Azarga Uranium could be in production by 2023; many global peers 6-10+ years away

For readers that are rolling their eyes and thinking, Epstein Research [ER] has been singing the praises of Azarga Uranium (TSX-V: AZR) / (OTCQB: AZZUF) for four years…. yet only recently has its share price started to move, let me beat you to the punch. While it’s true that I’ve been long this name for years, the unavoidable truth is that uranium prices have been very weak since 2h 2012!

Dewey Burdock needs a minimum sustained price of $40-$45/lb. to start layering on contracts. We haven’t seen that level since 2013. Over the past six years, the weekly spot price (tracked by investing.com) has ranged from $18.0 to $38/lb., averaging ~$28/lb.

Higher uranium prices are coming, everyone says so!

We’ve been told by sell-side analysts, consultants, mgmt. teams and industry cheerleaders (like the World Nuclear Association) that a recovery is right around the corner…. a nuclear renaissance is at hand. Pick your own, “prices are going a lot higher next year narrative

1] utilities have to sign contracts (they can’t wait any longer!), 2] Cameco & Kazatomprom are buying in spot market, 3] Japanese restarts! 4] U.S. gov’t support of domestic uranium players, 5] Small Modular Reactors, 6] Accelerating growth of nuclear power in China / India, 7] President Biden is pro-nuclear, pro-environment, 8] the world’s finally serious about decarbonization,

9] financial entities are hoarding uranium, 10] juniors like Denison Mines entering the spot market, 11] EV penetration soaring — EV owners demanding clean, reliable base load power, 12] aging reactors are getting operating-life extensions 13] security of supply, geopolitical concerns & ESG considerations — all roads lead to more nuclear power!

Most of the above has happened, or is happening — yet the spot price has barely budged. Many uranium juniors have seen strong moves higher in their share prices (16 of the 74 uranium names I follow are up 400%+ from 52-week lows). Azarga is up 97%. Prices are headed significantly higher, but most juniors are not positioned to directly benefit as they won’t be in production.

Some projects, with low grades and/or very remote locations — in tough mining jurisdictions — need $65-$75/lb. uranium to thrive. That’s more than double today’s spot price of ~$31/lb.! AND, most juniors will not reach commercial production in the next five years {they risk missing the upcoming uranium cycle}.

Azarga Uranium’s Dewey Burdock ISR project in South Dakota (USA) can thrive at $45/lb., and could/should start production by 2023. Near-term operations are critically important. It makes funding a project’s upfront cap-ex much more palatable. And, if uranium prices spike a lot higher in the next few years, near-term producers might be better able to capture that move by locking in attractive contracts.

Dewey Burdock is not without risk. It has been trying to secure all of its permits & approvals for the past decade, there’s ongoing risk that things could drag out longer still. That’s the biggest risk facing the Company. Importantly, funding is not a big concern as upfront cap-ex is budgeted at under US$35M.

The U.S. Government is serious about wanting to facilitate domestic production. I think that the drama around this project is coming to an end. (Yes, I’ve been wrong about that in the past). If/when all permits & approvals are signed, sealed & delivered, the share price could soar on that MAJOR de-risking event.

Mgmt. recently announced a significant increase in its uranium resource (+4M pounds) at its Gas Hills satellite deposit. This brings Azarga’s global inventory of Measured + Indicated + Inferred pounds of uranium in the western U.S. to 49M.

More important than the total resource # is the world-class Dewey ISR project that has an after-tax NPV(8%) of C$180M & IRR of 50% at a long-term uranium price assumption of $55/lb. At $65/lb., the NPV increases to C$248M & IRR to 62%. At $45/lb., the NPV falls to C$112M & IRR to 37%. Consider this, the after-tax IRR is still a strong 30% at $40/lb. uranium.

Compare that base case of C$180M to Azarga’s current Enterprise Value (“EV”) {market cap + debt – cash} of ~C$70M. On this basis alone, Azarga seems attractive, but there’s a lot more potential value at Dewey Burdock to consider. The Gas Hills deposit could become a viable satellite deposit, especially if uranium prices are headed above $50/lb.

Canaccord Genuity just raised its long-term price assumption to $60/lb. (from 2025 on). A group of nine Canadian sell-side research firms, (incl. Canaccord), have an average long-term price forecast of $52.5/lb. Several companies have yet to make changes to their uranium price decks.

To reiterate, a sustained long-term contract price of $45/lb. would be wonderful news for Azarga Uranium. I think we could see that level as soon as next year. Circling back to the PEA, if mgmt. can incorporate the Gas Hills resource into the Dewey mine plan, the pro forma economics would be greatly improved.

Instead of ramping up to 1M pounds of uranium/yr. over a 16-year mine life, mgmt. could consider producing 2.0-2.5M pounds/yr. for 10-12 years. That decision would likely be tied to the prevailing uranium price. Having the ability & flexibility to possibly produce 2.0+ million pounds/yr., as soon as 2025-26, makes Azarga a prime takeout candidate.

I estimate that at higher throughput the after-tax NPV could more than double, even after accounting for the commensurate higher cap-ex. Furthermore, economies of scale could cut op-ex comfortably under $30/lb. (all-in, after taxes).

A high-margin ISR project like that would be a world-class asset. Due to security of supply, geopolitical & ESG considerations, the U.S. Gov’t is believed to be motivated to see more U.S. mines producing uranium for domestic use. There remains a decent chance that a bifurcated market develops whereby a premium price is paid for U.S. produced uranium.

According to the EIA, U.S. utilities accounted for ~27% (~50M pounds) of the world’s uranium consumption in 2020, but over the past five years U.S. domiciled uranium mines have, on average, produced < 2% of the country’s annual needs.

While the U.S. gets a significant amount of uranium from Canada & Australia, material from Kazakhstan, Russia & Uzbekistan accounted for 47% of all uranium purchased by the U.S. last year. What could possibly go wrong?

Azarga Uranium could be a prime takeout target next year

At least four uranium players have clear strategic incentives to acquire Azarga. Active & standby ISR uranium operations / projects are scattered across New Mexico, Texas, Colorado, Nebraska, Utah, Wyoming & South Dakota (Dewey Burdock).

Energy Fuels (“EFR”) has an EV of > $1 billion and trailing 12-month revenue of just $2M. It has a very valuable uranium mill and a number of conventional + ISR projects / mines. Most of EFR’s assets are in Wyoming. In addition to uranium, the company has been pursuing REE opportunities. By comparison, Azarga’s EV = ~$70M.

Uranium Energy Corp. (“UEC”) has a EV of ~$860M, with trailing 12-month revenue of zero ($0.00) dollars. Like Energy Fuels, it has western / southern U.S. assets, all of them ISR mines & projects. The most prominent are in Texas & Wyoming. Azarga’s Dewey Burdock is on the border of South Dakota & Wyoming (Gas Hills is nearby, on the Wyoming side).

Ur-Energy’s two primary ISR assets are in Wyoming. It has an EV of ~$310M and trailing 12-month revenue of ~$8M. Finally, multi-billion dollar Canadian giant Cameco has some of its mines and other assets in the U.S., mostly in Wyoming & Nebraska.

A key takeaway is that Wyoming hosts a lot of uranium projects & mines! By the time Dewey Burdock reaches production (hopefully in 2023), the U.S. might be producing — at best — 10-12M of the 50M pounds/yr. it consumes. That’s without including Dewey Burdock, which might add 1M pounds from 2024 (and potentially 2-3M pounds/yr. if market conditions warrant).

The four uranium players mentioned would benefit from acquiring an incremental 1M, or perhaps up to 2-3M pounds/yr., of ISR production in the Wyoming area. All have substantial ISR operating experience.

These companies could presumably derive economies of scale & operating synergies by acquiring Azarga. Once meaningful long-term contracts start getting signed again, we could see a wave of M&A activity in N. America.

Azarga Uranium (TSX-V: AZR) / (OTCQB: AZZUF) is very well positioned to benefit from N. American M&A as it’s relatively close to production and has strong economics at even just $45+/lb. pricing. If market conditions warrant, flagship 100%-owned, Dewey Burdock has the potential to double or triple its PEA-derived 1M pounds/yr.

Finally, all uranium assets & prospects are in the geopolitically-safe U.S. at a time when U.S. production is expected to be in particularly high demand.

Disclosures: The content of this article is for information only. Readers fully 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 not 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 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 will consult with their own licensed or registered financial advisors before making any 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]. 

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 interview. While the author believes he’s diligent in screening out companies that, for any reasons whatsoever, 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 interview 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.