Merger of two uranium companies could create a major player in Mongolia

Jul 24 • Business, Economy • 584 Views • Comments Off on Merger of two uranium companies could create a major player in Mongolia

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by Danny Deadlock

Khan Resources makes an offer to buy out Western Prospector.

Western Prospector (TSX: V.WNP, Bullboard, 63 cents)

Some very good news out Sunday on WNP. Khan Resources (TSX: T.KRI, Bullboard), 93 cents) is offering to buy out WNP for the equivalent of 66 cents based upon Friday’s closing prices. Given the strength of this deal, that number could move higher, as the deal would create a major uranium player in Mongolia. We’ve been bottom fishing WNP for some time now (below cash value) and this is an excellent scenario for several reasons:
Of the 300 + stocks we’re tracking on our StreetSignal site, the uranium stocks are showing substantial signs of life this past week. This could be a very good indication that the uranium sector is on the verge of a good run – something we haven’t seen for a long time now. Cameco (TSX: T.CCO, Bullboard) (the industry benchmark) has done very well since the first of May and if this continues, expect the juniors to join the bandwagon. The timing of this merger between the two most important uranium juniors in Mongolia may be perfect.

A combined company creates the following:

– two world-class uranium projects with extensive reserves and exploration potential
– significant operating cost synergies
– dramatic capital cost savings in excess of $100 million by building one common mill
– the two companies would have no debt and more than $60 million in the bank
– market barely values these companies above cash value
– both are trading at the bottom of their charts
– a larger company makes it more attractive to institutional investors and funds

The political risks of Mongolia still exist but it’s very possible a combined company will carry more clout (and less risk). Should the government work with these mining companies (even if they take a % ownership), the upside is still tremendous from these levels. Should the uranium sector rally, it’s an even greater bonus while they’re trading this low.

While I would personally prefer to see a higher exchange ratio on WNP’s behalf, the combined companies create a very strong risk/reward scenario going forward. A Monday news release stated that the board of directors for WNP are reviewing the pending offer. Hopefully everyone can come to terms as the combined company makes tremendous sense. It may only be a matter of tweaking the exchange ratio in favor of WNP shareholders. KRI trades at a good premium to cash value while WNP traded at or below cash value.

Khan Resources Announces Offer for Western Prospector

TORONTO, ONTARIO, May 11, 2008 Khan Resources Inc. (TSX: KRI) announced today that it will make an offer to acquire all of the outstanding common shares of Western Prospector Group Ltd. (TSX VENTURE: WNP) in order to consolidate its position in the Saddle Hills district of Mongolia and achieve significant synergies from the joint development of Khan Resources’ Dornod uranium deposit and Western Prospector’s Gurvanbulag uranium deposit in that district.

Highlights of the Offer

– Western Prospector shareholders to receive 0.685 of a Khan Resources common share for each common share of Western Prospector

– The Offer represents a premium of 34% based on the 20 day volume weighted average trading prices of Khan Resources and Western Prospector and a premium of 30% based on the last Western Prospector and Khan Resources trading prices

– The Offer will consolidate ownership and operations of Khan Resources’ and Western Prospector’s contiguous properties in the Saddle Hills region of Mongolia

– Synergies in excess of US$100 million expected to result from the construction of one common mill (rather than two mills) and the sharing of infrastructure, as well as significant operating and administrative costs

Details of the Offer

Pursuant to the Offer, Western Prospector shareholders will receive 0.685 of a Khan Resources common share for each Western Prospector share. Based on the volume weighted average trading price of the Khan Resources common shares on the Toronto Stock Exchange (TSX) and the Western Prospector common shares on the TSX Venture Exchange (TSXV), in each case for the 20 trading days ending May 9, 2008, the all share Offer represents a 34% premium to Western Prospector shareholders. The Offer also represents a premium of 30% over the May 9, 2008 closing price of Western Prospector’s common shares of $0.50 on the TSXV, based on a closing price of $0.95 per Khan Resources common share on the TSX on that same date.

The acquisition of Western Prospector is expected to result in combined capital cost savings in excess of US$100 million, resulting from the construction of one common mill (rather than two separate mills) and the sharing of infrastructure. Khan Resources also anticipates significant operating cost savings from common ownership of the Dornod and Gurvanbulag deposits as a result of the consolidation of head office and management and administrative teams.

CEO of Khan Resources, Martin Quick, commented “This is a natural combination of two companies working towards the same goals in the same area. Western Prospector shareholders benefit by getting access to a rich and advanced Uranium deposit that can quickly be brought into production and by receiving a premium to their stock price. Khan shareholders benefit from an extensive exploration potential and by becoming more attractive to the Mongolian government as a mid-tier near-term producer.”

An advertisement formally commencing the Offer will be published on Monday, May 12th in English in The Globe and Mail and The New York Times and in French in La Presse.

Full details of the Offer will be included in the formal offer and take-over bid circular to be filed with the securities regulatory authorities on May 12th and mailed to Western Prospector shareholders. Khan Resources will formally request a list of Western Prospector’s shareholders on May 12th and expects to mail the take-over bid documents to Western Prospector shareholders as soon as possible following receipt of such list. The Offer will be open for acceptance until Friday, June 20, 2008 at 8:00 p.m. (Toronto time). The Offer will be subject to a number of conditions, including there having been validly deposited under the Offer and not withdrawn at the expiry time such number of common shares of Western Prospector that constitutes at least 50.1% of the common shares then outstanding (calculated on a fully diluted basis) and the provisions of Western Prospector’s shareholder rights plan being waived, invalidated or cease traded. The Offer is also subject to the receipt of customary regulatory approvals, including the approval of the Toronto Stock Exchange to the listing of the common shares of Khan Resources to be issued in respect of common shares of Western Prospector deposited under the Offer.


Disclosure: Danny Deadlock owns 20,000 shares of Western Prospector.

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