Uranium Consolidation – More To Come?

With the commodity price bumping along the bottom, corporate players are beginning to make moves that will position them nicely for an expected recovery. It’s still early innings however. Be aware of this space!

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Currently, the primary theme impacting the world of mining and resources is that of financing – specifically, the lack thereof.  Consolidation in the uranium space is another emerging theme that is not attracting as much attention.

The price of uranium is low.  At $42/lb or so, the commodity trades well below its marginal cost which sits up in the $60 or $70 range.  Many believe that the depressed price is temporary and will rebound once the nuclear industry regains its footing after the Fukushima disaster in Japan.  Smart corporate players are beginning to position themselves for this rebound.

Back in mid-January, a seemingly opportunistic bid to takeout one of the industry’s more prospective junior players occurred.  ARMZ, a Russian state-owned uranium miner is in the process of acquiring Uranium One (TSX:UUU).  Around the same time, Fission Energy (TSXV:FIS) and Denison Mines (TSX:DML) struck a deal that is expected to close in April.  This Fission/Denison deal appears far more favourable to Fission shareholders than the Uranium One deal was to that company’s shareholders.

Details

For each share owned, Fission shareholders will receive .355 shares of Denison as well as 1 share of a newly created company that will hold some of Fission’s more prospective exploration projects, as well as $15 million in cash and Fission’s current management team.

In exchange for its shares, the big asset that Denison is getting back is Fission’s stake in a project known as Waterbury Lake.  This will leave Denison as the 60% owner of the project, with Korean utility Kepco owning the other 40%.  The Waterbury Lake project sits directly adjacent to Rio Tinto’s Roughrider project, a deposit that they acquired by purchasing Hathor Exploration (after outbidding Cameco) back in 2011 for more than $600 million.

Shareholders

Fission is effectively selling itself – just like Uranium One did.  The reason this deal is more appealing for Fission’s shareholders than the UUU deal is that FIS owners are receiving shares, not cash.  UUU owners are being taken out of their position with cash at potentially the worst time, given the low commodity price.

It is widely believed that with this more consolidated Waterbury Lake project in its stable, Denison is now itself a viable takeout candidate.  Fission shareholders stand to benefit from this.

In addition, one of the early stage assets (Patterson Lake South (PLS)) that will be 50% owned by the new exploration company that Fission shareholders will hold, has had tremendous initial drill results.  This transaction will potentially unlock the value embedded within this asset as the other owner of PLS, Alpha Mineral Resources (TSXV:AMW), has seen its shares climb by over 900% during the past 6 months because of the successful drill results.  Rather than being taken out of the game like UUU’s shareholders, Fission shareholders are still very much alive and kicking.

The Foolish Bottom Line

A decent size list of companies that could be next in line for a corporate transaction in the uranium space exists.  To help your search, there are two themes that you can focus on.  One, seek out management teams that have pulled off shareholder friendly transactions in the past.  The other, look for companies with substantial resource bases in politically stable areas.  Majors tend to favour these rare assets.

With its shareholder friendly deal to sell itself in place, Fission’s management easily qualifies for theme number one.  In addition, the team with whom Fission shares the promising Patterson Lake project with is none other than the team that led Hathor and the Roughrider project into its bidding war between Cameco and Rio Tinto.  Seemingly, current Fission shareholders are in good hands!

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

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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