Innovation, Science and Industry Minister Francois-Philippe Champagne announces the launch of the Canadian Artificial Intelligence Safety Institute in Montreal, on Nov. 12.Christinne Muschi/The Canadian Press
Paladin Energy Ltd.’s PALAF proposed acquisition of Canadian uranium development company Fission Uranium Corp. FCU-T is hanging in the balance amid a deepening national security probe and a punishing Paladin stock sell-off that has spooked investors.
The Australian miner reached a friendly agreement in June to buy Kelowna, B.C.-based Fission in an all-stock transaction worth $1.14-billion. Fission is developing the Patterson Lake South (PLS) uranium project in the Athabasca Basin region of Saskatchewan.
When Perth-based Paladin announced the transaction, it hoped to close the deal by the end of September, believing it wouldn’t raise any red flags during an initial national security review by Ottawa.
But Industry Minister François-Philippe Champagne has since extended the review period under Section 25.3 of the Investment Canada Act, meaning he believes the transaction could be injurious to national security. On Nov. 19, Fission announced that the minister’s probe would continue until Dec. 30, with “no certainty” of approval.
Under scrutiny by Mr. Champagne is the significant Chinese influence on both sides of the deal. A little more than two years ago, he said he would only allow Canadian critical minerals companies to raise money from Chinese state-owned enterprises under exceptional circumstances. Canada is trying to rein in China’s control over strategic minerals, as the Asian superpower routinely uses its dominance in the sector to crush foreign competition.
Paladin’s Langer Heinrich Mine in Namibia is 25-per-cent owned by CNNC Overseas Ltd., a subsidiary of the state-owned China National Nuclear Corporation. CNNC is also Paladin’s biggest customer, with an offtake agreement to buy a quarter of the uranium output from Langer Heinrich.
Fission’s biggest shareholder is CGN Mining Co. Ltd., whose parent is state-owned China Uranium Development Co. Ltd. CGN also has an offtake agreement to purchase as much as 35 per cent of the uranium from PLS over the duration of the mine’s life. If Paladin buys Fission, CGN’s equity stake would go from 12 per cent of Fission to a 2.5-per-cent stake in Paladin. The Chinese stakeholder would also lose its offtake agreement on PLS after three years.
Mr. Champagne’s office declined to comment on the security review, citing confidentiality constraints under the Investment Canada Act.
Adding another wrinkle to the deal is a major operational setback at Paladin that knocked back the value of the takeover to such an extent that Fission shareholders are now worse off than they were before the proposed transaction was announced.
On Nov. 12, Paladin revealed that its mine in Namibia is experiencing ramp-up problems, including grade variability and disruptions to its water supply. The company slashed its guidance, and the new forecast is far more wide-ranging than before, indicating it doesn’t have a handle on the situation. Its shares immediately plummeted 28 per cent, which in turn dragged down the value of the all-stock deal for Fission shareholders.
Rick Rule, the founder and owner of Rule Investment Media and a significant retail shareholder in Fission, called the development “distressing.”
“I know that there are some institutional shareholders of Fission who are unhappy and who are suggesting that there has been an undisclosed material change,” he said.
“Whether they intend to challenge the transaction in Canadian courts or whether they intend to use that as a bargaining chip to get another deal is uncertain.”
Paladin, meanwhile, insists that Fission has no recourse to walk away.
“Neither party can unilaterally withdraw from the deal unless a material adverse event has occurred, which has not happened,” Paladin said in an e-mailed statement to The Globe and Mail.
Material adverse event clauses have been disputed before by parties in large M&A transactions, and deal terms have changed as a result.
A few years ago, LVMH Moët Hennessy Louis Vuitton attempted to back out of a US$16.2-billion deal to buy Tiffany & Co., citing a material adverse event clause in the agreement stemming from the pandemic. The deal was eventually renegotiated, with LVMH paying a lower price for Tiffany.
Marcus Giannini, an analyst with Haywood Securities Inc., has scrutinized the language around the material adverse event clause in the Fission deal, which spells out under what grounds the company could walk away. He said Fission’s lawyers may be in a position to argue that the operational troubles at Paladin qualify.
“There certainly is some wiggle room,” he said.
Fission did not respond to multiple requests for comment.
All the uncertainty is weighing on Fission’s share price. After rising more than 15 per cent on the day the deal was announced, the stock has since fallen 28 per cent.