Australia | Feb 28 2007
By Greg Peel
Back in Episode One (Uranium Wars: The Battle for Queensland; Sell&Buyology; 14/08/06) the audience was left hanging as an aggrieved Summit Resources (SMM) was about to take an opportunistic Paladin Resources (PDN) to court over a dispute regarding a rather significant reserve of uranium located near Mt Isa in Queensland.
Paladin was a relatively new character as far as most viewers – and stock analysts – were concerned. With a share price around the $4.50 level, Paladin had been the beneficiary of the great uranium speculation surge in the Australian stock market, which began as the uranium price started to creep up, and when climate change put nuclear energy back on the agenda.
Paladin was, like many players in the Australian uranium market, stuck with decent reserves in mines in Western Australia and unable to do anything with them. Unlike the others, however, Paladin had secured world-class reserves offshore – most notably in Namibia. But Paladin had not given up on Australia.
Suspecting that the Queensland government would soon see the light and open the state up for uranium mining, particularly once the federal Labor Party endorsed such a policy in April 2007, Paladin made a move on the Valhalla/Skal reserves which together boast some 57,000 lbs of contained uranium oxide.
The Valhalla reserve had also been the pot of gold at the end of the legislation rainbow for Alan Eggars. Eggars is the driving force behind Summit, and the man who had plotted out 50% of Valhalla way back in 1990. Eggars had also led a vigorous campaign to overturn Queensland’s uranium mining laws.
The other 50% of the Valhalla/Skal joint venture was, up until last year, owned by Valhalla Uranium, which was in turn owned 83% by Resolute Mining (RSG). Eggars felt comfortable with the joint venture arrangement, as Summit had in place a first refusal option to acquire the other 50% of the plot at an 85% discount to market value should Valhalla Uranium ever decide to sell.
Enter Paladin. Rather than offer to buy Valhalla Uranium’s 50% stake and thus face off with Summit, last August Paladin offered to buy Valhalla Uranium – subtle but clever. Resolute agreed to sell.
As we enter Episode Two, Paladin is still in court, with a $75 million indemnity provided by Resolute. While still a newcomer in Episode One, Paladin is now a senior character, revered in the market alongside heavyweight Energy Resources Australia (ERA) as one of only two pure-play uranium stocks of investment quality.
Paladin’s share price has since traded over $10.00, making it a $5 billion company on paper. Its major resource – Langer Heinrich in Namibia – has only just completed ramp-up, ready to enjoy its first cashflow. Langer Heinrich holds reserves roughly twice that of Valhalla/Skal.
While Paladin’s share price has doubled over the ensuing period, Summit’s had risen from $1.50 to $4.00 up until yesterday, driven by an increasing belief that Queensland would soon overturn the uranium ban.
No doubt frustrated by the court case, and buoyed by its significant market capitalisation, Paladin decided to take matters into its own hands. If you can’t beat them – buy them. To that end, Paladin has made a hostile, unconditional bid for all of Summit, offering Paladin shares in return. On yesterday’s close, the bid valued Summit at over $1 billion, and represented $5.12 per Summit share on Paladin’s closing price – around a 30% premium. The Summit board was not warned.
While not surprised, Alan Eggars is not amused. Even though the Paladin bid represents a huge premium, it is opportunistic. Paladin could likely never raise that sort of cash. Moreover, while the bid represents an in-ground value for Summit’s uranium of US$23/lb, it is still well short the US$32/lb implicit in the recent takeover offer by SXR Uranium One for UrAsia.
"At this stage shareholders should take no action, ignore all communication from Paladin and await our further advice", said Eggars in an ASX announcement yesterday.
Eggars believes Paladin is worried that Summit will win its court case and subsequently secure all of Valhalla/Skal, and at a discount. If this were to prove true, Summit shareholders would be in the box seat to enjoy the spoils once Queensland opened the floodgates. Summit has been pushing to have the mine operational by 2010.
So now it comes down to the shareholders. Take the money and run? The reality is that as the bid is unconditional, Paladin is ready to be satisfied with only 50%, or even less plus another sympathetic shareholder, in order to at least secure control of the reserve. But take up should be slow, as shareholders can sit back and wait to see whether Paladin will go higher, or a white knight (or even black night) will emerge. The Summit board owns 10% of the stock.
We have not seen the last episode in this drama, and nor will we have seen the last of global uranium market consolidation. With no end in sight for a rising uranium price, and a scarcity of reserves available to be mined, or anywhere near ready to be mined, the fun has only just started.
Stay tuned.