ARMZ’s $1.3B offer for Uranium One too low, analysts say

Uranium One (UUU-T) shareholders should “demand higher compensation” from majority owner ARMZ, which is bidding $1.3 billion to take the company private, one analyst says.

Before markets opened Jan. 14, ARMZ — consisting of JSC Atomredmetzoloto and its affiliate, Effective Energy N.V. — offered to buy all of the shares it doesn’t already own of Uranium One for $2.86 per share in cash. The Russian state-owned miner controls 51.4% of the Toronto-based firm.

The offer price reflects a 32% premium to the 20-day, volume-weighted average price and a 19% premium over the Jan. 11 close of $2.41 per share, and values the company — which has six uranium mines in Kazakhstan, another in the U.S. and one in Australia — at $2.8 billion.

Uranium One’s board has unanimously recommended the transaction, saying it is “fair” based on the recommendation of its advisors, who have set a $2.62- to $3.16-per-share range as a reasonable value for the company.

But Raymond James analyst David Sadowski argues the $2.86-per-share price for Uranium One should be higher, and suggests shareholders vote against the proposal.

“Given our positive outlook on uranium prices, as well as Uranium One’s high exposure to spot prices and the quality of the company’s growing and low-operating-cost mines, we believe the price is too low for Uranium One,” he writes in a note.

Sadowski has a net asset value of $3.47 per share on the producer and believes a fair value would be within a $3.20- to $3.60-per-share range or higher.  

Rob Chang, an analyst at Cantor Fitzgerald Canada, takes a similar stance saying the market should call for a higher price for Uranium One, given a predicted deficit in uranium supply and demand through 2025.    

“Through this lens, the market may want a higher premium to take private one of only five publicly listed, pure-play uranium producers [and one of only three that trade at a market capitalization north of $1 billion],” he says. 

If the sale goes through, Chang notes only Cameco (CCO-T) and Paladin Energy (PDN-T) would be the other two public firms, with a market capitalization exceeding $1 billion.

Both analysts note the transaction is timely, as it comes before Uranium One shareholders have to vote on the costly acquisition of the remainder of Mantra Resources from ARMZ in June 2013. Uranium One owns 13.9% of Mantra and the Mkuju River project in Tanzania, where it’s the operator.

In an email, Sadowski explains that Mantra is a put or call agreement, where if exercised, Uranium One would have to buy the remainder of Mantra from ARMZ for roughly $1 billion, something he believes the company’s minority shareholders would have voted against come June.   

“With an agreement now in place for ARMZ to buy out the remainder of UUU, the Mantra put-call agreement would be rendered null [as ARMZ would be selling to itself]. ARMZ would thus avoid a potential ‘no’ vote by UUU minority shareholders, which may have resulted in poor optics for the company [and a potential asset writedown],” he says.

Depending on shareholder and regulatory approval, the proposed Uranium One transaction could be completed in the second quarter of 2013.

The deal requires approval from a majority of Uranium One shareholders, excluding ARMZ, as well as the support from two-thirds of all its shareholders.

Uranium One will mail out a information circular containing terms of the transaction in February, and hold a special meeting for security holders to vote on the business combination in March.

The deal contains a $45-million break fee and a non-solicitation clause on the part of Uranium One, with ARMZ able to match superior bids.

While chances of a competing bid may be slim, Chang believes that if Uranium One shareholders vote against the $2.86-per-share proposal, the current offer provides enough “wiggle room” for ARMZ to revise its offer.  

On the news, Uranium One gained 14.2%, or 35¢, to close at $2.76, on 59 million shares traded.