DEALTALK-Cameco may go unchallenged in hostile Hathor bid

Fri Sep 16, 2011 10:57am EDT

Related Topics

* Hathor says Cameco's bid undervalues company

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* Suitors are limited by geography, nationality

By Julie Gordon and Bhaswati Mukhopadhyay

Sept 16 (Reuters) - Hathor Exploration HAT.TO might have trouble finding a white knight to rescue it from the clutches of Cameco Corp, the uranium giant whose C$520 million ($530 million) hostile offer stands a much better chance of succeeding than any foreign bid.

Cameco, Canada's largest uranium producer, faces none of the hurdles that a non-Canadian company would have to clear in acquiring a strategic asset such as Hathor. Only last year, Canada's federal government shot down a $39 billion Anglo-Australian bid for Potash Corp, the world's largest fertilizer producer.

That's a calculation that is likely to give any rival bidder pause. Even so, Hathor's share price has shot higher since Cameco's bid was made public late last month, suggesting investors believe a sweeter offer may emerge.

Cameco's (CCO.TO) C$3.75 a share offer also makes a lot of economic sense, a second big deterrent to a rival bid. It is one of the few uranium producers with an established mill in the Athabasca Basin, a uranium rich area in northern Saskatchewan. Hathor's flagship Roughrider project is located there.

"The best bet for Hathor is whoever is going to pay the most. Is that going to be Cameco? Difficult to say, but I also find it hard to see other bidders emerging," said BMO Capital Markets analyst Edward Sterck.

The deal is not only important for Cameco as a way to accelerate its production stream. It also marks the first big acquisition attempt in the industry since the nuclear disaster at the Fukushima power plant in Japan last spring.

The partial meltdown of the reactor, triggered by a devastating earthquake and tsunami, sent shares of Canada's top uranium producers tumbling. The industry is now eager to regain some of the cache it lost in the aftermath of the disaster.

HATHOR'S NEWS FLOW

Hathor has flatly rejected the Cameco bid as inadequate and said the offer failed to ascribe value to its non-Roughrider assets. It has also issued new drill results and released a preliminary economic assessment for Roughrider.

The Vancouver-based company hopes to show the market, and potential suitors, that it is being undervalued by Cameco.

"Any company, when they're defending a hostile bid, is going to put as much news flow as possible that supports them remaining an independent company or entices in a higher offer," said Sterck. "That's the nature of the situation."

SYNERGIES

Hathor's Roughrider project is located just 25 kilometers (15 miles) southeast of Cameco's Rabbit Lake mill.

The advanced exploration-stage project has the potential to produce at least 5 million pounds of uranium a year, which would give Cameco's output a nice bump, fitting in well with the company's goal of doubling uranium production to 40 million pounds a year by 2018.

Hathor also has other projects in the area, though all are in the preliminary stages of exploration and analysts warn there is no guarantee that any will succeed.

Still, for Raymond James analyst Bart Jaworski, Cameco's offer is simply too low.

"We have a C$5 target on the stock and that's closer to where we think Cameco should be bidding," he said.

Jaworski added that a white knight bid is possible and that France's Areva (AREVA.PA) would be the most likely candidate.

Like Cameco, Areva owns a mill near Roughrider and like Cameco, Areva's McLean Lake mill has room to process more ore.

But Areva could hold back from entering the fray simply because of its own relationship with Cameco. The French nuclear giant is working with the Canadian miner on the development of Cigar Lake, a large high-grade deposit in the basin, and the two companies co-own the McArthur River deposit.

Korean utility Kepco, which owns 15 percent of uranium miner Denison Mines (DML.TO) and holds a stake in Fission Energy's FIS.V Waterbury Lake project, could come in with a bid, Jaworski said. Analysts have also tossed out names like BHP Billiton (BHP.AX), Rio Tinto (RIO.AX), or even an Asian consortium.

But foreign companies may choose to pass on Hathor, as uranium is a strategic resource in Canada. This limits a foreign entity's ability to fully develop uranium assets.

"Foreign ownership rules state that once a project is in production a domestic company has to own 51 percent of that project," said Jaworski, adding: "That's a policy and not actual legislation."

URANIUM FEVER

Earlier this year, the uranium sector was on a tear as the spot price soared from $45 per pound in mid-2010 to $70.

Then Fukushima happened, prompting some nations to back away from their nuclear programs and sparking investor fear that future need for uranium was limited.

Despite the backlash, demand for uranium is still set to grow. China alone has 27 reactors under construction, 50 planned and 110 proposed. Russia, Korea and India are all moving forward with plans to ramp up their nuclear output.

On top of growing Asian demand, Russia will stop downgrading weapons grade uranium at the end of 2013, taking a large chunk of U.S. supply off the market.

All this makes it critical to get new uranium mines online within a couple of years. But permitting problems, financing issues and a lack of management experience is hindering many projects, and that could lead to more takeovers.

"In uranium, every junior who has a project is looking to be taken out," said PDAC President Scott Jobin-Bevans. "I see more deals happening in the uranium sector."

($1=$0.99 Canadian) (Reporting by Julie Gordon in Toronto and Bhaswati Mukhopadhyay in Bangalore; Editing by Frank McGurty and Peter Galloway)

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