Russian deal hits Uranium One
Uranium One Inc. has lost its takeover premium and gained even greater country risk, a negative combination that sent its shares sharply lower yesterday.
The company’s shares fell 34¢, or 13.4% to $2.19, a day after the Vancouver-based company announced it had acquired stakes in two Southern Kazakhstan mines and US$610-million in cash from ARMZ — in return for giving a controlling stake of at least 51% to the Russian state-owned miner. JSC Atomredmetzoloto currently holds 23% of its outstanding common shares.
“It tells you people don’t trust the Russians,” said GMP Securities analyst David Wargo. He downgraded Uranium One from “focus buy” to “buy” and trimmed his price target to $3 from $4.20 as the takeover premium fades.
“They basically took over the company without taking it over,” Mr. Wargo said in an interview. “The Russians own 51% of the company, but they control 100% of the net asset value — all the value is in Kazakhstan. Now transparency, pricing and all of those issues become a big problem.”
He suggests investors take the special cash dividend of at least US$1.06 per share that will be paid when the deal closes and sit on the sidelines until there is more clarity on AMRZ’s plans.
Mr. Wargo said the deal confirms the thesis that Kazakhstan is within the historic sphere of Russian influence, and it will continue to control as much of the region’s resource potential as possible.
The analyst also noted that while ARMZ has an 18-month standstill on acquiring Uranium One, it will likely buy the remaining stake once the agreement lapses.
He continues to believe Uranium One’s outlook remains positive, particularly since the company is now officially a Russian state enterprise.
However, Mr. Wargo doesn’t see much upside left in the stock other than the potential to trade alongside higher uranium prices.
Simon Tonkin, analyst with Thomas Weisel Partners, downgraded Uranium One from “overweight” to “market weight” and cut his price target to $3 from $3.75. He said the relinquishment of control removes any takeover premium and ARMZ’s strategy to use Uranium One as a platform for international growth outside the Russian Federation presents additional risk.
“Growing too quickly or paying too much for assets could result in a negative outcome for shareholders,” Mr. Tonkin told clients.
The analyst also believes that Uranium One’s country risk is now higher, noting that Kazakhstan ranked 57 out of 68 in the 2008 Fraser Institute survey of mining investment climates. He pointed out that expropriation of assets is always a threat and there are instances where Kazakhstan has allegedly taken control of resource assets or reneged on agreements.
At first glance, the transaction appears to be fair financially and should put Uranium One among the world’s top five producers and likely make it the lowest-cost miner of the metal, according to Paradigm Capital analyst David Davidson.
However, he noted that with production of about 20 million pounds, more than 80% will come from Kazakhstan, “a prolific uranium-producing area but a jurisdiction often clouded by shifts in fiscal and political policies.”
Mr. Davidson is also concerned about ARMZ’s control position as it attempts to become one of the world’s leading uranium producers.
“Now that it appears they will have control and significant influence on the board we have concerns that future transactions may not be as fundamentally sound as the current one,” Mr. Davidson said in a research note. “Russia has its fingers all over the uranium space and ARMZ is the aggressive and visible arm of the international policy.”
It has made uranium-related deals with Mongolia and Namibia in the past year, and is a counterparty to the current highly enriched uranium agreement set to expire at the end of 2013. Access to uranium has become much more strategically important given the next generation of nuclear reactors being built by such players as China, India and developing nations.
Mr. Davidson also noted that some will view the dividend as an incentive for shareholders to approve the deal in late August, while the acquisition will be seen as a great deal if the assets live up to expectations.
While these downgrades and comments contributed to the sell-off, many on the Street remain confident in Uranium One’s prospects. Raymond James left its $3.50 target price and “outperform” rating unchanged, Dundee Securities maintained its $4.20 target and “buy” recommendation, and UBS stuck with its “buy” rating but trimmed its share price forecast by 20¢ to $3.60.
Read more: http://www.financialpost.com/Russian+deal+hits+Uranium/3134605/story.html#ixzz0qVN66X3r
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