After the mega uranium merger between SXR Uranium One (SXR) and UrAsia (UUU), speculation has run rampant as to which uranium companies will next consolidate. With a soaring uranium price and lofty market caps, anything is possible. Or is it? Some of the more likely targets seem reluctant to sell out too soon.

On the heels of SXR Uranium One’s announcement to acquire UrAsia Energy, one might conclude this could spawn the beginning of widespread consolidation in the uranium sector. In the early morning hours after the $5 billion deal was announced, SXR Uranium One chief executive Neal Froneman emailed StockInterview writing, “Our focus on the U.S. has not changed.” In previous interviews, Mr. Froneman has kindly been transparent in his intentions to not only build up his uranium assets in the United States, but to pursue a senior stock exchange listing, presumably the New York Stock Exchange.

On Tuesday, the Financial Times (UK) reported that investors wanting high-quality exposure to the uranium bull market are basically limited to buying shares in Cameco Corp (CCJ). Froneman told the newspaper, “The new Uranium One will provide an alternative to Cameco.” He’s right, but there are also two mid-size uranium producers – Denison Mines and Paladin Resources – with sufficient market capitalization to acquire one or more of the smaller uranium juniors. Widely respected Justin Reid, uranium analyst at Sprott Securities, told the Financial Times, “for them to retain market share, they have to do something aggressively, and they have to do it now.”

Justin Reid’s recent thesis, 2007 – Uranium Equities, is appropriately sub-titled, “The Sector Moves Towards Production & Consolidation.” His dual theme for uranium mining stocks in 2007 is consolidation and U.S. uranium miners offering a security of supply. Reid wrote in his February 14th report, “We expect that the acquisition parade has just begun and will become a common theme in 2007. Moving forward we suggest that the U.S. will be a focus, as security of supply, aggressive development plans, and a large resource base waiting for exploitation should be attractive to companies looking for production visibility within a stable political climate.”

As an aside, we phoned Justin Reid to congratulate him on his brilliant and comprehensive 120-page uranium mining report. We also wanted to thank him for joining the growing minority of analysts who view the numerous advanced uranium exploration companies, developing their U.S. assets, as one of the more promising and safer havens for investors – the dominant theme in our articles over the past year. After all, the United States presently operates more than 23 percent of the world’s nuclear reactors and annually consume about 55 million pounds U3O8. By contrast, U.S. uranium production has only recently risen to about three million pounds of mined uranium oxide. U.S. utilities need reassurance there will be security in future supply so this market remains the premier country for uranium mining production for at least the next decade.

Who’s on the Menu?

On Thursday, TheInvestar website reported, “… it must be noted that our uranium index for Canada, as well as Australia, has closed at a record high for the past three days. The juniors are showing strength across the board as well as across continents.” Investors have been phoning their favorite companies, since Monday, asking if the company is on SXR Uranium One’s, or another’s, radar. The record uranium price of US$75/pound has helped enhance the currency of not only the potential acquiring companies, but also those on their menu.

In a recent telephone survey with four potential and often-discussed takeover candidates, we found reluctance, not eagerness, was the common thread.

“We are not for sale!” Uranerz Energy (URZ) Dennis Higgs told us. His company recently acquired additional property in Wyoming’s highly promising Powder River Basin. Higgs told us there has been strong interest in his company, but he’s not taking any offers seriously at this time. “Because of U.S. Securities and Exchange Commission (SEC) guidelines about resources, we are probably undercapitalized with regards to our peers.” Because his company only trades in the U.S. market, it is not required to file a National Instrument 43-101 technical report on its uranium resources. Higgs also pointed to his company’s management team – one of the company’s attractive qualities, and told us, “If management doesn’t bless the deal, it won’t happen.”

Uranerz continues to build value in the company as is the case with the other junior near-term producers we interviewed for this report. We asked Uranerz chief executive Glenn Catchpole why his company spent about 25 percent of the company’s cash on the recent property acquisition. To which an otherwise poker-faced Catchpole responded, “We spent $3.12 million for properties which may host about four million pounds of U3O8.” Not a bad deal – about $1.28/pound.

Another company which threw us for a loop is Strathmore Minerals (STHJF). While we believed the company would be acquired in 2006, based upon retaining National Bank Financial to help them evaluate and negotiate in the acquisition process, recent company developments suggest otherwise. “Right now, we are doing a lot of work on our properties,” Strathmore Minerals chief executive Dev Randhawa told us. “We have begun to maximize our shareholder value by spinning off our assets and doing joint ventures. By joint venturing some of our assets and having partners, we are showing the market these properties have more value than the market has been giving those properties.”

Randhawa told us the market has been giving some of the non-core assets zero value. It is something he appears to be in the process of remedying. Recent analyst ratings by Sprott Securities’ Justin Reid (Speculative Buy, Target Price: C$4.70) and Raymond James’ Bart Jaworski; Target Price: C$5.00) reflect the company’s present strategy. In Reid’s Wednesday report, he remarked that Strathmore broke out of a large trading base dating back to early 2006, targeting C$6.25/share.

Strathmore has about 20 uranium projects in three countries (U.S., Canada and Peru). And the company has been busy. Over the period of about two weeks, Strathmore announced its intention to form a joint venture with Yellowcake Mining (YCKM) on a Wyoming property, a proposal to spin off its Canadian mineral properties into a new exploration company, and an exclusivity agreement with Fortune Global 500 company to develop its Roca Honda (New Mexico) property and construct a uranium mill in the area.

It appears as a uranium company approaches near-term production, the company must also develop a stomach for responding to investor inquiries about takeover speculation. One chief executive weary of takeover rumors is UR-Energy’s (URE) Bill Boberg. “Potential opportunities have been discussed since early last year with a number of companies,” he told us. “There is nothing to be said at this time.” Personally, we believe UR-Energy is too busy, as are the others mentioned here, moving their projects forward. In a recent audio interview with Boberg, he explained the step-by-step procedure his company has been taking in advancing through the permitting process so he can bring the Lost Creek and Lost Soldier properties (Wyoming) into production.

In other discussions we’ve had with Bill Boberg, we believe he is completely determined to become Wyoming’s first uranium miner in the new uranium bull market. As with other companies mentioned here, he has strong faith and loyalty for his team. Mark this one as another company unlikely to sell out in the near future. Sprott’s Reid wrote that UR-Energy remains in an uptrend and has been forming another base since November, targeting C$6/share.

One surprise was the emailed comments from the vice president for strategic initiatives at Energy Metals Corporation (EMU). Farhad Abasov wrote, “Energy Metals has been aggressively building up its uranium property portfolio in the US via two-pronged growth strategy: organic, staking properties and corporate acquisitions. In the last 13 months Energy Metals completed the acquisition of 3 uranium companies in the US. Now we are gearing up for the first production in Texas in 2008. The company controls over 250,000 acres of land in the US. We will continue scanning the market for good and synergistic acquisition deals. At the same time we are open to opportunities on the other side of the M and A that will enhance our shareholders' value.”

During a phone conversation, nearly a year ago with chairman Bill Sheriff, we asked him whether his company was open to be taken over. At the time, Energy Metals traded for about one-quarter of its present market price. Sheriff snorted in response, “No way!” Asked at what price he would consider an offer, he answered, “At $20/share, maybe, but I doubt it.” For now, Energy Metals is safely below C$20, but perhaps not much longer. Reid wrote that Energy Metals is making new all-time highs and that he foresees a potential toward the upper end of the stock’s trading channel – about C$15+ per share.

Conclusion

Thanks to the steady upward uranium price climb, now being heralded as likely to be one of a top-performing commodity in 2007 – and with some analysts calling for US$100 uranium per pound, the sector has attracted several hundred players and wanna-be players. The majority will vaporize as many industry experts quietly, and not so quietly, predict. As Justin Reid accurately points out, the uranium sector is fragmented. It is more fragmented in the United States than elsewhere, aside from Australia. In Namibia, the uranium rush forced the country to re-evaluate its issuance of exploration licenses. Lucky stars for Paladin Resources and front-runners in the horse race, such as Forsys Metals and UraMin.

Fragmentation will eventually lead to consolidation. Those with the currency of their market capitalization have the most confidence from their bankers. And the most clout to advance additional consolidation in this sector.

Ultimately, the game boils down to negotiations. In January, SXR Uranium One chief financial officer Jean Nortier had complained about the high price of uranium assets around the world. In the all-stock transaction to acquire UrAsia, both parties agreed the uranium price should continue rising. And as long as this remains the case, further acquisitions should be expected – whether the targets are reluctant or not.

And the next very big deal will probably take place in the United States. Whether the acquirer would be SXR Uranium One or the alternatives in Paladin Resources (PDN) or Denison Mines (DML) is not known. Reid did make Denison his Top Pick, probably to the chagrin of uranium guru James Dines. Sprott Securities terminology for “top pick” is “our best investment ideas, the greatest potential value appreciation.” With this strong backing, Denison’s currency might improve and provide them with more clout to build their uranium asset base through another acquisition.

Strathmore Mineral’s Randhawa best summarized what makes U.S. uranium companies appealing, “By acquiring U.S. uranium assets, those companies with foreign assets also get an insurance policy when they make a deal.” Until then, the junior uranium companies continue to move their projects forward, and at some point, the time will be ripe. But not yet.