Investors are watching Cameco Corp. closely this week not just for its latest quarterly performance amid depressed uranium prices but whether it plans to put up a fight for Hathor Exploration Ltd.
The world's largest publicly traded uranium producer has extended its hostile $3.75-per-share offer for Hathor to Nov. 14, as it decides whether to top a friendly $4.15 offer from rival Rio Tinto PLC valuing the company at $578-million.
Saskatoon-based Cameco appeared to be caught off guard by Rio of London's bid on Oct. 19. Two days earlier, Cameco suggested Hathor shareholders give up hope of a white knight bid and tender their shares, even as Hathor shares continued to trade above the offer price.
Cameco has some decisions to make, starting with how badly it needs Hathor's large exploration-stage Roughrider project to meet its goal to double production by 2018.
Cameco likes the proximity of Hathor's properties to its own operations in the uranium-rich Athabasca region of Saskatchewan. Buying Hathor could also keep new competitors like Rio from muscling into the basin, which represents about 20 per cent of global uranium production.
What's intimidating for Cameco is just how high the bidding could go, given the kind of cash Rio can throw into the pot since it's the world's second-largest mining company and earns huge profits from a wide-range of commodities.
Cameco might find it necessary to arrange alternative means of financing its offer, said Dundee Capital Markets analyst David Talbot, noting it had $1.2 billion in cash at the end of the last quarter, much of it earmarked for capital expansion, and $1 billion in debt.
Cameco might try topping Rio with a cash-and-stock offer, which could be attractive to uranium investors, while limiting the amount of cash it has to put forward.
"This might give Cameco the opportunity to trump Rio Tinto, win the hearts and minds of the Hathor shareholders through valuation," Mr. Talbot said.
Rio's offer also has risks. The mining giant is betting that by time Hathor's project begins production, rules will change that prevent foreigners from owning more than 49 per cent of operating uranium mines. Or, Rio hopes Ottawa will make an exception.
The gamble for both Cameco and Rio has some analysts speculating the two companies could possibly join forces for Hathor.
It's not so far-fetched after Nunavut Iron Ore Acquisition Inc. and ArcelorMittal ended their long battle for Baffinland Iron Mines Corp. by proposing a joint bid earlier this year.
"Given that Rio Tinto does not have a mill in the area, is not a Canadian entity and does not have experience mining in the Athabasca, it would make sense for a future Cameco/Rio Tinto (51%/49%) partnership," Versant Partners analyst Rob Chang said in a recent note.
Cameco could offer its Rabbit Lake mill, Canadian status and expertise in the Athabasca basin, while Rio would be rid of worries of having to sell a stake at a later date to obey government regulation, Mr. Chang note.
As Cameco mulls its next move, the company is expected on Monday to report third-quarter revenue of about $618 million and earnings of 32 cents per share, according to analysts surveyed by Thomson Reuters. Spot uranium prices averaged about $53 in the third quarter, down from about $70 at the start of the year prior to Japan's nuclear disaster which sent prices plummeting.
Still, Cameco's earnings are expected to come in higher than last year when spot prices averaged about $43 in the third quarter. Revenues then were $419 million and earnings came in at 25 cents per share for the July-September quarter of 2010.