VANCOUVER — Lukas Lundin’s Denison Mines (TSX: DML; NYSE-MKT: DNN) and exploration powerhouse Fission Uranium (TSX: FCU; US-OTC: FCUUF) have agreed on a deal that could create the second-largest pure uranium miner in the world, based on market capitalization.
The companies have been major players amid a renewed exploration rush in Saskatchewan’s Athabasca basin, but downturns in nuclear markets had taken a toll on stock valuations. Amid struggling uranium prices the two management teams have labelled the move a protective measure that will leave merged entity well positioned for a market recovery.
Under the deal, Fission shareholders will receive 1.26 shares in Denison, plus 1¢ in cash for each share held, which values Fission at $483 million, or $1.25 per share. Denison and Fission shareholders would split ownership in the post-merger, rebranded Denison Energy , which would start life with a $900-million market value.
The transaction offers Fission investors an 18% premium, which is below earlier expectations of what the company’s landmark Patterson Lake South (PLS) project and world-class Triple R discovery would fetch in a bidding war that never materialized.
“I think we’re fighting against a perception from Fission shareholders that we were waiting on this big offer from a major uranium producer, and so I’ve been talking all day about why exactly we did this deal,” Fission CEO Dev Randhawa commented during an interview. “I realize now that this is about two things: It’s a great defensive move right now, and I believe it will end up being a great offensive move in the future.
“We could have fallen to a predatory bid at a slightly higher premium, but we’d have lost PLS and all the great work our team has done,”Randhawa said. “What we’re doing here is protecting the asset and putting it into a vehicle with other quality assets under the oversight of an accomplished, joint exploration team. So no one can attack us and we also have a powerful shareholder in Lukas Lundin, who can defend against any hostile moves.”
The senior executive team of the new Denison will draw from both companies. Lundin will be non-executive chairman, while Randhawa will be CEO. Ross McElroy will retain the president and chief operating officer positions he holds with Fission.
Randhawa expressed frustration over the state of equity markets in light of Fission’s stock performance to start the year. The company has been active at PLS, where it is in the midst of a US$15-million exploration program that includes over 20,000 metres of drilling.
Fission released an impressive maiden resource at on the newly minted Triple R in early January. The deposit hosts 2.3 million indicated tonnes grading 1.6% uranium oxide (U3O8) for 80 million contained lb. Inferred resources include 901,000 tonnes grading 1.3% U3O8 for 26 million contained lb.
The result catapulted Triple R into the big leagues. The deposit now ranks third in the Athabasca in terms of in-situ uranium, behind only Cameco’s McArthur River and Cigar Lake mines.
And the company’s discovery rate hasn’t slowed down. In March, Fission announced land-based drill hole 15-352 located 500 metres west of Triple R, cutting 28.32% U3O8 over 12 metres. The discovery could be an expansion of the R600W zone.
“We were out there cranking out great holes and discovering new zones, and we’re at the same price as we were before our resource statement,” Randhawa lamented. “I came to the realization that the only thing that could really help us was an improvement in the general uranium industry. Denison tends to do better than its peers when positive news emerges in the uranium business, and that told me that investors view it as the preferred stock. The question then became: ‘How can we make this happen?’ That’s when talks really got serious.”
The transaction offers Fission safety and exposure to PLS’ inevitable growth, but it’s a major win for Denison, which saw its stock languish in the first half of 2014. The company has advanced a series of assets in the eastern Athabasca, whereas PLS sits on the basin’s southwestern margin.
In an ironic twist Denison had picked up a 60% interest in the Waterbury Lake project — next to Rio Tinto’s (NYSE: RIO; LSE: RIO) Roughrider uranium deposit — from Fission back in early 2013 for $70 million. At the time Randhawa negotiated a spin-out that included the PLS asset.
Denison’s most active asset is its 60% interest in the Wheeler River project in northern Saskatchewan. Cameco (TSX: CCO; NYSE: CCJ) holds a 30% stake in the project, while Japan-based JCU Exploration holds the rest. Wheeler hosts the Phoenix and Gryphon zones, and boasts indicated resources of 166,400 tonnes grading 19.1% U3O8 for 70.2 million contained lb.
In June Denison announced it would drill 24,000 metres at Wheeler to expand Phoenix and establish a maiden resource at Gryphon, while targeting more discoveries on the property. Denison also has interest in the Midwest, McClean Lake, Waterbury Lake, Mann Lake and Wolly projects, as well as a 22.5% ownership interest in the McClean Lake mill.
“We started looking at the market capitalization of the three or four entities in the Athabasca basin and determined we’re basically just fighting among ourselves,” commented Denison executive chairman Ron Hochstein.
“The market tends to just shift in between the different vehicles, and nobody was really seeing gains. Now we have the second-largest uranium company in terms of market capitalization and that gives us a lot more flexibility, and so many more options in terms of development, cash flow and financing. I think it was the right time to do it because the market’s going to take off, and this will be the vehicle with the most torque,” he added.
The combined company will control 430 sq. km across the Athabasca basin and have enough flow-through capital to fund its exploration campaigns through early 2016. In May Denison closed a $15-million financing, wherein it issued 12 million flow-through shares priced at $1.25 each. Meanwhile, Fission completed a $17.4-million financing in early April that included 11.6 million flow-through shares priced at $1.50 each.
“From our side the shareholder feedback has been positive, and people tend to like the leverage Triple R provides. We do have to explain a little bit why we’re diversifying into the western Athabasca, since we were traditionally eastern focused. It’s a fantastic asset, and diversity is a great thing for us,” Hochstein said.
Denison has traded within a 52-week window of 83¢ to 86¢, and dropped 27% to start the year en route to an 86¢-per-share close at press time. The company has 506 million shares outstanding for a $436-million market capitalization.
Fission has moved within a 52-week range of 65¢ to $1.38, and rose 13% over the past six months en route to a $1.02-per-share close at press time. The company has 386 million shares outstanding for a $394-million market capitalization.
After closing the arrangement, Denison Energy will complete a two-for-one share rollback.
“Retail investors tend took look at things in a portfolio-centric way, and ask us: ‘Why are you selling so low?’ Well, we’re not selling. We’re getting equity in a much stronger company, and we’re merging. Also look at uranium prices. You can’t expect a company with our market capitalization to be overly influenced by anything but the overall uranium market,” Randhawa said.
“It also prepares us on the offensive side when we do transition into a bull market. We’ve got better manage
ment, a better team, superior institutional shareholders, a superior group of assets and cash flow from our mill. This makes investing in us simpler, and it gives potential investors great uranium exposure in a higher-quality vehicle,” he added.
Scotia Capital analyst Ben Isaacson has a “sector outperform” rating on Denison, and a $1.75 one-year price target.
“With two of the world’s best uranium projects now in the same portfolio [Patterson Lake South and Wheeler River], among other prospects, we believe [Denison Energy] should become the go-to name for those looking for uranium project torque on an eventual market recovery,” Isaacson wrote in early July.
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