TER: It looks like over the last six months, the unweighted basket of uranium stocks has lost nearly half its market cap. Has this affected its ability to raise funds for capital expenditures? And, if so, are there some good acquisition targets in the pile?
GM: Absolutely. I would like to take a step back to say that I think a number of company boards in the sector were cognizant of the 2008 financial crisis and the requirements to have significant working capital to keep their main projects going. Given that backdrop, many companies raised cash in late 2010 and early 2011 to keep projects progressing and to maintain other objectives, e.g., continue with permitting, maintain resource definition programs and undertake exploration. So, many companies have a good position to keep going. That being said, post-March 11 there has been a tangible lessening in the ability of companies in the sector to raise capital for exploration and large-scale development projects. Low stock prices have led to companies cutting back on work programs to better maintain working capital positions, and to minimize any potential future dilution.
The bottom line is that we are still looking for value. We are looking for acquisition targets. We still see that the uranium sector is very much a strategic commodity. There are still strategic acquisitions in the space for large, exploitable resources in uranium mining-friendly jurisdictions. One company in this category is Bannerman Resources Ltd. (TSX:BAN; ASX:BMN), which recently had a proposed cash offer of just over AUD$0.60 by Hanlong Mining Investment because it holds a significant asset in Namibia. We also saw earlier this year Kalahari-Minerals (LSE:KAH), the major shareholder of Extract Resources (TSX:EXT, ASX:EXT), engage in potential acquisition discussions with China's Guangdong Nuclear Power Corporation. So, we still see that large-scale resources represent strategic assets independent of where equity prices stand. Given the low equity valuations, these types of assets are even more prone to sovereign interests and other parties trying to lock up supply.
TER: You clearly don't believe $0.61 is going to fly, do you? Your target price is better than 100% implied return on Bannerman.
GM: We have a $0.90 target on the company based on our future commodity price expectations. Our view was that the proposal was opportunistically timed. We think the Etango project in Namibia represents one of the few projects out there that could be in production within four or so years. A number of other parties could seek an interest with Bannerman or engage in a joint venture for exposure to production. We still see more value than the offer that Hanlong put out.
TER: Hanlong probably wanted to see if the market would bid on the company.
GM: Obviously, Hanlong wanted to engage with Bannerman on potential acquisition. We understand that Bannerman will continue dialogue with Hanlong over the next period. But this period is not exclusive so the company can still discuss other options with other third-party interests.
TER: A ridiculously low bid, wouldn't you think? I believe you calculated that the bid valued the Etango project at about $0.85/lb. U308.
GM: That's correct, our estimates placed the bid with an implied EV/lb. metric of significantly less than $1/lb. U3O8. Compare that to the recent acquisition of Mantra Resources Ltd., which was based on implied EV/lb. somewhere near $9.
BMN Price at posting:
39.5¢ Sentiment: LT Buy Disclosure: Held
(20min delay)