Azarga Uranium, 2 U.S. ISR projects — both could be producing within 4 or 5 yrs

All figures in US$, unless indicated as C$.

Last month, Azarga Uranium Corp. (TSX-V: AZZ) / (OTCQB: AZZUF) (FRA:P8AA) announced the highly anticipated results of a maiden Preliminary Economic Assessment (“PEA”) on its Gas Hills (“GH”) ISR project in U.S. state of Wyoming. This followed an increased mineral resource estimate announced on March 30th. The Company’s nearby, primary ISR project — Dewey Burdock (DB”) — is even better.

President & CEO Blake Steele commented:

“We’re extremely pleased with the results of our maiden PEA for the GH ISR project. The PEA demonstrates robust economics and expands future production into the state of Wyoming, which has a long history of successful ISR operations. The results further validate our Company’s strategy of developing low-cost ISR projects as we continue to progress our flagship Dewey Burdock project towards construction. With uranium markets in a structural deficit, Azarga Uranium is exceptionally well positioned to capitalize on the anticipated recovery in the uranium price through two tier one, development-stage ISR uranium projects in the U.S.

Life of Mine Cash Flow Line Items
 UnitsTotal or averageUS$ per pound of production
Uranium production (U3O8)Lbs ‘000s6,507
Base case uranium priceUS$/lb55.00
Uranium gross revenueUS$ ‘000s357,885
Less: surface and mineral royaltiesUS$ ‘000s6290.10
Taxable revenueUS$ ‘000s357,256
Less: property, ad valorem and severance taxUS$ ‘000s22,9183.52
Net gross salesUS$ ‘000s334,338
Less: plant and wellfield operating costsLess: resin processing and transport costsUS$ ‘000s US$ ‘000s37,95716,5715.832.55
Less: product conversion and shipping costsUS$ ‘000sUS$ ‘000s2,5388,8960.391.37
Less: land and administrative support costs
Less: D&D and restoration costsUS$ ‘000s8,9661.38
Net operating cash flowUS$ ‘000s259,410
Less: pre-production capital costsUS$ ‘000s2,2400.34
Less: plant development costsUS$ ‘000s14,1262.17
Less: wellfield capital development costsLess: transfer pipeline costsUS$ ‘000s US$ ‘000s62,6456,0009.630.92
Net pre-income tax cash flowUS$ ‘000s174,399
Less: income taxesUS$ ‘000s24,8423.82
After tax cash flowUS$ ‘000s149,557

The PEA’s base case scenario generated an after-tax IRR of 101% and a NPV(8%) of $102.6M, at a long-term uranium price of $55/lb.

Projected cash flows for the GH project are positive in the first year of production, two years after the commencement of construction. Initial cap-ex is estimated at $26.0M. Total pre-tax cost of production was estimated to be $28.20/lb. Uranium recovery was assumed to be 80%.

From 1953 to 1988 many companies explored, developed & produced uranium in the GH district, including on lands now controlled by Azarga. Three uranium mills have operated in the district and two other nearby mills were fed by ore mined from the GH district. Cumulative production in the area is > 100M pounds, mainly from open-pit mining, but also from underground mining & ISR.

The GH project contemplates a satellite plant development approach with final processing at a central processing facility to be constructed at Azarga’s DB mine site. Construction of GH will consist primarily of well fields in four resource areas, connected by pipelines to a single location containing the ion-exchange equipment used to extract uranium from produced well field fluids.

Ion exchange resin will be shipped to the DB project site for uranium stripping & regeneration. A dried yellowcake will be produced at DB. The average project flow rate was estimated at 2,400 gallons/minute, with an average head grade of 97 ppm for an annual production capacity of 1.0M pounds U3O8.

Combined, the flagship DB project with an after-tax NPV(8%) of C$180M & IRR of 50% + the GH project with an after-tax NPV(8%) of $128M & IRR of 101% = C$308M of total NPV at a long-term uranium (contract price) of US$55/lb. Compare that C$308M figure to the initial combined cap-ex totaling C$73M. At today’s share price of C$0.305 (EV = C$70M), Azarga is trading at 23% of that combined after-tax NPV.

At $65/lb., DB’s after-tax NPV & IRR increases to C$250M / 62%, while GH’s metrics rise to C$174M / IRR 150%. That’s a combined C$424M of after-tax NPV on roughly the same cap-ex of C$72M! I’m not saying that uranium prices will necessarily reach $65/lb. in coming years, but prior to Japan’s Fukushima nuclear plant disaster in 2011, the long-term uranium price was ~$72/lb. Adjusted for inflation that’s $86/lb. in today’s dollars.

At a long-term contract price of $65/lb., Azarga would be trading at 16.5% of its combined after-tax NPVs. There are a handful of companies that would love to acquire C$308-$424M worth of NPV in the U.S. Energy Fuels, Uranium Energy Corp. [UEC], UR-Energy, Peninsula Energy & Encore Energy instantly come to mind. These five have an avg. EV of ~C$420M, 6x larger than that of Azarga.

Other (less likely) companies that might care about Azarga include African uranium players like Paladin Energy ltd., Global Atomic, Deep Yellow & Bannerman Resources. These four have an avg. EV of ~C$310M. Each has vast uranium market experience, some with past production, including industry-leading experts sitting on mgmt. teams & boards. However, Africa’s a tough place to operate and grades are typically very low.

Having two projects in close proximity facilitates operating synergies, most notably the benefit of sharing a central processing plant. Economies of scale would further improve the financials. Mgmt. gains significant operating flexibility by having multiple sites feeding a single plant. Instead of 1M pounds/yr. of uranium production, 2 or 3M pounds/yr. could be the number in the second half of the decade.

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 ~$32/lb. AND, most juniors will not reach commercial production in the next 3-5 years {they risk missing the boat!}. By contrast, Azarga’s DB & GH projects can do very well at just $45-$50/lb. DB should be ready to start production in 2023 or 2024.

Increasingly, uranium mgmt. teams & sell-side analysts are saying that although average prices over the next 20 years might be $55-$60/lb., the next decade could see prices well above that. Only near-term producers like Azarga would be in position to lock in contracts @ $60+/lb. Producing 2.5M pounds/yr. at $60/lb. would generate cash flow of ~C$72.5M.

Near-term producers will have the financial flexibility to acquire third-party satellite deposits. There are dozens of stranded deposits of uranium, especially in Wyoming, that Azarga can potentially look at securing. If properties can be obtained, Azarga could increase the capacity of its processing plant to produce > 3M pounds/yr.

While producing 3M+ pounds/yr. sounds far-fetched at today’s $32/lb., if the long-term contract price rises above $50/lb., Azarga and other near-term producers would be in excellent shape. Some analysts are expecting a long-term contract price of $50+/lb. as soon as next year.

U.S. production for U.S. consumption will be in high demand for years to come, so the cost of expansion will be manageable. Cash flow should be strong. I’m not saying that 3M+ pounds/yr. is coming anytime soon (if at all). But, only players like Azarga have a decent shot at near-term greatness. Operating in the U.S. is an added bonus.

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