Takeovers, Dogs & Potential - it's all in black and white below.
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BT
Reaching For The Summit
Source: FN Arena News - April 12 2007
By Greg Peel
There are two interesting points to note about the deal announced yesterday between French company Areva and local uranium resource owner Summit Resources (SMM): (1) Areva is not a uranium miner; (2) the price paid for a 9% stake implies a resource valuation for Summit's Valhalla/Skal project in excess of US$30/lb.
Yesterday Summit announced that Areva had agreed to subscribe for 9% of Summit at $6.20 per share, with an option to subscribe for a further 9% at $7.20 per share within 2-6 months. This averages to 18% at $6.75 or a 31% premium over Summit's closing price of April 5. This is a typical takeover premium.
Such a premium was also implicit in the earlier hostile takeover offer made for Summit by Paladin Resources (PDN). Implicit, as Paladin's bid offer was for a scrip exchange of one Paladin share for every 2.04 Summit shares. At yesterday's prices, this implies a value of $5.19 per share.
Summit's board had staunchly rejected the Paladin offer, and to date less than 1% of Summit shareholders have caved in. The offer is unconditional and as such still stands, but clearly Paladin has to reconsider its position.
Paladin shareholders had not initially warmed to the scrip offer for Summit, being as it was potentially 16% dilutive. The quandary though is that Paladin may end up with 50% of Valhalla – the significant resource in Queensland – and to really extract the value would prefer 100%. Even the 50% is unconfirmed, as Paladin has attempted to acquire this through its acquisition last year of Valhalla Resources, and, cutting a long story short, Summit is challenging Paladin's right to the Valhalla project in court as we speak. To win the Valhalla resource now, Paladin may really have to go to town in order to usurp Areva.
The Areva deal involves cash – potentially close to $300m – which is a significant boost to Summit as it prepares to enter production. Whether or not Summit can actually enter production is still not set in stone, as Queensland premier Peter Beattie continues to wax and wane as to whether he will allow uranium mining in the state or whether he will meekly capitulate to Queensland's powerful coal mining unions. It's not hard to see where Areva's money lies.
Paladin, on the other hand, is only offering its own scrip. Having only just commenced production at its Namibian mines, Paladin does not have the cash to spend. Paladin has been able to make what was an impressive scrip offer (up to yesterday) because its own share price has significantly appreciated over the last year.
All these shenanigans are occurring in the context of last week's biggest ever single percentage jump in the price of uranium. When 100,000 pounds sold for US$113/lb in Texas, local uranium shares went for a run again. Few gobs, however, were actually smacked by the high price, as it is well known that there are plenty of buyers and very few sellers. And the sellers are in no rush.
Just how high can the uranium price go? This question was discussed at length in "Is There Value Left In The Uranium Sector" (Sell&Buyology; 27/03/07). In short, analysts are expecting a significant increase in supply in the next five years. However, there is also a rush to build new reactors, and the great bulk of a reactor's uranium consumption occurs on start-up. As reactors also cost a great deal to build, the actual cost of that uranium is not a huge percentage of the price. In other words, desperate energy companies could potentially afford to pay more yet.
But then as overall cost of nuclear energy spirals upward, at what point does nuclear start to lose its appeal as an alternative energy source when compared to other clean/green sources that are rapidly under development as well? That one's not easy.
One way for nuclear energy companies to overcome the problem of a spiralling uranium price is to stop buying the processed ore and start buying the stuff in the ground. In other words, buy uranium mines. And that is exactly the direction Areva has moved in with respect to its Summit deal.
As noted at the outset, Areva is not a uranium miner, it is an energy company.
Areva provides "reliable technological solutions" for carbon-free power generation, electricity transmission and distribution. It has manufacturing facilities in 41 countries and a sales network in 100. Areva is the world leader in nuclear power. France has the highest percentage of nuclear power generation in the world.
As part of the deal, Areva will provide technical assistance to Summit in the development of Valhalla and in further exploration. It will also retain the right to market two-thirds of Summit's uranium.
That an energy company should be dealing with Summit, as opposed to uranium miner Paladin, opens up the wealth of possibility that not only are Australian uranium resources valued by competing global uranium miners, they are a target for energy companies trying to vertically integrate their way out of the current uranium ore scramble. While Areva is clearly one of the biggies, think what might happen if the Chinese get started.
Also notable in the Summit deal was the implied resource value in excess of US$30/lb. FNArena has constantly made reference recently to the SXR Uranium One/UrAsia merger, which also valued proven uranium resources at over US$30/lb. By contrast, Australian uranium resources such as ERA's (ERA) Ranger had been valued at US$16/lb. Paladin's current resource valuation, according to Macquarie analysts, is US$23/lb. This again raises the question of whether all Australian uranium resources are in need of further re-rating.
If you revalue Paladin on this basis it should be worth $15-17 per share. However, Macquarie analysts are quick to point out that the implied resource value is based off a mere 9% minority holding at $6.20 (implying US$30/lb) or 18% at $6.75 (implying US$35/lb), not the whole box and dice. Furthermore, within the valuation is the right to market two-thirds of Summit's uranium, which is itself a significant money-spinner.
The case of what Paladin should be valued at is thus a tough one. If Paladin is forced to up its bid for Summit with a juicier scrip offer this will imply even further dilution to the Paladin share price. And there is still no guarantee Paladin will secure even 50% of Valhalla, let alone 100%. On the other hand, consolidation in the uranium market – involving both producers and users – will underpin all uranium stocks. And then there is that resource value consideration.
As far as all Australian uranium hopefuls are concerned, investors must again be wary of just what real potential a local miner has, and just how much the share price has appreciated already. (If the Paladin share price can appreciate another 50%, that's a great result. But it has appreciated more than 1000% in two years, and that sort of upside has now past). Uranium analyst Resource Capital Research publishes a quarterly review of the sector. Its stock recommendations appeared in "Uranium Could Hit US$140/lb Next Year, Juniors Are Enjoying The Ride" (Commodities; 29/03/07).
In a nutshell, RCR advises looking for uranium companies that show the following characteristics: they are unhedged; they have exploration upside; they have projects that are already in some way advanced (eg a JORC resource); they have actual takeover potential.
Investment advisor Far East Capital also follows the uranium sector closely and produces regular reviews. Far East's Warwick Grigor warns that 90% of uranium companies are not yet able to say they actually have a "mineable proposition". Of those that can, many, in Grigor's view, are already overvalued. These include Toro Energy (TOE), Marathon Resources (MTN), Arafura Resources (ARU), Berkeley Resources (BKY) and…ahem…Summit Resources (a claim made before yesterday).
Grigor prefers Australian listed stocks showing prospects offshore (and not forgetting that uranium mining in Australia is still up in the air). He suggests Monaro Mining (MRO) which has prospects in Kyrgyzstan, Uranium King (UKL) (Nevada and New Mexico) and Contact Resources (CTS) (Peru).
There is clearly no end yet to the uranium story just yet. Once again, investors are advised to know the stocks that they are backing. While blind euphoria may still be ruling the day, you don't want to be stuck without a proper chair when the music stops.