11 Jun 2007 13:27
Has Neal Froneman, CEO and president of sxr Uranium One (TSX: SXR, C$14,28 a share), bitten off far more than he can chew? A few years ago, he took charge of basket of ragged South African mining assets, long discarded by Anglo American (AAL.L, £28,92) and prepared, with wonderful timing, a launch into the now-astonishing uranium bull market. Uranium One recently completed the acquisition of UrAsia, but that only spurred the story on; on June 4, Froneman announced a friendly bid for Energy Metals (EMC, C$16,36).It's proposed that Uranium One will issue EMC shareholders 1,15 Uranium One shares, representing a 28% premium, according to a defined formula. EMC shareholders would hold 21% of the resulting entity. In the previous deal, UrAsia shareholders received 0,45 Uranium One shares for each UrAsia share. Uranium One shareholders were diluted to 40% of the new entity, and would be down to 31,6% should the EMC deal complete.
According to First Uranium the acquisition of EMC "is consistent with Uranium One's value-accretive external growth strategy and will consolidate Uranium One's position in the US".
But at what price? In the past few months, uranium markets have moved into heavy froth, leaving listed stocks trading at significant premiums. Uranium One gained nearly 150% from its twelve month low, to trade at C$18,65 a share, before its recent sharp correction.
This may not be an appropriate time for mergers and acquisitions, even all-paper ones. In a detailed analysis of the EMC transaction, analysts at RBC Capital Markets "approve of the logic of the transaction as it diversifies risk and helps build a more robust production profile", but at the same time the analysts "feel the price being offered is too high".
There is no question that the EMC deal would diversify Uranium One's production base and also its political risk profile, not least the high perceived risk of the Kazakhstan assets taken up in the UrAsia deal.
But while RBCCM estimates that the development of EMC assets could add an additional 7m pounds of uranium oxide production by 2019, RBCCM's timing as to the potential new entity's production profile "is considerably more conservative than that of Uranium One and EMC management". The timing mentioned by the latter parties is 2013.
RBCCM believes that the EMC transaction will be dilutive to Uranium One's earnings per share by 27% in 2008, 25% in 2009 and 23% in 2010; the dilution of CFPS (cash flow per share) is similar. Taking all into account, RBCCM has deemed it appropriate to slash Uranium One's stock price target from C$19 to C$15 a share. In the past five trading days, Uranium One's stock price has slid by 15%.
Froneman may now have to resign himself to spending the next ten years trying to prove that management projections for the would-be merged Uranium One and EMC were right, from the outset. There are risks in any resources entity, and this proposed new one could be in for a bruise or two.
RBCCM's analysts believe that permitting is the greatest risk factor to valuing EMC. EMC and Uranium One are forecasting permitting times that are seen as "overly optimistic". For Texas, the companies believe the La Palangana/Hobson project can be in operation at the end of 2008; RBCCM, however, believes that the permitting process will be longer, with anticipated production commencing in 2009.In Wyoming, the companies are forecasting production commencing in 2010. Here, RBCCM believes the Powder River Basin projects would commence production in only 2012 and the Great Divide Basin projects in 2013.
Permitting new uranium projects in the US is a complex procedure, RBCCM argue, "and depends greatly on the nature of the deposit and the state in which the project is located". Three states - Colorado, Texas and Utah - are known as "Agreement States", meaning the state has historic agreements holding that permitting of uranium mines and mills are handled at a state level, rather than at the federal level by the Nuclear Regulatory Commission (NRC). Agreement States may have a faster timeline for permitting, especially if the NRC has a very large volume of applications; manpower is seen as a constraint in the near-term.
Overall, RBCCM finds that the proposed acquisition of EMC by Uranium One would add slightly more than 30% to the company's peak production profile in 2017 and onward. This forecast, states RBCCM, implies "significantly" slower production growth than the company's forecasts.
http://www.moneyweb.co.za/mw/view/mw/en/page1329?oid=140212&sn=Detail |
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