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U308 Bull
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I am an independent trader with a focus on commodities and precious metals. I trade (on average) on a weekly or bi-weekly basis. B.S., Mathematics - Rensselaer Polytechnic Institute J.D., Boston University School of Law
  • Acquisition Inquisition: What's The Story Behind Energy Fuels? 5 comments
    Jul 17, 2012 10:52 AM | about stocks: DNN, UUUU

    Did anyone else notice that Energy Fuels (EFRFF.PK) had a market cap of about $55 million before the April 2012 acquisition announcement with Denison Mines (NYSEMKT:DNN), and that EFRFF purchased DNN's U.S. assets for approximately $110 million in stock? That would normally lead one to believe that the new EFRFF entity should be worth in the neighborhood of $165 million.

    And yet, almost immediately after the transaction closed in the beginning of July 2012, DNN bounced to become worth more without its U.S. assets than it was worth with those assets before the transaction closed. Meanwhile, EFRFF (the aforementioned $165 million company), is now trading around $85 million at 13 cents per share. Evidently, those former DNN assets are now being valued around $30 million, assuming no other material change in EFRFF's business since the transaction.

    Something seems wrong with this picture. Perhaps loyal DNN investors intuitively shed their new shares in a previously unknown penny stock, and quickly used those funds to double down on their DNN positions. I was tempted to make this play myself. (I mean, hey: if it looks like a loser and smells like a loser...) After all, DNN has been getting the lion's share of positive press regarding this deal, as observers guess that a takeover of DNN is more likely post-transaction.

    The problem with these moves, in which the crowd dumps EFRFF for more DNN, is that they completely ignore the fundamental valuations underlying the transaction as it was announced. Assuming that the valuation of DNN's U.S. assets (as agreed upon by both companies and their major shareholders) was anywhere near accurate, and without factoring in any potential strategic benefits to EFRFF from the transaction, the stock should at least be trading where it was before the announcement: around 25 cents, nearly double its value today.

    And this appears to be a conservative perspective. The net asset value of DNN's U.S. properties was estimated by one analyst to be over $300 million. Even if the average uranium miner is trading around 50% of NAV, that would put the market value of the acquired DNN properties at $150 million or higher. This would mean the new combined EFRFF should be worth over $200 million, north of 30 cents per share. Again, this ignores any strategic benefits that might accrue from the transaction; but management of both EFRFF and DNN appeared to believe that the potential benefits were significant.

    Normally, markets are fairly efficient. But given the consistently low volume on EFRFF, and the fact that even uranium bugs (like myself) had not heard of this company before the April 2012 transaction announcement, perhaps the thin market for EFRFF shares is not valuing the company properly.

    That's why I am aggressively long EFRFF, and, in the short-term, highly cautious on DNN barring a near-term acquisition, despite the recent price action in both companies.

    Let me know your thoughts!

    Disclosure: I am long EFRFF.PK.

    Stocks: DNN, UUUU
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Comments (5)
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  • TheSlowLane
    , contributor
    Comments (58) | Send Message
    I agree that this price sale on EFR is a temporary phenomenon. I have had the company on my radar for several years as one of a small handful that I thought had a chance of making it into production. The background of the management team is what lead me to believe that they had what it would take to get there and it appears that time is vindicating that opinion. Not there yet, but now with an operating mill, they are transitioning to producer now, instead of 2-3 years from now with the Pinon Ridge mill.
    19 Jul 2012, 09:46 PM Reply Like
  • U308 Bull
    , contributor
    Comments (5) | Send Message
    Author’s reply » Hey thanks for the comment and insight!
    20 Jul 2012, 02:38 PM Reply Like
  • T-Rex81
    , contributor
    Comments (35) | Send Message
    Could people be scared off by the reverse stock split? I've been in this since pinon ridge was announced slowly building shares some bought @ prices as high as 1.36. Now I'll see my tens of thousands shares go to a few thousand it seems risky whats to keep efrff from going from whatever its price is after the 10 to 1 reverse split back to 30 cents to 13 cents a share again also with all the stock issued it looks like DNN owns over 65% of EFRFF. Seems shady to me who owns who. Perhaps someone could clarify.
    21 Jul 2012, 12:45 AM Reply Like
  • U308 Bull
    , contributor
    Comments (5) | Send Message
    Author’s reply » I don't know how significant an effect the reverse split will have on the share price, but I don't expect it to have a major impact to the downside. The reason for this is that the company is worth what it's worth, regardless of the number of shares outstanding (market cap = share price times the number of shares). Regardless of how many shares you own today, and how many shares you own post-split, you will own the same percentage of the company, which is worth exactly the same amount post-split (assuming all other things equal). Whatever might prevent it from going to 30 cents after the reverse split is exactly the same as what would prevent it from going to 3 cents without ever doing a reverse split.


    To sum all of that up, the reverse split shouldn't have any kind of significant negative impact on the share price.


    As for your concerns about DNN: DNN does not own any part of EFRFF. DNN's shareholders were compensated for the sale of their company's assets with newly issued EFRFF shares. So in effect, DNN shareholders became new EFRFF shareholders (unless they quickly sold their new EFRFF shares, as I believe many did). This is all priced in to EFRFF at this point (albeit inaccurately in my opinion), and DNN itself has no ownership interest in EFRFF.
    21 Jul 2012, 03:30 PM Reply Like
  • Lukester
    , contributor
    Comments (41) | Send Message
    Interesting to re-examine this valuation argument now in early 2015, after Energy Fuels bought Titan, then all Dennison's US assets, then all of Strathmore, and now will buy Uranerz. This company's book of assets has been growing briskly the last 3-4 years. Yet the company today has a market cap between 100 and 120 million. The value compression has become even more striking.
    6 Jan 2015, 08:33 PM Reply Like
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