July 8, 2015

#Uranium: Denison & Fission to merge consolidating the #Athabasca Basin $DML & $FCU

See the comments below from Cantor Fitzgerald's Rob Chang

DML & FCU - Betting that size matters: Denison and Fission to combine

Interesting transaction in the uranium space as Denison Mines and Fission Uranium have agreed to merge.  Details and our first thoughts below.
Rob Chang
Denison Mines | BUY | Target: C$1.80 | DML-T C$0.88 | DNN-N US$0.70 | MktCap C$456M
Fission Uranium | BUY | Target: C$2.10 | FCU-T C$0.97 | MktCap C$375M
Analyst: Rob Chang    Associate: Michael Wichterle
Betting that size matters: Denison and Fission to combine
Event: Denison Mines and Fission Uranium have announced the execution of a binding letter agreement to merge the two companies.
Bottom Line: Neutral.  The combined company will be appealing to acquirers that are looking to sweep up a large portfolio of quality assets in the Athabasca Basin. Moreover, the combined company will sport a larger valuation that will be more attractive to institutional investors with minimum market capitalization constraints. On the other hand, the merger does not seem to have many obvious synergies as DML's eastern Athabasca assets and FCU's western basin assets are too far apart to share many costs meaningfully.
  • According to the terms of the agreement, FCU shareholders will receive 1.26 common shares of DML as well as a cash payment of $0.0001 for every share of FCU.
    • The Transaction will require shareholder approval from two thirds of the votes cast by the holders of Fission common shares, plus any majority of the minority approvals of Fission Shareholders that may be required by Multilateral Instrument 61-101 as well as approval of 50% plus 1 of the votes cast by the Denison shareholders.
    • Based on yesterday's closing prices, this translates into a $1.11/share value for each FCU share, or a 14% premium
      • FCU last traded at $1.11/share on June 15th. However we do note this is a merger of equals valuation and not a takeout valuation. Indeed the management team of FCU is effectively taking control of DML by assuming the CEO and COO positions.
    • The transaction value translates into a $4.04/lb. multiple for FCU. This is roughly in-line with the average transaction multiple of $3.95/lb. post-Fukushima (see Takeout $/lb. exhibit below).
    • This transaction also raises an interesting question on whether the combined company would still be for sale as the two individual companies were prior to this announcement. If it is still for sale it could be argued that the number of entities that could make a legitimate run at acquiring the combined company may have shrunk now that it is a much larger bite size. On the other hand the company could also become a legitimate consolidator in its own right and step up to buy other promising Athabasca assets such as NexGen Energy, which is adjacent to Patterson Lake South.
  • Based on recent market capitalizations, the combined company would be approximately $900M, which would make it the second largest uranium company behind Cameco's (CCO-T, CCJ-N; Buy; Target: C$27.25) C$7.3B.
    • The increased size is a positive for the combined company as there are many institutional portfolios that can only invest in companies with market capitalizations that are north of $1B.
    • Headlining the asset portfolio of the combined company will be two world class uranium exploration and development projects: Fission's 100%-owned Patterson Lake South Project and Denison's 60%-owned Wheeler River Project
      • While both projects are located in the Athabasca Basin, the distance and the nature of the infrastructure in the Athabasca Basin are such that few synergies can be had operationally.
  • The combined company will effectively hold all notable projects in the Athabasca Basin that is not held by Cameco or NexGen Energy (NXE-TSXV, Buy Speculative). If someone wanted to make a large move into the Athabasca Basin, the combined Denison-Fission company would make an excellent choice in terms of a one-stop uranium shop for exploration/development stage assets.
  • The new company would enjoy the cash flow of the McLean Lake Mill (Denison owns 22.5%), which enjoys earnings from processing feed from Cameco's Cigar Lake mine.
  • The management of the new entity shall be comprised of Lukas Lundin (non-executive Chairman), Dev Randhawa (Chief Executive Officer), Ross McElroy (President & Chief Operating Officer), and David Cates (Chief Financial Officer). The Board of Directors will be comprised of ten directors: five of whom currently serve as directors of Denison and five of which will be appointed from the Board of Directors of Fission.
  • Denison shareholders will also be asked to approve a 2-for-1 share consolidation that will take place immediately following the closing of the transaction and a name change to "Denison Energy Corp."
    • The share consolidation and the name change will require shareholder approval from two thirds of the votes cast by the holders of Denison common shares.
  • The parties expect to execute a definitive Arrangement Agreement on or before July 27, 2015.
  • A joint conference call and webcast will be held on Tuesday, July 7, 2015 at 8:30 a.m. Eastern time. Participants may join the conference call by dialing: +1 647 788 4919 or +1 877 291 4570. A live webcast of the conference call can be accessed via the following link:http://www.investorcalendar.com/IC/CEPage.asp?ID=174153 or via www.denisonmines.com and www.fissionuranium.com.
  • A replay of this conference call will be available until July 14, 2015. The replay numbers are: +1 416 621 4642 or +1 800 585 8367. Replay passcode: 80824118


Historical Takeout Multiples (Mkt Cap/Lb)
Source: Cantor Fitzgerald Canada Research
Rob Chang
Senior Analyst and Head of Metals & Mining - Canada
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