Uranium Junior NexGen Energy, The Next Big Takeout in Athabasca?
I believe that the last 3 press releases in August, describing 2 spectacular drill holes from Athabasca junior NexGen Energy (TSXV: NXE) makes it a question of when, not if, the company gets acquired. The most likely candidate is Fission Uranium. However, there’s also the possibly of existing Athabasca players Denison, Areva, KEPCO, Rio Tinto and Cameco. Further, there’s various new entrants into the basin such as Glencore or Russia’s Rosatom (owner of Uranium One), Teck Resources and a Chinese SOE. Taken together, one or a few (through a JV) are likely to acquire NexGen in the next 6-18 months.
Why is NexGen an increasingly likely takeover target?
NexGen is run by an expert team and Board who spent considerable time scouring the world for uranium opportunities. Nothing compared to what they found in Athabasca, where the average grade is 10x that of the rest of the world’s. Of course, the eastern side of the basin is well penetrated by projects like Cameco/Areva’s Macarthur River and Cigar Lake, Rio Tinto’s Roughrider, Dension’s Midwest, Denison’s/Cameco’s Phoenix, Denison’s/KEPCO’s Waterberry Lake and others. That’s why NexGen prudently accumulated the largest land position in the western portion of the basin. The company locked up property cheaply, before the tremendous Patterson Lake South, “PLS” discovery by the Alpha Minerals/Fission Uranium JV. Fission subsequently acquired Alpha Minerals and has an Enterprise Value, “EV” of about C$ 400 million. NexGen is trading at an 80% discount to Fission at an EV of roughly a C$ 80 million.
Fission Probably the most likely suitor
Fission has single project risk at its PLS project and that deposit is located under a lake. Therefore, NexGen would greatly diversify Fission’s valuable asset, and give it operating flexibility. Perhaps Fission would develop NexGen’s Arrow (part of Rook 1) project before PLS? With greater financial resources and a lower cost of capital, Fission could efficiently develop PLS and more aggressively pursue multiple NexGen targets, most notably the company’s possible extension of Fission’s PLS deposit at Arrow. Importantly, Arrow is located very close to PLS but is not under a lake. An acquisition by Fission would likely offer the greatest number of synergies and give Fission exposure to the east side.
NexGen is much more than a one trick pony. In addition to blockbuster results in August at Arrow, NexGen controls roughly a dozen other targets, including a few highly prospective targets on the east side of the basin. Interestingly, Rook 1’s Arrow discovery was initially ranked #9 on the company’s list of targets. However, after Fisson’s PLS discovery, NexGen wisely moved Arrow to the top of the list. NexGen has an option to acquire 70% (with a right of first refusal on 30%) of the Radio project, directly adjacent to Rio Tinto’s Roughrider deposit.
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NexGen has important assets on BOTH sides of the basin
Rio Tinto acquired Hathor Exploration, for $654m in December, 2011 or about $11/lb of uranium resource. A third main asset of NexGen is the Thornburg deposit, which some believe is as important as Radio, (which Rio Tinto has 10% of). Thornberg is located close to Cigar Lake. Therefore, we have clear motives for Fission, Cameco, Denison, KEPCO (also partnered with Denison on the J-zone) and Rio Tinto to be naturally inclined to acquire NexGen.
NexGen has the second most exciting play in western half of the basin, 100% of Arrow. The company has 2 assets (Radio & Thornburg) located near Dension, Areva, Cameco, KEPCO and Rio Tinto on the eastern half. Notice the number of joint ventures on these projects. That’s another reason why I think the odds of a takeout of NexGen have improved dramatically with the last two drill holes.
NexGen’s Arrow discovery vaults it to the advanced exploration stage in the highest grade basin on the planet. Arrow could have a maiden resource within 12 months, before some of the previously named projects and probably before ten of the dozen or so public juniors that I could identify in the basin. For majors like Cameco, Rio, Areva, KEPCO and Denison, taking out NexGen would not initially move the needle, but would deliver a project (Arrow) with better prospects than some of their own, while giving them significant exposure to the west side. The price tag of NexGen would be no problem for Rio, Denison, KEPCO or Cameco, although Areva has been struggling of late and has high debt leverage.
What about Teck, Glencore, Russia, India or China?
Perhaps long shots, but look at Teck Resources for a moment- it has no uranium assets, but a significant investment in energy in the form of oil sands assets and Teck is a Canadian company. Glencore is interesting as a diversified commodities player, but also one that is known to go after companies at the bottom of the cycle. Uranium is certainly bouncing along at the bottom of the cycle. Russia’s Putin is exerting influence and projecting power around the world largely due to his country’s vast endowment of natural resources. Russia is very actively pursing all things Nuclear and is said to control 40% of the world’s uranium enrichment facilities. How about an Indian Energy Conglomerate, few countries have more need for uranium than India.
China’s nuclear program is growing faster than any other country’s and will need to be fed. China, like an increasing number of countries around the world, may not want to rely on Africa or Russia for uranium supply. China is on the hunt. For example, China Guandong Nuclear paid $2.3 billion for Husab in Africa.
There are many reasons why a host of mining companies might want to take a shot at NexGen. The last two drill holes make an acquisition attempt far more likely. Perhaps not this year, but 2015 seems quite reasonable. In the meantime, if NexGen can continue to report progress at Arrow, including a maiden resource, the stock price should move up even without a takeout. I don’t believe that a takeout premium is in the stock yet, but that could change quickly. One way or another, I see NexGen stock doubling within the next 6-12 months.
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