dd... a lonsec perspective

Holding AGS as well as AEX, I was somewhat surprised when reading the latest broker report on AGS by Lonsec to see that AEX had been omitted from an Aussie U company comparison table.

http://www.allianceresources.
com.au/documents/060921-%20Lonsec%20-%20AGS_060909%20Low_Res.pdf

The report is very good (for AGS), but also provides some excellent analysis on the U industry in general.

One of the most intriguing aspects of the report for me, was an attempt by the author to devise a Peer Company Comparison methodology, i.e. a "formula" if you like for comparing the value of U stocks at their various stages of progress.

Figure 10 on Page 7 of the report is the table that I am referring to in my following ramblings.

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Figure 10 devises a rating figure for a range of ASX listed U companies based on Fully Diluted Market Cap per lb U308.

ERA (excluding the Jabiluka deposit - Jabiluka was the subject of a Care & Maintenance agreement between ERA and the local Mirarr people that the deposit would not be mined without their support) is justified as the U industries "benchmark" company, against which other U companies "value" can be compared.

ERA have a fully diluted Mkt Cap of $2,466,200,000 and a JORC Resource of 191,000,000 lbs.
That gives ERA a Fully Diluted Market Cap per lb U308 of 12.9.

Fully diluted, AEX has 913,985,007 shares, partly paid shares and options on issue.

With a current shareprice of 5.4c that gives a Fully Diluted Market Cap of (913,985,007 * 0.054) = $49,355,190.

If AEX can prove up the 11,000t of U at Denny Dalton with the upcoming drill results/geological modelling from CCIC, the that would yield a JORC Resource of 24,200,000 lbs of U308.

AEX's corresponding Fully Diluted Market Cap per lb U308 would then equate to ($49,355,190 / 24,200,000) = 2.04.

A Fully Diluted Market Cap per lb U308 of 2.04 would place Denny Dalton at the same market valuation level as Marathon Resources (33,000t U308 at Mt Gee, SA) who have a Fully Diluted Market Cap per lb U308 of 2.0.

At this level, AEX would still prove to be one of the most undervalued U stocks on the ASX... nothing unbelieveable revealed there, AEX holders have been saying that all along.

What i wanted to do with Lonsec's report was to try and apply the logic within it to determine the market's reaction to the upcoming drill results, i.e. where will the SP race to, peak, falter, retrace and then settle?

Referring back to Figure 10, I was immediately drawn to Redport (RPT).
RPT has 633 million in issued scrip and has a JORC resource of 23,700,000 lbs U308.

The market is currently valuing RPT at $105 million Fully diluted.

Therefore, given the similarity of these figures to AEX, if AEX successfully proves up it's 24,200,000 lb resource, the SP may well settle around the 10c-11c range (913,985,007 * $0.11) = Mkt Cap of $100,538,350

Obviously RPT is the subject of a takeover and it is in the NT, not South Africa... so those are just some variables that would affect the accuracy of this comparison, and ones that the market would no doubt be aware of.
One should also bear in mind that RPT was trading around 10/11c before the takeover approach, which was a fully diluted mkt cap of approx $65-70million.

Looking closer to AEX's home, perhaps OMC would be a good alternative?

OMC's resource is in Zambia, which arguably poses a greater political risk factor than the more stable South Africa.

OMC has 154.7million in issued scrip (and has a JORC resource of 13,700,000 lbs U308.

The market is currently valuing OMC at $100.5 million Fully diluted.

Now OMC has half the JORC resource that AEX has, but is arguably more advanced in it's project considering it is aiming for production by September 2007. However, the risk factor is more comparable, and the market does not seem to concerned about this variable with OMC.

Without knowing how much premium to attach for OMC's more advanced stage of progress, with AEX having double the resource of OMC, AEX could possibly attract a Fully Diluted mkt cap of $200 million once DD is shored up. That would give a SP of approx 22c.

I would suggest that AEX are somewhere between RPT and OMC?

Providing that AEX do get some elevated JORC status to Denny Dalton, then once would conservatively envisage a Mkt Cap of approx $100 million = SP of approx 11c.

Even at this price, the Fully Diluted Market Cap per lb U308 would only be about 4.08, which would still see it as undervalued according to Lonsec.

So, there are obviously MANY different variables that could affect AEX's valuation, not the least of all the GOLD.
Assessing AEX for this reason alone provides upside to all my figures above which are entirely U308 based. I would think it would take the market some time to absorb and understand the AEX dynamics, as no other U speccie on the ASX has this combination of exciting variables.

I will settle for a post-announcement SP of about 10-11c, the spike could see 15c, and a retrace below 10c for a while could also occur (see EXT chart), but the fundamentals should see the SP around 11c going into the new year.

Cheers,

MisterMoon