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More takeovers seen in uranium sector after Ottawa makes rare policy move

Douglas McIlveen, chief geologist at Cameco Corp.'s Cigar Lake uranium mine, surveys a mine shaft that is 1,575 feet (480 meters) deep and just below the ore body in northern Saskatchewan, Canada, on Friday, Sept. 3, 2010. The federal government has granted permission for an Australian investor to own an upcoming uranium mining operation in Newfoundland, which could set a new precedent for the industry.

Geoff Howe/Bloomberg

The federal government has provided a measure of relief to the enduringly depressed uranium mining sector, granting an exemption to foreign ownership restrictions on producing mines.

On Monday, the Department of Natural Resources announced a potentially precedent-setting decision to allow Australia's Paladin Energy Ltd. majority ownership of a uranium mine in Newfoundland and Labrador.

The decision could help draw foreign capital into uranium projects in Saskatchewan, one of the world's largest producers of the green metal, said David Talbot, an analyst at Dundee Securities.

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"It may help incentivize foreign entities to come in and take a look at these companies, particularly companies that want world-class assets. And you don't get any better than what's found in Saskatchewan."

Since 1987, Canada has enforced a non-resident ownership policy, preventing non-Canadian companies from having more than a 49-per-cent ownership stake in operating uranium mines.

But Paladin was able to demonstrate that there are "no Canadian partners that would be interested in leading the development of the proposed Michelin mining project in the Central Mineral Belt of Labrador," Natural Resources Minister Greg Rickford said in a statement.

Michelin, which is 100 per cent owned by Paladin, is still in the development stage.

The only previous exception to the rule applied to Areva Group, a French company that had already been operating a Canadian uranium mine when the policy was brought into effect.

The rule has proven a deterrent to foreign mining companies considering the acquisition of Canadian mining assets, David Sadowski, an analyst at Raymond James, said in a note.

"In our view, it therefore significantly increases takeout potential for nearly all uranium companies with assets in Canada," Mr. Sadowski said.

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Two potential candidates include Fission Uranium Corp. and Denison Mines Corp., both of which have majority stakes in non-producing uranium mines in Saskatchewan's Athabasca Basin.

But the government's decision didn't inspire much enthusiasm among investors, with Denison shares declining by 2.1 per cent on the day, and Fission rising by 1.5 per cent.

"I think we've just got market malaise in the sector," Mr. Talbot said.

The uranium market entered a downturn in early 2011 from which it has yet to recover. Prior to the Fukushima meltdown, Japan was the world's third-largest producer of nuclear power. So a large chunk of global demand vanished when the country shut down its 50 nuclear reactors.

Japan continued to accept uranium deliveries as per its contracts, but that has resulted in an enormous stockpile of about four to five years' worth of supply.

The spot price for uranium peaked in January, 2011, at $73 (U.S.) a pound, falling by more than 60 per cent to $27.75 last May. The price has rebounded somewhat of late, but remains well below historic averages in the mid-$30s.

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Some who closely watch the industry have long predicted a coming bull market in uranium, with future supplies insufficient to meet expected demand. That recovery has been frustratingly elusive.

Now, there is "strong evidence that prices and sentiment in the uranium space have bottomed," Mr. Sadowski said. If he's right, foreign interest in Canadian uranium projects could soon rise in this country's uranium stronghold.

According to the federal government, the decision to grant Paladin majority ownership of Michelin had the blessing of the Saskatchewan government, although it has no stake in the asset, financially or geographically.

"So Saskatchewan supports it for its own jurisdiction, and that's positive for potentially getting Rio Tinto or BHP to go after some of those smaller companies," Mr. Talbot said.

Investor skepticism is to be expected. Bruce Campbell, president and portfolio manager at Campbell, Lee & Ross, said he supports the long-term bull case for uranium, but lost confidence in the timing.

"We're in the fifth year of a two-year turnaround in uranium prices," he joked. "It's coming and they're going to restart everything in Japan and it's going to be great, but it just keeps getting pushed out."

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