Interview with Uranium Expert and Chairman of Azarga Uranium


Alex Molyneux, Chairman of Azarga Uranium.

The following interview with Alex Molyneux, Chairman of Toronto main-board listed Azarga Uranium [AZZ.to] was conducted in the final week of December, 2014. Alex is a leading uranium expert and has been featured in videos online such as on Bloomberg News as well as in numerous online articles. Importantly, with today's big news of Energy Fuels [UUUU] merging with Uranerz, [URZ], M&A in the uranium sector could become a much larger focus in 2015. Azarga Uranium has a balance sheet and market cap that's big enough to make tuck-in acquisitions of smaller uranium producers or be taken out itself by much larger market cap companies such as Uranium Energy Corp [UEC) or UR-Energy [URG]. In fact, in reading the press release regarding the Energy Fuels and Uranerz deal, it stated that further acquisition by the combined company are likely. [This statement was in bold-faced font in the press release].

We saw a dramatic move higher in the spot uranium price to $44/lb, up from $28/lb, however the price has retraced to about $36/lb. Do you have a view on the spot price next year?

The real trade is still ending the year on a much stronger footing than how it started 2014. The discussions with nuclear fuel buyers at utilities are much more focused around purchasing at this time. I think what's happening is that financial investors are selling in a rather quiet December spot market because they’re seeing oil fall out of bed. The reality though is that nothing has changed for uranium and it doesn’t really have any meaningful substitution with oil in the energy mix. Almost regardless of where oil gets too, nuclear is still cheaper and its certainly radically cleaner and more reliable. Azarga’s forecast is for uranium to trade in the US$45-55/lb range through most of 2015.

Some analysts are forecasting $35-$40/lb prices for 2015. Do you think these analysts could be wrong?

Analysts are naturally very cautious so they almost never predict large near-term re-ratings in commodity markets even though we know that these markets can swing in large amounts on a proportional basis. Most of those forecasts for 2015 were done earlier in the year when the spot was down around the US$30/lb mark. I expect analysts will revise their predictions upwards in the first quarter of 2015 when they get more visibility on utility buying. There are a couple of things analysts miss though… Number one is that I almost never see an analyst add ‘first core’ demand to their demand / supply models… this is terribly important as a nuclear plant uses approximately three times the amount of fuel in its first year of operation. With all the new plants coming on line in the next few years, it's a significant amount of demand that they don’t model in. The key here is the deficit will actually be sooner than most predict… Number two is that analysts don’t take into account the much longer 'work in progress’ cycle for uranium compared to other commodities. After being mined, uranium goes through the cycle of conversion, enrichment and then fuel fabrication. Utilities tend to need the uranium around 18-months before its utilized as nuclear fuel… The impact of number two is that utilities act in the market well ahead of potential supply deficit periods… so these analysts that are predicting US$35-40/lb for 2015 are the same generally predicting US$65-75/lb by 2018… In fact what I think will happen is the price move up will happen in a more compressed time frame. I believe we will be at that US$65-75/lb level in 2016.

Can you comment on the nuclear build out in China over the next 10-20 years? There are differing views on this.

Most western analysts use figures that were published by the Chinese government as part of their 12th five year plan. These numbers are getting a bit out of date when you talk to people based in China. Azarga is based in Asia and have good dialogue with Chinese nuclear players so we know more about what's going on. A key difference is coming up as soon as 2020. That 12th five year plan shows a target of 58 GW of nuclear power for 2020. However, in our discussions with various leaders of the Chinese nuclear industry and policy makers, we believe the number to be around 70 GW. Here is an example for you… we sent a representative to Huaneng Power’s recent analyst briefing in Beijing. This is one of China’s top five utilities and its business focus to date has been almost entirely on coal. Yet in their briefing last week they focused on nuclear power. Furthermore, Huaneng discussed its intention to gain a nuclear operating license.

How much additional uranium will China need? What's the incentive price to get new mines into production? 

We do a model internally to keep track of China’s needs. We look at their growth in consumption and then we look at material they already have sourced through their own production both domestically and overseas. We also add in major long term contracts they have like the 25% of Paladin’s Langer Heinrich production and contract with Navoi in Uzbekistan… anyway, the upshot is that Azarga believes China is short a cumulative 250 million pounds by 2020. That's a lot of uranium that has to be purchased in the market. It could end up being 20-30% of transacted uranium in the next five years. China plus the growth elsewhere is what drives a requirement for new mined production. The price has to be in the US$75-85/lb range to get such new production happening because there is only a handful of meaningful projects that could come on with an economic return below that level and they’re not enough to generate the extra supply required…

Some analysts believe that there will not be a shortfall in uranium supply before 2019-2020, if true what does that mean for emerging producers like your company Azarga Uranium?

In our model, the market is in deficit in 2018 and then beyond for a few years. For us it's good news because we have a pipeline of projects to move into production. Ours are at the best end of the spectrum economically and have low country risk. That doesn't mean that utilities will be sit on their hands until 2017-18, meaningful long-term contracts should be announced as soon as 2015, but certainly in 2016 because the uranium market is mostly contracted through long-term contracts.

You've mentioned that Azarga's flagship project at this stage is South Dakota's Dewey Burdock on the south eastern border with Wyoming. Please describe this project.

This is a project for 1 million pounds of uranium production per year for nine years, with first production available as early as 2016. The uranium will be mined by in-situ recovery method, which is a very low cost method of production. Dewey Burdock is actually the highest grade in-situ recovery project of the peer group so it has incredible economics. It's in that ‘handful’ of projects I talked about that can be brought into production with a profit at lower uranium price levels. That will be described in a lot more detail in an economic assessment to be published in January. In terms of permitting, we are at the final end of that as well. We have the Nuclear Regulatory Commission license and we expect the EPA permit very soon. I cannot wait to share with the world the new economic assessment for Dewey Burdock. It's going to be quite the talking point.

How about Azarga Uranium's Centennial project in Colorado, is that on the back burner or can you develop both projects at the same time?

Centennial is NOT on the back burner… I know people have said such but we quietly revived the project in 2014. We have prepared a couple of different mine plans for it and will be revealing our plan for it probably in Q2 2015.

You've already stated what the incentive price is to get new projects off the ground, what prices do Dewey Burdock and Centennial need to move ahead? 

Dewey Burdock makes plenty of return to allow for project financing debt and a big return to shareholders at uranium price levels that equate to current term contract levels of US$45-50/lb… we are talking to utilities about contracts that are exposed to spot but have floor prices around US$45-50/lb. That will enable us to close a project debt financing and get moving into construction but still keep the upside for our shareholders. The new economic assessment will have sensitivities to show shareholders what returns are at various uranium levels. For Centennial we need to do some more modelling work but will have more info on that in Q2.

Is there anything not covered above that you would like to address? 

I think we want to make it clear that these in-situ recovery projects are incredibly rare. They’re much lower cost than the conventional mines like those in Canada and they don’t need a conventional mill in their capex plans. I know there is a lot of excitement around the Athabasca exploration plays but people would be shocked to know that those high-grade deposits don’t necessarily mean low cost… take a look at Cameco… its conventional mines are 200x the grade of its in-situ operations but the in-situ have lower cash costs and lower capex per pound of production. And, many proposed projects there are 10 years or more from production. People need to be more analytical in this sector… grade is NOT king!… amenability for in-situ recovery mining method is KING!!!… I hope people can take a look at our new website (www.azargauranium.com) and learn more about our company and the uranium market.

Peter Epstein

Peter Epstein

Contributing Editor

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In 2011, Peter Epstein, CFA, left a $3 billion hedge fund where he was a senior analyst, to help increase awareness of a number of natural resource companies in which he's invested in.

Mr. Epstein formed MockingJay, Inc., a consultancy for companies in the natural resources space and informal (non-licensed) advisor to high net worth investors. Mr. Epstein's areas of expertise include uranium, coal, gold, potash, copper and graphite. He has published hundreds of articles / blogs on investment sites such as Seekingalpha, Au-Wire.com and the Motley Fool and some articles on Stockhouse.com and CEO.ca

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