UPDATE 4-Cameco clears way for Rio's C$654 mln Hathor deal

Mon Nov 28, 2011 11:10am EST

* Cameco says cannot justify increasing bid for Hathor

* Uranium miner still sees doubling output by 2018

* Rio Tinto left to buy junior miner for C$654 mln

* Hathor shares down 7 pct; Cameco shares rise 4 pct

By Euan Rocha and Julie Gordon

TORONTO, Nov 28 (Reuters) - Cameco Corp has backed out of a bidding war for Hathor , clearing the way for Rio Tinto's C$654 million friendly offer and sending shares of the Canadian uranium explorer tumbling.

For weeks, Rio Tinto and Cameco have been locked in a battle to acquire Hathor, which controls the advanced exploration-stage Roughrider project in the uranium-rich Athabasca region of Saskatchewan in Western Canada.

Rio, one of the world's largest mining companies, and Cameco, Canada's largest uranium producer, see demand for reactor fuel growing even though the nuclear industry is under pressure in the aftermath of the Fukushima disaster in Japan.

But the latest, C$4.70-a-share offer by the Anglo-Australian mining giant was too rich for Cameco, which is known for its disciplined approach to acquisitions.

"After careful consideration we cannot justify increasing the price beyond our current offer and accordingly, we will let our offer lapse," Tim Gitzel, chief executive of Cameco, said in a statement on Monday announcing the decision.

Analysts said Cameco might have justified a higher bid on strategic grounds in terms of keeping Rio out of the Athabasca basin. That said, paying more for Hathor would have diluted for Cameco results on most metrics.

By backing away, Cameco has conveyed a strong message to the market, said Dundee Securities analyst David Talbot in a note to clients.

"Most importantly, it can't be pushed into doing something it doesn't feel comfortable doing," he wrote. "The company remained disciplined, sticking to its corporate culture."

Cameco's shares rose 4.38 percent to C$18.13 on Monday on the Toronto Stock Exchange, while shares of Hathor tumbled 7.33 percent to C$4.68.

WAR FOR ROUGHRIDER

Hathor went into play in August when Cameco made a hostile C$520 million bid after talks aimed at a friendly deal fell apart over price. Rio emerged as Hathor's white knight in October with a C$578 million bid.

Earlier this month, Cameco raised its bid to C$625 million, but Rio was quick to counter with a C$4.70 a share bid worth C$654 million, leading many analysts to speculate that Cameco would back out, as the price was already more than 25 percent higher than its original bid.

Cameco said that allowing the bid to lapse will not set back its plan to double annual uranium production to 40 million pounds by 2018.

Even so, investors may worry that missing out on Hathor will make it more difficult for Cameco to reach that goal, BMO Capital Market analyst Edward Sterck said.

Cameco has struggled with delays at its Cigar Lake project in Saskatchewan and with permitting issues at its U.S. assets.

"While acquiring Hathor was not essential for Cameco to meet guidance on BMO Research's forecasts, the acquisition would likely have provided the company with production flexibility," said Sterck in a note to clients.

Cameco said that it is focused on developing its existing assets and that it will explore other growth opportunities where there is a clear benefit to shareholders.

STRATEGIC ASSET

For Rio, buying Hathor will give the Anglo-Australian miner access to Canada's Athabasca basin, the highest-grade uranium district in the world.

But developing the project will not be without challenge. Under current Canadian legislation, foreign companies can own no more than 49 percent of an operating uranium mine, meaning Rio will need a domestic partner before it can start up Roughrider.

Rio will also need build a uranium mill, or gain access to a nearby processing plant. The Roughrider project, which has the potential to produce at least 5 million pounds a year, is located just 25 km (15 miles) southeast of Cameco's Rabbit Lake mill. France's Areva also owns a mill in the area.

"It would take Rio at least 10 years to get a new mill permitted and constructed," said Salman Partners analyst Raymond Goldie. "A permitted uranium processing plant is worth more than a uranium deposit."

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