value of the future cash receipts discounted at a market rate of 9.5%. The Company did not record a separate fair value for the options as the exercise of the options would reduce the amount outstanding under the notes receivable. Due to the high degree of uncertainties surrounding future mine development and minerals prices, as well as limited marketability, the Company determined the fair value of the NSR Royalty to be nil. The following fair value amounts were recorded as the purchase consideration:

(thousands of dollars)		Fair Value
Cash, less transaction costs		$ 1,950
Laramide common stock		569
Notes receivable		3,501
Total consideration received		$ 6,020

The fair value of the shares of Laramide’s common stock received were valued using Level 1 inputs of the fair value hierarchy and the fair value of the notes receivable was valued using Level 2 inputs, as defined in Note 4 below.

The Company recorded the following gain on disposal of uranium properties within its Condensed Consolidated Statement of Operations:

(thousands of dollars)
Total consideration received		$ 6,020
Carrying value of Churchrock project		(2,123)
Carrying value of other plant and equipment		(31)
Accounts payable		1
Asset retirement obligation		105
Royalty payable on Churchrock project		450
Gain on disposal of HRI		$ 4,422