discussion on takeover price

The following is from a respected poster on another forum, in reply to a discussion on possible takeover price for EXT. It is copied here with his permission.

"Thanks xxxx,

You have raised some interesting and important questions. Please note that the assumption of US$5 Billion T/O price was used primarily to demonstrate that RIO does not need to spend a lot of cash to gain control of EXT. However I also believe that this ballpark figure would be a fair representation of EXT value after DFS. Whilst I agree with some of your arguments, I also think that one needs to take wider and more lateral view of the RS standing in the global nuclear power industry (i.e. to look from an eagle's eye perspective).

1. Rossing South is the biggest uranium discovery of the last 3 decades and if one looks across/scans all uranium exploration companies currently operating in the world, NONE of them have the potential to deliver anywhere close the size of resources expected to be defined by EXT. Recent drilling results released by DYL have clearly demonstrated that high grade uranium mineralization (of >100m thickness) extends all the way down to DYL leases with bulk of it remaining on the EXT side of lease boundaries (congratulations to EXT geologist and PM for their foresight in selecting these leases). Assuming that EXT does announce say 500 - 550Mlbs of measured and indicated resources for Zones1 and 2 in the next few months and this resource is then converted into reserves in DFS then the acquirer/buyer would need to pay the full market value for that resource (about $7 - $7.5/lb which I believe is current industry average although Cameco is valued at $16/lb and ERA at $21/lb but these are already profitable miners). With 19 drills hard at work, I would also expect EXT to define at least another 200 - 300Mlbs over the next few months with these resources falling into inferred resources category (where discount of 50% - 70% may apply). The buyer would also be expected to pay premium for the strategic nature of the resource, very long mine life, minimal environmental issues, growth potential, ease of scaling up production capacity and efficiency etc, etc. I also want to stress that Zone 1 and 2 resources would represent only a fraction of total resources likely to be defined at Husab lease, given sufficient time to complete drilling. Thus if major shareholders were to sell out at prices significantly lower then $5 billion, I would think many serious investors would ask " What all these manoeuvrings, and gamesmanship were all about", and was this just another case of tough talking management which falls apart and seeks excuses for non-delivery when faced by challenging opposition Hmmmm?

The fact is that EXT always has a fallback position, which is to continue with mine development in JV with smaller stakeholders who will put up most of the cash required to develop the mine in exchange for off-take rights. Hence, if the prospective buyers are not willing to pay the fair price, they are the ones who most likely will loose out in the end.

Please note that Mantra Resources another successful Australian uranium exploration company operating in Tanzania (with which has 28.5Mlbs of measured and indicated resources and 56M of inferred resources is valued at $7.5/lb. Its planned production rate is 3.7Mlbs/a, production costs of ~$26/lb, capital costs of $300M and mine life of 12 yrs. As with EXT, the top 20 shareholders hold ~87% of shares. This brings a question why would EXT top shareholders want to sell out at 1/2 of Mantra's Resources EV when they are in control of such massive and strategic deposit???

2. Given the strategic nature of RS including:

- Geopolitical consideration
- Mining culture, logistics and infrastructure
- Size and grades of the deposit
- Operational flexibilities
- Low-moderate mining costs,

it would be very surprising that strategic investors which want security of uranium supply for the next 40 - 50 years would be overly concerned about DCF 's or EV's. These may be relevant (?) to Cameco, RIO or BHP but would not be major consideration to Chinese, Russian, Indian or French governments. As an example, in 2007 when Uramin was put-up for auction, the Korean offer of ~$1 billion was quickly trumped by $2.5 Billion bid by Areva which needed these resources to stitch the reactor construction deal with Chinese. Now, also imagine if Chinese were to lock up RS, what impact that would have on nuclear reactor construction industry. We should also not forget the US government which has at least not openly demonstrated its views in regard to control of global uranium resources.

3. Currently, nearly 90% of uranium mined comes from 8 or 9 producers which clearly demonstrates how heavily concentrated this industry already is. Whilst Kazakhstan's uranium production is on the increase, this is due to the fact that they are currently mining easy deposits (i.e. 16 low cost ISL deposits). However, in about 10 year's time, many of these are expected to be running out of uranium. It is worth noting that a significant proportion of new mines in Kazakhstan are slated to come from the more geologically problematic Syrdarya uranium province. This is less developed region which is expected to contain high carbonate content that neutralizes acid before it can dissolve uranium, and abundant fine grain content which causes clogging of filters and deeper deposits. As a result the production rates are expected to reduce and production costs to increase significantly. In addition to geological issues, there are other leading concerns including shortage of engineers and other skilled workers and electricity and acid shortages (already affecting operations). I also think that it want be too long before Kazakhs will realize or rather will be forced to realize that selling less for more rather then selling more for less is a better option (I understand this is already being addressed through key mine stakeholders/JV partners). Thus, will current uranium prices remain at these levels over medium to longer term? Well, I can answer this as definite NO WAY.

In actual fact, all we need is someone like BHP to take out EXT and couple M&A's (i.e Paladin + Cameco etc) and the world can forget about cheap uranium prices for ever. Perfect examples of what concentration of supply by limiting it to few producers' means, are iron ore and coal industries.

I would also like to emphasize that all these recent media reports/hype about Russians and Americans flooding the uranium market with downblended HEU have been total/gross misrepresentation of facts. Important question to ask in this instance would have been why Russians (having highest HEU stocks and enrichment capacity) are scouring the world to acquire uranium mines. Well, the answer is that majority of their HEU is heavily polluted/contaminated and the costs of downblending are higher then enrichment of natural uranium to LEU. Thus many now in the industry (including Cameco, ARMZ Areva etc. etc.) expect that after 2013, Russia will actually reduce the amount of downblended HEU coming onto the market (by about 30% according to some reports).

I would expect/hope that EXT major shareholders are being advised by reputable industry experts and they don't rely on information presented in the populist media and the advice of some brokerage houses (i.e. WHI who recently suggested that KAH should sell out at ~$11.0)."

My thanks to "Drag100" for permission to post this on HotCopper