Consolidation is key in today's uranium environment, especially in the US, according to Energy Fuels' (NYSE MKT:UUUU) (TSE:EFR) chief executive officer Steve Antony, who spoke on a conference call about the company's proposed acquisition ofUranerz Energy (NYSE MKT:URZ) (TSE:URZ) earlier Thursday.
Antony said the long term dynamics of the uranium market remain positive and that he expects major growth in the uranium industry in the years to come, albeit more measured than the heyday of 2008, as uranium provides base load electricity on a large scale.
The chief executive said that by consolidating Energy Fuels with Uranerz, the companies will become stronger as they can decrease their cost of production, making the combined entity more competitive. About $2 million of combined overhead cost savings are anticipated from the deal.
"The transaction will derisk the company from an investor standpoint and for utility customers," said Antony, "as well as provide two distinct production sources and a robust pipeline of future production."
Energy Fuels operates the only conventional uranium mill in the US at White Mesa in Utah, while Uranerz uses a process known as in-situ recovery (NYSEMKT:ISR) in which a leaching solution extracts uranium from sandstone uranium deposits in the Powder River Basin area of Wyoming. It is the newest uranium producer in the US.
In addition to the White Mesa mill in Utah and the Nichols Ranch ISR operation in Wyoming, the combined company is expected to own various development projects located throughout Utah, Wyoming, Arizona and New Mexico.
The deal will build the only integrated conventional and in-situ recovery (ISR) uranium mining company focused solely on the US, and will have a combined NI 43-101 resource base that will be the largest in the US among producers and near producers.
Antony, as well as Uranerz's executive chairman Dennis Higgs, also emphasized that the merger would result in an improved market profile, with a significantly larger market cap and strong working capital, "so that we can continue to build what we believe to be a bright future for the uranium industry."
The two executives said the new company's position would be "highly strategic" given its U.S. focus, with the U.S. being the largest consumer of nuclear power with 100 nuclear reactors in operation and five under construction.
"Our larger company will become more attractive to utility customers," explained Antony.
"[The deal] gives us more sustainable production in the current low uranium price environment," he added. Indeed, the Nichols Ranch ISR project in the Powder River Basin of Wyoming is the most prolific uranium basin in the U.S., with both Cameco andUranium One having production operations there. About half of US uranium production last year is expected to hail from the Powder River basin.
Under the terms of the deal, Uranerz shareholders will get 0.255 common shares of Energy Fuels for each Uranerz share held, for ownership of 55 percent of the combined company, with Energy Fuels shareholders owning the remainder. The transaction is expected to close in the first half of 2015.
Uranerz's Higgs said that Energy Fuels has the "best balance sheet" in the industry by a wide margin, and is a proven uranium producer with 1 million pounds of uranium output per year over the past five years. In 2013 and 2014, it was the second largest uranium producer in the US, only behind Cameco.
The combined entity will also have six long-term contracts, providing it with downside protection in the event the uranium market does not recover. The longest contract currently in place extends to 2020.
"Cost savings, diversified production and the combination of premium priced contracts make us a larger, stronger company. We expect to be better positioned with U.S. utilities as a stronger and more reliable supplier," said Antony.
"We will be better suited to respond to volatile uranium prices. While we expect uranium prices to increase over the longer term, hope alone is not a plan. Other actions are required to create value for shareholders."
Energy Fuels has embarked on a consolidation path for several years, acquiring the Gas Hills and Roca Honda projects last year, which are expected to be key development properties for the company as uranium prices increase.
Antony said that with Energy Fuels' newly acquired ISR technical expertise, it has opened up a whole new side of business opportunities. The CEO said he remains committed to looking for opportunities on a case-by-case basis, and will judge each potential acquisition by its merits.