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Acquisition Inquisition: What's The Story Behind Energy Fuels?

|Includes: Denison Mines Corp (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.