EFR mentioned in the Financial PostSXR's inverse perfect storm
Barry Critchley
Financial Post
Tuesday, October 31, 2006
Here's one prediction that is a dead set certainty: SXR Uranium Inc. will raise an additional $22.5-million from its equity offering once the underwriters exercise the so-called overallotment option during the next 30 days. SXR's offering closes today.
How do we know that?
The short answer is that we don't. But one has to look no further than the market price of SXR's shares -- they closed yesterday at $12.70 -- relative to the $8.30 issue price of its latest offering for the answer.
That the stock is way up means the extra 2.72 million shares, the so-called overallotment shares, have been placed -- just like the 18.1 million available under the firm offer -- and today will be sitting firmly in investors' accounts.
On the other hand, if the stock was trading near the $8.30 issue price, we couldn't be as confident about our prediction. In that case, the shares under the overallotment option would have been allocated, and perhaps used for market-stabilization purposes.
Under that process, the stock is allocated and the lead underwriter -- on behalf of the syndicate -- buys shares when the market price falls below $8.30. In this way, extra demand is created. And the lead may sell shares when the stock is running higher.
But when the stock runs and runs and runs, the lead does nothing to stabilize the market -- because there is nothing to do.
So, why is the trading price of SXR Uranium's shares so far above the issue price on its recently completed equity offering? The investors -- and SXR -- achieved what can be described as an inverse perfect storm. In short, it lucked out with lots of good news -- the dead opposite of a perfect storm.
Here's how:
- SXR filed a preliminary prospectus on Oct. 16 for a new issue, the sale of 18.1 million shares at $8.30 per share. Prior to the deal being announced, SXR traded at $8.55. Accordingly the issue was priced at a 3% discount.
- A few days later, workers at Rio Tinto Group's Rossing Uranium facility went on strike.
- At the same time, Cameco Corp. the country's largest producer, reported a flooding in its unfinished Cigar Lake mine. "There is no doubt that a good part of the outperformance is based on the RTZ and the Cameco situation," said one observer, who noted that SXR is in a good position because it is close to near-term production.
- Uranium is already a hot commodity. According to Ux Consulting Co., the spot price for uranium was US$56 a pound on Oct. 23, up from US$41 last May. Five years ago, a pound of U3O8 was changing hands at about US$8 a pound.
There was a report yesterday that the spot price is now a touch above US$60 a pound.
More important, the outlook is positive. There are a few investment professionals who contend the price will rise to US$100 a pound. But when the price is measured in real terms, the current price is still a tad lower than prices that prevailed over the past three decades. Despite the strong recent performance of SXR's shares, one question remains: Why didn't the stock rise that much from the $7.65 price of last February's financing to the $8.30 of two weeks back? In fact, the share price did rise over the period, but the market knew a deal was coming because of some recent SXR acquisitions, purchases that would require the raising of capital.
One such purchase was RTZ's Sweetwater uranium mill in Wyoming. That acquisition needed at least US$65-million. As well, SXR needed cash to finish one of its projects in Australia.
SXR Uranium, which also trades on the Johannesburg Stock Exchange, is also no stranger to raising piles of cash. Earlier this year, it announced plans to raise US$65-million via a brokered private placement. (BMO Nesbitt Burns was leading the charge.)
That issue ended up at US$147-million. In that deal, SXR sold 22.3 million shares at $7.65 a share. At that time, the shares were priced at a 2.3% discount to the market price.
SXR has been public for less than a year. Late last year, the then Southern Cross Resources (a Canadian company with an Australian operation) acquired Alfease Gold and Uranium Resources Ltd. (a South African company with a long name) by way of a scheme of arrangement and changed its name to SXR. SXR owns the Dominion uranium project in South Africa and the Honeymoon uranium project in Australia. It also has some gold operations. SXR should be producing uranium by the first quarter of 2007.
Energy fuels
SXR's new shareholders are not the only ones to have profited from problems at Cameco and RTZ. Consider Energy Fuels (EFR/TSX, Venture) which is the enviable position of having to raise $10-million of capital via the sale of units at $1.40 per unit. Each unit consists of a share plus half a share purchase warrant. The warrant runs for 18 months and gives the holder the right to buy another share at $1.75. Energy traded at $1.58 before the deal was announced. The shares closed yesterday at $2.08, up 26 cents.
© National Post 2006