Eldorado, SMDC deal possible brokers’ boon

The privatization of Canada’s as yet unamed uranium mining giant, is expected to spark a scramble by deal-hungry corporate finance departments vying to get a piece of the action. Following the October 19 crash last year, most corporate finance people at the major Canadian investment houses have seen their business evaporate as only a trickle of equity issues have come to market.

With the proposed merger of Saskatchewan Mining Development and Eldorado Nuclear into a new $1.6 billion resource company and the plan to sell equity to the public, the deal represents a big potential piece of business to the brokers. “Any corporate financings today are a treasured commodity. People will be scrambling to get a piece of this action,” an analyst with a major investment house told The Northern Miner.

For investors, both Canadian and foreign, who are considering portfolio exposure to uranium, the new Canadian entity will be tough to beat.

When merged, the company will be capable of producing almost 18% of the world’s total uranium output, The Northern Miner estimates. The new company will also control the largest and richest uranium reserves in the world — enough to make it the largest and lowest cost producer well into the year 2,000.

Prior to the merger announcement, both companies were crown corporations: smdc administered by the province of Saskatchewan and Eldorado by the federal government in Ottawa. The Eldorado sale is part of the Conservative government’s privatization policy.

Following the creation of the new company, smdc will hold a 61.5% interest in return for its assets and Eldorado will get 38.5%. The new firm will then embark on a program of public share offerings in Canada, which over a seven-year period is expected to dilute both government agencies holdings to nil. Debt on the books, before the share offerings, stands at almost $1 billion.

Due to the stagnant nature of the equity markets and the generally flat performance of uranium prices over the past five years, the future issues will “probably need an 8% yield to be considered attractive,” the analyst, who refused to be identifed, explained. “It won’t trade like a gold issue.”

Offshore investors, especially foreign utilities committed to long- term nuclear generating programs, will likely show some interest in buying a piece of the new firm. This will probably come from Japanese, Korean and German companies. However, foreign ownership of the company is limited to a maximum of 20%. These companies and Candian investors will be attracted to the combined annual output capacity of more than 15 million lb of uranium.

Last year, Eldorado churned out 7.9 million lb of uranium whereas smdc produced approximately 7.1 million lbs — a combined total equal to more than 18% of 1986 global output of 81.8 million lb, The Northern Miner estimates. The bulk of Eldorado’s production came from the Rabbit Lake mine and mill complex in northern Saskatchewan. Most of smdc’s output comes from a 50% interest in the Key Lake mine — the world’s largest.

With respect to reserves, both Eldorado and smdc control the richest rock in the world. By the mid-1990s, the Cigar Lake deposit, owned 50% by smdc and located in Saskatchewan, will come on stream. The deposit hosts more than 385 million lb of uranium in ore grading 12% uranium oxide per tonne. By contrast, the average U.S. uranium mine processes ore grading on average a miniscule 0.1% uranium oxide per tonne. Combined with a relatively low prices of $18(US) per lb, grade and long term sales contracts are the key to survival in the uranium business — factors both enjoyed by Eldorado and smdc.

Investors will also be encouraged by forecasts for commodity price increases beginning in the early 1990s. This, industry observers feel, will come about as the huge stockpiles of uranium are consumed and demand begins to exceed mine production.