The Chinese Are Coming
Friday, April 11, 2008
The past few months have been very hard on the uranium
mining industry's equity investors. Many uranium companies' shares are trading
near 52-week lows after a handful of problems have crept up for many in the
industry. Now that the market seems to have priced in the mining problems at a
handful of companies, the fact that many drill results are going to take longer
than expected to be examined, and the fact that some companies' treasuries were
struck by the sub-prime CDOs which have ravaged many balance sheets, it appears
that a bottom may have been reached.
The low prices set by the uranium equities lately have
attracted the attention of a few prospective buyers. It seems that the Chinese
have finally arrived to the market- as some have expected for years now, much as
the French did during the American Revolution. That was a pivotal moment during
that war, and if the Chinese are serious about locking up supplies through
agreements and acquisitions, then this will be a watershed moment for the
uranium mining industry as a whole. This market has been waiting for a catalyst
to reverse the current trend, and that moment has potentially arrived as
Bloomberg has reported that Chinese officials with China National Nuclear “met
with their counterparts” at Cameco Corporation (CCJ). These same officials were
quoted as saying that they were looking for deals in the range from, “several
hundred million dollars to more than a billion.”
This is very positive news regarding the industry as a
whole, as the Chinese have finally “tipped” their hand, and should they go
through with a deal, will have shown the world that they really are serious
about building all of those nuclear power plants they have plans for. Most
likely the Chinese would look at a company like Uranium One (UUU.TO) as a
takeover target and to Cameco to fill supply needs. A small list of potential
candidates the Chinese could purchase is listed below, and all of these
companies fall within the range mentioned by the China National Nuclear
Potential Take-over Targets for the Chinese:
Market Capitalization (Rounded)
Denison Mines Ltd.
Forsys Metals Corp.
Mega Uranium Ltd.
Uranium One Inc.
Laramide Resources Ltd. (LAM.TO) and Paladin Energy Ltd. (PDN.TO)
would both be attractive targets for the Chinese, especially Paladin, however
they have already angered the Australians and these two companies are Australian
so there is probably not much chance for a deal to get done. Mega is interesting
as it is a very well diversified uranium explorer with properties in Australia
and Asia which would be enticing to the Chinese as it would supply them with a
pipeline of advanced projects close to home.
Cameco is also rumored to be a target for Rio Tinto, which
would be an easier combination for the companies as Canada would be less
hesitant to allow the merger, but our belief is that you must wait regarding
this rumor as Rio Tinto was rumored to want to dump many of their uranium assets
to increase returns for shareholders in order to spurn the BHP deal. We leave
the door open however, due to the fact that over history the best way to fend
off a hostile takeover is to engage in a large merger yourself.
It should be
interesting watching CCJ trade in the next few trading sessions, and if shares
can break through $40 and hold, it should become that much more interesting.
Theinvestar's Canadian Uranium Average has fallen to lows
not seen since its inception. Sadly we have had to lower the intersection of the
X and Y axis further and further down, however this could be a trend which may
soon reverse. We are seeing strength among companies which have been stuck at or
slightly above their 52-week lows (which incidently are also multi-year lows) as
well as a general up-tick among many of these equities. Volatility is creeping
up along with share volume, and from those who we talk to, we get the feeling
that many investors are coming back to the market at these depressed prices.
Our sources have told us repeatedly over the past few
months that many equities were ailing as a result of institutions liquidating
their positions. We will not mention any names (neither the companies whose
shares were sold off, or the institutions doing the selling) but the
institutions were liquidating for tax purposes as well as to raise cash when
times were ugly. Unmentioned was that they may have been window dressing, but
that is another likely culprit to the recent sell-off. One company stated that
some of the institutions had grown tired of holding their shares and had been
liquidating whenever possible, thus every rally in its shares was met with
another downturn due to selling. New M&A activity in the industry would help
bring these institutions back into the fold, but until there are any announced
we doubt there will be any large movements of capital back into the market from
history is any indication, we could be in for a 10-20% run over the next month
barring any further deterioration in the credit and financial markets.
One should take close note of Ur-Energy (URE.TO) which has
fallen to lows not seen for nearly two and a half years. The company is moving
forward with its Wyoming properties and should bring their first project online
in late 2009. It will be an ISR project and the company has indicated that their
applications, both on the Federal level and State, are working their way through
the review process. By our calculations the company has plenty of cash on hand
to bring their first project online and will have plenty of millions left over
afterwards to continue bringing projects online. Also of importance is the fact
that the company has over $75 million of cash in safe investments.
Much is placed
on hopes and dreams, but our feeling is that many investors will be pleasantly
surprised when URE signs supply contracts with utilities at prices at or above
current long-term prices. Their future mines are in the U.S. (safe
geopolitically) and in close proximity compared to other mines located around
the world- this demands a premium.
Should China deliver on their talk, we will see much higher
volatility in all things uranium. The Canadians will perform much better than
the Australian miners as the Australian government and regulators are peeved at
the way China has shown disregard for proper procedure as required by their
laws. They have already shot down one iron ore merger and the Prime Minister
himself supposedly told the Chinese to forget about getting involved with BHP-Billiton.
With BHP off-limits and other promising smaller companies, it appears that
Australia has moved to “protect” their various mining industries and this
includes uranium above all. Remember that Australia wants China to ship back all
spent nuclear fuel so that they can guarantee that it is not used in nuclear
weapons proliferation, so in our opinion uranium investing- although previously
allowed- may be closed to Chinese investment. The Canadians agreed in 2005 to
opening up some trade within the mining sector and uranium as well, so the
Chinese may see it as 'Open Season' and a window of opportunity to lock up
future supplies in order to continue their massive build-out and modernization
of their country.
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