Cameco Offer for Uranium Junior Hathor Exploration to Lapse

By Dave Brown – Exclusive to Uranium Investing News

Cameco (TSX:CCO,NYSE:CCJ) has officially conceded the bidding war for Hathor Exploration Ltd. (TSX:HAT), after Rio Tinto PLC (LSE:RIO,NYSE:RIO,ASX:RIO) increased its offer for the Canadian uranium explorer to $654 million.

Cameco’s Chief Executive Officer Tim Gitzel commented on the news within the company’s press release “After careful consideration we cannot justify increasing the price beyond our current offer and accordingly, we will let our offer lapse.” Cameco has maintained uranium production guidance expecting double annual uranium production to 40 million pounds by 2018. The uranium producer committed to existing resources and will be evaluating potential growth opportunities where it can find positively accretive benefit for existing shareholders.

The market has rewarded Cameco’s more conservative capital allocation by strengthening share prices 4.5 percent of the previous trading session. Some analysts implied that Cameco could have accepted making an increased offer based on the strategic framework preventing Rio Tinto access in the area; however, increasing its offer might have diluted Cameco results on most metrics.

As expected Hathor share prices are demonstrating downside volatility to move 7.1 percent below Friday’s closing prices. The share prices of Rio Tinto have also appreciated 5.0 percent relative to last week’s closing value. The previous trading week had been particularly challenging for Cameco as share prices for the top Canadian uranium mining producer declined 10.4 percent, widely anticipating an additional bid for Hathor to follow.

Rio Tinto indicated it obtained permission to acquire Hathor from Canada’s competition bureau maintaining that Investment Canada approval is not required. The offer was set to expire at the end of the month and Rio Tinto is urging Hathor shareholders to tender their stock by the end of the day on Wednesday.

Mine production costs and potential issues

The extensive exploration phase Roughrider asset in the relatively high enriched uranium Athabasca region was considered by many observers and industry stakeholders to make the most sense for Cameco, with synergies and large scale operational capacity currently existing in close proximity. The uranium resource is located just 25 km to the southeast of the Rabbit Lake mill and could provide an estimated annual 5 million pounds of uranium production per year. In a preliminary economic assessment issued in September, Hathor estimated it might cost $567 million to develop a mine at the site.

Investors would also note that note that Rio Tinto might still need to find a Canadian company in order to share at least 51 percent of a joint venture production from the deposit, due to existence of the Non-Resident Ownership Policy, inhibiting an exclusive foreign mining interest from producing uranium from the region.

Raymond Goldie, Senior Mining Analyst for Salman Partners also speculated on a joint venture, and provided a very bullish outlook for the supply and demand fundamentals for uranium, “the outlook for uranium is that right now the demand for uranium is greater than the supply, and that is liable to continue for several more years.”  On prices, “So [spot market] uranium prices in the low $50′s [per pound of uranium] could double within the next couple of years”

Ambitious production targets

BMO Capital Markets Mining Analyst, Ed Sterck has suggested “While acquiring Hathor was not essential for Cameco to meet guidance on BMO Research’s forecasts, the acquisition would likely have provided the company with production flexibility.”  Cameco has previously experienced some delivery and operational delays over select time periods within the last 5 years, notably from a rockfall in the underground production area of the Cigar Lake mine leading to successive periods of flooding.

Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.