Denison Mines Corp T.DML

Cantor Fitzgerald comments on the merger between DML and FCU

[stockguru1982]

According to Cantor Fitzgerald:

https://personal.crocodoc.com/3qiVtov

DENISON MINES CORP/FISSION URANIUM

Betting that size matters: Denison Mines and Fission Uranium to combine

DML Recommendation: BUY

One-year DML target: C$1.70

FCU Recommendation: HOLD

One-year FCU target: N/A

EVENT

Denison Mines and Fission Uranium have announced the execution of a binding letter agreement to merge the two companies.

BOTTOM LINE

Neutral - The combined company will be more appealing to acquirers that are looking to sweep up a large portfolio of quality assets in the Athabasca Basin. Moreover, the combined company will sport a larger valuation that will be more attractive to institutional investors with minimum market capitalization constraints. On the other hand, the merger does not seem to have many obvious synergies as Denison’s eastern Athabasca assets and Fission’s western basin assets are too far apart to share many costs significantly.

FOCUS POINTS

Deal terms: According to the terms of agreement, FCU shareholders will receive 1.26 common shares of DML as well as a cash payment of $0.0001 for every share of FCU.

Valuation: Based on yesterday’s closing prices, the offer translates into a $1.11/share value for each FCU share, or a 14% premium. FCU last traded at $1.11/share on June 15th. We do note this is a merger of equals valuation and not a takeout valuation. The combined company will be approximately owned 50/50 by existing shareholder on a fully diluted basis. The transaction translates into a $4.04/lb. (US$3.18/lb.) multiple for FCU. This is roughly in-line with the average transaction multiple of US$3.95/lb. post-Fukushima.

Betting on size mattering: The combined company will be a market cap of approximately $900M, making it the second largest uranium company behind Cameco.

MERGER OF EQUALS LEADS TO THE SECOND LARGEST URANIUM COMPANY

Based on recent market capitalizations, the combined company (to be named “Denison Energy Corp.”) would be approximately $900M, which would make it the second largest uranium company behind Cameco’s (CCO-TSX, CCJ-NYSE; Buy; Target: $27.25) $7.3B. The increased size is a positive as there are many institutional portfolios that can only invest in companies with market capitalizations that are north of $1B - the larger size will likely lead to increased visibility, liquidity, and potential for index inclusion.

Headlining the asset portfolio of the combined company will be two world class uranium exploration and development projects: Fission's 100%-owned Patterson Lake South Project and Denison's 60%-owned Wheeler River Project. The combined company will effectively hold all notable projects in the Athabasca Basin that is not held by Cameco or NexGen Energy (NXE-TSXV, Buy Speculative). If someone wanted to make a large move into the Athabasca Basin, the combined Denison-Fission company would make an excellent choice in terms of a one-stop uranium shop for exploration/development stage assets.

Moreover, the new company would enjoy the cash flow of the McLean Lake Mill (Denison owns 22.5%), which enjoys earnings from processing feed from Cameco’s Cigar Lake mine. The mill itself is in the process of being upgraded and approved for total annual intake of 27M lbs. Note that from Denison’s management of Uranium Participation Corp. (U-TSX; Buy; Target: $6.75) and its stake in toll milling, annual cash flow of $5.5M is expected.