Digging deeper into the Fission-Alpha deal

VANCOUVER — In one of the more prominent junior deals of the year, explorer Fission Uranium (TSXV: FCU; US-OTC: FCUUF) opted in the last few weeks to fork over US$185-million in equity to take over joint-venture partner Alpha Minerals (TSXV: AMW; US-OTC: ESOFF). As a result, Fission will assume full control of the Patterson Lake South (PLS) uranium discovery in Saskatchewan’s Athabasca basin.

The Northern Miner sat down with Fission chairman and CEO Dev Randhawa to get a better look at the arrangement and negotiation process. Both companies acknowledged that the deal had been in the works for a few months, though according to Randhawa, it had been the endgame ever since his company sold its Waterberg uranium assets to Denison Mines (TSX: DML; NYSE-MKT: DNN) in January.

“Once we sold the assets to Denison, it was obviously just a question of ‘when are these companies coming together?’” Randhawa recalled. “I remember an investor saying that whichever company ended up with the higher premium following that deal would end up in charge, and that’s the way it should be.”

But he said that was “a concern for us. We did not want to be acquired because we feel we were the people who should be running this deal based on the results that Ross McElroy and Ray Ashley have been coming up with at PLS.”

In the end the companies agreed on a deal structure that will see Alpha shareholders receive 5.725 shares of Fission for each share held, which represents a 14.5% premium on Aug. 23, compared to an  11% premium in the initial informal offer. Both Alpha and Fission will also spin out all non-PLS assets into vehicles that will receive US$3 million in cash to get started.

Randhawa argues that Fission’s superior valuation is a result of two factors: the company has a stable of other promising assets in the Athabasca basin that could support a new company; and Fission retains exclusive rights to its recently patented geophysics technology, called “System and Method for Aerial Surveying or Mapping of Radioactive Deposits.”

“We had discussed potentially putting a value on that technology and including it in the deal, but that didn’t work out,” Randhawa said, noting that he was surprised when Alpha put zero value on the patent during negotiations.

“You have this entire edge of the Athabasca basin, and you can take this technology and pursue prospecting you would normally have to do by hand, by air. That’s a pretty significant advantage going forward when it comes to project generation,” he adds.

Amongst the assets Fission will spin out into a new vehicle, its most promising, according to Randhawa, is the wholly owned North Shore property located in Alberta, along the northwestern margin of the Athabasca basin.

In late August Fission announced it had discovered two significant and strongly radioactive uranium source anomalous regions at North Shore, which will be high-priority drill targets for its spin-out company.

Radiometric data collected during airborne-magnetic surveys identified elevated total counts with correlated elevated uranium concentrations. Fission notes that the width and responses of the peaks show that some of the larger anomalies are likely part of the outcrop and sub-crop, as opposed to boulders.

“We’ll need to do another raise on our new company, but I don’t foresee that coming until January. We’ll likely be drilling at North Shore in the future, as how could we resist punching a hole there? People are realizing that’s a pretty good asset to start a new company with,” Randhawa said.

When asked about the timing of Fission’s offer for Alpha — the companies are in the midst of a US$7-million drill program at PLS — Randhawa explained that a number of Alpha shareholders approached Fission about moving ahead with the takeover.

He says around 30% of Alpha’s investor base ended up requesting a deal, with most concerns surrounding Fission’s superior valuation and liquidity.

Fission has 151 million shares outstanding, and trades an average 4.3 million shares per day. By comparison, Alpha maintains 27 million shares outstanding, and trades 243,000 shares daily. Fission will dilute itself around 93% — or 138 million shares following the deal — though Randhawa says he is not concerned, since most of the equity will end up in the hands of keen investors.

“We were totally ready to go hostile,” he said. “We had hired Kingsdale Shareholder Services, and basically what we were hearing from the investors on Alpha’s side was that if management didn’t want to go with Fission that was fine, but the shareholders wanted to go with us. I suspect we would have had the votes anyway, but I’m quite glad it ended amiably.”

Fission and Alpha collectively had around US$33 million in cash at the time of the deal. Randhawa speculates that the transaction costs could total US$8 million, with the spin-out companies taking another US$6 million.

The deal is expected to close in November, and Fission will continue an aggressive drill initiative at PLS over the next several months. Randhawa is convinced the company may not reach the resource-definition stage at the project, as he speculates that Fission could be taken out by a larger suitor early next year.

“We were aware of the necessity to have PLS under one umbrella. I mean, as long as there were those two companies you have that built-in ‘poison pill,’” he commented. “I can tell you that both AREVA and Cameco (TSX: CCO, NYSE: CCJ) have their models done on the deposit. What makes PLS so simple is that it’s high grade and it’s shallow. That gives a degree of flexibility in development and production that is attractive to potential bidders.”

Meanwhile, Fission is releasing more high-grade uranium assays at PLS. On Sept. 4 the company announced results from hole 13-075 at its R390E zone, which cut 54.5 metres grading 9.08% uranium oxide. The result represents not only the best interval to date at PLS, but could hold its own with any recent drill hole across the Athabasca basin.

Since news of its agreement with Alpha came out on Sept. 3, Fission shares have dropped 13.4%, or 18¢, before closing at $1.16 per share at press time. Shares have traded within a 52-week range of 52¢ to $1.48, and the company has a $175-million market capitalization.