TORONTO Rio Tinto's battle to secure its foothold in Canada's uranium-rich Athabasca region has only just begun now that it has apparently won a bidding war to gain control of Hathor Exploration.
While the path is now clear for Anglo-Australian giant to acquire the exploration-stage company, a whole new set of rules will apply to Rio once Hathor's flagship Roughrider project nears production.
Under current Canadian law, foreign companies are barred from owning more than 49 percent of an operating uranium mine. That could throw a wrench in Rio's (RIO.L) plans to turn Roughrider into a producing asset.
"They have two options," said Salman Partners analyst Raymond Goldie. "Either they hope that the law changes, or they hope that they will find a Canadian partner to own 51 percent."
If it is the latter, that would be good news for Cameco Corp (CCO.TO), Canada's top uranium producer. Even though it backed out of the bidding war for Hathor, the company could end up owning half of Roughrider, located just 25 kilometers (15 miles) from its Rabbit Lake mill in Saskatchewan.
In partnering with Cameco, Rio could comply with ownership restrictions, while gaining access to a mill with spare capacity to process ore from Roughrider, said Goldie.
"I would be willing to make the bet that when the mine comes into production, Cameco will own more than half of it," he said.
But others feel uranium's days as a protected resource in Canada are numbered. The ruling Conservatives have already said they are reviewing the restrictions, and policy experts say the government will likely push to relax the legislation.
"Once upon a time there was a very clear reason for this (restriction), and there was also a climate of concern about foreign investment and foreign ownership in Canada," said Jeremy Rayner, a professor at the Johnson-Shoyama Graduate School of Public Policy at the University of Saskatchewan.
"It looks like an anomaly now," he said.
Canadian uranium first gained notoriety during the Second World War, when it was used to develop nuclear weapons as part of the Manhattan Project. In subsequent years, the government began to restrict uranium to safeguard domestic supply and to ensure it was only used for peaceful purposes. Today, Canadian uranium fuels nuclear power plants around the world.
Easing ownership restrictions on uranium mines would show that Canada is open to foreign investment, say experts, despite a controversial move last year to block a hostile $39 billion takeover of fertilizer producer Potash Corp (POT.TO) by BHP Billiton (BHP.AX), another Anglo-Australian mining giant.
"Both the federal and Saskatchewan governments are right-of-center governments that have declared that they are open for business," said Rayner. "They were, I think, frankly embarrassed by what they had to do with Potash Corp."
Rio's bid for Hathor has cleared the Competition Bureau, but still faces an Investment Canada review, required of all foreign purchases over a certain size. Because its projects are all exploration stage, there are no uranium-specific restrictions on ownership at this time.
BIG IN THE BASIN
While Rio's exact plans for Hathor remain unclear, analysts speculate the miner is using the explorer as a jumping-off point to gain a much larger foothold in the Athabasca basin.
France's Areva (AREVA.PA), which is undergoing a strategic review, could sell some of its uranium assets, including part of its Canadian mining portfolio.
"If the Areva rumors prove grounded, then Rio Tinto may end up with significantly more assets in the basin in short order," wrote Dundee Securities analyst David Talbot in a note to clients.
That could raise some alarm bells with groups that are opposed to foreign ownership of Canadian resources and become a "political hot potato," said Carmen Diges, a natural resources lawyer and partner with Miller Thomson.
"There's an overarching set of views that Canada - being so dependent on natural resource production - how much foreign ownership of our natural resources do we want?" she said.
Rio is already a major player in Canada's mining sector, producing diamonds, iron ore, titanium dioxide and aluminum from projects across the country. Other mining giants like Xstrata XTA.L and Vale (VALE5.SA) have taken over Canadian companies in recent years, often in face of public opposition.
But the Canadian government is eager to show it is open to business, and with a friendly deal with Hathor in place, Rio could be ideally positioned to challenge Canada's uranium ownership restrictions.
"Companies, if they want to be strategic players in an area, they'll figure out all possibilities to do that," said Diges. "Laws are a roadmap and creative business people have always been really good at getting to their destination using the road map in new and creative ways."
(Reporting by Julie Gordon; Editing by Frank McGurty)
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