TORONTO Rio Tinto (RIO.AX) (RIO.L) entered the battle for Hathor Exploration HAT.TO on Wednesday with a C$578 million (359 million pound) friendly takeover offer for the Canadian uranium explorer that tops Cameco Corp's (CCO.TO) hostile bid.
The attraction of Hathor for both miners is its large exploration-stage Roughrider project in the uranium-rich Athabasca region of Saskatchewan in Western Canada.
Both bidders see Hathor as a neat strategic fit. Roughrider is close to an existing mine and mill operated by Cameco in the Athabasca basin.
Anglo-Australian giant Rio Tinto said the Hathor acquisition fits its strategy of investing in the primary uranium producing regions of the world. Canada produces some 20 percent of global uranium supply from the Athabasca region.
Hathor's board recommended that shareholders accept Rio Tinto's (RIO.L) all cash offer of C$4.15 a share, which is 11 percent higher than Cameco's cash bid of C$3.75.
Hathor's shares jumped over 10 percent to C$4.47 on the Toronto Stock Exchange after Rio's bid was announced. By mid-afternoon shares had steadied at C$4.39, still well above Rio's offer on speculation of a bidding war.
"It just makes life a bit more difficult for Cameco," said BMO Capital Markets analyst Edward Sterck. "They've got to work out now if it is worth them raising their bid or not."
To outbid Rio, Cameco would have to come back with an offer of around C$4.25 a share, or about C$4.40 per share including the C$20 million break fee Hathor would owe Rio if a competing bid wins, Sterck said.
While too high of a bid could dilute earnings, Cameco may view the deal as essential as it looks to boost its uranium output to 40 million pounds a year by 2018, Sterck said.
The Saskatoon, Saskatchewan-based company expects to produce 21.9 million pounds of uranium this year. The Roughrider deposit, which is located just 25 kilometers (15 miles) southeast of Cameco's Rabbit Lake mine and mill, has the potential to produce at least 5 million pounds a year.
Cameco first floated its C$520 million hostile bid for Hathor in August, after initial talks on a friendly deal failed. The company said on Wednesday that it was reviewing Rio's offer and would update shareholders when appropriate.
Cameco's shares slipped 5 percent to C$20.42 on Wednesday on the Toronto Stock Exchange. Hathor's shares have risen more than 65 percent since August 25, the day before Cameco's bid was made public.
Uranium is a strategic resource in Canada, which limits a foreign entity's ability to buy fully developed assets. Before a uranium project can go into production in Canada, a domestic company must hold a controlling stake.
Because Roughrider is still exploration stage, Rio could buy Hathor outright, but it would likely have to find a partner to bring the project to production.
Canada has considered easing the foreign ownership rules for uranium projects, though on a conference call from Paris on Wednesday, Natural Resource Minister Joe Oliver said he is in no rush to revisit the issue.
"I haven't looked at the specifics of this particular proposed transaction so I really can't comment," he said. "With regard to foreign ownership there is no appetite to move forward with changes to the policy at this time."
"NET BENEFIT" TEST
Separately Rio's acquisition of Hathor would also have to be reviewed by the Canadian government under the Investment Canada Act. Last year, the government shot down BHP Billiton's (BHP.AX) $39 billion hostile bid for Potash Corp (POT.TO), the world's largest fertilizer producer, on the grounds that the deal would bring no net benefit to Canada, a requirement under the act.
Hathor said its directors and senior management have entered into lock-up agreements with Rio to tender their shares to the offer, amounting to about 4.6 percent of the company.
Rio said its affiliates already own 5.7 percent of Hathor. In addition to the C$20 million break fee, the bid guarantees Rio the right to match any superior offer.
The Anglo-Australian company currently produces uranium from its interests in the Ranger mine in Australia and the Rossing mine in Namibia.
(Additional reporting by Scott Haggett in Calgary; editing by Peter Galloway)
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