SXR moves to acquire UrAsia (February 19, 2007)

SXR Uranium One (SXR-T, SXR-J) has offered to take over UrAsia Energy (UUU-V, UUU-L) to create a $5-billion uranium company that would have early production from Australia and South Africa, and advanced projects in Central Asia.

The friendly deal is 0.45 of an SXR share for each share of UrAsia, with the successor company to be called Uranium One. The imputed value based on closing prices of the two companies before the offer was $7.05 per share, a 13% premium over UrAsia’s market value. UrAsia shareholders will have about 60% of the shares in the new company, and three of the nine directors on the board, including UrAsia chairman Ian Telfer and president Philip Shirvington. SXR’s Neal Froneman would remain as president and chief executive.

The deal values UrAsia, which has 480 million shares outstanding, at about $3.4 billion. SXR’s market capitalization is in fact a little smaller than UrAsia’s, about $2 billion.

UrAsia’s board has recommended the takeover, and plans a shareholder meeting — where the proposal will need a two-thirds vote in favour — for April.

“We’ve drawn a line in the sand for May (15) but we do believe this can be done by April,” said Froneman in a recent conference call.

He also said the boards decided an SXR shareholder vote “would not be appropriate.”

SXR has a right to match any competing offer, and will get a US$90-million break fee if UrAsia doesn’t complete the deal.

In the conference call, fund manager Ben Andrews of Columbia Wanger Asset Management argued for a decreased break fee and a cash “collar” to protect UrAsia shareholders from declines in the value of SXR shares. Froneman said the boards “would certainly consider it.” (SXR shares fell 88 to $14.79 on the day the merger plan was announced, implying a value of $6.65 for UrAsia shares; UrAsia rose 25 to $6.48.)

UrAsia has a 70% interest in the Akdala and South Inkai uranium projects in southern Kazakhstan, and a 30% interest in another Kazakh project, Kharassan. SXR’s major projects are Honeymoon, in South Australia, and Dominion, in South Africa.

UrAsia’s Akdala, in the South Kazakh oblast (region) of Kazakhstan, is currently in production as an in situ leach mine, in joint venture with the Kazakh state uranium producer, Kazatomprom; it sold 590 tonnes (1.3 million lbs.) U3O8 in the twelve months ended Oct. 31, 2006. In normal production, Akdala will produce 2.6 million lbs., with 1.8 million of that attributable to UrAsia, at an estimated US$10 per lb.

Akdala has a proven and probable reserve of 16.8 million tonnes grading 0.067% U3O8, with an inferred resource of about 10 million tonnes at 0.073%.

South Inkai and Kharassan are currently in development as in situ leach mines, and are both expected to go into production late this year. South Inkai is on the same land package as Akdala; construction of its recovery plant is under way and injection and drawing well holes were to be drilled this month.

The inferred resource at South Inkai is 58 million tonnes grading 0.049% U3O8. UrAsia is planning on production of 10.4 million lbs. annually from South Inkai, for a share of 7.3 million lbs. Scoping-level economic work on South Inkai studied production at 700 tonnes (1.6 million lbs.) U3O8 per year, concluding that capital costs would be US$25 million and operating costs US$8.49 per lb.

The current South Inkai plant is to have a 2,000-tonne-per-year capacity, with expansion to 4,000 tonnes planned.

Kharassan, in which Kazatomprom owns 30% and Energy Asia, a Kazakh-controlled company domiciled in the British Virgin Islands, 40%, is also in the South Kazakh oblast. UrAsia is attributing production of 2.3 million lbs. U3O8 to itself, implying annual production of 7.7 million lbs. Feasibility studies so far have only worked out the economics of 880 tonnes (1.9 million lbs.) per year total production, of which UrAsia’s share would be 580,000 lbs. That operation would have a capital cost of US$121 million.

SXR’s Honeymoon uranium project in South Australia is scheduled to go into production in early 2008, at about 400 tonnes (880,000 lbs.) U3O8 annually. Honeymoon has inferred resources of 1.2 million tonnes grading 0.24% U3O8. The project is fully permitted. About US$40 million is slated to be spent on Honeymoon between now and the end of 2009, and operating costs are estimated at US$14.30 per lb.

A feasibility study on its Dominion project in South Africa suggested production of 3.8 million lbs. annually. Mining started in January on a reserve of 18.5 million tonnes grading 0.077% U3O8 plus 1 gram gold per tonne. After byproduct credits for the gold, Dominion should produce at a cash cost of US$14.50 per lb. U3O8.

Another 219 million tonnes grading 0.038% U3O8 and 0.67 gram gold per tonne is Dominion’s inferred resource.

Both companies have sales contracts for anticipated production in hand, mainly priced near the market at the time of delivery, but with a floor price. Dominion is covered by sales contracts out to 2012 that speak for 4.7 million lbs. (2,130 tonnes) U3O8, about a quarter of mine production. UrAsia recently concluded a contract with a power utility in North America for 4 million lbs. (1,800 tonnes) and has now sold all of Akdala’s production for 2007 and part of its production from Akdala and South Inkai through to the end of 2011. (Kazatomprom will market the production from Kharassan.)

The new company would have US$389 million in cash and US$183 million in debt. While the assets held by SXR and UrAsia currently produce only 2.6 million lbs. U3O8, scheduled startups come to 11 million lbs. (5,000 tonnes) and expansions could bring that to 19 million lbs. (8,600 tonnes) by 2012.