Frone­man in to ‘make ben­e­fit’

But cre­ation of US$5bn com­pany is seen as flashy

Finweek English Edition - - Companies & markets - DAVID MCKAY

THE PRO­POSED R21bn (US$2,9bn) merger of Neal Frone­man’s sxr Ura­nium One with UrAsia En­ergy has en­gen­dered some mixed re­views. Sup­port­ers be­lieve it to be bold, ex­pan­sive and strate­gi­cally in your face. Doubters say it’s di­lu­tive to share­hold­ers and they don’t buy the need for scale.

The com­bined unit will pro­duce nearly as much ura­nium in 2012 as the world’s largest pub­licly listed pro­ducer. But at a time when sxr Ura­nium One is about to press the but­ton on pro­duc­tion in South Africa, ques­tions are be­ing asked if the com­pany has stretched its per­son­nel and re­sources.

There are also ques­tions whether UrAsia’s ura­nium mines, which it has owned for a mere 14 months, can pro­vide the value. The com­pany has so far booked a profit of $27m (R195m) on the mines, all of which are in cen­tral Asia’s Khaz­ak­stan. One other grum­ble is that Khaz­ak­stan car­ries with it po­lit­i­cal risk.

“I’ve gone cold on this,” says Pete Ma­jor, who helps man­age in­vest­ment funds for Cadiz. “They’ve paid a mas­sive pre­mium (21% on 20-day value-weighted av­er­age price) and di­luted the hell out of share­hold­ers.”

Still, cat­a­pult­ing sxr Ura­nium One in that way should come as no great sur­prise.

Frone­man is an ag­gres­sive busi­ness­man. Af­ter be­ing ex­cluded from Har­mony Gold’s ex­ec­u­tive in 2001, he left to be­come Brett Keb­ble’s cor­po­rate front­man at JCI Gold. He left that af­ter it be­came ob­vi­ous that Keb­ble wasn’t go­ing to brook chal­lenge.

Af­ter a stint at Gold Fields run­ning its Kloof gold mine, Frone­man even­tu­ally bought con­trol of Afrikan­der Lease (Aflease) through the New Kle­in­fontein con­sor­tium.

Shortly af­ter, Frone­man faced a slump in the rand gold price that al­most ru­ined Aflease. He shut Aflease’s gold mine, hop­ing to con­tain the dam­age and turn to Aflease’s gold ex­plo­ration prospects. But the mar­ket lost faith. Aflease’s price fell from R6,50 to R2,15/ share by late 2003.

Then, sud­denly, came the lucky packet of all lucky pack­ets: Aflease had ura­nium – lots of it.

Last week’s deal was to in­crease sxr Ura­nium One’s project an­nual ura­nium out­put in 2008 to 19,4m pounds in a com­pany worth $5bn (R36bn). One con­cern among an­a­lysts is that Frone­man is bet­ting big on a share rerat­ing solely on its mar­ket value with­out re­gard for share­holder value.

Nigel Su­lia­man, who helps man­age the re­sources funds for Metropoli­tan As­set Man­agers, says that se­cur­ing as­sets in a ris­ing ura­nium mar­ket makes sense. As for the pro- fitabil­ity of the Khaz­ak­stan as­sets, he’s will­ing to give Frone­man the ben­e­fit of the doubt.

Says Su­lia­man: “Frone­man saw the ura­nium mar­ket very early. So for the time be­ing I think we shouldn’t sec­ond-guess him. I’ll go with man­age­ment on this one.”

In­ter­est­ingly, there’s a slightly dif­fer­ent view in Canada, which may be de­scribed as less risk averse than their coun­ter­parts in SA, ac­cord­ing to a re­port by RBC Cap­i­tal Mar­kets on 13 Fe­bru­ary.

“Based on the price paid for ‘pounds in the ground’, sxr is pay­ing a pre­mium for UrAsia’s as­sets. How­ever, we be­lieve this may be jus­ti­fied by the ad­vanced stage of the projects and the fact UrAsia plans to bring its pounds out of the ground faster than sxr.”

Can he “make

ben­e­fit” in the glo­ri­ous

na­tion of Khaz­ak­stan?

Neal Frone­man

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