Salman Partners comments on the merger between DML and FCUAccording to Salman Partners:
Uranium M&A
Consolidation of Denison and Fission positions the Athabasca Basin for a major foreign investment
Background: Denison Mines Ltd. (DML - TSX) is a uranium exploration and development company with projects in Canada, Zambia, Mali, Namibia and Mongolia. The company's key assets are its 60%-owned Wheeler project, hosting the high grade Phoenix uranium deposit, in the Athabasca basin, in Saskatchewan. Denison's interests in Saskatchewan also include a 22.5% ownership interest in the McClean Lake joint venture, which includes the McClean Lake uranium mill, which is currently processing ore from Cameco Corp.'s (CCO - TSX) Cigar Lake mine under a toll milling agreement. Denison is also the manager of Uranium Participation Corp. (U - TSX), a publicly traded company which invests in uranium oxide and uranium hexafluoride.
Fission Uranium Corp. (FCU - TSX) is focused on the exploration and development of its 100%-owned Patterson Lake South uranium property - host to the world-class Triple R uranium deposit, in the Athabasca Basin, in Saskatchewan.
Event: Last night, Denison and Fission jointly announced a binding agreement to combine their respective businesses. "The Transaction creates a leading Canadian focused diversified uranium company ... [with] two world class uranium exploration and development projects: Fission's 100% owned Patterson Lake South Project, and Denison's 60% owned Wheeler River Project."
Analysis: We believe that the combined company Denison Energy would achieve a critical mass to attract substantial investors who are bullish on the long-term prospects of the nuclear energy or who need a secure access for uranium feed for their nuclear power plants.
Given the current capacity constraints at all three uranium mills in the Athabasca basin, we believe it unlikely that Denison Energy's greenfield projects could be developed without the construction of a new mill. Thus, we believe that potential strategic investors or acquirers who would be interested in Denison Energy and its world class projects would either already own an existing mill or contemplate permitting and constructing of a brand new one.
• Cameco could contemplate submitting a competing bid for Fission, or, it could later acquire the combined company, Denison Energy, in order to lock these world class assets and maintain its grip on the supply management of the uranium market.
• A foreign entity could contemplate:
• acquiring Denison Energy and trying to demonstrate to the Canadian government that there are no Canadian partners that would be interested in leading the development and mining of Denison Energy's mining projects. (Paladin Energy's was successful with such an approach with its Michelin project in Labrador.) We consider this scenario unlikely.
• becoming a minority (e.g. 49%) owner and a strategic investor in Denison Energy with the long term goal of permitting and constructing a brand new uranium mill in Athabasca.
• Potential foreign investors could include:
• Chinese nuclear power entities. On December 3, 2014, China General Nuclear Power (CGN) raised US$3.16 Bn and on June 2, 2015, China National Nuclear Power (CNNPC) announced a US$2.6 Bn raise. Furthermore, on December 5, 2014, Chairman of CGN Uranium Resources, said "Canada's uranium reserves are among the largest in the world and we hope to cooperate with Canadian enterprises to complete the mission".
• Rio Tinto. In 2011, Rio Tinto outbid Cameco and acquired Hathor Exploration, which owned the Roughrider uranium deposit in Saskatchewan. Since then Rio has been doing some exploration work on the project. We also know that Rio is quite comfortable operating projects with and/or through partners such as Bougainville Copper Limited (BOC - ASX), Energy Resources of Australia Ltd. (ERA - ASX), and Turquoise Hill Resources Ltd. (TRQ - TSX).
How to play:
• Buy Fission if you believe that a competing bid would surface (perhaps from Cameco);
• Buy Denison if you believe it would attract a large strategic investment or a take-over bid from Cameco, Chinese nuclear entities and/or Rio Tinto;
• Buy NexGen Energy Ltd. (NXE - TSX-v) and Forum Uranium Corp. (FDC - TSX-v) that own uranium projects in close proximity to Fission's Patterson Lake South project, as potential plays for further consolidation in Athabasca.