Australian Financial Review PRINT EDITION: 9 Mar 2011 Angela Macdonald-Smith
Rio Tinto is facing a threat to its ambitions to develop one of the world's biggest uranium deposits after a major Chinese nuclear company made a �756 million ($1.2 billion) play for a dominant stake in the owner, Extract Resources.
Rio has been in talks with Extract, of which it owns 14.7 per cent, over the joint development of the giant Husab uranium resource in Namibia. But those plans could be derailed by China Guangdong Nuclear Power's proposed offer for Kalahari Minerals, whose main asset is a 42.8 per cent stake in Extract.
Rio is now struggling on three fronts for control over world-class mineral deposits in Africa. Its $3.9 billion bid for Mozambique coal developer Riversdale Mining is meeting shareholder resistance, and new government policy in Guinea is threatening its ownership of the giant Simandou iron ore project that Rio hopes to develop with its biggest shareholder, Chinalco.
China has been scouring the world for uranium resources to feed its ambitious nuclear reactor program. China's 12th five-year plan envisages 40 gigawatts of new nuclear capacity.
China Guangdong Nuclear Power's proposed offer for Kalahari Minerals is complicated by regulatory issues and by several cross-holdings between Extract and Kalahari.
Rio owns about 11.5 per cent of London-listed Kalahari, while Japan's Itochu also holds minority stakes in both Kalahari and Extract.
Extract owns 100 per cent of the Husab deposit, which is set to be the world's second-biggest uranium mine after it starts in 2014. It has been negotiating with Rio about a joint development of Husab through Rio's adjacent Rossing mine, which would cut costs estimated at $1.5 billion.
The bid by the Chinese state firm, which is backed by the Kalahari board, depends on the Australian Securities and Investments Commission allowing it to proceed without making a full offer for Extract.
Kalahari, chaired by Perth businessman Mark Hohnen, is widely seen as keen to exit Extract to cash in its investment. But Rio, arguably the natural developer of Husab, has focused on ways to access the resource without making a bid.
"This is a play by Kalahari to force Rio Tinto's hand if they can; Kalahari are sellers and they want to get out," said Simon Tonkin at Patersons Securities in Perth.
Rio, which has endorsed uranium as a core business, now must decide whether to make a counterbid for Kalahari, whether to try to block it, or do nothing and work with the Chinese to develop Husab, he said.
Rio would not comment yesterday.
Kalahari's shares added 9.5 per cent in London to 285 pence, below the potential bid of 290 pence in cash.
Extract shares surged 7.3 per cent to $9.94 as some investors bet the Perth-based explorer would become the Chinese firm's next target. Extract's market value is $2.5 billion, still less than the implied $2.8 billion based on the China bid for Kalahari.
China Guangdong was likely to want at least 60 per cent of Extract or of Husab to feel it had control, said Warwick Grigor at BGF Equities.
While Rio may not sit happily as a minority partner with the Chinese in control, it may already have agreed development terms for Husab with China Guangdong, he suggested.
RBC analyst Adam Schatzker said: "We believe that CGNPC's motivation in acquiring Kalahari is to ultimately gain significant future uranium production offtake. The next logical move will be for CGNPC to acquire Extract."
Extract's independent directors are due to meet soon to consider the bid.
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