Description

Thesis: Buy Mantra Resources (MRU) (BB: MRU AU Equity)                           3.20.2011

This write-up will necessarily be short due to the time sensitive nature of the situation and the headlininess.  Normally I wouldn't write up something covered in a headline bloomberg article but this was actually interesting. We can get into assumptions, models, and details in the Q&A.

MRU offers a very straightforward way to play the overreaction in the nuclear fuel space emanating from the Japanese disaster with likely near-term catalysts.  MRU is a high-probability take-out/deal candidate that should be purchased for at least 900 million for a short-term appreciation of at least 20%, with return possibilities of exceeding 40% and limited downside.

MRU is an Australian early-stage uranium mine developer with assets in Tanzania.  MRU owns a 100% interest in the Mkuju River Project that contains roughly 110 million pounds of uranium reserves, 66 of which is indicated and 34 of which is inferred as of the most recent pre-feasibility study (March 2010).  These reserves equate to about 73% of 2011 uranium requirements.   At estimated production levels of 3.7 million to 5.7 million pounds per year, the MRU assets can contribute 3 to 5% to global uranium supply based on 2010 consumption numbers, making it one of the largest mines available.  It is widely recognized that MRU's Tanzanian assets are among the highest quality assets not currently owned by a major producer due to the combination of low cost - $25.50 - long life, production capacity, and friendly operating environment.

On December 15, 2010, JSC Atomredmetzoloto (ARMZ), uranium production giant and subsidiary of state-owned Russian state nuclear power corporation Rosatom entered into a Scheme Implementation Agreement (SIA) to purchase MRU for 8.00 per share, or 1100 million for the enterprise.   Furthermore, ARMZ entered into a put/call agreement with Uranium One (UUU), a publicly traded uranium production giant (of which ARMZ owns 51%) with which UUU has the right to purchase MRU's assets from ARMZ and ARMZ has the right to sell MRU's assets to UUU twelve months after the merger is completed, both struck at the acquisition cost plus certain additional expenditures.  Essentially, the transaction allowed UUU to receive very cheap bridge financing through its majority owner for the acquisition of MRU's assets.  The transaction values MRU at 10.26 per pound of reserves and 36 on a cash-cost adjusted basis.

Recently, the Japanese disaster has allowed ARMZ to cite a material adverse event clause in the SIA, essentially allowing them an opportunity to renegotiate the transaction.  From UUU release: "ARMZ has indicated to Mantra that it intends to continue discussions with Mantra in an effort to explore how the transaction between two companies may proceed by way of an alternative approach."  While this language is perfectly vague (damn lawyers), we believe that the acquiring company(ies) smell blood in the water and are simply trying to get a better deal.

We believe that they will come back with an offer slightly lower than before but still higher than the current share price.  Comparative deals have been struck at around 34 per cash-adjusted reserve, which would value MRU's assets at about 8.50 to 9.00 per pound and roughly 6.60 per share.  This is also roughly the average trading multiple for ASX listed uranium companies.  Currently, MRU trades at 6.27 per pound and 31 per cash-adjusted pound.  This would save UUU around 250 million.

• ARMZ already owns 12% of the company
• UUU has been looking to acquire MRU for a number of years but hasn't had the capital to do so
• UUU believes that the pre-feasibility study MRU performed in March 2010 understates the potential for the site
• The MRU assets contribute 17 to 22 percent to UUU's  long-term steady-state production goals.  Furthermore, according to UUU mgmt, the MRU assets will not increase average cash cost per pound produced, allowing UUU to maintain its status as a very low cost producer, if not the lowest cost.
• The Tanzanian government and the Russian government are very good friends, whatever that means

It would seem that UUU was pretty excited about this acquisition

No transaction: additional financing required but NPV looks good.

Estimated capex til completion is roughly 350.  What does that buy us?  We estimate that, given uranium prices of around 60, the company can generate about 3 billion in cash through 2030, which has a NPV of about 1 billion discounted at 13% at a reinvestment rate of 0%.  So we pay 700 today, fork over an additional 300, and get about 1 billion in present value - meaning the price today is roughly equivalent to the fair value of the planned mine as a stand-alone entity.  Thus, we think with limited downside, short-term upside potential greater than 20% and downside limited to MRU's, MRU provides a solid opportunity to get involved in the ravaged uranium market.

Catalyst