Guest Post: Azarga #Uranium [AZZ.to]

Preamble by Peter Epstein, CFA, MBA:  That’s right, you have to go through me before reading an excellent update on Toronto main-board listed Azarga Uranium Corp. (TSX: AZZOTCMKTS: PWURF, FRA: P8AA, Forum).  I came across the article on Stockhouse, and I’m very glad I did.  Even better, two days after the article by Jeff Nielson, an important piece of the Azarga Uranium puzzle fell into place.  The EPA issued draft permits for the high-grade Dewey Burdock ISR Uranium project in South Dakota, a major regulatory milestone achieved.  President Blake Steele commented,  
 

“The EPA issuance of the draft permits represents a key risk reduction event for, and a significant step towards, another major federal regulatory approval.  The decision of the EPA to issue these draft permits further confirms the technical merits of the project and establishes a path forward towards receipt of the final permits…”

Please NOTE:  {The press release contains A LOT more detail}.  

I had a great meeting with Blake on March 7th at the PDAC in Toronto.  It seems reasonable that the Company’s PEA-derived NPV could be higher if it was updated.  Why?  The cut-off grade used (grade x thickness, “GT”) = 0.5, yet other ISR projects in the U.S. typically use cut-offs of 0.2-0.3.  Uranium Energy Corp’s Goliad project incorporates a GT of 0.3, Peninsula’s Lance project 0.2, UR-Energy’s Lost Creek, 0.2.  Therefore, on an apples to apples basis, if a new PEA were to adopt a lower cut-off grade, more pounds would make it into PEA’s economics.  This is exciting.  Dewey Burdock is already a robust project, it could be even more attractive compared to peers than currently envisioned.  NOTE:  {Changing the cut-off grade has no impact whatsoever on the underlying the resource}.  Saving the best for last, Dewey Burdock is a project that could be in production by 2019, a period when many analysts and pundits believe the long-term uranium price will be north of US$ 60/lb.

Please continue reading…. here’s the Stockhouse article in its entirety,   

Near-term Uranium Project Boasts Awesome Economics

For the last several years; it has been difficult to be a uranium company, and difficult to be a uranium investor. Following the massive spike in uranium prices in 2007 above $130/lb (USD), prices plunged. After bottoming in 2010, prices advanced into early 2011 before steadily inching lower into 2016. 

In this changing climate in the uranium sector; Azarga Uranium Corp. (TSX: AZZOTCMKTS: PWURF, FRA: P8AA, Forum) is aggressively advancing its Dewey Burdock project, located in South Dakota. Dewey Burdock hosts an ISR (“in-situ recovery”) uranium deposit. Here investors seeking to make money in the uranium space need to do their homework.

Uranium geology is broken down into two forms of deposits, conventional hard-rock U3O8 deposits and ISR deposits.  The hard-rock deposits which actually make it to production are almost always of significantly higher grade, but there is a very good reason for this – capital costs.Conventional uranium mining is expensive, very expensive. Conventional uranium mining (like most conventional mining) requires a large tailings facility. In the case of a radioactive substance like uranium, the additional safeguards which need to be put into place eat up significant amounts of capital, and represent an ongoing cost of production.

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Notes: Data sourced from Dundee’s Cameco research note of 1 June 2016. Cash cost numbers are 2017’F to take into account when assets are in steady state production and based on weighted average of production.

In contrast, as the term implies, in-situ recovery processes the uranium while still in the ground, via the injection of catalyzing agents into the ore. In-situ recovery is only possible in porous geological formations (like sandstone) which are amenable to such a recovery process. On average, the cap-ex to put an ISR uranium project into production is less than 15% of the cost to build a conventional, hard-rock mine.

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Dewey Burdock is one of the uranium projects which is amenable to this much more cost-effective production process. How does this translate into capital costs? According to the Company’s PEA (prepared in April 2015), Dewey Burdock can be put into production with an initial capital expenditure of only $27 million (USD).

Many mining companies seeking to restart production at a dormant conventional mine (with full infrastructure already in place) have to spend much more than $27 million just to refurbish a facility which has already been constructed. Being able to move a new mining project to production with an initial cap-ex of $27 million is merely a fantasy for most mining companies.

What does this mean with respect to investor return on this project? The PEA lists the pre-tax IRR at 67%, and the post-tax IRR at 57%. This is based upon a long-term uranium price of $65/lb (USD) for yellowcake.

This leads back to the reasons why uranium companies are once again bullish on prices over both the nearer and longer term. Cantor Fitzgerald’s price target of $80 per pound would require a long, upward march from the current price level of $24+ per pound (USD).

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Mining investors will be curious to know why analysts now expect uranium prices to rebound so strongly after several years with soft prices. As is generally the case with commodities, it’s a story of supply and demand.

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As the previous graphic indicates, even with a uranium price of $70+/lb, projections are that the market will barely tread water over the medium term before slipping into deficit over the longer term. At lower prices, the imbalance becomes significantly worse and the supply deficits commensurately larger.

If uranium prices do not begin to appreciate over the near term, it can only result in even more dramatic price increases over the medium term. As things stand today, all roads lead to higher uranium prices. Why?

Supply and demand. Despite the Fukushima disaster, the global reactor pipeline consists of 1,018 nuclear reactors today, compared with only 987 pre-Fukushima. Of this, 225 new nuclear reactors are either already under construction, ordered, or planned, representing more than 50% of the currently operating nuclear reactors. China alone is expected to bring 6 – 8 new reactors online per year, with that construction rate anticipated to increase further after 2020.

India currently has 22 nuclear reactors, but 5 more are currently under construction and 64 additional reactors are ordered, planned, or proposed. Even in the United States, the first new reactor in 20 years was brought online in 2016 and 4 more U.S. reactors are already under construction.

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Meanwhile, with demand climbing and the rate of demand due to accelerate, supply has turned lower. Between 2013 and 2015; U3O8 supply dropped by 11%. This has already led to halts in production at several uranium mines, with more production halts scheduled for2017. Also of great significance, the U.S.-Russia HEU Agreement (“Highly Enriched Uranium”) ended in 2013.

HEU was an agreement between the U.S. and Russia which was part of their now-aborted non-proliferation initiative regarding nuclear weapons. The termination of this agreement is significant to the uranium market in two respects.
First of all, HEU represented a non-transparent and unpredictable source of additional reactor fuel coming onto the market. Further, because of the dramatically greater uranium enrichment, decommissioned nuclear weapons represent the richest source of reactor fuel, meaning that even a relatively small number of weapons being decommissioned can have a significant market impact.

Uranium prices must rise. The only issue in doubt is whether the price will begin increasing at a gradual rate over the short term, or at a much more aggressive rate if price increases are delayed until the medium term. Meanwhile, Azarga’s Dewey Burdock project is forecast to produce its U3O8 at a C1 cash cost of $12.53/lb (USD). This would put the Project in the lowest quartile life-of-mine cash costs for uranium mining.

The ore deposit itself is comprised of Measured and Indicated resources of 8,582,000 lbs with an average grade of 0.25%. There is an additional Inferred resource of 3,528,000 lbs with an average grade of 0.05%. The PEA estimates the mine life of the project at 11 years, with total life of mine production of 9.7 million lbs of uranium.

Even many experienced investors will look at grades at this level and be leery. However, Dewey Burdock represents the highest grade undeveloped ISR project amongst its peer group. As the cash costs indicate, the Project can be extremely profitable – proportionately more profitable than many conventional uranium mines with much higher grades.

Low capital costs and high margins, in a rising market. Those are fundamentals which are certain to whet the appetite of any serious mining investor. However, for readers looking for yet another reason to look closely at Azarga, think “vanadium”.

Vanadium is a metal which has not previously been on the radar of most mining investors. There are several reasons for this. Vanadium is a silvery-grey metal which is rarely found in nature. It can occur naturally in conjunction with more than 100 different metals and fossil fuel deposits. Previously used in steel-making, vanadium is currently attracting significant attention because of its superb energy-storage properties for battery-making.

Historical data and assays on the Dewey Burdock property indicate significant levels of vanadium. The Company has not yet had the opportunity to compile any NI 43-101 compliant data on the percentages present, but looks at this as another potential avenue to add value to the Project.

The management team which acquired Dewey Burdock and is moving it to production is loaded with experience. The Company’s Chairman is Richard Clement, a professional geologist with more than 35 years of experience in the mining industry.

Blake Steele is the President and CFO of Azarga. Steele is the former Finance Director of SouthGobi Resources. Prior to that, he served with Deloitte in its Audits and Financial Advisory practices. The Company’s  Chief Operating Officer is John Mays. Mays has 20+ years of experience in the design, construction and operation of ISR uranium mines. He was formerly Chief Engineer with UrAsia Energy.

With a Project which has extremely lucrative potential and relatively tiny cap-ex requirements, this leaves only one primary hurdle in Azarga’s path: permitting. The bad news when it comes to uranium mining – especially in the United States – is that permitting can be a long and arduous process. The good news is that Azarga is nearing the end of this process.

The Company has been working through the permitting/environmental review process now for approximately nine years. In 2014; Azarga achieved its first major milestone in this area when it was awarded its license from the U.S. Nuclear Regulatory Commission (NRC). This leaves one more major milestone ahead at the federal level: obtaining its draft permit from the Environmental Protection Agency (EPA).

While it is never possible to predict precisely when a regulatory body will issue a permit, management is very optimistic that a positive decision will be forthcoming in the near term. The South Dakota Department of Environment and Natural Resources has recommended the state permits for approval, so once the EPA is onside, the Company strongly believes that final permitting at the state level will follow.

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At that point, Azarga simply needs to find financial backers willing to provide $27 million in financing for a project with a 67% IRR. In a world where billion dollar cap-ex mines are not uncommon, the Company is confident in its ability to attract the necessary capital to finance the Dewey Burdock mine to production.

The highest grade ISR uranium project, a microscopic capital expenditure to move to production, cash costs near the bottom of the industry – as the uranium sector appears to be on the verge of a new bull market. It’s about to be a good time to be a uranium investor again. It’s already a good time to be an Azarga shareholder.

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DISCLOSURE:  Azarga Uranium Corp. is a paid client of Stockhouse Publishing.

Further Disclosure:  The content of this article is for illustrative purposes only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research[ER] including but not limited to, commentary, opinions, views, assumptions, reported facts, estimates, calculations, etc. is to be considered, in any way whatsoever, implicit or explicit investment advice. Further, nothing contained herein is a recommendation or solicitation to buy or sell any security. The content contained herein is not directed at any individual or group. Mr. Epstein and [ER] are not responsible, under any circumstances whatsoever, for investment actions taken by the reader. Mr. Epstein and [ER] have never been, and are not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and they do not perform market making activities. Mr. Epstein and [ER] are not directly employed by any company, group, organization, party or person. Shares of Azarga Uranium are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they consult with their own licensed or registered financial advisors before making investment decisions.

At the time this article was posted, Peter Epstein owned shares in Azarga Uranium and the Company was a sponsor of Epstein ResearchReaders understand and agree that they must conduct their own research, above and beyond reading this article. While the author believes he’s diligent in screening out companies that are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. Mr. Epstein & [ER] are not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. Mr. Epstein & [ER] are not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. Mr. Epstein and [ER] are not experts in any company, industry sector or investment topic.