U3O8 Corp. To Acquire Mega Uranium’s South American Assets

Analysts are applauding Mega Uranium’s (MGA-T, MGAFF-O) decision to spin off its South American uranium assets to U3O8 Corp. (UWE-V).

Under a definitive agreement announced Feb. 17, U308 Corp. will acquire Mega’s uranium properties in Argentina, Colombia, Bolivia and Brazil, plus $4 million in cash, in exchange for 30.56 million shares or about 57% of U3O8 Corp.

Mega’s main asset is its Berlin uranium deposit in Colombia with an historical resource of 12.9 million tonnes grading 0.13% U₃0₈ for 38 million lbs. U₃0₈. In Argentina’s Chubut province it owns the Laguna Salada project, which is close to the two largest known uranium deposits in the country: the 10-millionlb. Cerro Solo, and the 30-millionlb. Sierra Pintada. Those deposits are owned and are being developed by Argentina’s national nuclear authority. Laguna Salada is poised to advance to resource estimation this year.

In a research note to clients, Patrick Donnelly of Salman Partners in Toronto argued that the deal is a good transaction for Mega. “Mega was burning a lot of cash to maintain the South American assets,” he explains. Given that its current focus is really the development of its Lake Maitland uranium project in Western Australia, he adds, the transaction “removes a distraction to the company.”

At the same time, Mega’s shareholders still have the choice of exposure to the South American assets. The Berlin project in Colombia and the Laguna Salada project in Argentina are “very compelling and have significant upside potential,” Donnelly says.

Based on U308 Corp.’s closing price of 47¢ per share the day before the agreement was announced, the transaction gives Mega $10.4 million in U308 Corp. shares (after netting out the $4 million in cash Mega must give U308.)

“We expect Mega to continue to clean up its assets with only the Australian assets (including Lake Maitland) remaining in the core company,” Donnelly adds. “This should result in a positive re-rating of the company’s shares as Mega continues to focus on the development of the Lake Maitland project.”

Donnelly estimates the Lake Maitland project will start production in 2012 at an average rate of 1.65 million lbs. (100% basis) of U₃0₈over a minimum 11-year mine life. In June 2009, Mega sold a direct 35% stake in the project for US$49 million to a Japanese consortium of utilities and trading houses.

In addition to its 26-million-lbs. Lake Maitland uranium project, Mega holds uranium properties in Queensland. But those projects, Ben Lomond and Maureen are subject to a Queensland state government policy that currently prohibits uranium mining. Mega also has uranium assets in Canada and Cameroon.

Philip Williams, Mega’s vice-president of business development, says the company was spending the lion’s share of its capital and resources on moving Lake Maitland forward and wasn’t realizing value for its South American assets. The deal offers Mega shareholders “the opportunity for significant share price appreciation,” he says in an interview. And getting stock in U308 gives Mega shareholders access to “the next frontier of uranium exploration and development.”

Williams argues that, in terms of uranium, South America has been the “forgotten continent” despite excellent geological prospectivity. “The majors don’t have a big presence there so the idea was to pull out the assets and put them into a complementary company that can become the go-to uranium explorer and developer in South America,” he says.

“There are some very interesting prospective opportunities there. The problem is that none of them on their own have had a great deal of interest from the investment community,” he explains. “That’s what we think we can do now. U308 will have a larger suite of projects and $8 million in cash.”

From U308 Corp.’s perspective, the deal gives it an $8-million balance sheet and strengthens its portfolio of South American assets, adding to its market appeal.

“Despite advancing on a technically sound basis and generating significant results, U308 has struggled to achieve a commensurate market profile, Eric Zaunscherb and Gabriel Gonzalez outline in a flash update report on the transaction. “From U308’s perspective, the deal buys additional uranium exploration mass to generate incremental market appeal.”

The analysts also note that the involvement of Pinetree Capital (PNP-T), one of Mega’s major shareholders, should also boost U308’s market profile. “Pinetree Capital has been an astute investor in the uranium space and should help generate additional market profile for the combined company.”

Following the transaction, U308 Corp. will emerge as a dominant uranium explorer in South America. In addition to Mega’s assets, U308 Corp. is developing its Kurupung Batholith project in Guyana, which has a National Instrument 43- 101 compliant indicated resource of 2.7 million tonnes grading 0.10% U₃0₈ for contained U₃0₈ of 5.8 million lbs. and an inferred resource of 0.65 million tonnes grading 0.09% U₃0₈ for contained U₃0₈ of 1.3 million lbs. The exploration permits at Kurupung Batholith cover about 10,000 sq. km straddling the edge of the Roraima basin.

Uranium in the Kurupung is geologically similar to albitite-hosted uranium deposits worldwide that typically contain resources in the 50 to 130 million lb. range. U3O8 Corp. expects to start drilling of its unconformity-related targets in the Roraima basin in 2010.

The transaction is expected to close by March 31.

Mega Uranium closed up 1¢ or 1.5% at 66¢ per share. The company has traded in a 52-week range of 60¢- $2.28 and has 245.85 million shares outstanding.

Donnelly of Salman Partners has a 12-month target price on the stock of $1.70 per share, while Simon Tonkin of Thomas Weisel Partners believes Mega’s stock will reach $1.50 per share.

U308 Corp. remained unchanged at 47¢. Over the last year it has traded within a band of 24.5¢-77¢ per share and has 16.98 million shares outstanding.