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A tunnel at Cameco's Cigar Lake uranium mine in northern Saskatchewan
A tunnel at Cameco's Cigar Lake uranium mine in northern Saskatchewan

Fabrice Taylor

Hathor drama casts spotlight on small uranium players Add to ...

Tim Gitzel made a rookie mistake in September when he called Hathor Exploration Ltd. overvalued.

You don’t get far as a hostile bidder with comments like that, and as it turns out, the CEO of Cameco Corp. proved himself wrong on Monday when he was forced to raise his offer for Hathor after Rio Tinto trumped his opening bid.

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While Hathor’s valuation may be expensive, Cameco needs the company for strategic reasons, both to feed its nearby mill and to prevent another miner from entering its home territory, perhaps driving up labour costs. Rio desperately wants Hathor too, of course, to buttress its uranium resources in an area where the cost of extraction is low.

So rather than beat each other up, the two companies could very easily team up for one last bid at a small premium to the last offer. This makes sense for both sides: To operate the Hathor assets a few years from now, Rio will need a Canadian partner unless there’s a change in the law restricting foreign control of uranium resources. Cameco, with its conveniently located mill and wide expertise, would be ideal. I’d guess, from comments – or non-comments – Mr. Gitzel has made that a joint bid is already being discussed.

But that’s just a guess. What’s just as interesting is what this bidding activity means for the Athabasca Basin uranium plays. Cameco looks cheap at the moment, trading for less than half its 52-week high. Smaller players in the area are also beginning to look tempting.

To be sure, the uranium industry is a two-edged sword for investors at the moment. Cameco and other big producers are still struggling with the aftermath of the Fukushima disaster. Their stock prices reflect the widespread anxiety over nuclear safety and Germany’s high-profile decision to shun atomic energy. On the other hand, investors are starting to make some money in uranium thanks to the spillover effects of the Hathor deal and a slowly growing realization that nuclear energy is still a growth industry, because of strong demand from emerging markets like China.

In this environment, smaller and riskier stocks might be just as attractive as the big stable producers, because junior firms are natural targets for mergers and acquisitions. M&A tends to be contagious and Hathor may signal the start of a wider consolidation drive.

Take Fission Energy , which benefitted nicely from the fight for Hathor. Fission likes to show investors a picture of one of its drilling cabins, which is literally a stone’s throw from one of Hathor’s. No surprise that the stock has almost doubled since the fight for Hathor started.

Versant Partners, the brokerage, says that if you apply the Hathor valuation to what we know about Fission’s land – meaning this estimate could be conservative – the stock is still cheap. Part of Fission’s land package, the argument goes, would be a perfect bolt-on acquisition to Hathor.

It’s a sound argument. Just keep in mind that if Fission and Hathor were next-door houses, neither would be finished. Hathor would be far closer to move-in-ready, while Fission still has a lot of work to do to prove up its resource.

Other junior uranium companies in the vicinity haven’t really benefitted from the battle for Hathor, at least as reflected in their share prices, but talk to their CEOs, as I have lately, and you get a distinct sense of optimism.

Executives view the interest in Hathor as the beginning of a great thaw in the market for small uranium miners in the Athabasca Basin. Their body language suggests that they may be having discussions regarding partial or full mergers.

Most of these companies already have deep-pocketed joint venture partners, which is part of the appeal as it reduces finance risk. One company I spoke to has a $7-million drilling campaign and is responsible for only a quarter of that budget: Its South Korean and Japanese partners kick in the rest even though it’s a 50-50 venture. Find me a junior gold company with that kind of a deal.

A lot of these Asian joint venture partners are in the business because they’re involved in reactor sales and need to secure a supply of nuclear fuel. Their strategic goals are pretty powerful incentives.

I doubt that drill results in the area will be the proverbial trees falling in an empty forest any more. There will be someone there to hear.

Editor's note: The original newspaper version of this article and an earlier online version incorrectly stated that Cameco traded for less than half its 52-week low, instead of 52-week high. This online version has been corrected.



Fabrice Taylor publishes The President's Club investment newsletter, focusing on off-the-radar small to mid-cap companies trading at a discount to net asset value. His letter and The Globe and Mail have a distribution agreement. He can be reached at fabrice.taylor@gmail.com.

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