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Merger to Create US-Focused ISR Uranium Development Company
Contributed Opinion

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Todd Hilditch and Glenn Catchpole of URZ Energy speak with Gerardo Del Real of Resource Stock Digest about the company's just-announced merger with Azarga Uranium.

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is CEO of URZ Energy Corp. (URZ:TSX.V; URZZF:OTC), Mr. Glenn Catchpole, and Executive Chairman of URZ, Mr. Todd Hilditch.

It's an important day for you, for the company. Congratulations are in order to you and to shareholders. You announced the merger of URZ with Azarga Uranium Corp. (AZZ:TSE) to create a new U.S.-focused ISR uranium development company. I think it's an important announcement, but before I get to the details of the transaction, I want to talk about your past success because you have a track record of serial success in the U.S. I believe that's an important factor to look at when we analyze this particular piece of news today. Can you speak a bit to your past successes, and then we can talk about why you thought this deal was right now at the right time to consummate?

Glenn Catchpole: Well, I won't go way back. As you know, I've got 40 years in the uranium business, and most of that in the U.S., and worked for small companies, medium companies, and the largest company, Cameco, over time. And developed a project in Kazakhstan that turned out to be the biggest uranium mine in the world, and brought that into the first stage of production.

Then, back in the U.S., I hooked up with Dennis Higgs. And we acquired properties focused in Wyoming. I ended up with the Nichols Ranch Project, which we assimilated not only data that was there from the key player, for our Nichols Ranch, but also acquired properties in the vicinity, the Arkose property now, the Hank property. It's a nice setup now. We hit that at a good time, if you forget about Fukushima, but came out well and had that transaction with Energy Fuels, which was the right thing for us to do, and we're very pleased with it.

And now onto this latest venture, and again, with Dennis, and now Todd that Dennis introduced me to. We think we've put together an excellent team. We started out with properties that Todd and his group acquired, as you pointed out, at $0.03 a pound. From recent work we've done on Gas Hills, I'm actually very optimistic that someday that will also be a producer. It's not just that we picked up some scattered properties. That one, in particular, I think has real potential.

Then we moved on the Dewey Burdock. Actually, I've been following that for a long time, and the property has been around for quite a while. With Uranerz Energy, back when we were together there, we actually did due diligence on that property. We were really hoping to get it. I'm going to come back to that in a minute, but somehow, for whatever reason, we didn't get it. We tried hard, because I was very, very keen on it. Now, there's been a lot of what we would call negative thoughts about it because of the permitting.

In my early days in the business, I was involved heavily with permitting. And with the NRC now very close for us, dealing with one outstanding issue that just takes time to do it, it's not a matter that it could cause us not to be licensed by them. We were already licensed, it's just another step we have to do. But I'm very confident that we will, as Azarga URZ, we will get through that. Yes, there's some public concern up in that part of South Dakota, but Azarga's got a good staff person up there, working on the public relations. In the end we will prevail, and we can move forward. But I have frequently touted it as sort of a premiere property that I always wanted to end up with.

And not only do they have the Dewey Burdock, but there's more potential in there. It's like Nichols Ranch, when we first started that out we had one number for resources, but with exploration and getting a better handle on where the fronts were going, you can increase that. I see that same potential here at Dewey Burdock. It's going to be a significant operation one of these days.

Gerardo Del Real: Let's talk about Dewey Burdock, just a little. For those that are not familiar with the property, it will be the flagship asset of the merged company once the transaction closes. Once this merger closes, the merged company will have 30.7 million pounds in the measured and indicated category, and I believe in addition an inferred resource of 8.7 million pounds, all in the U.S.

Todd Hilditch: Yes, that's the total of the merged companies. Collectively that's what we would have under the umbrella of all of us.

Gerardo Del Real: Let's talk about the mindset going into this deal. What was the thinking when you're taking into consideration the macro situation in the uranium space? We have the lowest cost, largest producers in the world saying that these uranium prices are not sustainable, and those are good allies to have because they've said they're going to do everything in their power to create, frankly, a higher uranium price and a better balance between supply and demand. How did you approach the transaction and was that a big motivator for you to continue focusing here in the U.S.?

Todd Hilditch: Gerardo, everything you've just outlined is really the roadmap. When we put these together originally—this is pre-announcement of Azarga—part of the balance that we struck is we were a brand-new company. Glenn and Dennis and Uranerz had done it, and the environment has changed, though, going to your point.

Where we stood was, ok, we've got $0.03 a pound uranium. Let's continue and do some studies on the ISR capability, which obviously is a lower cost animal than going the other direction. We already had a really great structured company. We had good financing. We hadn't been sort of long in the tooth in the market. We IPO'd in July, so we were sort of a clean and hungry animal, if you will, to move forward and in a better cost structure.

So, our initial studies were looking at the ISR capabilities at Gas Hills, which now looks like is going to be a great opportunity for us. But where we found an opportunity with, say, the Azarga situation is they've done an amazing job of trying to push this along the permitting process. But the markets have turned over time, so if we can sort of restructure with both under one roof and making the asset, as you mentioned, sort of 30+ million pounds plus and inferred getting up to close to 40 we sort of set ourselves up in structure at a point where their asset will be a low-cost producer once we get through the permitting regime.

We've got a neat pipeline now of assets, of ISR, looks like ISR-capable in our Gas Hills, and then a couple others that are less priority. But coming out of the gate in a new structured, new well-financed vehicle puts us in a pretty good position to deal with some of the things you've suggested; cost curves, permitting regime, and then the "Buy USA" and the 232 initiatives. It just seemed like a good time to put all of that together in the hopes that we get a little bit of a uranium push over the next year plus and puts us in a good opportunity to grow the business in a better cost structure.

Gerardo Del Real: Absolutely. Now, let's focus on the flagship. Dewey Burdock has, in the measured and indicated category, 8.6 million pounds at 0.25% with 3.5 million pounds at 0.05% in the inferred category. So that's 8.6 measured and indicated, 3.5 on the inferred side. It's an impressive asset. I believe it's the highest grade ISR project that's not in production in the US. Is that accurate, Glenn?

Glenn Catchpole: That's my understanding, too.

Gerardo Del Real: Of course, that's important because of the low-cost nature, and obviously low cost meaning higher margins if we can get the uranium spot price to cooperate, right?

Glenn Catchpole: That's right. Let me just follow up with what Todd is saying there. It's an important point. With the Dewey Burdock, and those measured and indicated that they're initially focusing on, it's got all three things going forward. One is the grade, and the grade is the most important thing. 0.25, I think, is the highest number I've heard for a project in the U.S. The depth situation is good. That's another big cost factor is putting in your well fields. And the deeper you have to go, the more expensive the drilling and your costs go up, appropriately.

You've got grade, you've got the depth, if you will, and you've got not only the depth but in the hydrology, the permeability is good. So, with all those things, this should be a low-cost producer. The world belongs to the low-cost producer, and we think we're going to be right in there. Even when we look at the world situation, but particularly in the domestic, here in the U.S., you say, "Why are you doing it at this time?" Well, we think now we've got the asset that we'll be very competitive and it's going to work.

Gerardo Del Real: This is also going to provide a lot of catalysts in 2018. As far as development, what does the rest of the year look like?

Glenn Catchpole: This outstanding issue being worked on with the NRC, that whole thing, it'd probably be completed in May of 2019. Then, there's the other permits that they need, and the state permits and so forth. So, it's probably sometime in 2019 before all that happens. But again, looking at the timeframes and what's going to happen to the price over that time, that's probably a good point for us to be, if you will, in the construction and operation business.

Todd Hilditch: Yeah, and before that, Gerardo, to go to your 2018 comment, there would be expected a resource and PEA update. Azarga has completed some review of historic data, and they have the Dewey Terrace, which is just on the other side of the border from Dewey Burdock, but contiguous. There's some additional drilling, etc., that they expect to be able to pull into the resource. So, to answer your question, that could be part of 2018 and we'll also continue to focus on our ISR capabilities for the ISR at Gas Hills.

We've got some, from a catalyst standpoint, we've got a few of these things lined up for 2018. And then there's also a bit of a platform for additional consolidation if we come across something that makes sense. If we could do all of that over 2018 and into 2019, as Glenn's identified, the permitting side of Dewey Burdock, I think we'll have a pipeline of actionable items for the next year.

Gerardo Del Real: Excellent. Let's talk about the structure of the deal. We haven't gone over that yet, so I understand that Azarga will acquire all of the issued and outstanding shares of URZ for two Azarga uranium shares for each URZ Energy share. Is that correct?

Todd Hilditch: Yes, that's correct. The implied price to URZ based on Friday's close or spot price is about $0.54 a share for us. So that's good and that's based on spot, and about a $0.51 share on a VWAP 20. So respectively, that's a 35% premium for us or a 10% if you look at the VWAP 20. So certainly from a shareholder standpoint of our company, it's a great deal, and obviously with the stuff we've talked about with bringing on the asset.

As it turns out, the way we've structured this is we've come in with three directors on each side. We'll go through our shareholder approval process in July, it looks like for timing. All management and directors are all locked up and everybody believes this is a good combination. So transactional summary-wise, I think both companies are pretty happy with the way things are working out.

Gerardo Del Real: And there will be zero debt once this all closes. Is that accurate?

Todd Hilditch: Other than some accounts payable, correct. Nothing long-term. The $1.8 million that they've held on their books from loans payable is being converted, and that's sort of at our push and they were accepting of it. So, we came out the gate with a clean structure.

Gerardo Del Real: Now, as far as management and the board, I understand, Glenn, you'll be chairman. Is that accurate?

Glenn Catchpole: That's correct.

Gerardo Del Real: And Blake Steele, who is Azarga's president and CEO right now, will continue in that capacity. Is that correct?

Todd Hilditch: Yes, that's correct. We should draw a differentiation ... not differentiation of, sort of a line. Glenn's movement from CEO to chair is not a moving out of not working. With Glenn's expertise permitting and moving Nichols Ranch forward, his on-the-ground presence and his company-building presence doesn't go away. So, we want to make that clear. He will be working hand-in-hand with Blake, and then along with the rest of the directors and special advisors, including Dennis. So, this is about putting some of the pieces of the pie together and Glenn is integral into this new go.

Gerardo Del Real: It's an incredible set of assets, an incredible team obviously. I mentioned earlier you have a track record of a serial success. Congratulations. Guys, is there anything else that you'd like to add?

Todd Hilditch: I just want to reiterate that obviously all the uranium companies need a little help on the pricing, but I think with this transaction—we appreciate your kind works Gerardo—I think putting this together now was a smart move by both companies to structure up as the price starts to move forward. We're looking forward to building a great company.

Gerardo Del Real: Congratulations again. I'm a happy shareholder. You mentioned the expertise that Glenn and the team, and the combined team now brings. I'm looking forward to see what else you're able to find out there. I know you're always looking.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. He brings his extensive experience to the public through Outsider Club, Resource Stock Digest, Junior Mining Monthly, and Junior Mining Trader.

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1) Glenn Catchpole and Todd Hilditch: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: URZ Energy. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company currently has a financial relationship with the following companies mentioned in this article: URZ Energy.
2) Gerardo Del Real: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: URZ Energy. My company currently has a financial relationship with the following companies mentioned in this article: URZ Energy is a sponsor of Resource Stock Digest.
3) The following companies mentioned are sponsors of Streetwise Reports: Energy Fuels Inc. Click here for important disclosures about sponsor fees.
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