The Voice Against :
Some things we thought you should consider leading up to the Vote, and that you should consider leading up to the AGM.
"This one is special" Dundee Capital Markets analyst David Talbot said in a note. He called the resource numbers "truly phenomenal". Hmm? Well, we thought that Phenomenal was another word for pretty good. Okay then.
1. Synergies : As a rule mergers are based on tangible synergies and are undertaken to benefit from them. We saw no tangible synergies, nor did we see the any benefit for FCU shareholders. PLS is a pure play on one of best uranium deposits there is. PLS is located on the western-side of the
2. The Representations : The proposed Arrangement was highly inconsistent with the historical representations of FCU. Management has always communicated that that FCU was an explorer, and shareholders bought into the exploration story as told. The thought of being invested in what was proving to be one of the best uranium finds ever was compelling. FCU communicated publicly, and on a very regular basis, tacitly conveying that PLS would be / is / was for sale. FCU positioned PLS to shareholders as de-risk, prove up, sell. This is what shareholders believed in, and what shareholders invested in.
3. The Unlimited Downside : The proposed Arrangement exposed FCU shareholders to unlimited downside. There was no "collar" or price protection. No self-modifying ratio tying the value of FCU to the DML offer price of $1.25. It was based on a ratio of 1.26 regardless of what the DML share price was. As stated in the original news release “Based on the 30 day volume weighted average price of Denison's shares on the TSX of CAD$0.99 as at July 3, 2015, the offer implies a price per Fission common share of CAD$1.25 and represents a premium of approximately 18% to the 30 day volume weighted average price of Fission's shares on the TSX of CAD$1.06 as at July 3, 2015.” The day the deal was announced FCU’s share price closed at $0.97. The price at $1.25 as represented should have been the benchmark, and lanquage related to sustaining the price should have been present for the protection of FCU shareholders.
4. The Assets : We believed, and believe, that the value and nature of PLS is exceedingly greater than the assets being contributed by DML. FCU is contributing +/- 135 million pounds of near-surface, high grade uranium. DML is contributing +/- 70 million pounds of uranium from a variety of deposits - which we feel are inferior to PLS. Wheeler River is the largest of the DML deposits of which DML's share is 42 million pounds. Wheeler River is generally accepted as deep and ultimately difficult to mine. In addition DML is contributing a 22% ownership stake in a mill and some - we feel - relatively insignificant lower-grade offshore assets. FCU has no off-shore operations. Pure play. "Best" in World. Uranium resource. No building a Mill.
Where was the DML PEA? The proposed Arrangement did not allow for a clear understanding of the value of
On October 6th at the Town Hall Meeting at The Royal York we heard that the PEA’s for some of DML's exploration assets may be available by year-end. Pre-Vote we asked : Why not wait and make the deal contingent on results?
5. Deal Timing : We felt the timing of the deal was totally unfair to FCU shareholders. FCU entered into the Arrangement prior to significant material events on the horizon. We felt that simply ignoring these failed to protect FCU shareholders. These events had the potential to dramatically increase the value of FCU and included -
The PLS PEA turned out to be very strong. FCU may have surmised the likelihood of a positive PEA which was scheduled to be released in September.
The publicized and anticipated restarts of the Japanese reactor fleet. The Sendai reactor #1 was subsequently re-started on Aug 11th. It is anticipated that #2 and #3 will be re-started later this fall.
A resource update of ALL drilling results to be incorporated into a "current resource estimate" - surely raising the estimate from the original 105 million pounds. The expectation that the 600W results would be robust, was tangible.
The PLS summer program was scheduled to commence.
All of these events are highly material to the company's value. So the question is Why? Why was there a rush to enter into a "Deal" when you have worked so hard and are so close? FCU has an obligation to maximize shareholder value - the proposed Arrangement was void of material information and was clearly not in the interest of FCU shareholders. Thus, the Against Vote prevailed.
6. The Implied Valuation : It was, and is, our opinion that the proposed transaction severely undervalued PLS. On October 9th FCU closed at $0.69 = to a market-cap of $266,000,000. With an initial resource of 105 million pounds and a conservative current resource of +/- 135 million pounds this valued FCU at +/- $2.00 CDN per pound - significantly lower than previous transactions - "The sins of others" aside.
>>> November 2011 Hathor (HAT) sells Roughrider to Rio Tinto (RIO) - 57 million pounds for US$600 million @ US$10.00+ per pound = +/- $13.00CDN. The deposit was categorized as deep underground. FCU shareholders being asked to accept an Arrangement that values PLS at < $2.00 per pound. Why?
7. The Fairness Opinions; Verbal & Written : This was, and is still, a Wow for us. The use of a verbal fairness opinion provided to substantiate the proposed Arrangement at the time of the announcement raised eyebrows. Our position was, and is, is that the written fairness opinion provided to support the deal was, and is, Materially Out-Dated.
It did not incorporate - even consider - the possibility of a robust PEA subsequent to the proposed Arrangement. How do you determine the fairness of a deal - to the shareholders of the company or otherwise - if you don’t have a Materially-Up-to-Date Fairness Opinion?
Pre-Vote we suggested that it was reasonable to ask that the Arrangement be postponed so that material information could be quantified. Did you read the Fairness Opinion? Please do and let us know what you think it says. See MIC Appendix "C".
8. CONFLICTS? : Pre-Vote we asked you to decide. Certian of FCU's management were to be paid some $1.2 million by-way-of retention bonuses while transitioning to executive positions in the new company. Other employees were to receive a share of $1.0 million by way of retention bonuses in the aggregate. See MIC Page 59.
The directors and officers of Fission may have interests in the Arrangement that are, or may be, different from, or in addition to, the interests of other Fission Shareholders. These interests include those described below. The Fission Board is aware of these and considered them, among other matters, when recommending approval of the Arrangement by Fission Shareholders.
9. NO OTHER OFFERS : The Non-Solicitation Covenant can be found on Page 72 of the MIC. The conditions therein seem less than optimal for the shareholders of FCU. You might take a look.
10. SHAREHOLDER VALUE IMPLODES :
July 3rd FCU = $390,000,000
October 9th FCU = $266,000,000
At the Town Hall Meeting we heard the CEO say "this is an $800,000,000 deal" along with some other choice remarks. It was an $850,000,000 deal. It almost ended up being a $600,000,000 deal. Yeah, that looked right. Everybody loved it - until the Vote.
FCU + DML 7-3-15 = $ +/- $850,000,000
FCU + DML 10-9-15 = +/- $615,000,000
Note: This was after a serious DML rally from $0.51 on October 1st to $0.67 on October 9th which added some $75,000,000 to DML's market-cap. It's called "An Arbitrage Un-winding". The things that make us go Hmmm....
11. The Street Knew: The deal was clearly being questioned by "The Street" - and the street knows good deals and bad deals, regardless of when they occur. Rob Chang of Cantor Fitzgerald had wondered why FCU didn’t wait till after the PEA to negotiate the merger. David Sadowski of Raymond James categorized the Arrangement as a win for DML shareholders and a quantum change for FCU shareholders.