JOHANNESBURG () -- SXR Uranium One [TSX:SXR] entered into an agreement with Rio Tinto [NYSE:RTP; TSX:RIO; ASX:RIO] to acquire their Sweetwater Uranium Mill and Green Mountain uranium deposit in Wyoming on Monday. Then, on Tuesday, SXR announced a deal with U.S. Energy Corp. [Nasdaq:USEG] to buy the Shootaring Canyon uranium mill in Utah and uranium properties in Wyoming, Utah, Colorado and Arizona. Here's a chat with SXR CEO Neal Froneman.
Rio Tinto Deal
LINDSAY WILLIAMS: Toronto Stock Exchange listing SXR Uranium One - with a secondary listing on the JSE - owns the Dominion Uranium Project in South Africa, the Honeymoon Uranium Project in South Australia, and has been actively pursuing growth opportunities in the western United States. SXR holds a 79% interest in Aflease Gold Limited - that owns the Modder East Gold Project etcetera - but it's uranium that's exciting investors, and SXR has entered into an agreement with Rio Tinto today. Neal, SXR is buying more prized uranium assets - how did you manage to get hold of these?
NEAL FRONEMAN: We've been targeting certain uranium assets for quite a while - we had to bid competitively for this specific one. I think it came down to price, also I think we are the type of company that Rio would like to see own this asset - so it all came together in the end.
LINDSAY WILLIAMS: Why are they selling, that is what worries me? With uranium prices doing what they're doing, and this being the future of the world's energy - why would Rio Tinto get out of such a prize?
NEAL FRONEMAN: That's a good question. I can only really put it down to their core assets in uranium being much larger than these assets - they have a substantial part of Energy Resources of Australia (ERA) which is a big producer, and Rossing Uranium in Namibia - so I think Sweetwater is just not core to them, but it's certainly very core to us.
LINDSAY WILLIAMS: What has Sweetwater got, and what are its prospects?
NEAL FRONEMAN: Sweetwater consists of a uranium "mill" as it's termed in the U.S. - that's really a processing plant similar to the one we're building at Dominion. Then in the Green Mountain properties there's a whole lot of resources - some of them have been drilled out. Although we can only quote a historical resource these have gone through a number of feasibility studies - so there's a high level of confidence on them, and we will declare them as 43-101 compliant as soon as we can. Certainly it's a very professionally mothballed plant with prospective resources - we believe it has production visibility probably from about 2009.
LINDSAY WILLIAMS: So at the moment it's mothballed?
NEAL FRONEMAN: Yes. It was in operation up until 1983 when the uranium price collapsed - since then it has been on care and maintenance, and it has been done very professionally I must say.
LINDSAY WILLIAMS: How much did you pay for it?
NEAL FRONEMAN: The initial price is $110-million - of which Rio Tinto has agreed to take $45-million worth in our shares - and there are some payments that get triggered once we are in commercial operation, depending on the increase in the uranium price. That could add another $40-million to the price taking the total price tag to about $150-million.
LINDSAY WILLIAMS: So they're taking $45-million worth of your shares - does that mean you're issuing shares to them? Where do those shares come from?
NEAL FRONEMAN: They would be new shares that we would issue - that would make Rio Tinto about a 5% shareholder in our company. The $65-million that we've got to raise in cash - there's a number of ways of doing that.
LINDSAY WILLIAMS: What do you think you're going to do to raise that cash?
NEAL FRONEMAN: Certainly our financial advisers are looking at the normal forms of finance, but of course the easy way is shares, but that could be dilutive - we will have to see what the cost of financing is.
LINDSAY WILLIAMS: There is a lot of talk about uranium at the moment, and there has been for quite a while - can you take us a step back and tell us what the price has done, and what the prospects are? Some people are saying they've heard this story before with SXR Uranium One, and asking when you are going to actually start producing? The first one - what has the uranium price been doing?
NEAL FRONEMAN: Uranium has increased from when we got into the uranium market in 2003 at around $11 to about $46 a pound today - so there have been very significant increases. Our expectations are that the uranium price will continue to increase quite substantially - $50 a pound is a very conservative target, and that's based on the supply and demand gap that's easily demonstrable. In terms of our assets - if you could buy a producing uranium mine in the world now you would be very lucky - they just don't exist. In fact Dominion would probably be one of the first new ones to come into production - a three year lead time for a brand new mine is very short, so people should really just watch us.
LINDSAY WILLIAMS: You said today's announcement is a "significant step towards one of the key strategic goals we set ourselves as a company in 2005" - maybe you could set out what your key strategic goals are?
NEAL FRONEMAN: We've got a very strong position in South Africa, and we intend to nurture that and grow it through Dominion. We have a presence in Australia through the Honeymoon project. Australia is a great place to do business - I've just recently returned from there. We expect some growth there. Australia also has the largest resources when it comes to uranium in the world. The U.S. is the largest consumer of uranium - it consumes about 26% of the uranium that's produced in the world, yet it only produces 4% - so there's a big gap between internal production and what's consumed. We know that the U.S. is trying to make itself less dependant on external energy sources, and the other thing is that as the uranium price goes up that give leverage to uranium from its own resources - so we think it's strategically smart to become involved in the U.S.
U.S. Energy Corp. Deal
LINDSAY WILLIAMS: I've got this feeling of d'ej`a vu - only last night Classic Business Day spoke to SXR chief executive Neal Froneman about their acquisition of uranium assets in the U.S., and flashing across the newswires there's another uranium mill also in the United States. It reminds me of one of these James Bond films - a mad scientist corners the market in one particular commodity and holds the West to ransom! Soon Neal Froneman will own the whole uranium mining and processing industry in the world. Neal, what have you bought now?
NEAL FRONEMAN: We're just following through with the same strategy - we've bought another uranium mill and its associated resources this time in Utah.
LINDSAY WILLIAMS: Why suddenly one mill after another - what is the rationale behind it?
NEAL FRONEMAN: As we indicated yesterday we identified a strategic gap in the US uranium market - we've been working on these two transactions now probably for nine months. They've happened to come to a head at roughly the same time - but it's essentially the same strategy. There's a shortage of uranium, and it's more pronounced in the U.S.A. - the U.S. has high prospectivity from a resource point of view, and on top of that there are four existing uranium mills of which two have been professionally mothballed. We've just bought those two.
LINDSAY WILLIAMS: So these are both mothballed. What's it going to cost? Yesterday's acquisition was $110-million - that's funded through the issue of shares, and Rio Tinto will take 5% of SXR - what's the deal with this one?
NEAL FRONEMAN: The total acquisition cost here at face value is $90-million. The reason I say at face value is because some of the payments are made out into the future, and that depends on commercial production and so on. The initial payment is $50-million and that's SXR Uranium One shares - so it's roughly another 5% of our equity that would be used to fund this. This particular company did not want cash - they actually want our stock because they want exposure to uranium.
LINDSAY WILLIAMS: So what's your shareholding looking like now - I would imagine it's a very diverse portfolio of shareholders?
NEAL FRONEMAN: Yes, quite right. Before these transactions we already had a diverse portfolio - most of our shares are held offshore now, with about 10% held in South Africa. The two new entrants to our share register would be Rio Tinto at 5%, and now U.S. Energy also at about 5%.
LINDSAY WILLIAMS: So it's two quite good partners to have. The re-commissioning of these mothballed plants - what's it going to cost you?
NEAL FRONEMAN: They both have different capital costs - we intend upgrading this mill slightly, so we're expecting to spend about $50-million on this particular mill. Because their tailings ponds are lined, and they've been lying dormant for about 20 years they need to be reconstructed - but in the big scheme of things that's not a lot of money for building a new mine, or even a new mill.
LINDSAY WILLIAMS: U.S. Energy's other interests are White Canyon, Henry Mountains, Green River North - and maybe they list them because SXR is interested? It sounds like a film with Julia Roberts - are there any other acquisitions coming up?
NEAL FRONEMAN: We are certainly looking for an acquisition that would give us capacity in the U.S. from a human resources point of view - we have identified another company with a cracker-jack team of technical people that would fit very nicely into our plans. That's some way off - it's certainly not going to be in the next day or two. The assets that you refer to here are good - they're highly prospective, but we're not able to quote resources numbers yet. Sheep Mountain is immediately adjacent to the Green Mountain asset that we bought and announced yesterday - so there's a lot of synergy between these two acquisitions.
LINDSAY WILLIAMS: You're not over-stretching are you?
NEAL FRONEMAN: No. If we try to do this with existing capacity then certainly we would be spreading ourselves too thin - that's why I said we've identified our North American team. We would like to complete that transaction to give us the capacity to manage these assets.
LINDSAY WILLIAMS: SXR Uranium One was one of the top performers on the JSE today up nearly 7% to closing just below R60 a share on good volumes.
Classic Business Day speaks with Semadi Motau from Noah Financial Innovation about SXR Uranium's purchase of assets in the U.S., the continued strength of commodity prices and currency markets.
LINDSAY WILLIAMS: Aflease split their gold and uranium assets - uranium does sound like a great story doesn't it? We're not going to be burning coal forever - because coal is going to choke us to death, and there won't be much left in 50 years, and there's going to be no oil left by the next World Cup comes here - so we're going to need some kind of new energy. Neal Froneman says "keep watching us" which is all very well - but how long do we have to keep watching?
SEMADI MOTAU: The reality is that it's an exploration company - I think historically the South African investor has never been quite comfortable in evaluating exploration companies. If you look at the Canadian market - where quite a number of the exploration companies are listed - I think the investors there are quite comfortable with the kind of risk that is associated with that. Uranium and energy is going to be a discussion for the next 20 to 25 years - because it's a finite commodity that we've got at the moment. If you look at coal - coal has only become fashionable again after oil prices spiked to the current levels. Of course now we start looking at other forms of energy like ethanol - look what that's done to the price of sugar. I'm afraid that until we can find some sort of easily available alternative type of energy uranium is a good story - at the moment it's sentiment driven, I think you've got to ride it. Yes, there is risk involved in that all they've got at the moment is: "We've got these reserves - we think it's a good story."
LINDSAY WILLIAMS: This is a good one though - because it's Rio Tinto, and Rio Tinto is one of the top three resources companies in the world. It's a mothballed operation from the 1980s when the price of uranium collapsed - and they've got a good partner. It also seems to be a cheap way for Rio Tinto to keep some kind of hold into that market, letting SXR Uranium One do all the re-commissioning of the plant.
SEMADI MOTAU: Yes, and I think if you look at it from a Rio Tinto point of view the reality is we don't know what their in price was back in the 1980s when they mothballed the whole thing - it might have been sitting on their balance sheet at an unrealisable value of maybe $50-million or whatever the case may be - and all of a sudden they've been given the opportunity and an exit strategy on something that's non-core. I think it makes a lot of business sense - because at the end of the day they're still looking to share some of the upside.
LINDSAY WILLIAMS: On 12 of January 2006 you could have bought SXR Uranium One at R30.10 ($4.21)- if you'd held on in mid-May you could have sold SXR for R65.50 ($9.18) - so it more than doubled in that time period. It's since come back briefly to below R45 ($6.30) - today it closed in the mid-R50s ($7). From a technical point of view, and from the news that we're seeing - and the reaction of the market today, which propelled the price up nearly 4% - it looks as though it could be going into the R60s ($8) again. Would you be a buyer of it?
SEMADI MOTAU: I think most definitely. I must be honest - I'm quite comfortable with commodities where they are at the moment, and I think we are going to see another run in the commodities before the end of the year. With that view I think we should be looking to be long of this counter.
LINDSAY WILLIAMS: Certainly in dollar terms every time I see an international commentator on the international television stations looking at the dollar index - they're saying the dollar is a one-way ticket to nowhere, and certain people are calling some outrageous prices for commodities. I don't know what that would mean in rand terms, but certainly in dollar terms it looks like commodities - the ones that we look at like gold, copper and platinum in particular could be set for new highs in the next two to three months.
SEMADI MOTAU: We are one of those that believe the U.S. dollar is doomed to some kind of a major devaluation - it hasn't quite happened as all of us hoped, but the reality is that if you look at the U.S. deficits, at what's happening with the consumers there - the only reason why the U.S. currency has held up as well as it has is the 13 consecutive quarterly increases in the interest rates. That's got to help the currency, but what happens after that? You can't continue increasing interest rates indefinitely.
LINDSAY WILLIAMS: Do you know what would be a beautiful situation - if the U.S. dollar depreciated and pushed up the dollar price of commodities, and at the same time there was still a little nervousness about South Africa and other emerging markets so the rand either stayed around the 6.75 to 7.55 range, or even weakened. In that case you would have shares like Anglo American up at R350 ($49) and R400 ($56) - and SXR Uranium even without uranium prices doing anything going to R75 ($10.52) or R80 ($11.21).
SEMADI MOTAU: I think under the current circumstance at the moment - should the U.S. dollar weaken - I can't see the natural switch that we saw three years ago, out of the U.S. into emerging markets - I don't think that's the case any more. The main reason is that of course the interest rate differential spread has narrowed quite substantially - until it widens again that sort of trade is not such an obvious one any more. So as a result what I'm saying is that yes, even if those commodity prices do appreciate, I don't think the strength in the rand as a result of the depreciation of the dollar will be as strong as say two years ago.
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