The proposed takeover of Canada's second-largest uranium mining company, Uranium One by a Russian government-controlled conglomerate has panicked some shareholders and alarmed industry observers worried that the Vancouver-based company might end up serving the Kremlin's strategic interests.
But that is precisely the deal's strength, says the Moscow official behind the deal. Vadim Zhivov, CEO of the Russian uranium miner ARMZ, argued that Kremlin involvement would bring greater stability, security and profitability to Uranium One's extensive operations in Kazakhstan, considered the world's largest source of readily accessible uranium.
"Given Russia's long-term relationship with Kazakhstan, an 8,000-kilometre land border and a long history of good relations with [them] I think the Russian Federation is the least likely player to be affected by any political changes that will happen there, and it will be important for any company doing mining operations there to have a state partner," Mr. Zhivov said.
ARMZ is a division of the huge Russian state corporation Rosatom, which controls 40 per cent of the world's uranium enrichment and builds reactors and fuel assemblies for 70 countries. Last year, it took a 17 per cent stake in Vancouver-based Uranium One, and this month launched a bid to buy a 51 per cent controlling stake in the company.
The prospect of Kremlin control of the Canadian company left many investors worried that Uranium One would be pressured to serve Russian strategic interests that do not necessarily deliver the best returns, and that the political associations will lead to instability and lost opportunities.
Under the deal, Uranium One would receive $610-million (U.S.) in cash and controlling stakes in the company's two Kazakhstan uranium mines, which are also part-owned by the Kazakh state company Kazatomprom.
It would also pay a special cash dividend of $1.06 per share to Uranium One's minority shareholders - an offer that has been greeted with skepticism by some investors.
But Jean Nortier, CEO of Uranium One, described the shift to Russian-style state capitalism as an important boost for the company, allowing it to become Kazakhstan's largest uranium miner while protecting it from the sort of volatility, corruption and political crisis that could drive independent miners out of the country.
He said the company's shares have been selling at a 30 to 40 per cent "Kazakhstan discount" based on the political risk inherent in the Central Asian republic, but that having the Kremlin as a partner should eliminate that risk and bring share prices up to the full value of the underlying resource.
"We have been at a significant discount, but we believe this transaction swings the thing around," Mr. Nortier said. "Whereas previously the investor community could be concerned about the security of our tenure on assets in Kazakhstan, they shouldn't be concerned at all now."
Both he and Mr. Zhivov said they understand the reluctance of shareholders, since Rosatom has been a closed-door state enterprise for decades, only recently opening its books and behaving like a publicly traded multinational company.
"The concern now is, are ARMZ and Rosatom going to act responsibly toward minority shareholders? And we are saying, through the actions of the last year and a half, they have been showing that they can act responsible. We need to educate [shareholders]that we're not dealing with a bunch of cowboys. We're dealing with a bunch of responsible people who've been in the market for a very long time."
The Russians structured the deal as a 51-per-cent controlling stake rather than a full takeover, Mr. Zhivov said, in large part because they want to create a perception of independence and good corporate citizenship.
"It's very important for us to show to the world that we're a global corporate citizen, and we can act keeping in mind the interests of the minority shareholders," Mr. Zhivov said.
Uranium One will become Rosatom's main Kazakhstan uranium operation, he said. While the Russians are not ruling out the possibility of expanding Uranium One's operations into other regions including Africa, they are not interested in expanding the company beyond mining into refining or fuel production.
Mr. Nortier described the cash dividend offer to shareholders as a way to avoid the perception that ARMZ is simply taking advantage of the current low market price of uranium.
"The question of a 51-per-cent stake versus a takeover has been driven by two issues," he said. "ARMZ has a need to grow an international company that's transparent for the world to see how they manage their business. And from our perspective, we wanted our shareholders to retain their exposure to the uranium market going forward."
"With the uranium price trading off, you could have said that ARMZ was being opportunistic by buying 100 per cent of the company at a low valuation.… So by giving our shareholders an effective change-of-control premium that doesn't reference the [uranium]market but references the [Uranium One]valuation - the higher of the two - they're receiving cash in their pockets, but they retain exposure to the uranium market… it's the best of both worlds."