Clock - Uranium Supply Crunch and Critical ... - Andrew Johns

Canada Research | Page 64 of 87UraniumARMZ Tax Battle with TRA. According to several news sources, the Tanzanian RevenueAuthority (TRA) is demanding ARMZ pay US$206 mln in capital gains taxes and stampduty following its US$1.04 bln acquisition of Mantra. Legal proceedings are on-going.We believe this situation is worth monitoring, given that:(i)(ii)(iii)According to Tanzania’s Public Corporations Accounts Committee, the countrymissed out on ~US$300 mln in potential tax revenue from the Bhati Airtel-ZainAfrica acquisition in 2010 (now a focus for the government’s opposition);The proposed 2012/2013 Tanzania budget (to be tabled in parliament in August2012) is reported to include a framework for the taxation of multinationalM&A;In a similar case, the tax authority of Uganda ruled in November 2011 thatHeritage Oil must pay US$404 mln after its US$1.45 bln sale of Ugandan assetsto Tullow Oil in 2010.Although Uranium One maintains TRA’s case is without merit, the potential impact of anegative ruling would be very material to the company as, according to the put/callagreement, the total purchase amount is equal to what ARMZ paid (US$1.04 bln) plus,amongst other items, “expenses incurred by ARMZ in connection with the acquisition”;in our view, inclusion of this tax could further compel minority shareholders to vote ‘no’to acquiring the remainder of Mantra in June 2013.Is It Worth It? On balance, we view Mkuju as a world class deposit that is highly likely tobe developed; however, for Uranium One, the large up-front purchase/developmentcosts (requiring additional debt) and scalability risk suggest the company may seek toretain its 13.9% stake and not acquire the remainder. Based on our currentassumptions, our NAV estimate would be 21% higher if we assume Uranium One passeson the acquisition (see Exhibit 77). Our ‘without Mkuju’ scenario excludes the $0.9 blnpayment and 86.1% higher equity in Mkuju and the other Mantra assets.Exhibit 77: RJL NAV Estimate With and Without Mkuju River and Requisite DebtFunded NAV Valuation C$mln C$/afd.sh. Funded NAV (w/o Mkuju) C$mln C$/afd.sh. %Δ w/oCorporate Corporate MkujuWorking Capital (1Q12) 619,800 0.64 Working Capital (1Q12) 619,800 0.64 -Options & Warrants 40,273 0.04 Options & Warrants 40,273 0.04 -LT Liabilities (+PV of interest) (1,127,720) -1.17 LT Liabilities (+PV of interest) (1,011,023) -1.05 -10.3%Mantra Purchase (900,000) -0.93 Mantra Purchase 0 0.00 -100.0%Future Equity Raise 0 0.00 Future Equity Raise 0 0.00 -SG&A (NPV, 8%) (197,176) -0.20 SG&A (NPV, 8%) (197,176) -0.20 -(1,564,824) -1.62 (548,126) -0.57 -65.0%ProjectsProjectsAkdala (DCF, 8%) - 70% 480,467 0.50 Akdala (DCF, 8%) - 70% 480,467 0.50 -South Inkai (DCF, 8%) - 70% 1,171,961 1.21 South Inkai (DCF, 8%) - 70% 1,171,961 1.21 -Karatau (DCF, 8%) - 50% 760,004 0.79 Karatau (DCF, 8%) - 50% 760,004 0.79 -Kharasan (DCF, 8%) - 30% 311,973 0.32 Kharasan (DCF, 8%) - 30% 311,973 0.32 -Akbastau (DCF, 8%) - 50% 881,952 0.91 Akbastau (DCF, 8%) - 50% 881,952 0.91 -Zarechnoye (DCF, 8%) - 50% 420,073 0.43 Zarechnoye (DCF, 8%) - 50% 420,073 0.43 -Honeymoon (DCF, 8%) - 51% 56,476 0.06 Honeymoon (DCF, 8%) - 51% 56,476 0.06 -Willow Creek (DCF, 8%) - 100% 411,606 0.43 Willow Creek (DCF, 8%) - 100% 411,606 0.43 -Mkuju River (DCF, 8%) - 100% 339,722 0.35 Mkuju River (DCF, 8%) - 13.9% 47,221 0.05 -86.1%Other Mantra Assets (notional) 50,000 0.05 Other Mantra Assets (notional) 6,950 0.01 -86.1%4,884,234 5.05 4,548,683 4.70 -6.9%3,319,410 $3.43 4,000,557 $4.14 20.5%Source: Raymond James Ltd., Uranium One Inc.With that said, the upcoming DFS (3Q12E) should provide the requisite clarity on capex,opex, throughputs, and recoveries. We will also be looking for the change in Proven andProbable reserves (tonnages/grade), which should help quantify the economic impact ofthe lower cut-off grade in the November 2011 resource. Beyond movements in spoturanium prices, we view the study as the most important catalyst for the stock.Raymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2