Is Paladin Energy's bid for Fission Uranium a good deal?

Paladin Energy (ASX: PDN) entered into a definitive agreement to acquire Canada's Fission Uranium Corp in an all-scrip deal valuing the company at $1.25 billion.

This deal arrives at a critical juncture for the uranium industry, where several factors are converging:

• Uranium prices have surged in the past 12-24 months to levels not seen since 2007

• The mining sector is experiencing a wave of M&A, with companies finding it more cost-effective to acquire and merge, rather than build new projects

• Countries like China are aggressively expanding their nuclear power capacity to meet growing energy needs

Under the offer, Fission shareholders will receive 0.1076 shares of Paladin Energy for every Fission share they hold. The deal implies a value of C$1.30 per share or a 25.8% premium to its closing price on 21 June.

The transactions does not require Paladin shareholder approval and the Fission Board of Directors have recommended shareholders to vote in favour of the transaction.

Merger rationale

Fission Chief Executive Ross McElroy says the deal significantly de-risks the financing the construction of its flagship Patterson Lake South Project (PLS) in Saskatchewan, Canada.

A definitive feasibility study was completed for PLS in 2023, making it more progressed than Paladin's Michelin Project – where a PFS is not expected until after FY26.

According to Morgan Stanley, the deal has the potential to bring forward Canadian production. Some of the key takeaways from Paladin Energy note dated 24 June include:

• PLS is more progressed, has a bigger expected annual production, is higher grade and lower cost than Paladin's existing Canadian growth option Michelin

• We estimate Fission EV/Resource at 6.3x in line vs. Paladin EV/Resource of 6.4x, but well below global peers at ~26.6x

• With PLS, Paladin could grow to produce up to ~15 Mlbpa (~12% of CY22 global supply) by FY29+, making PDN a meaningful global uranium play

• If Michelin is approved, the first production will be in the next decade (2035+). Paladin plans to keep its Australian assets as potential long-term growth options

The report reaffirmed an Overweight rating for Paladin Energy with a $16.65 target price.

Leveraged to higher prices

"For the uranium bulls, as we are, this transaction looks attractive as it could lift our Paladin Energy NPV ~37% to ~$21.7 per share using our base case long-term uranium forecast of US$115/lb," Citi analysts said in a note on Friday.

While uranium prices have pulled back to the US$85 level, current spot prices could still increase the company's NPV by approximately 12% to $17.70.

Source: Citi

In essence, this merger has the potential to forge a globally significant uranium producer over the next decade. Paladin's plans to bring Patterson South Lake and Michelin into production, coupled with the acquisition of Fission, will substantially increase the company's size and scale. This strategic move also helps mitigate funding risks for the Patterson Lake South project.

As with all cyclical industries, the profitability of these projects is closely tied to uranium prices:

1. At prices around US$50, the projects become economically challenging and less attractive.

2. However, if uranium prices surpass US$100, these same projects could generate robust earnings.

Citi's base case assumption for uranium is US$115/lb on expectations of a growing global supply deficit and nuclear energy's role in the global energy transition.