Energy Fuels kicks off 2015 with bid for Uranerz

In what will be its fifth acquisition since February 2012, conventional uranium producer Energy Fuels (TSX: EFR; NYSE-MKT: UUUU) hopes to pick up in-situ recovery (ISR) uranium producer Uranerz Energy (TSX: URZ; NYSE-MKT: URZ) in a friendly all-stock deal worth $179 million.

If approved, the transaction would transform Energy Fuels into the second-largest integrated uranium producer in the U.S. Its wholly owned White Mesa uranium mill in Utah — the only licensed and operating conventional uranium mill in the U.S. — already accounts for 20% of all uranium production in the country, and Uranerz Energy became the newest uranium producer in the U.S. in April 2014 when its Nichols Ranch in-situ recovery (ISR) mine in Wyoming started production.  

A combination of the two companies’ pipeline of development projects would also pair conventional assets — such as the Canyon mine in Arizona, the Sheep Mountain project in Wyoming, the Henry Mountains project in Utah and the Roca Honda project in New Mexico — with ISR assets such as the Jane Dough, Hank, West North Butte and Reno Creek projects.

Energy Fuels’ president and CEO Stephen Antony said in a prepared statement that by adding Uranerz to the company’s “corporate umbrella,” it was “creating a multi-source uranium production platform that is better positioned to respond to the dynamic and volatile nature of the uranium market.”

Antony also noted that Wyoming has been an area of focus for the company, and that the team at Uranerz “has done an exceptional job of exploring, permitting, building and operating their Nichols Ranch project.”

It took Uranerz nearly seven years to advance Nichols Ranch into production, and it is one of only two companies to have received permits to mine uranium in Wyoming in the last eight years, according to the company.

Under the proposed takeover, Uranerz shareholders would receive 0.255 of a share of Energy Fuels for each share of Uranerz Energy, a 37% premium to its closing price in New York on Jan. 2 and a 46% premium to its 20-day volume-weighted average price.

Once the transaction closes Uranerz shareholders would own 55% of the combined company, with the remaining 45% owned by shareholders of Energy Fuels.

The combined entity would have six long-term sales contracts extending to 2020, with contracted sales in 2015 expected to be 1 million lb. uranium at US$58 per lb. — a 63% premium above the current spot price of US$35.50 per lb.

The long-term contracts “should provide … downside protection in the event of no recovery in the uranium market,” analysts Jeffrey Wright and Jake Sekelsky of H.C. Wainwright & Co. in New York commented in a research note, adding that they expect uranium spot prices will improve from current levels and that “with the uranium sector showing signs of recovery, the timing of this transaction could not have been better.”

Other analysts such as Daniel Scott and Bryan Bergin of Cowen and Co. say they expect “management teams have been actively assessing combinations” given “the depressed state of the global uranium market,” and argue that the deal “could jump-start a sector that is ripe for further M&A.” They also note that the larger scale of the combined entity would give it “an improved competitive position globally” and could serve as “a more attractive investment vehicle.”

Analysts at Dundee Capital Markets expressed more reservations about the combination from the perspective of Energy Fuels’ shareholders.

David Talbot and Aaron Salz concede the deal will create a “stronger company,” but argue that it “comes at a cost to existing shareholders” and that the merger “lacks operational synergies.”

They write in a research note that “given dilution to Energy Fuels’ shareholders, and, in our view, few operational synergies, we aren’t sold on this deal yet from an Energy Fuels perspective. Average operating costs are likely to drop only because ISR is relatively cheaper than existing production, [and] while Energy Fuels remains a producer and maintains a corresponding premium valuation … its shareholders give up control, owning only 45% pro forma and accepting potential for up to 35% dilution to net asset value upon close.”

As for Uranerz, the deal offers a “generous premium” and the company can “use Energy Fuels’ balance sheet” to ramp up its Nichols Ranch mine to full capacity “while selling previously unhedged production into Energy Fuels’ contracts.” It also “brings a couple larger projects” into Uranerz’s pipeline and “decreases the risk of production halts based on the need to perfectly time the permitting of its numerous ISR projects.”

In an email to The Northern Miner, Raymond Goldie, a senior mining analyst at Salman Partners, says that while he can’t disagree with what the Dundee analysts say regarding the steep premium and lack of operational synergies, “consolidation makes sense in Canadian markets because equity investors prefer bigger, more liquid plays.”

If shareholders approve the transaction, the enlarged Energy Fuels will be led by its existing management team, and Uranerz will nominate three people to the board of directors, including Dennis Higgs, Uranerz’s current executive chairman.

In addition to Energy Fuels’ White Mesa mill, it has a producing mine, mines on standby and mineral properties in various stages of permitting. Nichols Ranch is Uranerz’ first property in the Powder River Basin of Wyoming to become a mine, but six of the company’s 30 other properties have National Instrument 43-101 compliant resources and could become satellite deposits.

Uranerz sends uranium-loaded resin from its Nichols Ranch mine to Cameco’s (TSX: CCO; NYSE: CCJ) Smith Ranch uranium-conversion facility, 40 km away, for processing into dried and drummed uranium concentrates based on a toll processing agreement between the two companies. 

The ISR uranium operation involves groundwater — which is fortified with oxygen, sodium bicarbonate and carbon dioxide — and circulated through the sandstone-hosted deposit by injection and recovery wells. The uranium is extracted from the groundwater using ion-exchange technology.

News of the deal on Jan. 5 sent shares of Energy Fuels down 14.6%, or $1.07, to close at $6.25, while shares of Uranerz jumped 4.5%, or 6¢, to $1.39. 

Dundee Capital has a “buy” target rating on Energy Fuels and a $9-per-share price target.