Big news in the uranium market. The Chinese company Hanlong Mining Investment Pty Ltd, a subsidiary of Chinese conglomerate Sichuan Hanlong Group, made an unsolicited offer to buy 100% Bannerman Resources for A$0.612. For new readers, Black Swan Insights bought a basket of uranium shares 4 days after the Fukushima incident in Japan. We bought Bannerman at $0.38. The thesis was that the market was mispricing uranium shares based on the fundamental outlook for uranium. It is good to finally see our thesis be proven correct. The Chinese see the value and are trying to buy as much cheap uranium as the market will allow.
The company's board has not agreed to the terms of the acquisition because of the conditions required by Hanlong offer. The main problem was Hanlong's insistence on a 3-month exclusivity period. Management rightly rejected this. The major point is that the Chinese have put Bannerman in play. Management said in the PR that they plan to explore other options (e.g sell to someone else at a higher price). However, the significance of this announcement is that it proves that uranium deposits have significant strategic value to smart investors. This should be supportive of other uranium stocks.
The only major concern we have at this point is incompetent management. Will management do the right thing and sell the company, or will they follow the disastrous Yahoo policy of rejecting an offer and watching the stock decline dramatically? In the case of Bannerman, it is difficult to say. Management has not shown itself to be very shareholder friendly at all. The egregious amount of dilution has destroyed value for shareholders. The market has acted accordingly by sending the shares to new lows (before the Chinese offer). Furthermore, the company has failed to find a strategic partner (e.g. off-take/financing agreement) to help finance its Etango project. If they had been able to accomplish this, they would not be in the position of having to defend themselves from this low-ball acquisition from the Chinese.
One positive indication is that management did not flatly reject the idea of selling the company. Let's be very clear--the company should be sold at this point, but at a higher price in our opinion. Bannerman owns 80% of its Etango project and has 118 million pounds of uranium in the measured and indicated category (80% of the 148 million pounds for the total project). The Chinese offer is for A$0.612 a share. Bannerman has 275 million shares fully diluted (according to the May 2011 presentation), meaning the total value is only A$168 million or around $179 million. This equates to a value of only $1.51 per pound of M & I; I uranium in the ground. Totally unacceptable and significantly below fair value. The company should be able to get at least $2-3 dollar per pound, which implies a higher price of around A$0.81-A$1.22.
At this point, we are still holding our position in Bannerman, expecting more interest from other parties.
Black Swan Insights