Cameco‘s (CCO-T, CCJ-N) hostile takeover bid for Hathor Exploration (HAT-T) turned uglier when the uranium producer slammed the credibility of the junior’s preliminary economic assessment (PEA) for its Roughrider deposit in northern Saskatchewan.
“Based on our extensive experience developing and operating projects in the Athabasca Basin, we believe Hathor’s PEA 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 Sept. 19 news release.
“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, after releasing a PEA on its Roughrider deposit. The PEA, which doesn’t include the Far East zone, outlines a $1 billion pre-tax net present value (NPV), 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 11-year mine life, based on 5 million lbs. 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 200 tonnes per day.
The PEA envisions four years of mine construction, followed by more than 10 years of mining and milling to produce 52.3 million lbs. 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 PEA forecasts capital expenditures for the mine and mill of $567 million, including a 25% contingency.
In its press release, however, Cameco argued that Hathor’s capital expenditure estimate “is not credible,” and used 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 and excluding a mill and tailings management facilities, was $690 million.
Cameco also asserted that the PEA’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 PEA 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 PEA, prior to establishing a reserve or completing proper feasibility studies, that Roughrider has already achieved this status.”
In a conference call on Sept. 14 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 and 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 Cameco’s offer “undervalues the intrinsic value of Roughrider based on the discounted cash flow model in the independent PEA,” and describes it as “significantly below premiums paid in recent comparable transactions.”
“Twenty-day volume-weighted average price 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 716.7-sq.-km Russell Lake exploration project in the southeastern part of the Athabasca Basin.
Gunning also emphasized the opportunistic timing of Cameco’s offer – which came during a period 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 since July. 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.
Cameco believes its offer provides full and fair value to Hathor shareholders. At $3.75 per share, Cameco maintains that it 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 closing share price on Mar. 11.
Meanwhile, Hathor updated the markets on Sept. 20 with assay results from seven drill holes at its Far East zone. Highlights included a composited interval of 27 metres of 7.91% U308, including 4 metres of 41.77% U308 in hole
715. Hole 711 returned 10 metres of 5.4% U308, hole 712A returned 43 metres of 4.23% U308 and hole 713 reported 5 metres of 5.33% U308.
Assays are pending for two drill holes from the Far East zone, including hole 718, which intersected 17 metres in the greatest amount of off-scale radioactivity found within a single drill hole at Far East. The radioactivity was intersected in two zones, the company reported: one at a depth correlative with other drill hole intersections in the Far East zone, and one at a much shallower depth, only 45 metres below the unconformity.
“The shallower zone presents significant potential for the discovery of an additional zone in the Roughrider system,” the company stated in its press release. The Far East zone is also “open both to the east along strike and southeast up-dip from the most pervasive alteration and replacement mineralization intersected to date, and the largest grade-thickness quotients from assays,” Hathor noted. The junior’s summer drill program involved two drill rigs active for about nine weeks. The 9,600-metre drill program completed 20 holes, 19 of which were in the Far East zone.
At presstime Hathor traded at $4.10 per share within a 52-week range of $1.50 on Mar. 16, 2011, and $4.21 on Sept. 8, 2011. The Vancouver-based junior has 125.4 million shares outstanding.
Be the first to comment on "Takeover bid for Hathor becomes heated"