Azarga Uranium Prepared for Upcoming Uranium Price Increase
With almost all commodities down sharply in 2015, the uranium spot price performed relatively well as it remained unchanged at about $36 per pound.
As for 2016 and beyond, the atomic fuel’s price is bound to increase sharply as more countries around the world turn to nuclear energy to meet their energy demand and emission levels. At the same time, very little new investments are going into uranium projects, because of the sustained low uranium prices.
This of course is excellent news for our favorite uranium related Company, Azarga Uranium Corp (TSX:AZZ – $0.30 CAD & Frankfurt:P8AA – $0.18 EUR).
Globally, at least 30 developing countries are seriously considering the use of nuclear power. China, Russia and India lead the world in terms of the number of new nuclear power plants under construction, with 22, 9 and 6 respectively.
China in particular has recently announced a plan for at least 110 operating nuclear power reactors by 2030, accelerating its approval and construction process from 3-5 units per year, to 6-8 units per year between 2016 and 2020. In total, China plans to spend $1 trillion to expand its nuclear capacity by 2050.
In addition, China is starting to sell reactors, services and financing abroad. A couple of weeks ago, for example, Argentina signed an agreement with China for the construction of the South American country’s fourth and fifth nuclear power plants.
Moreover, many countries that eliminated or reduced their nuclear reliance are now encountering significant consequences and are switching back to nuclear. For example, in Japan the switch away from nuclear power after the Fukushima accident in 2011, has caused a significant increase in the country’s trade deficit. Furthermore, CO2 emissions for Japan are at an all-time high, as fossil fuels are now used for power generation.
As a result, Japan has approved a plan to cut emissions by 26% by 2030 and to have approximately 20% of the country’s electricity generated from nuclear power. So far, two reactors have been restarted in the country, and the government has announced it will continue to restart reactors that are deemed safe under the nation’s standards.
Since 2011, the uranium spot price has come down from about $65 to the mid-$30s today. To justify new project development however, prices should return to the $60s level. As a result, some producing mines are shut down and no new ones are taken into production.
With a growing demand for uranium and a depleting supply, prices for the metal are bound to increase.
Cantor Fitzgerald, the well-known financial services firm, estimates global uranium demand for 2017 and 2018 at 198 million pounds and 201 million pounds respectively. The firm also believes that as of 2017 there will be a shortage of about 25 million pounds U3O8, with that number increasing to 40 million pounds by 2018.
And because many years are required to take a new mine into production, the long-term supply deficit is likely to grow and become more intense.
For the above reasons we searched for an ideal uranium related small cap stock. Our search lead to Azarga Uranium as the Company’s flagship Dewey Burdock project is one of the world’s leading undeveloped uranium deposits in terms of its low initial capital expenditure and post start-up operating costs.
The Dewey Burdock project contains measured uranium resources of 4,122,000 pounds at 0.33% U3O8 and indicated uranium resources of 4,460,000 pounds at 0.21% U3O8 at a 0.5 grade-thickness cut-off. Inferred uranium resources are 3,528,000 pounds at 0.05% U3O8 at a 0.2 grade-thickness cut-off.
The Company published an excellent Preliminary Economic Assessment (PEA) on Dewey Burdock earlier this year.
Receiving the Nuclear Regulatory Commission (NRC) license for Dewey Burdock in April 2014 and the ASLB ruling in April 2015 were key risk reduction events for the project. Azarga is now continuing work to resolve the remaining two contentions on the NRC license and to complete the Environmental Protection Agency (EPA) and South Dakota state permitting requirements through 2016.
In addition, the Company is considering several financing options for the Dewey Burdock project, with a view to having a funding solution in place concurrent with the finalization of the permits.
The Company aims to have the project ready for construction by early 2017.
One of the most important aspects of any resource company is the amount of cash it has in the bank. As of September 30, 2015, Azarga had cash of approximately $535,000.
However, Azarga holds a 4.1% stake in Western Uranium, a publicly traded company on the Canadian Securities Exchange and a 4.6% stake in Uranium Resources Inc, a publicly traded company on NASDAQ. As of November 12, 2015, the combined market value of these shares is approximately $3.2 million. Azarga may very well monetize these stakes to increase its cash balance.
In addition, the Company expects to generate about $1 million from the sale of redundant assets.
All in all, based on our analysis the available cash should carry the Company until the end of 2016.
At the United Nations Climate Change Conference in Paris, held earlier this month, it was clear that nuclear power will become a key part of many nations’ clean energy plan.
Because increasingly more nuclear power plants will come online, we firmly believe uranium prices will move meaningfully higher in the coming years.
Therefore, we consider the likelihood of Azarga attracting sufficient financing to move its Dewey Burdock project into production to be high.
This, in its turn, should lead to a considerable price increase of Azarga’s stock.
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