Last week enCore Energy (TSX-V: EU) / (OTCQX: ENCUF) announced a proposed acquisition of Azarga Uranium (TSX: AZZ) / (OTCQX: AZZUF) in an all shares transaction. If the deal is approved, Azarga shareholders will get 0.375 shares of enCore in exchange for each share owned.
At the time of the announcement that equated to $0.71 per Azarga share. As I write this article a week later, the implied share price is C$0.72, because enCore closed at $1.92. Readers that follow my work know that I’ve been covering Azarga for years.
I knew this day would come (a takeout), but I thought it might come after there was more certainty on a construction decision for Azarga’s flagship 100%-owned Dewey Burdock ISR project in South Dakota.
I think that market fundamentals may have forced enCore’s hand. Azarga’s share price (and the spot price of uranium) had been climbing for weeks. Be that as it may, I truly believe this is a win-win for both companies.
Of course, I’m biased, but forget about my history with Blake Steel & Azarga Uranium, and my ownership of shares in Azarga… just follow the facts.
Consider the many benefits for Azarga shareholders of an acquisition by enCore Energy
1] The headline takeout premium of 31.5% may have initially disappointed some Azarga holders, but the share price had been up 74% from $0.31 just 10 trading days earlier. So, the implied premium was 129% above that $0.31 level. Likewise, enCore shares are up a lot since August.
2] Azarga has been cash starved for years, this transaction suggests not only that Dewey Burdock will reach initial production in the next several years, but also that the 100%-owned Gas Hills ISR project in Wyoming will be advanced, perhaps concurrently. In my view, both projects should be in production by 2025.
3] Azarga holders will benefit from enCore’s near-term ISR production profile in Texas. Near-term cash flow can be used, in part, for Azarga’s two PEA-stage projects, but also on significant exploration projects that Azarga holds.
4] 100% share exchange — Azarga holders remain firmly tied to the bullish uranium narrative in what would be a much larger company with near, medium & long-term assets. [Texas ISR near-term, Azarga assets medium-term & New Mexico prospects longer-term]
5] With a greatly enhanced mgmt. team & strong financial backing, the combined company is closer to construction decisions and to signing long-term contracts for Azarga’s projects (as soon as next year).
Azarga holders will become part of an entity that could become the #1 ISR uranium producer in the U.S. within five years.
Many benefits to enCore Energy shareholders of acquiring Azarga Uranium
1] the overhang of Dewey Burdock project delays has weighed on Azarga’s valuation. enCore is getting a very good deal by taking on reasonable project risk that several uranium peers were uncomfortable with.
2] Azarga’s projects, plus its uranium resources & exploration targets, are worth a lot more in the hands of enCore. There’s only a handful of sizable, high-quality U.S. ISR projects, and enCore is grabbing one of them. enCore has the managerial talent & financial wherewithal to both expand & optimize Azarga’s two primary projects.
Azarga’s Dewey Terrace & Aladdin projects have been on hold due to cash concerns. enCore will be able to expertly advance four Azarga projects / satellite deposits. The best time to acquire assets is early in a bull market. Will enCore’s timing prove to be excellent?
3] A combined enCore + Azarga, plus additional tuck-in acquisitions enCore might make, could vault enCore to the #1 U.S. ISR producer of uranium later this decade.
4] U.S projects could become much more valuable virtually overnight if the U.S. government gets serious about supporting domestic uranium production. This is not a sure thing, but there has been speculation about this. Announced measures to date have not been meaningful.
5] As enCore grows through acquisition and starts generating cash — it will become a takeout target itself. Especially as the U.S. is an especially important uranium market.
For example, Cameco might not care about enCore now, but if enCore demonstrates clear line-of-sight to 5 or 6M lbs./yr. in 2026 or 2027, from high-quality, environmentally friendly ISR projects, Cameco (and others) would surely take notice.
6] If uranium prices have finally turned the corner, (at 7-yr.+ highs) speed to market will be critically important. How many emerging producers, hard rock or ISR, anywhere in the world, have a shot at 5-6M lbs./yr. anytime soon?
None the dozens of small or large pre-PEA Athabasca juniors can move as fast as enCore. Five million pounds at [US$60-US$100/lb.] for many years would command a premium valuation.
7] As a first mover, rolling up U.S. ISR projects, with an enviable project pipeline, including ISR processing facilities in Texas, and eventually in other states — enCore stands to benefit from stranded third-party deposits amenable to ISR methods. Could enCore be a 10M lb./yr. producer by 2030?
8] enCore is looking into a NYSE or full NASDAQ listing for the combined company. Energy Fuels & UEC trade at premium valuations due in part to their U.S. listings.
Have readers missed the boat on Azarga or enCore or the uranium sector?
enCore’s proposed acquisition of Azarga is not the end of the story, it’s just the beginning. A few days ago, the uranium spot price surpassed US$42/lb., more than a 7-yr. high.
Readers might be wondering if they’ve missed the boat on Azarga, enCore or the uranium sector. If prior uranium price rallies are any guide, we could still be fairly early in this year’s bull market.
There have been four significant uranium price bull markets in the past 18 years. Two, occurred (with several months between them) from mid-2003 to 3rd qtr. 2007, as the spot price skyrocketed from ~$11/lb. to ~$136/lb. More recently, in the 10-month period of May 2010 to February 2011, the price gained ~80%.
Importantly, the 2010-11 bull market was halted in the low $70s/lb. due to a nuclear power accident in Japan caused by a tsunami. At today’s level near $42/lb., spot is up ~50% since the end of February.
Readers should note, spot is 22% above the August 31st quoted long-term contract price. This is quite unusual. Over the past five years the contract price has averaged ~25% higher than spot.
I believe there’s a decent chance the contract price will rise faster than spot over the next 12-24 months. In 2022 or 2023 we could easily see $50/lb. and a contract price 20% above that at $60/lb.
Strong longer-term contract pricing, (= or > $60/lb.), as soon as next year is critically important for players that can be in production sooner rather than later. Companies like enCore Energy could be layering in contracts at very attractive levels.
Combined, the flagship Dewey Burdock project with an after-tax NPV(8%) of C$185M & IRR of 50% + its Gas Hills project with an after-tax NPV(8%) of C$129M & IRR of 101% = C$314M of total NPV at a long-term uranium price assumption of $55/lb.
At a long-term price of $65/lb., the combined after-tax NPV of Azarga’s two projects would be ~C$438M, and at $75/lb., it would be ~C$562M. To be clear, I’m not predicting what the long-term price will be, but a range of $60-$80/lb., seems reasonable.
Of the 72 juniors I’m tracking, I estimate that enCore is one of fewer than six emerging uranium players that could reach initial production within two years.
enCore + Azarga seems like the right acquisition at the right time in the right place (USA) — at an attractive valuation. I look forward to seeing this transaction succeed and watching enCore become a major player in the U.S. uranium market. I expect to remain fully invested in enCore Energy for the next few years.
Disclosures: The content of this article is for information only. Readers understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER]) about Azarga Uranium, including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of Azarga Uranium are highly speculative, not suitable for all investors. Readers understand 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 will consult with their own licensed or registered financial advisors before making investment decisions.
At the time this article/interview was originally posted, Peter Epstein owned stock options in Azarga Uranium and the Company was an advertiser on [ER]. Peter Epstein has no prior or current relationship with enCore Energy, and he does not own any shares, options or warrants in enCore.
Readers should consider me biased in my view of the Company. Readers understand and agree that they must conduct their own due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reasons, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is 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. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.