The Extract Complex

Just out:

 http://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=00974381

• Preliminary cost estimates indicate Rossing SOuth could support a long life, low cost, low technical risk uranium mine producing 14.8M lbs U3O8 per year
• Base case conventional load and haul, open-pit mining operation utilising agitated tank leach processing technology
• Close proximity to road, rail and port and a pro mining culture adds to the prospects of developing a new uranium miningoperation in central west Namibia.
• Uranium mineralisation on all zones drilled to date is still open at depth and along strike and supports the expectation that ongoing drilling will increase the Company global resource.

Preliminary cost estimates on the granite hosted, uranium mineralisation at Rossing South indicate that the project can support a viable open pit mining operation developed to feed a 15M tpa agitated tank sulphuric acid leach processing plant. Annual production has been estimated at 14.8M lbs U3O8 with capital costs estimated at US$23.6 per lb U3O8.

Under promise and over deliver! AFAIR Mark's assumptions were US$30 per lb to produce. They've beaten that target nicely.

Xig

In reply to xigris (post #74)

bit of a slip in the figures you cut and pasted.....

should say

...capital costs estimated at US$704 million and operating costs estimated at US$23.6 per lb U3O8....

 

if you use the above to figure out the total all-in cost per lb - ie capital plus op costs you get about US$ 27 so not so far from $30

This is a great story and while I feel bit guilty for being a freeloader on the back of other peoples' insight, it makes up for not buying into British Energy bonds when they were in technical default because I got restricted.

The one thing I would add, is I hope the owners are patient enough to wait for uranium prices to correct.  I think I have a pretty good track record on commodity prices and I am of the view that uranium prices are way under fair value at the moment.  

Story today about the Japanese in Kazakhstan seeking to secured supplies and with the Chinese, Japanese and South Koreans in a three way fight to secure vital uranium and the USD heading down the sewage pipe, prices are surely heading to 3 figures in the near future, regardless of the supply from decommissioned weapons.  So, I hope they see the $6/lb benchmark and keep their patience, I am sure they can get a multiple of this is if they are prepared to wait 6 months.

The recent spike in prices was driven to a large extent by the activities of hedge funds, and while I think they were correct, they suffered from redemptions which forced them to liquidate whatever they could.  I am not sure they are going to pile back into uranium, but there are sufficient end users seeing the supply demand situation deteriorating, prices will head back up, even if not quite so far and fast this time.

An important new presentation has been released today on Extract's website, titled "Extract Presentation Rothschild (31 July 2009)": http://www.extractresources.com/DesktopModules/Bring2mind/DMX/Download.aspx?EntryId=3386&PortalId=13&DownloadMethod=attachment

"Must read" for any serious investor.

On the website, it is titled "North America Roadshow - August 2009". Now, I wonder why Extract/Rothschild would be doing a North American Roadshow? :0)

For anyone not already familiar with Extract's positioning, slide 24 says it all. :0))))

Particularly interesting that they expect output around McArthur River's figure by 2013. Slide 16 shows construction & development beginning around the middle of next year - ambitious. Hitting 15Mlb production in 2013 immediately takes my baseline DCF valuation over the US$2bn mark.

On the negative side, slide 25 is a little troubling (for the industry, not Extract specifically): it suggests around a doubling of global U production by 2013 - that seems to me to call into question the likelihood of shortages leading to higher U prices. I also observe that one of the largest production increases is from Areva and presume that most of this increase must come from Imouraren and Trekkopje - neither of which are shown on slide 24 - strange.

However, the supply side of the equation is kinda impacted by SW10's law: few projects are likely to come in on time. Here, IMO, Extract has some big advantages. Firstly the project is technically pretty straightforward - just huge scale. It's just an enormous, not especially deep, open pit and the metallurgical testwork results indicate that the ore should be easy to process with good recovery. Secondly, on the political front too, I understand that the Namibian govt will be keen to fast-track the project as it is economically important to the country. Environmental permitting should not pose significant problems/delays (unlike other projects/expansion), as Rossing South is in sparsely populated desert terrain, near the existing major open pit mine at Rossing. ISTM that the main risk factors to the schedule are infrastructure, esp power and water - though capacity expansion is already underway in Namibia.

Slide 17 is of key significance, specifically the bullet point: "Implement development / corporate initiatives following strategic review". At that point extract will either:

- Have to do a major capital raising
- Join a consortium/JV to exploit Rossing South
- Sell itself

Regards,

Mark

BTW I have updated the thread header to reflect my current expectations of future short-term newsflow - please let me know if I've missed anything.

Extract have released new diagrams offering a geological interpretation of their drilling results today, available here: http://www.extractresources.com/DesktopModules/Bring2mind/DMX/Download.aspx?EntryId=3388&PortalId=13&DownloadMethod=attachment

My amateur understanding of these diagrams is as follows. The first diagram compares zone 1 with Rio Tinto's main SJ pit at Rossing. In SJ the ore dips very steeply and is in the form of a "pipe", meaning there is a relatively narrow (in a west-east direction) orebody to mine. Zone 1 appears to be divided into several parts, due to folding of the earth's crust. The western part is similar to the structure in SJ but thinner - not great for mining (though probably still good due to the good grades in the alaskite). The "east limb" shown on the diagram, however, is really exciting. Again due to folding, the alaskite sheets appear to be in a much less steeply dipping plane. This is great for mining. It means that a really wide (E-W) pit can be built and should yield lots of high quality ore at relatively shallow depths, compared to Rossing, where they're now 350m down - and may have to move to underground mining, if Rio want to continue following the "pipe" down. The wide pit explains the very high production rates proposed for Rossing South.

Moving on to the second diagram, which is a section at right angles to the first (i.e. South-North vs West-East). We can see that there is a dip between Zones and 2. IF the zones join, they do so at a depth below ~250m. More drill results are needed to confirm this. It looks to me as if it makes sense to mine zones 1 and 2 as two separate pits initially but if there is a join at, say, 250-350m depth then it might make sense to eventually join the two pits up into a single "super pit" - but this would be many years after mining began.

The second diagram also shows the flat-lying nature of the alaskite sheets - great for mining. 

Hi All

New report out on EXT


WHIreland Equity Research 18th August 2009

Extract Resources Limited* (Valuation A$9.93ps)

This Yellowcake Slice has just increased by 58%

Following the release of the JORC compliant Inferred Resource for Zone 2, and
preliminary cost guidance from the company, we have up-dated our valuation. The key changes to our financial model is a 25% increase in production rate (12 to 15Mtpa), an 85% increase in project capex (US$380 to 704M), and most importantly, a 30% drop in estimated production and processing costs (US$33.8 to 23.6/lb U3O8).

In addition, as flagged in our initiating note, we felt that the ore-resource grades that we were using were very conservative. This has proved to be the case, with Zone 2 grades being on average 21% higher than Zone 1's. As a result, one of the important assumptions we have made is that, in the process of project optimisation, any subsequent mining operation will preferentially mine the higher-grade Zone 2 initially to facilitate capital pay-back and maximise economic returns. This assumption has been confirmed as a possible scenario by management.

Following the recent 14% drop in the spot uranium price and the fact that demand appears to be both discretionary and price sensitive, we have taken this opportunity to lower our long-term uranium price from US$75/lb to US$65/lb U3O8. However, we reiterate that primary supply only accounts for 64% of the global uranium demand, with secondary supply reliant of reprocessing and/or decommissioning of Russian nuclear weapons.

Based on modelled after-tax cashflows from Rossing South and the Ida Dome, we
reiterate our Buy recommendation and value EXT at an after-tax NPV12% of
A$2,757m or A$9.93ps fully diluted. Our 3-year value is based on after-tax cash-flows from FY12 onwards, resulting in A$15.20ps target.

http://www.minesite.com/fileadmin/content/pdfs/Brokers_Notes_August_09/ExtractWHI180809.pdf

Steve

In reply to tournesol (post #75)

You're quite right, sorry for the schoolboy error. I agree that Mark's calculations are very good; however, I'm glad he was 10% over current estimates.

Moving on, with thanks to stayhere on HotCopper:

RBC Capital Markets initiated coverage of Extract Resources this week with a $11.50 target

***********************************************************

Event
We are initiating coverage on Extract Resources, an Australian-based uranium
exploration company with Namibian assets, with an Outperform, Speculative
Risk rating and a 12-month target price of $11.50/sh.

Investment Opinion
Extract's focus project is its Rössing South uranium project in Namibia
where a 267 million pound resource has already been identified. We believe
that Rössing South is among the best undeveloped uranium resources in the world
and that its size, grade and expected ease of permitting will make it a highly
sought after project by all large uranium producers and utilities with significant and growing uranium fuel needs (e.g. China and India).

We believe that Rössing South will be developed into a 15 million pound per
year mine in 2013 with a capital budget of US$800 million and operating
cash costs of under US$24 per pound. This will rank Rössing South as one of
the largest uranium producing mines in the world.

Given the quality and size of Rössing South, we expect the company will have
many suitors. One major company, Rio Tinto, has already established a
~22% foothold in Rössing South through a direct (15%) equity stake and
indirect holding through Kalahari Minerals (~6%). Rio Tinto's stake is a
significant investment, but we do not believe it is large enough to successfully
block a rival bid.

Valuation: Our target price of $11.50/sh is based on a 1.25x NAV multiple. We
believe the premium multiple is justified by: the very high quality of the project; its location in Namibia (arguably the best country in which to permit a uranium project); exploration upside; and our belief that the Rössing South project will be highly sought after by all major uranium players and that it will become a key strategic uranium producing asset.

and from page 32 of Extract's American presentation

I estimate the current average Target Price about AS$10

Xig

You're quite right, sorry for the schoolboy error. I agree that Mark's calculations are very good; however, I'm glad he was 10% over current estimates

Just to clarify, my $30 estimate didn't include CAPEX so we are considerably below my guess. I also think that the currently publsished OPEX estimate is probably STILL conservative, as I've seen lower figures claimed by companies with less attractive projects. I hope it will come down as more work is done to firm up estimates. However, actual OPEX depends heavily on input costs which can vary widely (e.g. sulphuric acid).

IMV, however, Rossing South should have one of the lowest OPEX costs of any U mine, due to ease of mining, U extraction & good grades. AFAICS it should certainly be cheaper than Rio's Rossing mine and BHP's Olympic Dam.

BTW... WHIreland = DJ Carmichael, so they have today updated their figures shown in the table in post #80 to be:

Target price: A$9.93 (with a 3-year target of A$15.2)

NPV: A$2,757m

Discount rate: 12%

Annual production: 7,494 tU at plateau

CAPEX: US$704m

OPEX: in line with company guidance

I see that Polo  has freed up some cash today: http://fool.uk-wire.com/cgi-bin/articles/200908200700097379X.html

Polo Resources (AIM:PRL), the AIM listing company with uranium and coal interests in Africa, Australia, Europe and Asia, announces that it has disposed of 8,221,893 ordinary shares in Berkeley Resources Ltd ('Berkeley') for A$8,484,276.41, representing 6.66 per cent of Berkeley's issued share capital. Following this disposal Polo has an interest in 10,388,181 ordinary shares in Berkeley as well as options over a further 5,670,037 ordinary shares. 

 

The funds received from the disposal will be used to meet Polo's liquidity requirements and provide resources to focus on other value adding uranium opportunities. 

This seems like a sensible time for Extract to  make a small placing - say 10m shares @ A$7-8 - to ensure that the company is fully funded through to the end of the BFS, expected for mid-2010. Freeing up this cash would allow Polo to maintain its % by taking part in such a placing.

Regards,

Mark

Hi Mark,

If EXT want to raise au$70m - 80m, KAH would need to do a pre-emptive placing to maintain their 40%. Unless they try to synchronise the two placings to avoid giving a warning to Oz  PI's.

Possibly Rio Tinto might not be making an offer after all:

Kalahari has been raising
its interest in Extract and is keen to protect
the ASX-listed company’s independence.
Rio Tinto’s 69%-owned subsidiary, Rossing
Uranium, owns the nearby Rossing uranium
mine and holds a 20.9% interest in Extract.
Rio Tinto has confirmed that Rossing
Uranium is seeking to negotiate a joint
venture for the development of Rossing
South with Extract.

http://www.minesite.com/fileadmin/content/pdfs/Brokers_Notes_August_09/EY_Mining_eye_Q2_2009.pdf

I'd just like to make clear that Rio's desire for a JV is nothing new. AFAIK it was first stated explicitly in their 2008 Annual Report and rumours have been swirling amongst PIs since the boardroom battle over Bob Buchan at the start of this year.

Rio may be forced into making an offer by other potential bidders, may throw their lot in with them as part of a consortium, or may have to give up if competing offers are too rich for them.

Of course, a bid is not certain but a deal of some sort seems highly likely to me, sooner or later, given a) the attractiveness of Extract's discovery; b) major shareholders' desire to cash in, rather than holding for the long term through a major mine-building programme.

Regards,

Mark

Yes Mark,

I totally agree. Without being able to prove this right now (its some time ago and i was not directly invested in Uramin) so i just try to recall these events by memory.

With Uramin there was no speculation about a takeover.5 days prior to the deal Uramin "outsourced" their Niger projects into URU.Uramin was always talking about to become a producer.

Then Areva made the offer,the managment recommended it and shortly afterwards it was a done deal,no other bidders there,but of course Areva paid a proud price for Trekkoppje.

In my opinion it seems clear that this deal was made "watertight" between Dattels and Areva in the weeks before the announcement. (and absolutely nothing leaked out...)

But i can remember that longterm Uramin PIs were not at all happy with this deal (same as today with some EXT s/h)

And there is still no replacement in sight for Peter Mac. (and its just about  three weeks till his official resignation...)

So the 15 th of September seems to be a date were we can expect something...

In reply to wantedman (post #87)

I don't disagree with anything you or Mark have said. However, I do realise that there are SOme COmpanies that have been considered to be a take over target for years with nothing overt happening.

I'm trying to consider what will happen should a takeover not occur. I continue to be reassured that the risk/reward of the Extract story is firmly in our favour irrespective of whether a takeover occurs or not.

FWIW, stayhere on HotCopper is getting very excited about the upside if a takeover doesn't occur. I can't fault his calculations, thus I continue to be reassured and would buy at these levels if I wasn't so overweight in the entire complex!

Xig

In reply to xigris (post #88)

Hello Xig,

I think you are absolutely right regarding the risk/reward-factor,but there is one big difference between "some companies" and this one:

His name is Mr.Dattels.

His strategy (right now) seems to be portfolio investing: Get into everything in the junior uranium exploration market which looks promising,dump everything with coal...

But  IMO what he wants,is to find the highflyers of  2010,2011...

So EXT  IMO is already a past story for him (alltough the best one he ever found in his life) He did invest there at the right time and in the right companies.Nothing proceeds without him. So i think he wants that money now or in the near future to be able to find the next high flyers...

And while EXT may be able to advance into new dimensions,i am personally a little bit more conservative than suggesting 1 Bio lbs of uranium ( i dont rule this possibilty out,but it would be a very long way to go from todays inferred/indicated resources-and a takeover will probably happen before this)

But nobody knows....

Extract have issued an updated presentation today: http://www.extractresources.com/DesktopModules/Bring2mind/DMX/Download.aspx?EntryId=3389&PortalId=13&DownloadMethod=attachment

Technical report on Rossing South just released here

Runs to 155pages, so alot to digest - don't think there is anything new though.

Market seems to like it - EXT up another 7.9% to AS$9.7

The report is here: http://www.extractresources.com/DesktopModules/Bring2mind/DMX/Download.aspx?EntryId=3390&PortalId=13&DownloadMethod=attachment As you say, lots to read...

...and here's the placing by Kalahari & Extract we had been expecting: http://fool.uk-wire.com/cgi-bin/articles/20090825171801P3CA0.html

Kalahari Minerals plc, the AIM listed mining exploration and evaluation group
with a portfolio of uranium, copper and base metal interests in Namibia, is
pleased to announce that Extract Resources Ltd (`Extract'), in which Kalahari's
subsidiary, Kalahari Uranium Limited, holds a 39.98% interest, has launched a
proposed A$91 million equity raising, by way of a non-renounceable pro-rata
offer to eligible shareholders and a private placement to institutional
investors. The proceeds will be used in particular to accelerate the
exploration activities of the world class Rossing South uranium project in
Namibia, which has a current resource of 267 M lbs of U3O8 @ 487 ppm across two
zones which are open at depth and along strike, where preliminary cost
estimates have indicated it could already support one of the world's largest
uranium mines.

Accordingly, in order to maintain its exposure in Extract, and to fully take up
its rights with regards to Extract's fund raising, Kalahari is pleased to
announce an associated funding, the details of which are being considered. This
may include a potential convertible bond/debt component in addition to equity,
details of which will be released in due course. As well as participating in
the pro-rata offer for its relevant portion of new shares in Extract (`New
Shares'), being 2,616,927 new shares at an issue price of A$7.75 per new share
for a total consideration of A$20,281,184.25, Kalahari has, along with
Extract's two other largest shareholders, Rio Tinto International Holdings
Australia Pty Limited (15%) and Polo Resources Limited (10%), irrevocably
committed and agreed to subscribe at the issue price, for any additional New
Shares not subscribed for by the other holders of shares in Extract, in the
same proportion to their current holding in Extract. Full details of this and
Extract's placing are provided in their full announcement below.