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 • [email protected]
Bill Mantzoutsos, CFA, Associate • (416) 607-3027 • [email protected]

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.

Highlights

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).

Valuation

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.

Recommendation

Our Buy rating for Uranium One remains unchanged but we are adjusting our risk qualifier to Speculative from Average Risk.

Uranium One Inc.

Rating Buy–Speculative

Target C$3.20

 
 
 

Symbol

Exchange

Closing price

Potential return

52-week range

Shares O/S

Market cap

Year-end

Revenue 2013E

2014E

EPS 2013E

2014E

P/E 2013E

2014E

Book value/sh

Debt/debt+equity

Dividend

Dividend yield

Quarterly data

UUU

TSX

C$2.75

16%

C$1.78–3.45

957m

C$2,632m

Dec-31

US$458m

US$660m

US$0.18

US$0.25

15.3x

11.0x

US$2.02

24%

US$0.00

0%

US$0.02

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

EPS 4Q12E Desjardins

 

Consensus US$0.03

EPS 4Q11A US$0.02 Source: Desjardins Capital Markets

 
 

6

 

Morning Pulse • JANUARY 24, 2013

 

There is no Canadian regulatory approval required for the deal. Nevertheless, receiving all regulatory approval remains a risk to the proposed deal. We would suggest a reasonable time for the closing of the deal would be early June 2013. We highlight below the regulatory approvals required and the estimated timeframe to receive the approvals:

  • ?  Kazakhstan government—late May or early June 2013

  • ?  Australia FERB—by the end of March 2013

  • ?  Tanzania—by the end of March

  • ?  US Nuclear Regulatory Authority—by the end of March

    Several events in the uranium market support our higher uranium price forecast:

? Japanese reactor restarts pending. The Fukushima disaster during 1Q11 resulted in the closing of ~50 nuclear reactors in Japan and dampened pricing sentiment in the uranium spot market. Prior to Fukushima, the uranium spot price was US$70/lb vs US$42.50/lb currently; UUU shares followed the decline in the uranium price, falling from C$5–6/share to C$2.21/share prior to the AMRZ offer (see Exhibits 1a and 1b). Earlier this week, a variety of safety initiatives were introduced under the draft proposal by the newly established Nuclear Regulation Authority, including requirements for backup control rooms located far from reactor buildings as well as reinforcement of protective structures sufficient to withstand the impact of a jet airliner. Utilities would also need to demonstrate the ability to contain a serious accident for at least one week using their own resources. A final version of the new rules is expected this summer, following which Japanese utilities would be able to apply for restarts. A theme of reactor restarts in Japan should provide positive trading sentiment for uranium spot prices.

Exhibit 1a: 2011—uranium price declines after Fukushima...

75 70 65 60 55 50 45

Fukushima (March 11, 2011)

 
 
 
 
 
 

Source: Desjardins Capital Markets, Reuters

Exhibit 1b:...and UUU share price falls in tandem with uranium price

7 6 5 4 3 2 1

Source: Desjardins Capital Markets, Reuters

 
 
 
 

? Highly enriched uranium (HEU) agreement ending December 31, 2013. A significant structural change in uranium supply occurs at the end of this year when the US/Russian agreement relating to highly enriched uranium expires. No replacement agreement is anticipated. The HEU downblending of nuclear warhead material provides 24m lbs of U3O8 into a world market with 200m lbs/yr of supply. Although additional uranium production from Kazakhstan and Canada should largely fill the supply gap, the risk is now on the upside for uranium prices, particularly during 2H13.