Takeover bid for Hathor turns nasty

Cameco Corp.’s (CCO-T, CCJ-N) hostile takeover bid for Hathor Exploration (HAT-V) turned uglier today when the uranium producer slammed the credibility of the junior’s preliminary economic assessment of its Roughrider deposit in northern Saskatchewan.

“Based on our extensive experience developing and operating projects in the Athabasca Basin, we believe Hathor’s PA significantly underestimates the costs, timelines and risks associated with development of the Roughrider deposit and so, by inference, significantly overstates the value of the Roughrider deposit and Hathor as a company,” Tim Gitzel, Cameco’s president and chief executive, declared in a news release put out this morning.

“We are convinced that the development of Roughrider as a standalone operation cannot be economically justified using realistic development cost and timeline assumptions. The economics work for Cameco because we have existing infrastructure in the Athabasca region including nearby milling capacity.”

Hathor’s board has urged shareholders to reject Cameco’s $520 million ($3.75 per share) all-cash bid launched on Aug. 30 and yesterday released a PA on its Roughrider deposit. The PA, which doesn’t include the Far East Zone, outlines a pre-tax net present value (NPV) of $1 billion, a 38% internal rate of return (IRR) and a payback period of 1.2 years, using a discount rate of 7% and a uranium price of US$70 per lb.

The undiscounted pre-tax NPV rises to $2 billion over an estimated eleven year mine life, based on 5 million pounds U₃0₈ per year mill output, generating total mine and mill production costs of $14.44 per lb. U₃0₈. Hathor explains that the low cost of production is mainly due to the low daily milling rate of about 200 tonnes per day.

The PA envisions four years of mine construction, followed by more than ten years of mining and milling to produce 52.3 million pounds of U308. Because the deposit is relatively shallow, Hathor plans to use a decline to access the underground workings as opposed to developing multiple shafts. The PA forecasts capital expenditures for the mine and mill of about $567 million, including a 25% contingency.

In its press release, however, Cameco argues that Hathor’s capital expenditure estimate “is not credible” and uses Denison Mines (DML-T, DNN-X) as an example. In January Denison estimated that the capital expenditure necessary to build a comparable mine to access its Phoenix deposit, also in the Athabasca Basin, excluding construction of a mill and tailings management facilities, was $690 million, Cameco noted.

Cameco also asserted that the PA’s estimate of $14.41 per lb. U₃0₈ in operating costs was “unreasonably low when compared to mines operating in the Athabasca Basin for many years,” and pointed to its own McArthur River uranium mine as an example.

“Despite significantly lower grades, Hathor’s PA suggests that Roughrider can produce uranium at a much lower cost than McArthur River,” Cameco states. “McArthur River is generally perceived by the uranium industry as the best underground uranium mine in the world. Hathor suggests that based on its PA, prior to establishing a reserve or completing proper feasibility studies, that Roughrider has already achieved this status.”

In a conference call today Hathor’s president and chief executive Michael Gunning reiterated the arguments outlined in the company’s Directors’ Circular urging shareholders to reject Cameco’s bid, calling it “predatory and opportunistic” and one that “pre-empted Hathor’s preliminary economic assessment and anticipated Far East mineral resource estimate.”

“The Cameco offer clearly falls short of what we would consider fair value for our shareholders,” Gunning told analysts and investors on the conference call. “We see a wide gap between what Cameco is offering and what Hathor shareholders actually deserve.” He also noted that the offer was “fraught with conditions that are only to the benefit of Cameco,” including ones that “give Cameco the right to terminate the offer at its discretion.”

When asked by investors what he considers fair value for the company, Gunning said it was not appropriate for him to comment, explained that there are many different criteria used in determining value, and guided investors to portions of the Directors’ Circular where “there are clear examples of recent precedents in recent transactions.”

According to the Circular, for instance, Cameco’s offer “undervalues the intrinsic value of Roughrider based on the discounted cash flow model in the independent PA” and says it is “significantly below premiums paid in recent comparable transactions.”

“Twenty-day VWAP premiums paid in 22 completed transactions in the mining sector, believed to include all completed transactions commenced by an unsolicited offer since 2007 with an equity transaction value greater than $100 million, have averaged 75%, with premiums for the development project subset averaging 99%,” the Circular stated.

In addition Gunning pointed out that Cameco’s offer does not recognize the value of Hathor’s exploration assets, including its 71,670-hectare Russell Lake exploration project in the southeastern part of the Athabasca Basin.

Gunning also emphasized the opportunistic timing of Cameco’s offer–which came at a time of depressed uranium prices and a significant decline in the share prices of uranium companies following the Fukushima nuclear plant disaster, not to mention the general market downturn over the last two months. He also noted that Cameco’s offer fails to recognize the strategic importance of the Athabasca Basin as the pre-eminent primary uranium producer in the world and “fails to recognize the ‘best of breed’ quality” of Roughrider compared to other undeveloped uranium deposits.

For its part Cameco continues to believe its offer provides full and fair value to Hathor shareholders. At $3.75 per share, Cameco maintains that its offer provides an all-cash premium of 40% over Hathor’s closing share price on Aug. 25, a 33% premium over Hathor’s 20-day volume weighted average trading price to Aug. 25, and a 31% premium over Hathor’s pre-Fukushima closings hare prince on Mar. 11.

Hathor closed at $4 per share within a 52-week range of $1.50 (Mar. 16 2011) and $4.21 (Sept. 8 2011). The Vancouver-based junior has about 125.4 million shares outstanding.