Azarga cuts initial capex by 50% in Dewey Burdock PEA

An upgraded resource estimate that confirms its flagship Dewey Burdock in-situ recovery (ISR) uranium project is the highest-grade ISR project among its North American peers, and a revised preliminary economic assessment (PEA) that has cut the project’s initial capex in half, puts Azarga Uranium (TSX: AZZ; US-OTC: PWURF) in an enviable position, the company says.

Estimated cash costs of US$18.86 per lb. uranium oxide (U3O8) produced over the project’s 11-year mine life have also been slashed from the US$29 per lb. estimate in the previous PEA completed in 2012, while total cash costs (including well-field and facility capital costs) have fallen to US$29.90 per lb. from US$42.20 per lb.

“Significant improvements across the board prove why Dewey Burdock is one of the best undeveloped U.S. ISR deposits,” David Talbot and Aaron Salz commented in a research report after the revised PEA was released on Jan. 29, adding that the cut in initial capex to US$27 million “is a smart move in this market.”

Azarga cut the initial capex from the US$54.3 million estimated in the first PEA because it is planning toll milling the resin off-site in the first two years of operation, with two options being Cameco’s (TSX: CCO; NYSE: CCJ) Smith Ranch facility and Ur-Energy’s (TSX: URE; NYSE-MKT: URG) Lost Creek plant.

The junior developer envisions developing the South Dakota project gradually, with a central processing plant at the Burdock resource area (which consists of 11 well fields) initially accepting a flow rate of up to 1,000 gallons per minute of lixiviant from five well fields, and gradually expanding to a flow rate of 4,000 gallons per minute in year three. Similarly, the ion exchange capacity will also be increased. Once the Burdock resource has been depleted, the IX vessels in the central processing plant will be transported to the Dewey satellite facility.

First production will come in the first year after construction starts with 126,000 lb. U3O8 produced, before ramping up to 1 million lb. U3O8 two years later, in the third year after construction starts. Once Dewey Burdock reaches steady production, it will produce 1 million lb. U3O8 annually for the remaining mine life.

Azarga expects the project will be cash-flow positive from the second year after construction using a base case of US$65 per lb. uranium, with life-of-mine uranium production of 9.7 million lb. U3O8, up from the 8.4 million lb. estimate in 2012. The company did not release after-tax numbers, but the pre-tax net present value at an 8% discount rate is forecast to come in at US$149.4 million, up from the previous estimate of US$109.1 million, with a 67% pre-tax internal rate of return, up from the previous 48% estimate.

In addition to the initial capex estimate of US$27 million, Azarga will likely have to spend another US$28.5 million to complete an ISR plant, and the PEA estimates sustaining capital costs over the mine life will add up to another US$135.8 million.

The PEA was based on a revised resource estimate that saw measured and indicated resources grow by 28%. At a 0.1% cut-off grade, the project has 1.6 million tons (1.5 million tonnes) grading 0.3% U3O8 for 8.58 million lb. contained U3O8 in the measured and indicated category. Inferred resources add 586,000 tons (531,610 tonnes) averaging 0.05% U3O8 for 3.53 million contained lb. U3O8.

The company received its final nuclear regulatory commission licence in April 2014 and says it expects to receive its final Environmental Protection Authority (EPA) licence in the second quarter of 2015, and the South Dakota permits by either the second or third quarter. The Dundee analysts point out that despite intense public opposition, “its NRC licence was upheld, and only final EPA and SD permits remain.”

In a corporate presentation in November, Azarga pointed out that ISR has been the fastest growing source of uranium production and now represents more than 48% of total global uranium production. It also predicted a supply deficit emerging in 2017 and lasting to beyond the end of the decade, with 72 reactors under construction in Brazil, Russia, India,  China, the Middle East and the U.S. 

Only sandstone-hosted deposits with the right hydrological and geological conditions are amenable to ISR, which involves pumping solution into the ground, after which the solution returns to surface containing dissolved uranium.

Azarga is  advancing a second development project called Centennial and has hired SRK to rework the existing PEA and prepare a new mine plan for permitting. The revised PEA is expected by June. Based on a previous PEA completed in June 2010, Centennial could produce 9.5 million lb. U3O8 over its mine life at cash costs of US$30.06 per lb. U3O8.

Azarga owns a 12% stake in Anatolia Energy (ASX: AEK) and its Temrezli ISR project in Turkey, which, according to a May 2014 PEA, could produce 1 million lb. U3O8 a year for a decade and already has an operating licence. Azarga also owns a 19% stake in Black Range Minerals (ASX: BLR; US-OTC: BLKMF), which owns the Hansen/Taylor ranch deposit in Colorado. (Western Uranium Corp. launched a takeover bid for Black Range Minerals on Jan. 30.)

Azarga’s key shareholders as of November 2014 were insiders and management, who together own 29.8%, and Blumont Group, with 30.4%. The company has US$4.1 million in cash and US$1.8 million in debt.

Over the last year, the junior’s shares have traded in a range of 30¢ to $1.20, and at press time traded at 41¢. Dundee has a 80¢-per-share price target on the stock. Azarga has 59.4 million shares outstanding and a $22.9-million market capitalization.