Peter Epstein of Au-Wire.com EXCLUSIVE Interview with Alex Molynuex of Azarga Resources, July 10, 2013
Peter- Alex, can you please describe your background?
Alex- I currently serve as Chairman of Azarga Resources (private), a uranium investment vehicle founded in 2012. I am also Executive Chairman of Celsius Coal, a Non-Executive Director of Ivanhoe Energy, Inc. and a Non-Executive Director of Goldrock Mines Corp. From early 2009-late 2012, I was CEO of coal producer SouthGobi Resources, until Rio Tinto’s takeover of SouthGobi’s parent company Ivanhoe Mines.
SouthGobi was the largest and most successful foreign-owned coal producer in Mongolia. Prior to SouthGobi, I was Head of Metals and Mining Investment Banking, (Asia-Pacific) for Citigroup and worked as a specialist resources investment banker for ten years. I’ve been based in Asia for most of my career and have developed strong relationships there throughout all aspects of the natural resources industry.
Peter- Many commodities, and the stock prices of the companies that mine them, are down very substantially. Why are you so bullish on uranium?
Alex- Simply put, uranium has the most relative upside of all mainstream commodities. The spot price is at a seven-year low, having had the double ‘beat down’ of the great financial crisis and then Fukushima. What’s happened is an unnatural, and I think short-term, supply glut. In the five years before Fukushima, the uranium market was in supply-deficit on average six million tonnes but then in 2012-13 it’s in surplus between four and five million tonnes.
That’s what’s driving this uranium price decline, but on the other hand we know the surplus will vanish fairly quickly. In 2013, we will see the lowest amount of global nuclear power generation in more than a decade, but by 2016 we will be at record levels again (i.e., above pre-Fukushima levels) and growing. Japanese utilities have applied to restart 10 of the 48 reactors that are offline. One should not underestimate the boost to investor sentiment this will carry.
Given rapidly declining secondary supply and conservative, yet reliable demand growth projections, the world will need to increase mined uranium supply by 50% by around 2018-2020. However, when you look at uranium growth, there’s almost no new supply that can come on with a 15% return on capital at less than around $60-$65/lb… more importantly, when you look at the amount of growth required overall, the incentive price to bring on that vital supply has to be around $75-$90/lb, a price echoed by analysts and company management teams. So, I think uranium prices of $80/lb are quite achievable by 2016… i.e. a doubling of the current spot price within 3 years.
Peter- Can we get a brief history of Azarga and its current capitalization?
Alex- Azarga started raising money for its ambitions just before Christmas last year. We currently have around $21 million of cash and liquidity for equity investments. We are also working closely with a debt fund that’s allowing us to direct $10 million of their funds into debt-based uranium investments. This is our current liquidity situation after having invested quite a bit in assets in Central Asia (incl. our main operating asset in Kyrgyz Republic), Europe and of course, Black Range Minerals.
Azarga’s funding comes from a group of investors in Asia that have experience in the minerals industry and a long-term approach to gaining returns in the sector.
Peter- Does Azarga intend to make a lot of investments in uranium, or just a few concentrated bets?
Alex- Good question, we just want to be involved in the 4-5 best situations we can find in the sector, no more than that. We want add significant value in each situation, so we can only do that in a few situations, otherwise the team gets stretched too thin.
Peter- You had looked at dozens of public and private uranium companies, what was it about Black Range Minerals that attracted Azarga?
Alex- Well, we are highly confident that the uranium price will go to $80/lb +… the only issue is WHEN???… the problem for most uranium companies is that they may not survive if these bad times last too long. In the case of Black Range, there’s tremendous value to be created even in the bad times! Firstly, their Ablation JV is being commercialized and is very valuable in a low uranium price environment. Secondly, their Hansen / Taylor Ranch is one of the projects in the world with better returns, even at lowish uranium prices.
Peter- What’s your opinion of the progress that Black Range is making on its key exploration and development plans?
Alex- I’m really happy. I personally have learnt a great deal from Mike Haynes and his team. They’re honest people, experts in their field and passionate about their business. Right now investors can see that they’re very focused on getting Ablation to a commercial cash flow generating stage and they’re making excellent progress. I’ve heard other investors talk about delays with Ablation etc. in a frustrated manner.
I think that’s a little harsh, it’s essential to remember how complex these things can be and how many issues can pop up from nowhere to hamper these types of projects. I personally, and my network of contacts, have been involved in dozens of mining-related technology commercialization plays, believe me, Ablation is doing just fine! Azarga did a tremendous amount of due diligence on Black Range and Ablation, it’s a cornerstone investment for us. I can assure you that investors in Azarga, and my network of natural resources investors, will be hearing A LOT more about Black Range in coming months.
For readers of this interview who don’t know, Peter and I visited Casper, in March. I was blown away by the Ablation prototype unit and very impressed with the experienced management team there. In addition, the Black Range team includes some excellent permitting experience and that’s all progressing to plan for Hansen / Taylor Ranch.
Peter- What would you like to see Black Range accomplish over the next six months? Over the next 3 years?
Alex- Next six months, I can’t wait to see Ablated concentrate move to a uranium mill and revenue come from that… then next year we need bigger Ablation unit(s) and third-party deployment(s), including positive cash flow coming back to Black Range from its Ablation JV. In the meantime, Hansen / Taylor Ranch will be moving forward through permitting. Black Range should have cash coming in from the Ablation JV at the time it has to put capital into the development of Hansen / Taylor Ranch, putting the company in a very robust position.
Peter- How important to your initial investment decision was Black Range’s 50/50 JV with Ablation Technologies, LLC? How important is it now?
Alex- At the time of our initial investment, we didn’t understand Ablation as well as we do now. We knew Black Range was very cheap and had excellent people involved. We liked the story of Ablation but didn’t understand its potential in a financial sense. Now we see that Ablation is a ‘game changer’ in terms of what it can do for costs and capital of certain uranium deposits. It has huge value and I’m much more certain its value will be recognized by producers going forward.
I’m aware of some powerful groups showing interest in Ablation. One company that I’m close to owns a very large, high-grade deposit in Africa. They’re going to use Ablation in their Feasibility Study being put together by SRK. I think that’ll be another strong endorsement for the technology.
Peter- Does Azarga have any plans to use Ablation technology in Kyrgyzstan or elsewhere in the world?
Alex- We certainly are looking at how to apply Ablation. We have sent samples of Kyrgyz material to be tested in Casper, Wyoming and are looking at the results in a modeling sense now. The truly exciting thing is that Ablation will work in sandstone-hosted uranium deposits all over the world. We are keen on helping market Ablation to China National Nuclear, who operate the largest uranium mine in China.
Peter- To the extent that you speak to your network of friends and business contacts about Black Range, what kind of reception do you get?
Alex- Well it’s still not the time to be talking uranium with people… its been such a tough time in the junior mining sector first half of 2013 that everyone wants to leave the room when you talk about anything in the space. Even for a compelling story like Black Range, it’s hard to get air time… but this will change like it always does and then Black Range will have more upside when the market is interested to hear the story. In the meantime, value is being created every day by the progress being made. It’s not a ‘dead project’ company like most whacked juniors out there.
Peter- You’ve invested or committed to loan a total of $4.3 million into Black Range, what’s your exit strategy? What do you think that Black Range could be worth?
Alex- We don’t have an exit strategy. I can’t tell you at what valuation Azarga might possibly sell, but I can say we are patient and think the company is worth comfortably above $100 million. What we might do is list Azarga in Asia once it’s fully invested and then we can give the broader Asian investment community access to the select few compelling investments we will have made, including of course Black Range.
Judging by Peter’s calculations, Black Range’s uranium resources alone are trading roughly a 60% discount valuation [EV/LBS] to that of global peers. I see no reason why BLR stock couldn’t double based on resources alone, and then investors get a free option on Ablation. If pressed, I see Hansen / Taylor Ranch being worth $100-$200 million depending on the uranium price, plus their share in Ablation could be worth something like $100 million within a few years. As demonstrated by our recent loan to Black Range, we remain very committed and increasingly excited about both Black Range and Ablation.
I highly encourage existing and prospective investors to contact Peter Epstein for more information. Peter and I speak frequently, he’s very up to speed on the uranium market and Black Range Minerals.