Cameco Corp.’s (TSX:CCO,NYSE:CCJ) announcement that it intends to raise up to $1 billion has generated considerable speculation and commentary from analysts who believe that the uranium producer could be actively seeking a large acquisition.
Cameco demonstrated capital allocation restraint by withdrawing from last November’s competition for Hathor after Rio Tinto (LSE:RIO,NYSE:RIO,ASX:RIO) increased the bidding stakes several times. However, Cameco recently acquired uranium trader NUKEM Energy GmbH for $136 million, following an earlier $150 million acquisition of AREVA‘s (EPA:AREVA) 28 percent interest in the Millennium project.
While the price of uranium has remained relatively stable, since the end of November volatility in the equity market has revealed weaker sentiment for some uranium mining and exploration companies and has strengthened the positions of others. This time period might be of significance to investors as it benchmarks the date that Cameco officially conceded the bidding war for Hathor at $654 million. At the time, many analysts believed that with its strong position within the Athabasca Basin, Cameco had the most synergies that it could reasonably achieve, and may have also had a compelling interest in keeping Rio Tinto out of the region.
Competing capital requirements
In a recent presentation to investors at the Bank of America Merrill Lynch 2012 Global Metals, Mining & Steel Conference in New York, Alice Wong, Cameco’s senior vice president and chief corporate officer, discussed operational priorities. “Ongoing exploration is important to us, so we have a direct interest in almost 75 active exploration projects in nine countries. Our approach to obtaining assets has been and continues to be strategic, planned and disciplined in order to remain one of the world’s lowest cost and largest producers, well into the future.”
Cameco is already a leading, low-cost uranium producer with a relatively strong balance sheet consisting of approximately $1.4 billion in cash and short-term investments as of the end of March. Given its relative financial strength and ability to generate free cash flow, the point that has drawn speculation is the company’s intention to raise an additional $1 billion of financing.
Bhagyesh Dash of Singapore-based Bromius Capital discussed the prospects with Uranium Investing News, commenting, “being the leading producer, Cameco is at the ‘coal face’ when it comes to demand for uranium, and I believe it is well understood in the industry that nuclear energy will play a key role in the energy mix for the world moving forward. Asians, especially the Koreans and Chinese, are still seeking to shore up uranium supplies for the future and are now moving upstream to acquire projects, such as CGNPC’s acquisition of Kalahari.”
Dash believes that the increased likelihood of an acquisition from Cameco “should certainly liven up the sector as others look to emulate Cameco and grab assets that are trading at very cheap levels now. General consolidation in the junior sector is also quite possible as juniors look to aggregate to create minimum critical size of resource base and make themselves more attractive to either Asian strategics or the likes of Cameco.”
Competing with strategic Asian investment interest will stimulate growth. Dash stated that “clearly those miners which are targets for the likes of Cameco should experience a re-rating in stock price. These would be those with projects in Canada, Australia, and possibly Africa and Kazakhstan. Miners who already have a decent resource with large upside potential and those close to or in production will be the targets. Targets will have projects in jurisdictions that are conducive to uranium mining, so certain states of Australia, Canada, Africa, and Kazakhstan make sense.”
In a recent note, Dave Talbot, vice president and senior mining analyst at Dundee Capital Markets, indicated that the company continues to favor Paladin Energy Ltd. (TSX:PDN,ASX:PDN) as the top pick of the established producers and is “looking forward to pending M&A activity that could give clarity to its pipeline development strategy, improve its balance sheet and remove project financing risk.” Talbot also presciently wrote, “[c]onsolidation in the Athabasca Basin is happening,” with targets including UEX Corp. (TSX:UEX), Fission Energy Corp. (TSXV:FIS), Forum Uranium Corp. (TSXV:FDC), and Pitchstone Exploration Ltd. (TSXV:PXP).
Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.