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.
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