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Proceeds from sale of stake in gold firm fuel drive for growth
This report is based on an article in Fuel Cycle Week, V9N360, January 20, 2010, published by International Nuclear Associates, Washington, DC. Stock prices referenced in this article are in the currency of the country of origin and cited as of market close January 19, 2010.
What will Cameco (TSE:CCO) do with the C$1.5 billion it has amassed from the sale of Centerra—and with the extra $500 million that will soon roll in from another tranche of debt? Clearly the world’s second-largest uranium producer is building up a war chest. In recent weeks financial analysts have piled on speculation as investors clamor for answers.
Last November CEO Jerry Grandey proclaimed that Cameco would pursue a strategy of growth through acquisition. Pressure from investors comes in the form of questions. What are its likely choices, and how would they affect the company’s stock price and earnings? For instance, will Cameco recoup the 20% of its earnings that went out the door with Centerra?
Last March JPMorgan Chase & Co. highlighted Paladin as a possible acquisition by Cameco. Although a Cameco acquisition of Perth-based Paladin Energy (ASX:PDN) has been the subject of industry observers’ chatter for some time, the prospect gained momentum as that Paladin’s share price dropped 15% in the last months, from A$4.80 last October to A$4.06 this week on the Australian Stock Exchange against a 52-week range of A$2.68-5.52. Last October the stock traded at a high of A$5.06. The stock high for the year was June 3, 2009.
CEO Grandey noted in November that his company considered Paladin an attractive target. More recently, Bloomberg reported that RBS Equities Australia analyst Lyndon Fagan suggested that Paladin’s underperforming stock, which stems from its lowered production forecast in October, may further tempt Cameco.
Paladin Managing Director John Borshoff would not comment for the Bloomberg story, but in the past he has vigorously denied to FCW that Paladin had any interest in being acquired by Cameco or anyone else.
Cameco Covets Enrichment Capability
Not everyone agrees Paladin is a suitable buy for Cameco. Edward Sterck, a mining industry analyst with U.K.-based BMO Nesbitt Burns, published a compelling report on Jan. 6 assessing Cameco’s acquisition choices. The Australian miner does not come out on top.
The report rates a series of acquisition candidates in financial terms, and concludes that from Cameco’s perspective, diversifying up the nuclear fuel chain by purchasing a $3 billion stake in Urenco "remains the most attractive proposition outside the uranium mining segment."
Sterck told FCW that the uranium industry is "entering a period of oversupply," and that it therefore makes more sense for the miner to move into uranium enrichment than to buy additional supply.
Taking a stake in Urenco would reduce Cameco's net present value per share by 10%, but would raise its earnings more than 40% by 2014. For the company fiscal year ending Dec 31, 2008, with revenue of about C$2.86 billion, a 40% increase in revenue over four years would be worth $1.14 billion.
Some analysts have dismissed this possibility due to Cameco’s $125 million, 24% stake investment in the laser enrichment process GE-Hitachi is developing in the U.S. The investment is consistent with Cameco’s stated interest in gaining a foothold in enrichment and other high-value segments of the nuclear industry. It is a bet, but clearly does not have to be its only bet.
Some analysts think Cameco would have to divest from the competing enrichment technology to be allowed to buy into Urenco, which champions the modern, proven centrifuge enrichment process. Sterck, however, denied that a divestment would be necessary.
"There is no leverage between the two firms in terms of technology," he told FCW.
His point is no conflict exists in the key area of intellectual property rights because the two technologies are so distinct. The GE-Hitachi process, which comes from the Australian company Silex, separates U235 from the U238 isotopes in UF6 much the same way a laser printer separates various weights (mass) of toner to put it on the paper to produce gray shades.
Further, URENCO already has significant market share. Its centrifuges are going into Areva's George Besse II plant in France, the Louisiana Energy Services plant in New Mexico, and are planned to be used in Areva's Eagle Rock Enrichment Facility in Idaho.
However, assuming GE-Hitachi succeeds in developing the process for commercial application, the two technologies will eventually compete for market share. Sterck believes that, given Cameco’s larger interest in diversifying its nuclear capabilities, its laser-enrichment investment should be understood as covering all available enrichment bases. At this point it is a far more speculative venture than Urenco. That said, it is unclear that URENCO's European owners will see it that way.
Nevertheless, an acquisition by Cameco with the proceeds of the sale of its stake in Centerra would boost its earnings and replace revenue that would have come from the gold mining operations, Sterck said.
Pricing the investment would not be easy, he added, because “there are no good comparables."
More Obvious Choice Offers Less Advantage
Acquiring Paladin, Sterck told FCW, "is an attractive proposition given the growth profile, geographic location of its assets and the shareholder base."
The tradeoff, according to Sterck, is that acquiring Paladin would require a 40% premium against the current stock price (Fagan of RBS Australia told Bloomberg the premium would be 30%). Sterck’s report found the pairing would increase Cameco’s earnings 30% by 2014, but would dilute the Canadian’s net present value per share 27%.
An acquisition of Paladin by Cameco "would be an expensive and challenging prospect," Sterck told FCW. He added that a substantial portion of the deal would have to be in cash "as Australian shareholders are unlikely to be interested in Canadian paper.”
At its current market price Paladin is valued at about A$2.9 billion ($2.7 billion), Bloomberg noted. A 40% premium relative to its Jan 17 share price would put the stock price for acquisition at A$5.68, which is well above its 52-week high of $5.06. Paladin has 717 million shares outstanding with a market cap of A$2.91 billion.
Cameco has C$12.4 billion market capitalization. Its share price on Jan. 18 was C$31.58, with 393 million shares outstanding. As of January 19, 2010, Cameco's stock is trading near its 52-week high of $32.35.
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