some thoughts on the future..., page-3

...and my own reply to that...

In Reply To: marben100's post @ Today, 01:17 AM

Mark,

Thank you for an excellent and detailed critique of my posting. I pretty much agree with everything that you say. However, I think that my points on what Rio would do if faced with a higher counter offer still stand.

Consider the following hypothetical scenario: Rio makes an initial bid of $12, someone else makes a counter bid of $13; what is Rio to do? KAH would accept the higher offer - I don't think Rio's holding of 11.5% in KAH (even in combination with Itochu's 13.8% KAH stake) could block that. Most EXT holders would also accept the higher offer. If we assume for now that Itochu sides with Rio and refuses to sell, that means that if unopposed the new bidder ends up with a combined holding of about 64.6%, with Rio holding 19.4% and Itochu holding 16.0% (my thanks to you for working out the figures, btw).

Would a 19.4% minority holding satisfy Rio's desire to continue a presence in the uranium field? Is this what a worldwide diversified resource company wants? I would argue that this is not so; such a minority holding would leave Rio as a bit player in the uranium boom of the next decade, and they would need to find other uranium projects to boost their energy portfolio. As discussed in my original posting, this will take time and effort over a number of years, with all Rio's patience with their investment in EXT gone to waste. Furthermore, as a minority holder, they risk being diluted out of EXT by the new owners if things get testy.

Would a 64.6% holding satisfy the new bidder? I would argue yes, particularly if the new bidder was an end-user seeking security of resource offtake. They may be able to take advantage of Rio's minority holding to utilise Rio's uranium expertise, if both were co-operative. If they wished to convince Itochu to sell their share, they could come to a mutually agreeable contractual sharing of the resource.

Would a 16.0% minority holding satisfy Itochu? I think Itochu would be happy to side with whichever camp - Rio or the new bidder - offers them security of supply. With the right guarantees, Itochu may even be a seller, locking in a very good capital gain as well as security of uranium supply.

I made the point that an end-user could potentially bid higher as they would have a different view on future commodity prices, while Rio could potentially bid higher due to advantages of holding the Rossing mine plant. I think my original posting over-egged the financial advantage for Rio to use the existing Rossing plant. I also did not consider the advantage of earlier production that use of the Rossing plant would provide - my thanks to you for pointing out both.

However, I think my basic argument still stands - Rio will fight for EXT if faced with a counter-offer. They have a lot of advantages with their current holdings, but not a complete stranglehold. They also have a lot at stake if they wish to stick to their public announcements on future strategy - diversification of their portfolio with greater investment in uranium. As Tom Albanese said recently on a question about uranium:

"Well, again I've said, and I think Guy said the same thing, we like uranium and you in fact have to have the best business there* - and watch this space!"

*(my bold).