Investing in Uranium Companies

Brian Hicks

Written By Brian Hicks

Posted June 11, 2013

The uranium market is suddenly becoming a lot more active.

Just recently, two junior miners – Mega Uranium (TSX: MGA) and Rockgate Capital Corporation (TSX: RGT) – have agreed to a merger deal. The deal assigns a value of 25 cents Canadian per share to Rockgate, which represents a premium over its current trading price.

Both companies have signed a binding letter of intent and are committed to the creation of a new diversified uranium company, according to Proactive Investors. This new company will have a strong mix of assets, including projects in Australia and Africa, to go along with a pro-forma cash balance of $22 million and investments of around $12 million.

As part of the deal, Mega Uranium will consolidate its shares on a 10-for-1 basis. Rockgate shareholders will receive 2.2 Mega shares for each current Rockgate share held. Of course, all this needs to be approved by shareholders, but key company executives have already clearly indicated their full support of the agreement.

After the deal is finished, Rockgate investors will own 49 percent of the new combined company, and Mega Uranium investors will control the other 51 percent. The obvious goal is to combine resources and create an international uranium company that has enough cash on hand to advance existing assets and maintain ongoing projects.

This merger seems to be a good fit for both companies, giving Rockgate investors a good way to gain exposure to the junior uranium sector and Mega Uranium investors a nice way to gain some exposure to overseas markets in Africa (Mali), further diversifying their asset base.

What Assets Come to the Table?

When identifying and analyzing any kind of deal like this, it is helpful to examine what each partner brings to the table and how each will benefit.

Mega Uranium owns three resource-compliant uranium projects in Australia. It also has other properties that are currently being explored for potential throughout the territories of Queensland, Western Australia, and the Northern Territory. These exploratory areas account for approximately 5,800 square kilometers.

Rockgate has a significant stake in the African country of Mali. It has a flagship project named Falea, which is wholly owned and covers 225 square kilometers in southwestern Mali. The project totals three permit,s and the area is believed to contain potentially viable quantities of not only uranium but also copper and silver. This polymetallic, flat-lying property is also in the midst of a pre-feasibility study that was started during the last quarter of 2012 and is expected to be finished by the end of this year.

Obviously, this merger has benefits for everyone involved. Most of the projects and properties involved are in the later stages of development, and a merger will also create a company with improved capital reserves and economies of scale.

Between the two companies, there is also a strong portfolio of investments in other junior uranium explorers and development companies that could provide a catalyst for future growth. Both management and technical teams are also quite experienced, so this seems to be a great fit in terms of pooling knowledge as well.

Current Uranium Prices & Future Implications

Uranium prices have been riding at or near multi year lows recently. At the beginning of 2008, prices sat at nearly $90, which was already off previous highs. Since that time, prices trended down until about the middle of 2010 and then spiked upwards in a fairly dramatic fashion, reaching over $70 briefly towards the end of 2010 and beginning of 2011. Of course, after the nuclear disaster in Japan during 2011, with the future of nuclear energy in doubt, the prices again took a tumble and are current back around the $40 level.

Analysts and other industry experts indicate that prices should begin to rise once again. The main reason for this is a lack of cheap and viable alternatives. Many investors might have thought that cheap natural gas was the salvation, but with these prices now crossing over the $4.25 mark, it is becoming too expensive to be seen as a viable alternative to nuclear energy fueled with cheap uranium. Not only is the currently available uranium cheaper than almost any time before, it is cleaner.

Germany and Japan initially wanted to shut down all of their nuclear power plants, but the countries now realize this is simply an unworkable solution from an economic point of view. They now see the answer is to modernize; after all, the Fukushima plant had been around since the 1970s. All over the world, more and more countries are turning to nuclear power, which bodes well for the future of uranium prices.

The Future For Miners

This future looks particularly bright for miners of all levels. Even in developing countries, the trend is clearly towards nuclear energy, with the need to increase energy capacity and bring air pollution down. Japan now seems to be getting solidly back on board with the election of a very pro-nuclear Prime Minister.

Nuclear power plants are currently under construction in China, Vietnam, Saudi Arabia, South Korea, Canada, Slovakia, Argentina, United Arab Emirates, Russia, Ukraine, and other countries. Even the U.S. is building plants in Georgia and South Carolina.

These modern nuclear power plants are cleaner, safer, and more efficient than ever before. They demand an increase in the supply of cleaner uranium, which means a strong opportunity for well-positioned miners all over the world.

Investor Opportunities

This also spells a big opportunity for investors. There are a number of interesting ETFs in the global uranium market, which could be a good way to get involved in the sector without exposing yourself to too high a level of risk. Some of the better ones to watch for would be Global X Uranium (NYSE: URA) and Market Vectors Uranium + Nuclear Energy (NYSE: NLR).

For those looking to become more directly involved, it is also possible to stake out some positions in the mining companies. The largest uranium miners like Cameco (NYSE: CCJ) and Rio Tinto (NYSE: RIO) seem to be delaying large capital expansions and projects for the moment, so they might not be the place to invest right now.

The most risk, as always, is with the junior miners. It is quite possible that the larger companies, sitting on cash at the moment, might be looking to make some acquisitions in the junior miners category. Of course, there are simply too many juniors to mention here. They can be found by focusing on specific countries or even projects.


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