Over the weekend there's been much discussion about the implications of the 22% drop on Thursday. As someone seriously considering buying EXT about 4 months late I see many uncertainties that appear not to have been covered in much detail. If you've been busy with other stocks and are looking at EXT only now, like me, then I think the following needs to be taken into account and I hope this generates some worthwhile fact based discussion rather than emotive responses and personal attacks.
FUNDAMENTALS
1. Many here argue that EXT is a takeover target so we don't need to think of the company as a mining concern.
IMO, we do. Someone is going to have to dig the Uranium up, it's going to cost a lot of money and take a lot of time (possibly up to 50 years). As a shareholder you'll get the money quickly if RIO pulls the trigger, but the price RIO will be willing to pay you depends entirely on how RIO values EXT... as a business! This weekend was the perfect opportunity for those who know the company best and have held for years to demonstrate their superior FA skills, yet the only person who honestly tried to value the company in depth was BeerBaron (who admitted himself that he's not an expert). Considering the calibre of several posters here, as a group, we should be able to do a lot better than just multiply pounds of Uranium by a dollar multiplier.
2. Price of Uranium appears to be falling.
The most striking thing I notice is that in the last 4 months while the SP has risen many hundreds of percent, the spot price of Uranium has fallen about 25% (approx $55 to $40):
Why is the price falling if, as many here claim, demand will outstrip supply in the near future? Where's the hard evidence for that claim? And why isn't the market anticipating it, if it's such a certainty?
3. Maybe supply has exceeded demand?
2001:
The IAEA published an 'Analysis of Uranium Supply to 2050'. To avoid needing to predict future economic conditions, the publication lays out three demand scenarios: low, medium, and high. In the high demand scenario, a shortfall of 2950000 tonnes (cumulative, up to 2050) of Uranium was projected based on the known resources at the time and an assumption of "high economic growth", "rich and clean energy future without recourse to stringent environmental policy measures", and "significant development of nuclear power".
Well, we had high economic growth for a while, but that scenario no longer seems valid considering the Global Recession.
2007:
The IAEA hasn't updated its publication yet, so let's see what the World Nuclear Organisation has to say about the Supply of Uranium:
* "Current usage is about 65,000 tU/yr." * World Total (RAR) 5.5 mT Uranium (about 80 years supply) * "There was very little uranium exploration between 1985 and 2005 so the significant increase in exploration effort that we are now seeing could readily double the known economic resources" * "Over the 18 years to 1993 the electricity generated by nuclear power increased 5.5 fold while uranium used increased only just over 3-fold" * "thorium can also be utilised as a fuel for CANDU reactors or in reactors specially designed for this purpose ... thorium is reported to be about three times as abundant in the earth's crust as uranium"
* "The spot price has remained under pressure from concerns of fund selling and postponed utility discretionary purchases" * "The Fund Implied Price is currently $35/lb indicating market expectations of near term downside price risk." * "Industry fundamentals, however, remain strong, underpinning support for the contract uranium price, with anticipated growth in nuclear reactors and risk of supply shortage mid term (4-8 years)" * "Production and development stage companies continue to face significant challenges in financing and developing new projects, including cost pressures and potential delays variously relating to permitting, infrastructure development, commissioning and now credit and equity market weakness." * "However, strategic interest in uranium projects continued in the first quarter 2009 with a number of significant deals announced."
5. So, does the Uranium business really live up to the hype?
IMO, it's far from certain that there'll be a temporary shortage of Uranium in the near future (4-8 years), or a sustained shortage of Uranium in the long term, so I expect that to reduce the valuation suitors such as RIO might calculate for EXT.
I also think the very things that many here argue are strengths for Extract, reduce the long term economic value of the mine:
* Potential size of ore bodies at Rossing South.
If Rossing South was unique or Uranium scarce, then this would be great but if you read the WNO report on Uranium, you find that Uranium has been discovered in nearly every country and is considered to be one of the most common metals to the point that it's "ubiquitous"! That's the opposite of what you want as a producer because it means shortages/price hikes will be short lived. Prices don't have to rise much before hundreds of thousands of tonnes of already known Uranium deposits become economical to mine.
* Ease of mining and speedy startup (production possible within 1-2 years)
It's repeated often that it's low cost and won't take long to remove sand cover, set up operations, and then start trucking ore to a processing plant. Again, this is terrible from a competitive standpoint. Coupled with ubiquitous resource availability, what this amounts to is that whenever the Uranium price rises a little, then it's going to be easy for new entrants to find some Uranium and start mining it within a couple of years. This is exactly what just happened, prices rose to $130 for a short time, and are now less than a third of that only a few years later.
The one big strength for Rossing and Rossing South is that together they offer potential for an economy of scale that will be hard to duplicate and may thereby offer slightly higher margins to RIO over most of its competitors. Does anyone understand this well enough to provide some objective figures?
The US is printing trillions of dollars to pull itself out of the GFC and already owes the rest of the world something like 13 trillion. If Australia remains largely unaffected, then we might see at least 80-90 cents on the dollar again over the next decade and maybe beyond.
All my opinions are intended as discussion points, but I'll specifically pose this one as a question since I'm not quite sure what the answer is. My question is: If, hypothetically, the AUD/USD exchange rate ends up averaging 0.85 from 2010-2020, how could that affect RIO's profits from Rossing South should they purchase it? My instinct is that it'd mean significantly lower profits and that RIO will take currency risk into account when valuing EXT.
7. None of the attempts at valuation I've seen at HC have used any kind of Discounting Model.
BeerBaron's Zone 1 valuation is the most favourable for holders so I'll use that as an example: 108 000 000 lbs Uranium x $10 = $1080 000 000 USD = $6.64 AUD/share. By my calculations, a Net Present Value estimate of Zone 1 equates to an SP between $1.74 and $13.52. This range was derived by using the least favourable and then the most favourable of the following value ranges:
Discount rate: 5.75% (15 year bond rate) - 3.5% AUD/USD exchange rate: 0.65 - 0.85 Production per year: 3.7 million pounds (lifespan: 29 years) - 7.4 million pounds (lifespan: 14 years) Net Price Per Pound: $10 - $30
CAPEX to develop a productive mine: $92 million USD (cost of PDN's Langer Heinrich mine I believe) Time to develop productive mine: 2 years (also based on Langer Heinrich plus 6 months to resolve current bidding war)
Note that I only managed to double BeerBaron's estimate by tripling the price per pound and assuming every variable turns massively in favour of EXT. I'll leave it to others to make predictions about future drill results and extrapolate. These figures are only intended as a start. I'm hoping those genuinely interested in valuing the company will provide different perspectives and contribute to improving accuracy.
8. What would happen to the SP if RIO pulls out?
We ought to be familiar with how the big boys play the takeover game by now. Probably don't need to go past BHP's failed attempt to takeover RIO just last year to remind us that not all takeover plays complete the way people and the media expect. There's a lot of talk about Dattels and KAH defending EXT from RIO. What if they're successful and it leads to a BHP/RIO like standoff that takes months/years to resolve and then ends with no result? What if RIO simply chooses to call Dattels' bluff and walk away?
I know there's been talk of countless other suitors, but I only see RIO, KAH, Acorn, and Dattels on the shareholder registry. Where's proof of other suitors? Based on the current confirmed resources, I'd expect the SP to fall to a support level below $3, perhaps closer to $2 if RIO were to back out. A company 2 years away from any chance of production isn't anywhere near as exciting as a take over target.
TECHNICAL ANALYSIS
Since others have provided excellent charts/analysis of support levels already, I'll just focus on history and say that Extract's performance this year keeps reminding me of Minotaur Resources (MNR), which merged with Oxiana in 2005, and spun off another entity with the ASX code MER.
On 13 Nov 2001, shares in MNR were worth $0.17. The next day, discovery of an Olympic Dam sized copper/gold resource is announced and the shares close at $1.65 (the highest one day gain for any Aussie share in 30 years). You hold another day, and see the shares shoot up to an intraday high of $2.25, but by the close they've fallen back to $1.61. Within 2 more days they fall as low as $1.32.
What do you do? Well, if you'd waited 5 more trading days, you'd have seen the price rally to $2.53, but within 3 weeks the SP is back down to $1.85, and within 2 months the price has again risen back to a new high of $2.75.
Here's where it gets ugly if you're the buy and hold type. Over the next 15 months you'd watch your massive profits gradually grind down to less than one fifth of the high price, and if you're a true die hard buy and holder, then you'd have to wait until 30 Nov 2004 for the price to climb back to $2.20 just before the merger with Oxiana.
EXTRACT
It's silly to draw firm conclusions about Extract by analysing Minotaur, but it's important to stay grounded. For me, Minotaur is an objective reminder that share prices can be extremely volatile after steep rises, and that waiting for a takeover doesn't always pay no matter how big your lump of metal in the ground is.
CONCLUSION
As I said at the outset. I still see a lot of question marks when I think about EXT. I look forward to learning more and maybe eliminating some of my doubts.
As always, do your own research. Speak to a professional advisor before taking any action. Good night, and good luck.
Z
EXT Price at posting:
$3.92 Sentiment: ST Sell Disclosure: Not Held
(20min delay)