Rio’s Uranium Gambit in Canada Seen Enriching Denison Bid

Rio Tinto Group’s ambition to extract uranium in Canada is opening the door for Denison Mines Corp. to reap the industry’s richest takeover offer.

Denison, which owns deposits in Saskatchewan’s Athabasca Basin, rose 29 percent last week after the sale of its U.S. unit sparked speculation it was positioning itself to be acquired. The decision came three months after Rio secured a toehold in the area by outbidding Cameco Corp., the world’s largest uranium producer, with a $642 million offer for Hathor Exploration Ltd.

While Rio paid the biggest premium of any uranium takeover, BMO Capital Markets Ltd. says it needs more assets to justify the investment in Hathor. Denison would double Rio’s resources in the basin, where a fifth of the world’s uranium is produced. Cameco, which has a stake in Denison’s largest development, may also try to keep Rio from expanding in a region it has explored for decades, Versant Partners Inc. said. A bidding contest could make Denison costlier than Hathor, which extracted a 65 percent premium, according to Versant and data compiled by Bloomberg.

“Both companies would be likely to look at it, and if one does, then the other one is certainly going to be kicking the tires,” said Robert Gill, a Toronto-based money manager at Aston Hill Financial Inc., which oversees $5.7 billion. He runs the Aston Hill Global Uranium Fund, which owns shares of Denison and Cameco. “With the possibility of Denison being available, if Rio was able to buy that, that might really provoke some anger in the Cameco camp, like ‘Hey, this is my backyard and we don’t want you guys expanding here.’”

‘Looking at Opportunities’

Illtud Harri, a spokesman at London-based Rio, declined to comment on whether the world’s third-largest mining company has approached Denison about an acquisition or considered buying it.

Gord Struthers, a spokesman for Cameco, said the Saskatoon, Saskatchewan-based mining company is “looking at opportunities in the Athabasca Basin and elsewhere all the time.”

He declined to comment on whether Cameco was interested in Denison or had approached it about an acquisition.

Denison Chief Executive Officer Ronald Hochstein said in a telephone interview that selling the U.S. assets was intended to boost shareholder returns and not to create a more attractive takeover candidate. The Toronto-based company will still evaluate whether to sell more than just the U.S. assets, he said.

“Everything’s for sale at a price,” Hochstein said, adding that Rio and Cameco would be among the most likely buyers if Denison put itself up for sale. He declined to comment on whether Denison had been approached by either company.

Geological Corridor

Denison has undeveloped uranium deposits in Canada, Zambia and Mongolia. Denison’s resources in Saskatchewan hold about 50 million pounds of uranium, or more than 40 percent of the company’s total of about 118 million pounds.

The Wheeler River claim, Denison’s largest in Canada, is located on the eastern edge of the Athabasca Basin in northeastern Saskatchewan. The site is in the same geological corridor as Cameco’s McArthur River and Cigar Lake mines, which sit atop two of the world’s richest uranium deposits.

Before last week’s rebound, shares of Denison had lost more than half their value after a partial meltdown in Japan 13 months ago caused the worst atomic disaster since Chernobyl and pushed the price of uranium down by almost 30 percent.

Denison then said on April 16 that it agreed to sell all of its U.S. mining assets to Energy Fuels Inc., disposing a unit that was unprofitable last year and less attractive to potential buyers wanting to expand in the Athabasca Basin, according to Curtis Watkins, an analyst at New York-based Water Island Capital LLC, which oversees more than $3 billion and owns shares of Denison in its Arbitrage Event Driven Fund.

Logical Target

The U.S. operations had an operating loss of about $11 million in 2011, in addition to a charge of $32.6 million after Denison said it overpaid for an acquisition in Utah, according to the company’s filings and data compiled by Bloomberg.

“If there was an acquirer that was interested in the company as a whole, the U.S. assets were probably a big detractor of value,” Watkins said in a telephone interview. The U.S. sale “isolates and showcases the development assets Denison has, specifically in the Athabasca region of Canada. It makes those assets that much more attractive,” he said.

Rio’s purchase of Hathor in January signaled its commitment to Canadian uranium projects and Denison is a logical target to fortify the $111 billion global mining company’s interests in the Athabasca Basin, Watkins said.

Rio beat out Cameco in a three-month bidding contest that drove Hathor’s price to C$4.70 a share, 65 percent higher than its 20-day average before the first offer was made.

Relative Value

Hathor’s Roughrider deposit, which contains at least 58 million indicated and inferred pounds of uranium, cost Rio the largest premium in the non-ferrous metals industry for deals worth more than $250 million, data compiled by Bloomberg show.

While producing uranium from undeveloped deposits can take years, adding Denison would give Rio more than 100 million pounds of uranium resources in Canada alone and help it narrow the gap to Cameco once it starts extracting the ore.

With its mines in Australia and Namibia, Rio plans to increase its global uranium production this year by at least a third to 9.4 million pounds. That’s still less than half as much as Cameco, which anticipates that its total output will slip about 3 percent to 21.7 million pounds.

Denison’s ownership in the McClean Lake mill would also allow Rio to process the ore it eventually unearths, according to David Sadowski, a Vancouver-based analyst at Raymond James Financial Inc. Rio doesn’t currently own any mills in the area.

“It’s not just simply a matter of pounds that Denison has in the ground,” Sadowski said. It offers “more strategic value because of the interests in the McClean Lake mill,” he said.

Nimby Principle

If Rio bids for Denison, Aston Hill’s Gill says Cameco could be pressured to counter with its own offer to maintain its grip on the Athabasca Basin, which Cameco says is home to the world’s richest high-grade uranium deposits.

Cameco, which accounted for about 16 percent of last year’s worldwide uranium production of 143 million pounds, owns a 30 percent stake in Denison’s Wheeler River project.

“It’s in their backyard so I think that they might take umbrage” if Rio tries to buy Denison, said John Kinsey, a Toronto-based fund manager for Caldwell Securities Ltd., which oversees C$1 billion ($1 billion) and owns Rio and Cameco stock. “It’s always better, if it’s a good project, to have it all than to have to split a joint venture with somebody else.”

Cameco also wants to double production to 40 million pounds by 2018 and acquiring Denison could help it reach that target.

Cigar Lake

Cigar Lake, site of the world’s richest undeveloped uranium deposit that Cameco co-owns, was delayed by six years after an underground flood at the mine in October 2006. The project, which will eventually provide Cameco about 9 million pounds of uranium a year, is now scheduled to start production in mid-2013.

Denison might help “backstop their guidance,” Caldwell’s Kinsey said. “Cigar Lake is still a bit of a question mark.”

Rio and Cameco are both betting demand for uranium will rebound as developing countries from China to India and Russia build more nuclear reactors to power their economic growth.

China is constructing 26 reactors, the most of any country in the world, and also has 51 more planned, according to the World Nuclear Association’s website. India and Russia, which together have 53 reactors, are building 17 and have 33 planned.

Among industrialized nations, Japan is preparing to start two nuclear power plants closed after 19,000 people were killed or presumed dead from the earthquake and tsunami that wrecked the Fukushima Dai-Ichi nuclear station. The U.S. also approved four new reactors, the first licenses issued since 1978.

Triuranium Octoxide

Uranium prices may climb to $65 a pound this year and $80 by 2014 as a shortfall of uranium supplies worsens, according to Rob Chang, an analyst at Versant in Toronto. That’s why it makes sense for either Rio or Cameco to buy Denison now, he said.

Futures on uranium’s tradable form, U3O8, ended last week at $51.10 per pound on the New York Mercantile Exchange. Before the earthquake and tsunami in Japan on March 11, the contracts sold for $67.50 a pound, data compiled by Bloomberg show.

“They should do it sooner rather than later because uranium prices are low and the consensus is they will eventually go higher, not lower,” Chang said in a telephone interview. “This is the move that everyone’s expecting.”

While Chang says a bidding contest could make Denison more expensive than Hathor, Edward Sterck, an analyst at BMO Capital in London, is less optimistic.

Denison’s deposits could be more costly to develop because the sites are deeper and the uranium ore is lower quality than what is mined at the Roughrider project, he said.

Cost of Losing

The Wheeler River project “might have more challenges,” Sterck said in a telephone interview. “Hathor effectively is a one-asset company. Denison has got a few more strings.”

The cost of losing Denison could still be enough to compel either Rio or Cameco to pay up, according to Aston Hill’s Gill.

Denison’s uranium claims are “pretty strategic assets and they are very attractive to both of these companies and they’re right in the location where they’re looking to expand,” he said. “Whoever moves first on this, the other guy is going to have to take a look at this as well.”

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