Thursday, March 22, 2012

China eyes Canadian uranium mines

Takeover activity is poised to heat up in the Canadian uranium sector as energy-hungry China hunts for feedstock to fuel its growing family of nuclear reactors.

The state-controlled China Daily recently reported that the country plans to buy more uranium mines abroad, and is looking in Canada. China also expects to import more uranium this year as its nuclear program resumes after being halted following Japan’s Fukushima nuclear disaster.

China has 15 reactors in operation and 25 under construction, and plans to build another 50. It imports nearly all its uranium from Kazakhstan, Uzbekistan, Namibia and Australia.

“It comes as a surprise” that China is showing its hand by publicly targeting this country’s miners, which could boost the prices of potential acquisitions, said Versant Partners analyst Rob Chang. But he said the country’s announcement deserves to be taken seriously in the wake of Prime Minister Stephen Harper’s decision last month to overturn previous trading bans and permit uranium sales to China for civilian use.

China would most likely focus on buying Canadian “exploration companies with high-quality assets” because there are no ownership restrictions on early-stage firms, Mr. Chang said. However, Ottawa bars foreigners from owning more than a 49-per-cent stake in a company that is mining the metal.

China has already been on the acquisition trail for explorers in Africa. China Guangdong Nuclear Power Corp., its nuclear agency, recently struck a $2.4-billion (U.S.) deal to snap up Australia-based Extract Resources Ltd. (EXT-T8.97----%), which owns a huge uranium deposit in Namibia.

In Canada, uranium juniors such as Fission Energy Corp. (FIS-X0.67-0.02-2.90%), which has a property in Saskatchewan’s Athabasca Basin, Kivalliq Energy Corp. (KIV-X0.50----%), which has a deposit in Nunavut, and Strateco Resources Inc. (RSC-T0.50-0.03-4.81%), which is developing the Matoush project in northern Quebec, could be of interest, Mr. Chang said.

There is industry speculation that the Conservative government will relax its foreign ownership laws on uranium mines. Throne speeches since 2010 have talked about lifting regulations that inhibit the growth of Canada’s uranium industry.

Foreigners are already snapping up Canadian exploration companies. Last year, British mining giant Rio Tinto PLC (RIO-N54.59-0.56-1.02%) trumped Cameco Corp. (CCO-T22.81-0.44-1.89%) to buy Hathor Exploration for about $625-million (Canadian). Paladin Energy Ltd. (PDN-T1.97-0.01-0.51%), Australia’s second-biggest uranium miner, acquired the Michelin uranium project in Labrador for $261-million from Fronteer Gold Inc.

Euro Pacific Canada analyst Merrill McHenry, who is bearish on the uranium sector because Japan’s 52 reactors are still shut down, agrees that Fission Energy could be a strategic acquisition for China. If ownership rules don’t change, China could comply by partnering with a player like Cameco when it comes time to extract uranium, he said.

Macusani Yellowcake Inc. (YEL-X0.15----%), which has acquired Southern Andes Energy Inc. and merged their uranium properties in Peru, is also a potential takeover candidate, Mr. McHenry suggested. But those deposits would need to be combined with another project for the play to become economically viable, he added.

The Chinese could buy Macusani Yellowcake and also acquire an additional nearby deposit in Peru from Fission Energy through an outright purchase or joint venture with that company, he said.

“You would then not have a foreign-ownership problem with the Canadian assets [because they are not in Canada].”

China could also become involved with Canadian uranium projects through joint ventures in properties like Paladin’s Michelin project, he said. A three-year moratorium on uranium mining on Inuit lands was lifted this month and the Chinese could help finance the next phase, he said.

“They [Paladin] would need a mill so we are talking about a substantial amount of capital expenditures.”