Uranium Deals Prove Most Lucrative as Nuclear Demand Increases: Real M&A

Uranium takeovers are offering investors the biggest potential payoffs, less than a year after the partial meltdown of Japan’s Fukushima nuclear plant.

Hathor Exploration Ltd. (HAT), the owner of a uranium deposit in northern Saskatchewan, yesterday traded 8.4 percent above a bid from Rio Tinto Group that topped an offer from Cameco Corp. (CCO) That signals investors are now betting Hathor will extract the biggest price hike of any pending North American deal greater than $500 million, according to data compiled by Bloomberg. Kalahari Minerals Plc (KAH), which resumed talks with China Guangdong Nuclear Power Group after a takeover was derailed by Japan’s disaster, would now hand shareholders a higher return than the pre-Fukushima agreement, even with a 5 percent lower offer.

Hathor has become the target of a bidding war, while talks to buy Kalahari, which owns a 43 percent stake in the developer of what will be the world’s third-largest uranium mine, have reignited as energy demand surges in developing nations. China, India and Russia are still constructing or planning to build at least 125 nuclear reactors combined in the wake of the March 11 earthquake and tsunami that caused radiation leaks in Japan.

“The Chinese and other emerging economies are going to need uranium to power their nuclear reactors,” Rob Chang, an analyst for Versant Partners Inc. in Toronto, said in a telephone interview. “When you start seeing consolidation, it’s usually a sign of the bottom. Buyers, they’re trying to snap these assets up on the cheap. Investors would be well served.”

Today’s Trading

Kelsea Murray, a spokeswoman for Vancouver-based Hathor, didn’t respond to phone calls and e-mails seeking comment. Tony Shaffer, a spokesman for London-based Rio Tinto, declined to comment.

Hathor slipped 0.2 percent to C$4.49 in Toronto today, while Cameco fell 0.2 percent to C$20.88. Rio Tinto retreated 2.1 percent to 3,302.5 pence in London.

Cameco, the world’s biggest uranium producer, took its takeover offer for Hathor directly to shareholders after the companies couldn’t agree on a price. The proposal would give Hathor’s shareholders C$3.75 a share in cash, valuing the uranium explorer at C$520 million ($530 million), according to the Aug. 26 statement.

After investors pushed the stock as much as 12 percent above Cameco’s offer, Rio Tinto, the world’s second-largest mining company, trumped the proposal last week. Rio Tinto’s bid valued Hathor at C$4.15 a share in cash, or C$578 million, according to the Oct. 19 statement.

‘Have a Look’

“Investors thought that another offer would come and it did,” John Kinsey, a Toronto-based fund manager for Caldwell Securities Ltd., which oversees about C$1 billion in assets, said in a phone interview. “Rio had a look at it and said, ‘well, if Cameco wants it, maybe we should have a look at it.’”

While Hathor’s board unanimously recommended investors accept Rio Tinto’s offer, the stock closed yesterday at C$4.50 a share, 8.4 percent higher than the agreed price, signaling investors are still betting on a higher bid.

After the agreement with Rio Tinto was disclosed, Cameco said it was reviewing the announcement and would update shareholders “when appropriate” regarding its offer.

Murray Lyons, a spokesman for Cameco, today declined to comment beyond the Oct. 19 statement.

The companies are vying for control of Hathor’s Roughrider uranium deposit in Saskatchewan’s Athabasca Basin even after the worst atomic disaster since Chernobyl 25 years ago. Still, Hathor yesterday traded further above Rio Tinto’s offer than any other pending, agreed-upon deal greater than $500 million in North America, the data show.

Japan’s Earthquake

The magnitude-9 earthquake and subsequent tsunami that struck Japan on March 11 knocked out power and disabled back-up generators at Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant, leading to explosions and radiation leaks as cooling water boiled away.

While Japan was hit by rolling blackouts, then-Prime Minister Naoto Kan called for the nation to end its reliance on atomic energy and imposed the first mandatory power savings since the 1970s. Nuclear energy provided about 30 percent of Japan’s electricity before the crisis.

Kalahari of London received a takeover bid for 290 pence a share, or 698.2 million pounds ($1.1 billion), from Guangdong Nuclear, China’s second-largest reactor builder, only days before the disaster. The proposal was 17 percent higher than Kalahari’s 20-day trading average when it was announced.

Extract Resources

A purchase of Kalahari would give Guangdong Nuclear a 43 percent stake in Extract Resources Ltd. (EXT), which is developing the Husab uranium project in Namibia. The deposit is expected to produce 15 million pounds of uranium annually, which would make it the third-largest uranium mine in the world, according to Versant Partners’ Chang.

The Chinese “have recognized that nuclear power is a very important part of their energy strategy going forward,” Chang said. “Their plan is to just get direct interest in actual mines. Looking at the assets of Extract itself, it’s a fantastic asset and one of the best ones being developed.”

After the nuclear crisis slashed the value of Kalahari’s stake in Extract, Guangdong Nuclear tried to reduce its bid to 270 pence a share in May. The deal was called off after the U.K. Takeover Panel barred the company from lowering the price.

On Oct. 10, Kalahari said that discussions with the state- backed nuclear fuel producer had resumed and that there can be “no certainty as to the terms of any offer.”

‘Decades to Come’

“A company like Guangdong Nuclear isn’t looking at uranium over this year or next year or the near future,” Edward Sterck, a London-based analyst for BMO Capital Markets, said in a phone interview. “They’re looking at securing uranium for decades to come.”

Kalahari is likely to seek a price similar to the 290 pence a share originally offered, while Guangdong Nuclear may push for something lower, Sterck said. Representatives for Kalahari didn’t respond to a phone message or e-mail outside normal business hours. Guangdong Nuclear representatives couldn’t immediately be reached for comment.

Even if Guangdong Nuclear were to offer 5.2 percent less, or 275 pence a share, it would give shareholders a return of 17.5 percent to Kalahari’s 20-day trading average of 234 pence a share before today, data compiled by Bloomberg show. That would still top the 17.3 percent premium in the original bid.

Kalahari fell 1.7 percent to 237 pence today in London.

Uranium Prices

Japan’s nuclear crisis caused uranium to plunge 27 percent in three days to $49.99 per pound of U3O8, its tradable form. While prices extended their decline to as low as $48.75 on Aug. 30, they recovered 6.2 percent to $51.76 through yesterday, according to data compiled by Bloomberg.

The Global X Uranium ETF (URA) tumbled 61 percent after the earthquake through Oct. 3 before rebounding 30 percent as of yesterday, data compiled by Bloomberg show. That’s left the median company in the exchange-traded fund valued at 1.04 times net assets, down from 2.68 times on March 11, the data show.

A softening of Japan’s stance toward nuclear power may help bolster uranium prices. Yoshihiko Noda, who replaced Kan as the nation’s prime minister in August, said in a policy statement that the country will “guarantee the stable supply of power by utilizing nuclear plants after confirming their safety.”

“Most forecasts would suggest that even though we had a pretty severe event like Fukushima, there’s still growth expected in nuclear power going forward,” said BMO Capital’s Sterck. “The main growth drivers pre-Fukushima being China, Russia, very Southeast Asian countries and possibly India --they really haven’t changed.”

Additional Reactors

China, the world’s biggest energy user, has 27 nuclear reactors under construction and 51 more planned, according to the World Nuclear Association’s website. India has six under construction and 17 planned, while Russia is already building 10 with 14 more in the pipeline.

Of the 350 additional reactors that have been proposed worldwide, China accounts for 34 percent.

“Longer term there’s going to be demand” for nuclear power, Caldwell’s Kinsey said. “It’s not a matter of if, but when.”

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.

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