How much of a premium do think we would get in a takeover offer?
Denison and EMC Subject of Takeover Rumours
By Todd Flagg and Jon A. Nones
10 May 2007 at 10:14 PM GMT-04:00
St. LOUIS (ResourceInvestor.com) -- Issues of supply and demand have brought the spot price of uranium to $120/lb. Rumours of corporate mergers and acquisitions in the uranium sector are beginning to circulate as companies look to buy up additional resources.
On Wednesday, shares of Denison [TSX:DML; AMEX:DNN] and Energy Metals Corp. [TSX:EMC; NYSE:EMU], both jumped 5% following rumours that the uranium miners were being pursued by Cameco [TSX:CCO; NYSE:CCJ] and France-based Areva.
According to Cheryl Brandon, a research analyst with Leeward Hedge Funds, both Areva and Cameco - along with other major uranium producers - are looking to expand their global position in the uranium market.
Denison has ongoing uranium projects in the U.S., Canada, Australia and Mongolia. As an intermediate uranium producer with five active uranium mining projects in North America, Denison expects estimated production of 5 million pounds of uranium by 2010.
Energy Metals Corporation (EMC) has extensive advanced property holdings in Wyoming, Texas and New Mexico that are amenable to ISR (in-situ recovery). EMC is also actively advancing other significant uranium properties in the States of Colorado, Utah, Nevada, Oregon and Arizona.
Denison has 189,107,823 shares outstanding with a $2.77 billion market cap at today’s price of $14.32. EMC has with 81,184,214 shares outstanding with a $1.14 billion market cap at today’s price of $13.40.
At a modest 15% premium to today’s closing prices, the bidder(s) would have to make an offer of about $16.50 per share for Denison and $15.40 per share for EMC, $3.12 billion and $1.25 billion, respectively.
According to Brandon, in 2007 the next major mergers and acquisitions wave will be focused within the uranium sector. Thus far, uranium companies have not been subject to the frenetic pace of M&A in the gold and base metals sectors.
In February, SXR Uranium One [TSX:SXR] launched a bid worth $3.1 billion in stock for UrAsia Energy. Later that month, Paladin Resources Ltd [TSX:PDN], offered about C$950 million for Australian miner Summit Resources Ltd.
In December 2006, Denison purchased International Uranium for C$1 billion and made a failed attempt for Australia’s OmegaCorp [ASX:OMC], acquire just a third of the company. On April 13 2007, when Denison’s bid expired, Central African Mining and Exploration Co., [LSE:CFM] bid $222 million in shares for OmegaCorp.
Thus far, the world’s largest uranium companies have stayed on the sidelines. But Cameco and Areva are not the only companies looking for consolidation within the uranium sector. CVRD [NYSE:RIO], BHP Billiton [NYSE:BHP] and Teck Cominco [NYSE:TCK; TSX:TCK-B] are all possible players for future mergers and acquisitions.
Brandon said that with an estimated 300 uranium miners or explorers on the market, several of the largest companies are looking to buyout prominent juniors. Companies isolated in one country on continent are looking to expand projects to North America and Africa.
Brandon said uranium companies as Paladin Resources Ltd. [TSX:PDN], SXR Uranium One and Cameco are in the best position to expand their global position.
Cigar Lake Influence
According to a report by Leeward, one of the key moments in uranium market occurred on October 22, 2006. When a rock slide flooded Cameco’s Cigar Lake mine, the stage was set for the globalization of the uranium market.
According to Leeward, Cigar Lake was an anomaly. With very high uranium grades -approximately 20% versus the average world uranium grade of 1-1.5% - production was expected to hit 18 million pounds, which would have equated to 10% of the current uranium used today. Reserves for the mine were estimated at 232 million pounds.
“With Cigar Lake flooded, Cameco seems to be more willing to go into acquisition mode to compensate for the delay,” Brandon said in the report. “While the company is already involved in numerous joint ventures, it has not made a big splash in the acquisition of other larger uranium companies.”
By 2011, 40% to 50% of new production was slated to come from Cigar Lake. Cameco has postponed production until 2010 and the capital expense has risen from $600 million to $1 billion.
“One might presume that the answer seemingly lies in how long it would take Cameco to de-flood Cigar Lake; the longer it takes, the more interested Cameco naturally becomes to acquiring fairly advanced-stage uranium junior.”
Cameco's CEO Gerry Grandey announced that the company "may acquire smaller rivals after years of insufficient investment by the industry leaves tight supplies and high prices," with a strategy "to watch very carefully how they succeed. And at some point in time, if they need expertise or money or joint ventures or acquisitions, it would certainly be possible."
Supply deficit
The global supply-demand deficit is now estimated to be 10.6 million pounds (or 7%) in 2006, 7 million pounds in 2007 and is expected to remain in deficit until 2010.
Currently, 443 nuclear reactors operate worldwide, consuming 180 million pounds of uranium annually. Primary supply makes up 60% of total supply with secondary supply making up the balance.
The main source of secondary supply is highly enriched uranium (HEU) in Russia and the United States, and uranium inventories held by utilities. Leeward expects the largest reduction in supply to come from the removal of HEU from the market.
Russia has indicated that it will not renew its uranium agreement to supply the market with its stockpiles after 2013 and the U.S. plans to slow its uranium sales this year considerably.
Russia signed a contract with the United States in 1993, agreeing to convert 500 metric tonnes to HEU (equivalent to approximately 23 million pounds annually) and export to the U.S. over a 20 year period, according to Leeward.
The contract is set to expire in 2013. Russia has made it clear that they will not renew the HEU supply contract with the United States.
This month, a spokesman for the U.S. Department of Energy (DOE) said that the organization is looking into scaling back its inventory and releasing part of its strategic reserve.
Brandon said that even though estimates of that the DOE will be releasing up to 500,000 pounds of uranium onto the market, Leeward does not expect this to affect the spot price of uranium.
AI
