EDITOR: | July 7th, 2015 | 12 Comments

Bigger is Better: Fission Uranium Sold and the Athabasca Basin is in Play

| July 07, 2015 | 12 Comments
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bigger-betterStarting Jan 31/15 we’ve been telling anyone who would listen: the Athabasca Basin is in play, and Fission Uranium Corp. will be bought out within six months. See earlier articles here and here and here. Our investment thesis was this part of the world has too many junior companies with me-too assets, weak management and depleted treasuries, which meant the only survivors would be the lucky and the strong.

Fission made sure luck had nothing to do with it and brought home a solid deal inside the six month window. On July 6/15 Fission and Denison Mines Corp. announced a binding Letter of Intent under which Fission’s shareholders will receive 1.26 Denison shares for each Fission share. Each Fission shareholder also will receive $0.0001 per share in cash – there has to be some investment banking reason for this token but I don’t know what it is.

The Resulting Issuer will be approximately 50% owned by each of Denison’s and Fission’s existing shareholders on a fully-diluted in-the-money basis. The combined market cap will be roughly $900M.

This math implies a price per Fission common share of $1.25 and represents a premium of about 18% over the 30 day volume weighted average price for Fission’s shares as at July 3, 2015. The closing is subject to the usual adjustments and conditions.

This is a fair deal for both sides. The shareholders at both Fission and Denison should commend management and directors for working on their behalf (unlike the slow-motion disaster movie that is playing at Copper Mountain Mining Corp.) The shareholder approval needed to close the deal should be a formality.

Sometimes, a Cigar Lake is more than just a Cigar Lake. This consolidation of assets globally means bigger is better. It’s more expensive to drill here than in many other parts of the world. In the Basin all-in costs run $400 – $500 a metre to drill for uranium in fairly deep rock at 300plus metres, while in the Archaen rock of northern Ontario drill costs are less than $100 a metre. Consolidating Fission and Denison to reduce overhead and gain purchasing power makes financial sense.

It’s clear the Resulting Issuer will have a portfolio of exploration and development properties, plus the ability to eventually ramp up valuation by exploiting undervalued properties in Zambia and Mali. That mitigates risk for shareholders in the medium and long terms. What’s interesting in the short-term is free cash flow: the toll-milling of ore from the Cigar Lake Mine and management fees from Uranium Participation Corporation should provide the Resulting Issuer with free cash to help fund its activities.

There are of course weaknesses in the deal. Denison and Fission operate on opposite sides of the Basin which will reduce the operational savings otherwise expected. There will be some management reduction but not enough to materially matter. Denison’s package of assets is not as good as Fission’s, but this is offset by the free cash flow to be generated from Denison’s assets.

Overall, though, this transaction changes the game in the Basin. With over 20% of the world’s uranium coming from here, what happens in the Basin has global repercussions.

Denison and Fission hosted a joint conference call and webcast on July 7, 2015 to discuss the business combination. A live webcast of the conference call can be accessed via www.denisonmines.com or www.fissionuranium.com.


Peter Clausi

Editor:

Mr. Clausi is an experienced investment banker, executive and director. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, Mr. Clausi ... <Read more about Peter Clausi>


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Comments

  • leewebb

    On the conference call, I was struck by the emphasis on cash flows that Denison brings to the deal, but then the slides show the the actual cash flow from the mill for 2015 is only $2.5M. Seems almost immaterial relative to the market cap of the combined entity. Overall feels like a poor deal for Fission. They give up half their share of the top notch PLS project, in exchange for a share in Denison’s relatively weaker projects (some not 100% owned) and modest cash flows.

    I was surprised that FCU traded at less than 1.26 x DML today. I would have expected FCU to trade at a premium given the potential for a competing bid from a different suitor before this merger deal closes.

    July 7, 2015 - 5:05 PM

  • Peter Clausi

    Re the competing bid: I haven’t seen the actual LOI so I don’t know for sure, but I suspect there must be a break fee of enough size to prevent competing bids. This was disclosed as a binding LOI so the break fee would be expected. No competing bid means no premium over the 1.26x.

    July 7, 2015 - 5:32 PM

  • leewebb

    The break fee is $14M.

    For camparison, I believe the Hathor/Rio break fee was $20M.

    July 7, 2015 - 5:56 PM

  • Peter Clausi

    So there’s your answer as to why no premium. No one expects a competing bid because the break fee is there and because the deal overall is rationally priced by both sides.

    July 7, 2015 - 6:00 PM

  • leewebb

    I would argue the opposite on the break fee. Cameco was willing to pay $20M to outbid Rio when it submitted it’s buyout offer in the 2nd round of the Hathor bidding.

    Can’t argue with your comment that the market sees this as rationally priced. I personally see it as FCU getting run over, but clearly others see it differently.

    July 7, 2015 - 6:14 PM

  • Stephan B. Feibish

    I used to own a bunch of uranium miners. Not anymore. I can’t even remember t heir names. They all seem to be taken over by Energy Fuels, Dennison, …

    “There can only be one.”
    French model/actor guy

    July 7, 2015 - 6:18 PM

  • Stephan B. Feibish

    mistake
    English model/actor guy

    July 7, 2015 - 6:25 PM

  • Peter Clausi

    This merger sets up the resulting issuer as a prime takeover target for any foreign company wanting some degree of control over global uranium supply.

    July 8, 2015 - 11:00 AM

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  • leewebb

    Clearly the market thinks otherwise. Off -20% since merger announcement.

    To me it feels like investors are fearful and confused ever since the merger conference call. The presentation and Q&A was not very well articulated and further quotes in the press have not inspired confidence.

    July 20, 2015 - 12:21 PM

  • Peter Clausi

    This is an all-stock deal with shareholders of each getting shares in the Resulting Issuer. That means the absolute valuations aren’t as meaningful as are the relative valuations. Deal was announced July 6 after market. That day, FCU was 97 cents, and DML was 88. Today, it’s 81 and 68 respectively. For FCU, that represents a 16.5 % decrease and roughly 22% for DML. They’re both trading in the same range. What the market is saying is that the uranium market got a bit tougher over that period, not that there’s anything fundamentally wrong with the deal.

    July 20, 2015 - 12:40 PM

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