The Conversation (0)
Energy Fuels has brushed aside claims that it overpaid in its acquisition of Uranerz Energy.
Energy Fuels (TSX:EFR,NYSEMKT:UUU) has brushed aside claims it overpaid in its acquisition of Uranerz Energy (TSX:URZ,NYSEMKT:URZ), arguing that acquiring good assets requires paying a premium.
In a conference call with investors held four days after the deal was announced, Stephen Antony, CEO of Energy Fuels, was asked how the company came up with a near 40-percent premium to buy the low-cost, in-situ recovery (ISR) uranium producer. Antony argued that “[g]ood assets require a change of control premium.”
“Uranerz has ISR knowledge and top-flight management. This premium was the only way we could get Uranerz interested in being acquired,” he added.
While David Talbot, senior mining analyst with Dundee Securities, maintains a buy rating for Energy Fuels — with a target price of $9 per share — he believes there could have been a better way for Energy Fuels to buy its competitor.
“There could’ve been a way to have a better win-win,” he said. “If I was Uranerz, I’d be thrilled. My fear is that [Antony] thinks this is still an Energy Fuels company because management is in place. That shouldn’t be the thinking.”
That said, Talbot said he believes the newly formed company will be strong and able to compete in the US uranium market.
The deal bringing together the two companies is valued at roughly $150 million, with Uranerz shareholders acquiring 0.255 shares of Energy Fuels for every Uranerz share. However, that means Uranerz shareholders will hold 55 percent of the combined company. Energy Fuels’ existing management team will continue to helm the company with the addition of Uranerz management to the board.
“The 55-percent ownership by Uranerz shareholders is a mathematical function of the 0.255 exchange ratio. Energy Fuels is comfortable with the exchange ratio,” said Antony.
The red line is Energy Fuels’ share price while the blue line highlights that of Uranerz.
Despite the optimism from both management teams about the deal, Energy Fuels’ share price continues to remain down. Since the deal’s announcement, Energy Fuels’ share price has dropped 14 percent whereas Uranerz has seen a 12 percent rise. It’s worth noting, however, that similar reactions are typical during acquisitions.
Speaking further about the benefits of the deal, both Antony and Dennis Higgs, executive chairman of Uranerz, emphasized the need for consolidation in the current uranium market, highlighting that the deal will save $2 million in overhead costs. They said that in comparison to previous times in the once-prosperous uranium industry, they expect to see more measured growth in companies.
The combined company will have the largest uranium resources in the United States, with 91 million pounds of measured and indicated uranium and 31.8 million pounds in inferred uranium. Its market cap will be $231.7 million.
Uranerz began selling uranium from its Nichols Ranch project in September, selling 75,000 pounds of U3O8. Uranerz uses an ISR process whereby a solution is injected to reverse the natural process of depositing uranium into its host. Energy Fuels is considered a more typical producer, focusing on the mining of uranium. Uranerz currently has a deal with Cameco (TSX:CCO,NYSE:CCJ) for processing, and Higgs said he does not expect that deal to be affected by the takeover.
Energy Fuels has long-term contracts in place until 2017, with Uranerz contracts bringing that to 2020, allowing for more guaranteed revenue in the near future.
Securities Disclosure: I, Nick Wells hold no direct investment in any of the companies mentioned in this article.
Related reading: