Uranium One's Private Placement Reduces Overall Risk

Positive sentiment for Uranium One Inc. (SXRZF.PK) continues to build on the Street following the announcement that the company will sell a 19.95% stake to a Japanese consortium.

On early Tuesday morning, the uranium miner said it had entered into a private placement agreement to unload 117 million common shares at C$2.30 per share for total proceeds of C$270-million. The Japanese consortium on the other end of the deal is comprised of Toyko Electric Power Co. (TKECF.PK), Toshiba (TOSBF.PK) and the Japan Bank. The private placement includes up to a 20% long-term off-take agreement that give the consortium the opportunity to purchase up to 20% of Uranium One's production commencing in 2014.

Uranium One. Inc. shares have climbed almost 9% since the deal was announced.

UBS analyst Brian MacArthur told clients in a note that Uranium One has reduced its overall risk as a result of the deal and from a liquidity perspective is well-positioned with C$406-million in cash.

He said in a note to clients:

We believe the transaction is positive as it has lowered the company's political risk (it now has a partner in Kazakhstan through the consortium) and financial risk (it has a greater ability to develop assets outside of Kazakhstan).

Due to dilution from the deal, the analyst revised his net asset value from C$3.65 to C$3.38 and lowered his 2010 EPS estimate from C$.07 to C$.06. His target price, however, was increased from C$2.20 to C$2.70 based on a higher NAV multiple based on the reduced risk profile of the company following the private placement. Mr. MacArthur's "buy" rating remains unchanged.

Canaccord Adams analyst Orest Wowkowdow also maintained his "buy" rating and left his C$3.30 price target on the stock unchanged.

The analyst said in a note to clients:

While the consortium is expected to provide significant industry expertise to Uranium One, we cannot place a value on this aspect of the transaction.

On a positive note, the terms of the off-take agreement, while not disclosed, suggest pricing at levels above our long-term estimates. Security of uranium supply (rather than price), particularly for nuclear power plant providers (which view U308 supply as a competitive advantage in bidding for contracts) is clearly a driving force behind this transaction.