Tag: UUU

Uranium One now majority controlled

Uranium One’s shareholders voted convincingly in favour of the takeover of a majority stake in the corporation by a Russian “crown” corporation SC Atomredmetzolo (“ARMZ”) with approximately 91.99% of non-ARMZ shareholders in favour of the transaction.

The salient terms of the agreement is that ARMZ will take a 51% majority stake, and pay the rest of the shareholders $1.06/share in a cash dividend. Shareholders, assuming they haven’t already sold at market value, will be in for the ride and will have to make sure that their interests are in alignment with the majority ownership.

This is almost the reverse case of Magna International, where the Stronach family is being paid a considerable sum by the corporation to relinquish its controlling stake.

Investors should always be very cautious in making sure whenever they invest in companies that have majority or near-controlling ownership stakes that their interests are in alignment with the large shareholders. While a majority stake is not necessarily an exclusion criterion to considering a potential investment, it does raise the bar considerably higher. I tend to have a high aversion to majority or near-majority controlled domestic corporations as they can abuse minority shareholders.

The debenture holders, however, should be looking good – Uranium One has a December 31, 2011 issue that has a 4.25% coupon that is a very probability candidate for maturity at par; between the bid and ask, it is trading at 98.5 cents. Once you factor in capital gains, it is a relatively low risk 5% return on investment. Uranium One has another outstanding debenture issue that matures in March 2015 and this one is muddied by the fact that the conversion privilege (at $4/share) is close to the common stock price – this issue is trading at around 105 cents.

It is not likely that the 1.3 years between now and December 31, 2011 will pose much of a credit risk for the initial debenture issue – the corporation is likely to refinance this debt. However, the 2015 debenture has more embedded risk simply due to the time between now and the March 2015 maturity – you never know how much of the company assets will get stripped out. The worst case scenario is that ARMZ will try to to repatriate the assets (mainly agreements to mine and sell Uranium, mostly from Kazakhstan) of Uranium One into some other corporation controlled by ARMZ. You then don’t have to worry about the bankruptcy of a Canadian corporation once the assets have been stripped out of it, and debenture holders and shareholders alike would be left with nothing. It is unlikely this scenario will happen by 2011, but by 2015 it becomes somewhat more likely.

Suffice to say, I won’t be touching the equity or debt of this corporation.

Uranium One gets taken over

In a somewhat complex arrangement, Uranium One (which has a primary business of owning and operates several uranium producing mines in Kazakhstan) announced a transaction with its existing 23% owner, JSC Atomredmetzoloto (ARMZ, a Russian corporation that is state-owned by the Russian Atomic Energy Corporation) such that Uranium One will receive an economic stake in two more mines and ARMZ will receive a majority stake in the company.

The salient details are in the press release.

Although I do not have a current position in Uranium One equity or debt, I do keep an active watch of their debentures. They traded up from about 92% to 94% after the announcement. The debentures have a change of control provision, but this is for 2/3rds of the company and not majority ownership.

When dealing with majority-owned companies, you have to be very careful in knowing the motivations of those shareholders – their goals and interests might not line up strategically with the interests of the minority shareholders (which is either to derive an income stream or realize capital gains in the marketplace). As such, you should never own companies that are majority controlled unless if you can answer this question. Some majority owners are there to pillage or otherwise legally transfer the assets of a subsidiary company into a parent corporation and some majority owners like to depress the market valuation of the subsidiary firm just so they can acquire the rest of it. It is rare when the alignment is correct (i.e. the majority owner wants to sell the rest of the stake for a high price, or the majority owner wants to peacefully derive as much long-term income out of their investment).

For shareholders, I would be extremely cautious in the future about Uranium One.

Fortunately, the debenture holders do not really have to care about the motivations of shareholders (other than their willingness to pay off the debt). Even after the proposed special dividend the company is proposing, the corporation will have sufficient liquidity to pay off the $155M of debentures when they are scheduled to mature on December 31, 2011. At a price of 94, they have a current yield of 4.5% and a potential capital gain of 3.9% annualized assuming redemption at maturity.

Both shareholders and debenture holders also realize the same risks with respect to having a Canadian corporation owning and operating mineral rights in foreign countries. I have no idea as to the political stability of Kazakhstan, but would be slightly comforted in knowing there are a few directors on board that speak Russian and would have some clue about the legalities of their political system. However, I would not be comfortable as a shareholder knowing that a Russian government corporation controls the board of directors in the company. Their only vested interest would be to maintain control of the company, and at least this means they should be paying their December 31, 2011 debentures.