China Keeping a Cool Head on Uranium

MARCH 22, 2011   THE WALL STREET JOURNAL

By ROBB STEWART

With its biggest uranium-mining deal at stake, China has kept its head during Japan's nuclear crisis while other investors in the sector have been losing theirs. It likely had little choice.

China Guangdong Nuclear Power Holdings Co. appeared to have scored a major coup when it struck a £756 million ($1.23 billion) deal on March 7 to buy Kalahari Minerals. The deal put the Chinese in the box seat to secure access to one of the world's biggest uranium deposits in Namibia, as Kalahari's main asset is a near-43% stake in the mine's developer, Extract Resources.

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• Chinese Hunts for Uranium (3/9/11)

However, the nuclear crisis in Japan following the devastating earthquake and tsunami has triggered a collapse in uranium-mining shares that makes the Chinese deal look extremely overpriced. Kalahari shares last traded at 240 pence each (US$3.91) amid widespread worries over the outlook for nuclear power, versus CGNPC's offer for 290 pence each.

CGNPC's stance also appears surprising as other deals in the sector are being renegotiated in favor of buyers. Russia's JSC Atomredmetzoloto was able to shave 140 million Australian dollars (US$141 million) off its original A$1.16 billion bid for Tanzania-focused uranium miner Mantra Resources due to the impact of the quake, and still secure a recommendation from its target's board Monday.

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What's driving CGNPC's thinking is probably fear. The nuclear-power generator knows that it caught the market napping with its surprise offer. Many investors had expected Rio Tintoto be a suitor for Kalahari, given it already owned 11.50% of the company and its producing Rossing uranium mine is just a few kilometers away from Extract's Husab deposit in Namibia. By walking away, CGNPC would give Kalahari's board the chance to drop its support for the bid and talk to Rio.

CGNPC's reluctance to renegotiate may also reflect a belief that the current worries about nuclear power—especially in its home country—are overdone. China and India, which account for about half of the 479 new reactors planned globally, are unlikely to abandon the technology given the pressing need for electricity to maintain their growing economies.

When Chinese companies weigh strategic needs against valuations, it's strategy that usually wins. CGNPC's deal for Kalahari may no longer look a bargain, but that doesn't make it a bad bet.

Write to Robb Stewart at robb.stewart@dowjones.com