extract resources in play...

Extract Resources in play as Chinese firm launches offer for Kalahari Minerals Sarah-Jane Tasker

From: The Australian
March 12, 2011 12:00AM Increase Text SizeDecrease Text


CHINA has added fuel to the heated battle for Extract Resources' massive uranium deposit in Namibia as emerging economies begin the scramble to secure future energy supply.

Chinese state-owned CGNPC Uranium Resources this week launched an offer for Kalahari Minerals, which has a 43 per cent stake in Extract, in a move that has effectively put Extract in play and demonstrated the level of interest in yellowcake.

The move by the economic powerhouse is not a straightforward grab for supply, with the deal complicated by the shareholder structure of Extract, which includes global giant Rio Tinto and Japan's Itochu.

Extract has been fending off unwanted suitors, including Russia, over the past three years as it developed the site, which neighbours Rio's significant Rossing operation. It was no surprise when the Perth-based company moved to protect its shareholders' interests this week when China moved on Kalahari.

Because of Kalahari's strong interest in Extract, CGNPC is seeking relief from the Australian Securities & Investments Commission to acquire a relevant interest in more than 20 per cent of Extract. But the company's independent directors said they would make a submission to ASIC asking that CGNPC's request not be granted, or -- if it is granted -- on the condition that CGNPC's offer for Kalahari is extended to all of Extract's shareholders.

Extract chief executive Jonathan Leslie, speaking to The Weekend Australian from his London office, said the company would do everything it could to ensure its shareholders were not disadvantaged in any way.

"We'll be making representations to ASIC but we are not commenting on the offer, because it has not been made to us yet, or Kalahari," Mr Leslie said.

"But for us, it is business as usual, and we are cracking on with the definitive feasibility study."

Extract had announced last month it was holding discussions with Rio around a potential combination of Extract's Husab project and Rio's Rossing mine.

"We are certainly still in discussions with them (Rio) and are free to do so," Mr Leslie said.

"But this (Kalahari offer) has put them in a different context, so we are back to evaluating what our options are."

The market is expecting China to make a full bid for Extract, with speculation also around whether Rio will launch a counter offer, or be content with being a joint venture partner with the new owners.

Analysts have estimated that China's offer for London-based Kalahari would value Extract at around $10.75 a share. The company's stock has been tracking higher all week, closing at $10.63 yesterday.

Merrill Lynch analyst Glen Chipman said he did not see Rio as a seller, which suggests CGNPC could realise a maximum 88.5 per cent acceptance in Kalahari, translating to an approximate 38 per cent interest in Extract.

"Itochu, we think, could be a possible seller given substantial gains made to date although their desire for future offtake is still likely to be a heavy consideration," he said in a client note.

"We think ultimate striking of a JV deal with Rio is a highly probable outcome with additional potential offtake agreements via other strategic investors another possibility (eg, Asian utility)."

Extract had also announced last month it was holding discussions with Kalahari to explore options for simplifying the Extract/Kalahari shareholder structure.

Rio has an effective 19.6 per cent holding in Extract with its 11.5 per cent cross-holding in Kalahari and Itochu, with its 13.8 per cent stake in Kalahari, has an effective interest in Extract of 16.2 per cent.

"The corporate structure is what it is," Mr Leslie said.

"We were having discussions with Kalahari on simplification. It has been something that shareholders have commented on that it would be easier to understand if it was more straightforward but that was in the hand of the shareholders, so we were getting on with the project."

The heightened interest in Extract comes as no surprise to market experts who say Namibia is set to be the fastest growing source of global uranium mine supply and Extract's Husab project is shaping up to be one of the largest deposits in the world.

Mr Leslie said through the partnership process the company announced last month, there had been strong interest from the world's key uranium players.

He said merger and acquisition activity was increasing in the sector and the Husab resource was always going to be in the mix because of its strategic value.

"At a time when more production is coming from more politically risky parts of the world, it has highlighted the strategic importance of Husab," he said.

Mr Leslie said he was a "real bull" on the uranium market and it was driven fundamentally by Asian demand, of which China was the most important.

"I think that view is shared by all the participants, which is why they are trying to ensure they have access to uranium supplies," he said.

Simon Tonkin, senior resources analyst at Patersons Securities, said while the number of nuclear reactors had not changed substantially in the past 30 years, China was now charging ahead with a plan to build around 58 new stations.

"China is definitely the reason why things are moving, but it is also coming from India, Russia and South Korea," he said.

"Momentum is in the emerging nations. China's pollution has been a problem and this is one way of fixing that while creating no carbon emissions."

There are 62 reactors globally under construction, a considerable increase since 2007 when there were around 25. China is building 27 of those under construction, Russia 10, and South Korea and India five each.

"It all comes down to demand for energy," Mr Tonkin said.

"With China's 8 per cent plus growth, they need more energy to continue to grow and nuclear is one part of that solution," he said.

"When you build reactors you want security of supply, which is what China is doing. By owning part of an asset, they can have their say about where the uranium goes."

Canada's Cameco, the world's largest uranium producer, trades around 30 million pounds of the 130 million pounds of global production each year, but demand is for about 170 million pounds.

The 40 pound difference comes from secondary supplies, through the HEU agreement between the US and Russia, which accounts for around 14 per cent of demand.

That agreement is set to end in 2013, leading market observers to predict a significant shortfall in supply during 2013 and 2014, which is driving the increased deal activity as customers attempt to secure their own supply.

"There are some big projects coming up, but there could still be a deficit between 2013 and 2014," Mr Tonkin said.

"We need further supply to fill that gap, which is why there is a lot of interest, which will drive further M&A in the sector this year."

Australia could play a key role in future uranium supply but political debate and regulatory hurdles have stifled developments.

The increased activity in the sector is likely to reignite the debate locally, as Australia has one of the largest resources of uranium.

Just this week Foreign Affairs Minister Kevin Rudd announced the United Arab Emirates would be added to the list of countries that Australia can sell uranium to for civil nuclear power generation.

"Australia has a huge amount of uranium . . . it's a politically stable part of the world with uranium supply, why is it not taking advantage of it?" Mr Leslie said.