EXT's stock price hasf allen below NAV of A$8.00/share,probably due to reduced takeover speculation.This seems unjustifed-why wouldn't a major seek control of this potential ~ 600mlb resource at up to US$4/lb, which would equate to A$11/share?
Investment points 100%uraniumfocusinNamibia.Explorationbudget~A$50m pa, cash ~A$83m, production potential 2013.
RossingSouth("RS")isapotential>500mlburaniumdiscovery, Zones 1+2 resource 267mlb (@487ppm).
Updatedresourcestatementdue3Q10,DFScompletion4Q10-targets15mtpa,14.8mlbpauraniumoperation-60% bigger than current Rossing output.
Still major exploration upside-newzonessouthofZone2: 185-285mlb target.
EXT assessing strategic partnership options.
New CEO brings strong pedigree:ex Rio Director and Rossing MD.
Our assessed NAV is A$8.00/share, stock is now undervalued (@ ~US$2.60/lb potential resource).
We think a major would consider paying US$4/lb potential resource (A$11/share) to seek full ownership.
Overview:
EXT's exploration for uranium in Namibia has continued to exceed expectations as the world class potential of the major Rssing South discovery (located immediately south of the RIO's Rssing uranium mine) becomes more evident. Exploration is advancing towards a possible ~600mlb U3O8 total resource based on new targets for additional southern zones. A DFS is underway which targets a 14.8mlbpa operation (production 2013?) which would be the world's second biggest uranium mine. Rssing South Project Resource Status: EXT has identified extensive strongly mineralised high grade alaskite which is a major southern extension of the Rssing Mine (RIO 69%) orebody (previously concealed beneath Namib desert cover). To date EXT has identified two initial mineralised zones (Zones 1 and 2) covering a combined 8km strike length out of a total target zone of 15km. Zones 1 and 2: EXT has defined to date an Indicated and Inferred resource of 249mt @ 487ppm for 267mlb contained U3O8 for zones 1 and 2. Infill resource definition drilling is proceeding at a furious pace (16 RC rigs are currently engaged), heading towards an updated resource statement in 3Q10 which will increase the size of the resource as well as upgrade status. Zone Extensions: All zones drilled to date are open at depth and along strike. EXT's initial drilling south of Zone 2 has intersected uraniferous alaskite with indicative results better than Zone 1 discovery holes. EXT has announced an additional resource target of 210-260mt at grades 400-500ppm to give 185mlb 285mlb contained (to max. 400m depth for the new zones). If the upper limit is achieved (as EXT has consistently done in the past), total Rssing S resource would more than double to >550mlb. Rssing South DFS: As previously reported, GRD Minproc has completed a preliminary cost estimates ("PCE") based on a conventional acid tank leach 15mtpa operation, for 14.8mlb/year U3O8 production. A DFS is underway (completion 4Q10) which is validating PCE assumptions. Further Metallurgical testing indicates recoveries 90%+. EXT has confirmed that the likely pit design will be to a depth of ~400m, (LOM strip ratio 6.9:1) with a high degree of conversion of resources to mineable reserves expected. Capex quoted of US$704m does not include power, water, site infrastructure could add US$200m? Board Composition: Johnathan Leslie, an ex Rio Tinto director and former Managing Director of Rssing Uranium, was recently appointed as the new CEO and will join the board of EXT soon. His pedigree looks well suited to guide EXT's evolution into a major uranium producer, although those keen on the takeover story for EXT may rightly assume that a friendly Rio JV get together is now more likely. Investment Comment: Our preliminary DCF modeling of the GRD Minproc PCE, gives an assessed NAV of A$8.00/share (see next page) assuming long term US$60/lb uranium contract price, US$1.2bn capex and a conservative 30% pre-DFS discount applied to NPV. So why is EXT trading closer to A$7.00, which would value a potential ~600mlb resource at only US$2.65/lb, when corporate transactions in uranium companies have taken place at US$6-US$7/lb in recent years? It seems the market has decided that EXT won't be taken over by a major (maybe more so now an ex Rio man is CEO) with Kalahari's 40% blocking stake. This removes much of the speculative upside and brings the market back to NPV's and a focus on major capital raisings. And the market doesn't get excited by JV's with majors, which could represent a sell down without a major premium being paid. Our view is that the stock looks undervalued, and it should be trading closer to A$9/share. After all, why wouldn't a major pay US$4/lb for this likely massive uranium resource and make Kalahari an offer it can't refuse at ~A$11/share?
EXT Price at posting:
$7.82 Sentiment: LT Buy Disclosure: Held
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