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An Opportunistic Bid For Uranium One

Canadian headquartered Uranium One (TSX:UUU) announced on Monday that it received a go-private offer from ARMZ, a Russian state-owned uranium miner.  The bid came through at $2.86 per share, a 32% premium to the 20-day volume-weighted average price  and a 55% premium to where UUU was trading just a month ago.   On the surface, these figures make it appear that ARMZ is paying a fair premium, and UUU shareholders should be happy.

ARMZ already owns 51.4% of Uranium One.  Along with ARMZ’s majority ownership, if we consider that uranium, with a spot price of $42.25, is currently bumping along at lows not seen since the financial crisis of 2009, this deal begins to take on an opportunistic hue.

The Fukushima disaster in Japan has wreaked havoc with the global nuclear industry, sending politicians scrambling to review their policies on this energy source.  As reviews conclude and the dust settles, the future of nuclear power, and uranium, remains very bright.  Reactors are being constructed at a staggering pace, especially in China, and the current spot rate is too low for many producers to profit from supplying uranium to these new reactors.

In the five years prior to Fukushima, uranium traded at an average price of $61/lb.  Over this same period, Uranium One traded at an average price of $6.56/share — a far cry from the ARMZ takeout offer!  If the majority of planned nuclear reactors are built, it wouldn’t be a stretch to see uranium prices average $60 or more over the next five to ten years.  In addition, UUU has some of the most attractive assets in the business, sporting an average production cost of about $19/lb.  This compares favourably to the industry’s marginal cost of $50-$60/lb.  Bottom line, Uranium One should be a big winner in a more normalized uranium pricing environment.

The deal requires 66.7% of shareholders to vote in favour. Given that UUU shares currently trade slightly below the bid, the market is predicting that the deal will clear as it currently stands.  With the next largest shareholder owning just 5% of the company, it is unlikely that there will be enough naysayers to prevent the transaction from occurring.  If shareholders are lucky, they might be able to squeeze some more pennies out of ARMZ, but that’s probably the extent of it.

If you are a UUU shareholder, depending on your cost base, you may be wise to hold on to your shares until the deal closes and receive the final takeover price.  This is not typically the best move in these types of situations, but the probability of this deal falling through is very small, and there is no point in selling your shares into the market at a price below the bid.  Plus, you’ll have to pay a commission if you sell now.

Your best case scenario, in my mind, is holding onto your shares and hoping the deal does in fact fall through.  Your upside can be expected to be much more significant several years from now, when Fukushima has drifted to the back of everyone’s memory and nuclear is once again considered a go-to energy source for the coming century.

 

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Fool contributor Iain Butler does not own shares in any of the companies mentioned in this post.  The Motley Fool has no positions in the stocks mentioned above.

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