Uranium One Inc. (UUU C$2.75, TSX)
Adjusting target price to C$3.20/share (from C$3.75/share) to reflect the high end of ARMZ valuation; maintaining Buy rating but adjusting risk qualifier to Speculative from Average Risk
John Hughes • (416) 607-3021 • firstname.lastname@example.org
Bill Mantzoutsos, CFA, Associate • (416) 607-3027 • email@example.com
The Desjardins Takeaway
We are lowering our target price on the shares of Uranium One to C$3.20/share (from C$3.75/share) to reflect the upper end of ARMZ’s valuation range for the company’s shares. ARMZ, the majority shareholder which holds 51.4% of UUU, has offered to acquire in a ‘friendly’ deal the remaining UUU shares it does not already own for C$2.86/share (cash) and to take the company private. In our view, the current offer does not reflect the full value of UUU shares. Our Buy rating remains unchanged but we are adjusting our risk qualifier to Speculative from Average Risk.
We are lowering our target price for the shares of Uranium One (UUU) to C$3.20/share (from C$3.75/share). Our adjusted C$3.20/share target reflects the high end of ARMZ’s formal valuation for UUU shares. On January 14, 2013, UUU’s majority shareholder ARMZ (51.4% owner) offered minority shareholders C$2.86/share (cash) in a plan to take UUU private. The C$2.86/share offer compares with our C$3.75/share valuation for UUU shares and a consensus valuation range prior to the AMRZ offer of C$3.50–4.00/share.
ARMZ undertook a formal valuation of UUU shares through an independent advisor; the fair market value of a UUU share is US$2.66–3.21/share or C$2.64–3.19/share using the current US$/C$ exchange rate. In our view, the higher end of this formal valuation better represents the ‘real’ value of UUU based on our forecast average annual long-term uranium price of US$60/lb.
We are not expecting a white knight, given the large majority stake of 51.4% held by ARMZ. We recommend that minority shareholders vote against the C$2.86/share offer, given we anticipate the potential for a ‘sweetener’ to the higher end of ARMZ’s valuation range for UUU.
The C$2.86/share offer provided a 20% premium to the closing price of UUU shares the day prior to the offer and a 30% premium to the 20-day average day-end level of C$2.21/share. We would have expected at least a 35–45% premium to the 20-day average, which is more in line with the 42% average paid for change-of-control premiums in precedent transactions. Previous acquisitions include KGHM buying Quadra (41% premium), Minmetals acquiring Anvil Mining (40% premium), Nystar buying Breakwater (44% premium) and Barrick acquiring Equinox (final 43% premium).
We are lowering our target price on UUU to C$3.20/share (from C$3.75/share) to reflect the higher end of the parent company’s (ARMZ) formal valuation related to its recent C$2.86/share offer to minority shareholders to take UUU private.
Our Buy rating for Uranium One remains unchanged but we are adjusting our risk qualifier to Speculative from Average Risk.