Azarga Uranium Corp. (AZZ:TSX; AZZUF:OTCQB) has been battling to obtain the permits, licenses and approvals to construct a world-class in-situ recovery (ISR) uranium operation in South Dakota for over a decade. I've been both supportive and optimistic on uranium fundamentals and on Azarga for four years.
Local opposition has slowed the process down, but in December 2019, the company eliminated the last remaining contention on its U.S. Nuclear Regulatory Commission (NRC) license at the 100%-owned Dewey Burdock (DB) project. Now, the company remains focused on obtaining final U.S. Environmental Protection Agency (EPA) permits.
In August 2020, management arranged funding for the financial assurance bonds required by the EPA. This is a critical step in advance of the final EPA permits being issued. With the NRC license in place and EPA permits thought to be imminent, a number of institutional investors, as well as strategic and financial partners, could drive the valuation higher.
Today's share price of CA$0.18 is 28% below its April 2020 high of CA$0.25. To be fair, the entire sector has sold off as the underlying uranium price declined from $34.25/lb to ~$30/lb, despite industry fundamentals that, arguably, have never been better.
Peers Energy Fuels Inc. (EFR:TSX; UUUU:NYSE.American), Ur-Energy Inc. (URG:NYSE.MKT; URE:TSX), Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT), Fission Uranium Corp. (FCU:TSX; FCUUF:OTCQX; 2FU:FSE), Global Atomic Corp. (GLATF:OTCMKTS) and GoviEx Uranium (GXU: CSE) are down between 25%–40% from 52-week highs.
However, very few (if any) uranium juniors have as impactful a news release hanging over them as Azarga does. It seems reasonable to wonder if the share price could surpass its 52-week high upon finally reaching this long-awaited stage of being granted final EPA permits for DB.
Of course, we've seen this movie before, right? I've been expecting this development to unfold for a long time. Importantly though, I don't believe that management has ever deceived me. CEO Blake Steele has always been open with me about the challenges and timing uncertainties.
The company has had advisors, consultants and lawyers working with it on DB virtually every step of the way. CEO Steele and his board have listened to the experts, and their efforts could pay off fairly soon.
Here I am again, suggesting that the long wait could soon be over. The market cap has languished in the CA$30 million (CA$30M) range, currently at CA$34M. If Azarga can show line of sight toward getting DB into production in the next three years, what might the company potentially be worth?
The after-tax, preliminary economic assessment (PEA)-derived, net present value (NPV)(8%) of Dewey is $147M = CA$195M. Azarga is trading at 17.5% of its NPV. That's pretty cheap, again assuming that DB could be up and running within three years.
Three U.S.-focused peers, UR-Energy, Uranium Energy Corp. (UEC:NYSE.MKT) and Energy Fuels trade at enterprise values of CA$111 to CA$271M (average = CA$206M). All should be interested in partnering with Azarga on DB, or acquiring Azarga outright for its larger portfolio of Western U.S. uranium assets in South Dakota, Wyoming and Colorado.
Cameco Corp. (CCO:TSX; CCJ:NYSE) has three uranium operations in the area. To the extent these companies have deposits or projects near DB, there might be meaningful synergies to gain with Azarga.
In the chart below, notice that at Dewey's base-case, long-term uranium price assumption of $55/lb, its internal rate of return (IRR) is 55%. Compare that to the average of eight similar-stage peers; $58/lb and an IRR of 31.8%. The current long-term contract price is $35/lb.
This means Azarga might possibly be able to sign a five-year contract for a portion of its nameplate capacity at a price that most global peers would not, or could not, accept.
Readers are reminded that of the $31.7M of upfront capital needed, $20–$25M could probably be raised in debt. Of the remainder, some might potentially be satisfied with an upfront payment on an off-take agreement with a utility.
Even more impressive is that Dewey's NPV divided by its upfront capex is 5.4x. This is very strong for any mining project, not just in the uranium sector. The average NPV/capex ratio of peers is 1.2x. This is perhaps the biggest differentiating factor between Azarga and other juniors, including dozens not in the chart.
Even at a long-term uranium price assumption of $45/lb, which I believe we could see within 12–24 months, DB's IRR is 37% (still above the average of peers). However, at $45/lb, the average IRR among peers falls to 20%–25%. Several names in the chart might not be financeable at $40¬–$45/lb uranium.
It's worth noting that of the many dozens of preconstruction uranium projects across the globe, the vast majority cannot possibly deliver commercial quantities within three years. Time to market matters, and DB is looking at fairly near-term production.
Another observation is that DB is in the U.S., a place I believe will be better to operate a mine in than countries like Argentina, Zambia or Niger.
But wait, the story gets even more interesting. In addition to a robust PEA, there are up to three potential satellite deposits that could feed the DB project: Dewey Terrace, Gas Hills and Aladdin. Once Azarga gets over the permitting hurdle, these satellite deposits will instantly become more valuable.
Having millions of additional pounds of uranium available to enhance the DB project might make a meaningful difference to the economics depicted in the PEA. Instead of 14 years of operation at 1.0M lbs/year, perhaps 15–20 years at 1.5 to 2.0M lbs/year will be contemplated.
Once Azarga Uranium clears the final hurdle, a number of investment catalysts will present themselves. Preliminary discussions on off-take agreements with utilities would be launched. Lining up debt funding for construction would be aggressively pursued. More earnest talks with prospective strategic/financial partners would take place.
Importantly, management could probably sell off a modest interest (15%–20%?) of the DB project to cover 100% of its funding needs through cash flow positive operations.
All eyes are on Azarga Uranium, and the uranium price in coming months. Will investors' patience finally be rewarded?
Peter Epstein is the founder of Epstein Research. His background is in company and financial analysis. He holds an MBA degree in financial analysis from New York University's Stern School of Business.[NLINSERT]
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