valuation for ext - no takeover

There has been quote some despondency of late, partly due to the six month share price decline and partly due to a perception (whether warranted or not) that a takeover is increasingly unlikely. My personal opinion is that this is somewhat overdone, but just for interest I took a look at what the valuation of EXT might be with no takeover premium.

This is not a definitive calculation, such as an NPV - this has been done for EXT many times before and varies from $9.04 (WH Ireland 24 March 2010) to $12 (RBC 25 August 2009). Rather, my approach is to (rather simplistically) compare the enterprise value of uranium companies and plot this against the size of the resource. This lumps together many different uranium companies, from explorers (such as EXT) all the way through to producers (such as Paladin, ERA, Cameco). Each company has its own unique set of conditions that could affect the share price, so we are not really comparing like with like. Still, it may be a starting point to see where EXT fits in.

The data came from Uranium Weekly Report 18 March 2010 (http://smallcapepicenter.com/images/Uranium%20Weekly%20-%2003182010.pdf), and contained a snapshot of all uranium companies as at 17 March 2010. The size of the resource appears to be just the JORC data, so for EXT this is the latest JORC as at 22 July 2009. As we all know, this will be upgraded in the third quarter of 2010 calendar year, and the company has set itself a target of between an additional 185 to 285 Mlb. We can plot this increased target and look at what the share price range might be, without any takeover speculation premium in the share price.

So, with all those caveats, here is the plot:



As we can see, there is a large range of possible share prices for EXT after the next JORC update, depending upon the size of the resource and how much the market values the company in its particular circumstances. I have assumed a broad range for the valuation to show the maximum extent of what might be reasonable. You can also see quite a range of valuations for various companies - remember these are at all stages from explorers through to actual production.

It looks like EXT will never go below about $6.50 to $7, and this seems to be borne out by the recent share price movements. It also looks likely that if the next JORC estimate is close to the high target this will push the share price higher, to at least $8 in the worst case of a fairly low valuation of US$3 per lb.

So much for that. However, I would like to add my own opinions on the no-takeover hypothetical estimate:

* I believe that EXT will exceed the upper limit of the target set, for a total of about 600 Mlb, based upon thorough analysis of drilling data released by EXT.
* I believe that this will still not be the final estimate of the resource size, but there will be considerable drilling yet to be done and a potential total resource in the range of up to 1 billion lbs - or perhaps even more. I base this on aeromagnetic and RadonX data released by EXT.
* I believe the grade of the resource will exceed 500ppm and the cost to extract the resource will be significantly lower than any other new mine, at about US$30 per lb initially reducing to the low US$20s per lb for full production. I base this on preliminary estimates released by EXT.
* I believe there will be supply problems with other new mines, such as Cigar Lake in Canada.
* I believe there will be a concerted push by end users to lock in significant long term supplies.
* I believe that even with no takeover, there will always be speculation and a premium added to the share price depending upon the latest "rumour of the day". For example, the current low share price can only encourage companies that once thought EXT was expensive, to run the ruler over the company once more.
* I believe the market has not taken into account any of the above in a significant way, so when the next JORC upgrade comes out I believe this will renew investor interest in EXT and we will see the share price rise.

For all the above reasons, I expect that in the event of no takeover, the share price will be at a higher level than other comparable companies after the next JORC upgrade has been released and when the market has taken an interest once more in EXT. To put numbers on it, I would say a JORC estimate of about 600 Mlb and a share price between A$10 and A$12, with no takeover speculation.