October 12, 2007
October
12, 2007
The
Board
of Directors
U.S.
Energy Corp.
000
Xxxxx
0xx
Xxxx
Riverton,
WY 82501
Gentlemen:
We
understand that U.S. Energy Corp., a Wyoming corporation (“Parent”),
owns approximately 71% of the outstanding common stock of Crested Corp.,
a
Colorado corporation (“Crested”). We also understand that
Parent and Crested have entered into an Agreement and Plan of Merger dated
as of
January 23, 2007, as amended by a First Amendment dated as of July 31, 2007
(collectively, the “Merger Agreement”), which provides that Crested
will merge with and into Parent with Parent as the surviving corporation
(the
“Merger”), and that in the Merger each two issued and outstanding
shares of Crested common stock not held by Parent will be converted into
the right to receive one share of Parent common stock (the “Exchange
Ratio”).
You
have
requested our opinion (the “Opinion”) as to the fairness, from a
financial point of view, to the common stockholders of Parent of the Exchange
Ratio.
In
connection with this Opinion, we have made such reviews, analyses and inquiries
as we have deemed necessary and appropriate under the
circumstances. Among other things, we have:
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1.
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Reviewed
Parent’s and Xxxxxxx’s audited financial statements included in their
respective Annual Reports on Securities and Exchange Commission
(“SEC”) Form 10-K for the fiscal years ended December 31, 2002
through 2006 and their respective unaudited financial statements
included
in their respective Quarterly Reports on SEC Form 10-Q for the
six months
ended June 30, 2007, together with in each case the related Management’s
Discussion and Analysis of Financial Condition and Results of Operations
included in the Report;
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2.
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Reviewed
the Merger Agreement, including (a) Section 1.5 providing for the
conversion of Crested common stock into the right to receive Parent
common
stock based on the Exchange Ratio and (b) Section 1.6 providing
for the
cashless exercise at the effective time of the Merger of options
to
purchase Crested common stock outstanding under Crested’s Incentive Stock
Option Plan and the conversion of such shares of Crested common
stock into
shares of Parent common stock based on the Exchange
Ratio;
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3.
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Reviewed
the Voting Agreement dated January 23, 2007 between Parent, Crested
and
certain stockholders of Crested;
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4.
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Reviewed
certain internal financial and other data concerning the operations,
financial condition and financial forecasts relating to the business,
earnings, cash flow, assets, liabilities and prospects of Parent
and
Crested prepared by management of
Parent;
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5.
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Conducted
discussions with members of management of Parent concerning the
matters
described in subparagraphs 1, 2, 3 and 4
above;
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6.
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Visited
certain facilities and business offices of Parent and
Crested;
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7.
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Visited
certain of Parent’s and Xxxxxxx’s
properties;
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8.
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Reviewed
the executed Exploration, Development and Mine Operating Agreement
between
U.S. Moly, Parent, Crested, and Kobex Resources Ltd. dated April
3,
2007;
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9.
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Reviewed
the executed Joint Venture Agreement by and between Parent and
Crested
dated August 1, 1981 and subsequent amendment dated January 20,
1989;
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10.
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Reviewed
the list of outstanding employee stock options and warrants issued
by
Parent and Crested as provided by
Xxxxxx;
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11.
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Evaluated
net asset approaches for Parent and Crested as stand-alone
entities;
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12.
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Reviewed
the terms of (i) recent mergers and acquisitions of companies in
the
sector and (ii) premiums paid in acquisitions of a diverse set
of
companies;
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13.
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Reviewed
the historical market prices, trading activity, and valuation multiples
for Parent’s and Xxxxxxx’s publicly traded securities and compared them
with those of certain publicly traded companies;
and
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14.
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Conducted
such other studies, analyses and inquiries as we have deemed
appropriate.
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In
preparing our Opinion, we have not independently verified the accuracy and
completeness of the information supplied to us with respect to Parent or
Crested
and do not assume any responsibility with respect thereto, and have further
relied upon the assurance of management of Parent that it is not aware of
any
facts that will make such information inaccurate or misleading in any respect
material to our analysis. We have not made any physical inspection or
independent appraisal of any of the properties or assets of Parent, nor have
we
evaluated the solvency or fair value of Parent under any state or federal
laws
relating to bankruptcy, insolvency, or similar matters. Our opinion
is necessarily based on business, economic, market and other conditions as
they
exist and can be evaluated by us at the date of this letter. With
respect to the financial forecast information furnished to or discussed with
us
by Xxxxxx, we have assumed that such information has been reasonably prepared
and that it reflects the best currently available estimates and judgment
of
Parent’s management as to the expected future financial performance of Parent
and Crested. For purposes of this Opinion, we have assumed that
Parent and Crested are not involved in any material transaction other than
the
Merger and those activities undertaken in the ordinary course of
business.
This
Opinion only addresses the matters specifically addressed
hereby. Without limiting the foregoing, this Opinion does not
address: (i) matters that require legal, regulatory, accounting, insurance,
tax
or other professional advice; (ii) the underlying business decision of Parent,
its security holders or any other party to proceed with or effect the Merger;
(iii) the fairness of any portion or aspect of the Merger not expressly
addressed in this Opinion; (iv) the fairness of any portion or aspect of
the
Merger to the holders of any class of securities, creditors or other
constituencies of Parent, or any other party other than those set forth in
this
Opinion; (v) the relative merits of the Merger as compared to any alternative
business strategies that might exist for Parent or the effect of any other
transaction in which Parent or Crested might engage; (vi) the tax or legal
consequences of the Merger to either Parent, its security holders, or any
other
party; (vii) the degree to which the amount and nature of the compensation
from
the Merger benefits any individual officers, directors, employees or class
of
such persons, relative to the benefits to the stockholders of Parent; (viii)
the
likely price at which Parent’s or Crested’s common stock will trade; or (ix)
matters relating to the exercise or conversion of options issued pursuant
to
Crested’s Incentive Stock Option Plan. We have not been engaged to
initiate any discussions with third parties with respect to a possible
acquisition or any other alternative transaction or to negotiate the terms
of
the Merger, and we have not been asked to, and do not, offer any opinion
as to
the material terms of the Merger Agreement or the form of the
Merger.
We
have
assumed that the Merger will be consummated on the terms and conditions
described in the Merger Agreement reviewed by us, without material delay,
waiver, amendment or modification of any material term, condition or agreement
therein, and that the definitive Merger Agreement will not differ in any
material respect from the draft reviewed.
It
should
be understood that subsequent developments may affect the conclusions expressed
in this Opinion if this Opinion were rendered as of a later date, and we
disclaim any obligation to advise any person of any change in any manner
affecting this Opinion that may come to our attention after the date of this
Opinion.
Based
upon the foregoing, and in reliance thereon, it is our opinion that the Exchange
Ratio is fair, from a financial point of view, to the holders of Parent’s common
stock.
This
letter is not to be quoted or referred to, in whole or in part, in any
registration statement, prospectus or proxy statement, or in any other document
used in connection with the offer or sale of securities, nor shall this letter
be used for any other purposes, without our prior written consent; provided,
that we consent to a description of and the inclusion of the text of this
Opinion in any filing required to be made by Parent with the SEC in connection
with the Merger and in materials delivered to Crested’s stockholders that are a
part of such filings, provided that any such description shall or inclusion
shall be subject to our prior review and approval.
We
will
receive a fee from Parent for this Opinion, no portion of which is contingent
upon the consummation of the Merger or the conclusions reached in this
Opinion. In addition, Xxxxxx has agreed to indemnify us for certain
liabilities arising out of our engagement.
Our
Opinion is furnished solely for your benefit and may not be relied upon by
any
other person without our express, prior written consent. Our Opinion
is delivered to each recipient subject to the conditions, scope of engagement,
limitations and understandings set forth in this Opinion and our retainer
agreement, and subject to the understanding that our obligations in connection
with this Opinion are solely corporate obligations, and no officer, director,
employee, agent, shareholder or controlling person of ours shall be subjected
to
any personal liability whatsoever to any person, nor will any such claim
be
asserted by or on behalf of you or your affiliates.
NAVIGANT
CAPITAL ADVISORS, LLC
