SXR Uranium One to buy Energy Metals (June 11, 2007)

Anxious to add U.S. uranium assets to its rapidly expanding, global uranium empire, SXR Uranium One (SXR-T, SXR-J) has tabled a $1.5-billion, all-share, friendly offer to buy Vancouver-based uranium junior Energy Metals (EMC-T, EMU-N).

SXR is offering 1.15 shares for every Energy Metals share, representing a value of $19.12 per share based on closing prices in Toronto on June 1.

SXR notes that this is a 28% premium when taking into account the 20-day volume-weighted average prices of both companies’ shares on the TSX for the period ending May 17, the day before Energy Metals announced that it had entered into exclusive negotiations over its potential sale.

However, SXR’s official takeover offer was already priced into Energy Metals’ stock: the latter’s shares rose only 15 to $18.44 on heavy volume on June 4, the day SXR unveiled its firm bid. Meanwhile, SXR stock dropped 53 to $16.10 on the same day.

Other details of the bid: Energy Metals has agreed to pay a $55-million break fee to SXR; SXR has the right to match any competing offers; Energy Metals’ senior officers and directors will vote in favour of the deal, though their shares account for only 5% of the company; and the deal requires two-thirds approval from Energy Metals shareholders at a vote due to be held in July.

BMO Capital Markets and legal firms Fasken Martineau DuMoulin in Canada and Dorsey & Whitney in the U.S. are advising SXR in the deal, while Energy Metals’ advisors are GMP Securities and Stikeman Elliott.

The combined company, which will be renamed Uranium One, would be owned 79% and 21% by existing SXR and Energy Metals shareholders, respectively. It would have a fully diluted market capitalization of about US$7.8 billion, and a cash balance of US$678 million (including anticipated proceeds from in-the-money warrants and options).

For SXR, one key aspect of the deal is the retention of Energy Metals management: Energy Metals chairman William M. Sheriff will join the board of the expanded Uranium One; subject to shareholder approval, Energy Metals will be able to nominate a second non-Canadian director; and Energy Metals’ Paul Matysek will continue in a similar role in the U.S. as executive vice-president for the Americas.

Energy Metals holds a diverse portfolio of uranium deposits in the western U.S., with near-term, in situ-leach (ISL) production potential from projects in Texas and Wyoming. Uranium mined from the company’s deposits in Utah may be able to be processed at SXR’s newly acquired Shootaring uranium mill in the same state.

SXR anticipates that Energy Metals’ current assets could be producing at an annual rate of 8-10 million lbs. U3O8 by 2013 from six production centres.

In terms of publicly traded, pure-play uranium companies, SXR reckons that the enlarged company would boast the second-largest uranium reserve and resource base in the world (808 million lbs. U3O8), after Cameco (CCO-T, CCJ-N).

The expanded Uranium One will have two producing mines in Kazakhstan and South Africa, plus a pipeline of nine projects which the company says will have the potential to deliver year-on-year growth in production out to 2013.

In Kazakhstan, SXR owns 70% of the operating Akdala uranium mine and is developing the South Inkai and Kharasan uranium projects. SXR’s other advanced projects are the Dominion underground uranium mine project in South Africa and the Honeymoon ISL project in South Australia.

Roughly 70% of the expanded Uranium One’s uranium output would come from ISL mines. The expanded company would have 1,500 operational employees in South Africa, 250 in Kazakhstan, and 65 in the U.S.

SXR’s play for Energy Metals keeps intact the former’s reputation as the uranium subsector’s leading consolidator, coming as it does on the heels of its friendly acquisition of UrAsia Energy and last year’s purchase of U.S. Energy’s (USEG-Q) uranium assets.

“The key word is growth,” said Neal Froneman, SXR Uranium One’s president and CEO, of the company’s strategic direction during a conference call following the unveiling of the Energy Metals bid. “At this point, Uranium One is a strategically driven company, driven by both internal and external growth initiatives.”