Russian state-owned miner JSC Atomredmetzoloto (ARMZ) has signed a deal to acquire a majority stake in Uranium One (UUU-T) in exchange for its interest in two uranium mines in southern Kazakhstan and US$610 million in cash.
Uranium One will issue 356 million shares to ARMZ, bringing its interest in Uranium One from 23.1% to at least 51%.
Uranium One would acquire a 50% interest in the Akbastau mine and a 49.67% interest in the Zarechnoye mine from ARMZ, boosting its 2011 total production by 30% to 10.5 million lbs. U3O8.
Uranium One chief executive Jean Nortier said the two new mines would make Uranium One a top five uranium producer next year and allow the company to keep costs under US$20 per lb. U3O8.
“We’ve been looking for opportunities that would immediately add production to Uranium One, or for assets that could be in production within the next few years,” Nortier said during a conference call on June 8. “We’ve also been looking for opportunities — that are operating — with total costs plus capital requirements of less than US$40 per tonne. Opportunities such as these are extremely scarce.”
Under the deal, Uranium One will issue a dividend of at least US$1.06 per share to its minority shareholders other than ARMZ. This transaction also assumes that Japan Uranium Management (JUMI) would exercise its right of repurchase under the terms of its $270-million convertible debenture, which would be triggered by the transaction.
If the deal goes through as planned, Uranium One would be left with US$331 million in cash and investments, down from US$458 million.
Analysts say that the deal is positive for Uranium One because it’s acquiring the mines for a bargain but note that investors may question why Uranium One has given up control to ARMZ, which is a subsidiary of Rosatom, a state corporation that controls the Russian government’s nuclear activities.
“Investor eyebrows may go up,” writes David Talbot, a senior analyst at Dundee Securities, in a note to clients. “The deal will likely remove most takeover premium from the stock while recognizing that ARMZ may ultimately scoop the rest at a later date.”
During the conference call, Adam Schatzker, a mining analyst at RBC Capital Markets, asked ARMZ director general Vadim Zhivov why the corporation didn’t go for total control.
“We would like to use Uranium One as a global platform for future growth and all the M&A activity we envision on the basis of Uranium One,” Zhivov said.
Zhivov added that with the Russian government’s plan to build eight nuclear reactors between now and 2018 and commitments to other countries, it’s Rosatom’s plan to become fully diversified.
“Is it proper to say that Rosatom is using uranium as part of its sales strategy to link the two, to compete for instance, with the Koreans and Areva?” Schatzker asked.
“Yes, that’s the strategy, exactly,” Zhivov replied.
Raymond James analyst Bart Jaworski speculates that ARMZ’s plan is to set up an indirect platform for future acquisitions outside of Russia and Kazakhstan. “Or perhaps as a conduit to more effectively sell uranium to the U.S.,” he writes in a note to clients.
Talbot of Dundee Securities gave the two mines a net asset value of $734 million combined, much higher than the estimated $276 million he says Uranium One may end up paying for them. “A strong valuation appears to partially make up for hefty dilution,” he says.
The deal will be good for Uranium One says Talbot because US$610 million in cash improves the balance sheet by eliminating some debt and providing a special dividend of US$1.06 per share to Uranium One’s minority shareholders.
“The company’s value is not destroyed and our target price is unchanged,” Talbot says.
Talbot’s target price is $4.20 per share, while Jaworski’s is $3.50 per share.
“We continue to recommend Uranium One on recent share price weakness, low-cost production and dominance in the industry,” Jaworski says.
Jaworski also noted that the US$610 million coming in ultimately results in a net cash outflow of about US$140 million after the estimated US$479 in dividends and the $270-million debenture payout to JUMI. He says these payments will be handled easily because the company had US$458 million in cash at the end of the first quarter.
Production at Akbastau began in 2009 and in 2010 the mine is estimated to churn out 1.7 million lbs. U3O8, increasing to 7.8 million lbs. per year by 2016. The Zaraechnoye mine came into production in 2007. This year, it is slated to produce 1.6 million lbs. U3O8, climbing to 2.6 million lbs. per year by 2012.
This isn’t the first deal Uranium One has done with ARMZ. Late last year, ARMZ acquired a 19.9% interest in Uranium One in a deal that gave the Canadian miner a 50% interest in the Karatu uranium mine in Kazakhstan.
With the recent deal, shares outstanding for Uranium One would climb to 943.5 million from 587.5 million and the market capitalization would increase to US$2.5 billion from US$1.5 billion. Total debt would decrease to US$460 million from US$716 million.
Uranium One shares were down 9¢ to $2.53 in Toronto on June 8, on a trading volume of 10.2 million shares.
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