ern report posted for all

Hi . decided to post the report due to popular demand. Thanks for all the feedback. Don't expect anything overnight - rome wasn't built in a day.

ERONGO ENERGY ( ASX: ERN) – Report analyses uranium only

Erongo(ERN) is one of few uranium explorers in Namibia. They have 4 tenements and 1 application in the proven Erongo province which contains Rossing a 4000tpa/yr mine. Erongo is hunting for similar deposits to Rossing, or what I dub several “mini Rossings”

It is targeting granite style uranium mineralisation. So far it has undertaken radiometric reprocessing and a desktop study incorporating historical data to better define drill targets and determine likely resource tonnages. The company’s conservative and experienced management all have extensive experience in African conditions, hence this will assist in the long term. Klaus eckhoff has good connections in Namibia. The management indicate that the tonnage potential is “large” at a low average grade.


Management Team

This is the critical element in the transition from explorer to producer. I believe the management have what it takes, with a Paladin connection noted.

Klaus Eckhoff is the consultant and geologist to the company and is the MD of Moto gold mines. Moto is bringing on a 300,000 ounce gold mine in the DRC, Africa. Eckhoff has extensive experience in Africa and is highly regarded in the minerals industry ,especially in Germany where Erongo is also dual listed.

Mark Gasson is the technical director of the company. He is also a geologist and also has extensive experience in Africa. He is also the technical director of Tiger Resources – a copper company with operations in the DRC, Africa.

Patrick Flint, the Executive director of the company, is also company secretary to Moto, the same company Eckhoff runs. He has good experience with many resource companies.

Matthew Walker has to be praised for his vision in transforming the company from Louisiana Petroleum to a uranium focussed company. He has experience in the finance side and his connections will prove vital in fund raisings and general management.

Dr Leon Pretorius, one of the founding directors of Paladin resources and key to foundation of the Langer Heinrich mine, is a substantial shareholder of Erongo. He is also the chairman of Deep Yellow (DYL) which also has operations in Namibia. Its obvious Erongo’s tenements have strategic value as a uranium expert like Pretorius would not invest unless it was worthwhile. The Paladin connection assists as well as PDN is a success story in its own right.

This management team has what it takes to bring the projects to the next level i.e. resource production. The extensive African “on the ground” knowledge and experience would be ideal in Namibia. I must complement management who have also researched the tenements extremely well, prior to the acquisition.

Now on to the Erongo granites project, EPL 3454 (90% owned) that is the target of the upcoming drill program due to start in early April. Please refer to the map as in the presentation.

*Area 1 - Currently we know that 68 holes were drilled and two Diamond holes were also drilled. The picture of the diamond hole was attached in the previous quarterly reports and showed several zones of mineralisation. This combined with the percussion holes have considerably de-risked Erongo as it shows good 30m+ hits of uranium at some good grades, almost up to 350ppm. Remember historical grades can be upgraded, as historical equipment was not as reliable.

Moreover the company has described the zone as “25 to 35m thick” over an area of 800m by 250m and “potentially open for another 800m”. This suggests Area 1 resource is likely to be 800m by (250+800m) = 800m by 1050m.

The potential resource is thus 800m * 1050m * 3(Specific gravity) * 30m(average thickness- see historical drills) = 75mT from one area. The average grade will be conservatively 280-300ppm at surface, say 280ppm which can be upgraded through modern drilling, but there is no guarantee.

75mT @ 0.028% = 21,000T contained u308.

in pounds = 21,000 * 2204 = 46,000,000

Note this Area 1 will be the main focus of the first 10,000m drill program, and the market has only priced in Area 1 800m by 250m into Erongo’s share price. No extensions have been priced in. Just based on the historic holes i can conservatively estimate a 8 million pound resource already. I believe Klaus Eckhoff (consultant and shareholder of the company) has used his connections to source a drill rig-, which are extremely hard to find in this mining boom.

Importantly most of Area 1 hits are from surface and will prove extremely easy and low cost to mine.

Area 3 –

This is the 2nd priority area as per the reports. This potential here cannot be underestimated. Here the company refers to the “contact between the younger Erongo Granite and the older Salem granite” being important in forming uranium deposits. A quick look at the orthophoto and you can see this contact formation clearly.


Area 3 holds the Radon gas anomaly. A google search indicates that “The presence of radon gas indicates a uranium ore body may be in the vicinity.” Radon gas is pretty much caused by the decay of uranium and suggests uranium in the area, and is a popular technique used to find ore bodies in this part of the world.

Area 3 has not been effectively drill tested as all the holes kept caving. The potential tonnage of this area is extremely large considering the size of the anomaly: about 5000m by 2000m by 6m thick * 3 (“a flat lying zone approx 6 m thick was identified”). No grades were specified so we will leave this blank.

Area 3(potential) = 5000 *2000 * 3 * 6 = 180mT of mineralisation. It will be very interesting to see whether this throws up grades >200-300ppm as the size of this anomaly is very big. It will only take a few holes to test this anomaly.

Area 2-

Good mineralisation has already been annotated and intercepted in 3 holes, and this fact itself suggests uranium mineral is present throughout the EPL, not just in Area 1. The probabilities of discovering other potential ore bodies are high. Supposing this is in the same style as Area 1, the tonnage itself is also large and could be bigger. The presentation highlights radiometric targets 1.5m by 1km, and another south of Area 2 4km by 0.5km. In short these anomalies are bigger in size than Area 1 (which was only 800m by 1050m and potentially 75mT).

Also contained in Erongo’s latest quarterly report, it states that there were 21 radiometric anomalies in total in all of their tenements. So its very likely that there is more potential, and that the company has just focussed on areas where they have historical data. This is a similar count to the number of anomalies on Bannerman’s(BMN) tenements. A quick look at the diagrams in the latest announcement shows the size of the “yellow” anomalies, with an estimated 8 kilometre strike length for the EPL 3454 itself (the southern Erongo license).

Area 1 itself represents only about 1000m of that potential, or about 12% of the overall area in one license (out of two in Erongo, the other being EPL 3453). There doesn’t appear to be any historical data on EPL 3453 at this stage, even though it shares a similar looking anomaly.

At this stage the Spitzkoppe license areas look less prospective for large tonnage deposits than the Erongo areas. However they provide variety to Erongo offering calcrete/Langer heinrich style potential as opposed to Rossing style.

Metallurgy has been already tested in the past and so far there have been no problems, suggesting the project is more advanced than it would seem.

Valuation and Peer comparisons

Erongo has 41.8 million shares on issue and 37.5 m options on issue. Therefore its fully diluted market cap is around 54 million dollars(@ 70c), which is extremely low considering the potential. Erongo is therefore highly leveraged to any additional discoveries through their drill program and any upside in future drill programs.

Now other uranium companies based in Namibia generally command a premium. This is because the ease at which one can transition from explorer to producer. Namibia is the most friendly to uranium producers because of the lack of a strict approvals process.

A likely optimistic development timetable:

ERN drills from April-June(phase 1), and then from August to end yr(phase
2). A JORC estimate could be released by Jan/Feb 2008 30million pounds(conservative).

3) Scoping studies and Bankable feasible studies could commence and last until about early 2009.

4) It could construct sometime in the 2009 year and be in production sometime in 2010. This is probably more realistic. This seamless transition from explorer to producer is only possible in Namibia. This is because there are no restrictions to mining, and no tough approvals processes/red tape. Paladin itself states that SMM, likely to be one of the first uranium mines in Australia, will only come on fully in 2012 due to delays. Two years or even one year is a long time extra to wait for an Aussie producer.

Uranium price commentary: It seems to me that the price as it is increasing, is increasing with greater velocity. It is very likely that we won’t see any pullbacks until meaningful supply is added. Due to Australian mines not being online for a while, this won’t happen until after 2015 when Olympic dam fully ramps up (which hasn’t even undergone a Full feasibility)! As reflected in the broader base metal sector, even a small deficit is enough to sustain higher prices. The demand for uranium is expected to conservatively exceed over 200 million pounds (with supply of about half that). This supply has to come from somewhere.

This is why it is uncommon to see $10/lb EV/lb valuations for Namibian upcoming producers, it normally closer to $20/lb on the resource(i.e. closeness of production). Paladin is selling for over $50/lb on its Langer Heinrich reserves(not including other resources).

Here is a comparison with other companies:

*Uramin (TSX listed UMN). Market capitalisation 1500m AUD equivalent. Their primary project is the Trekkopje project(which is mainly what they are valued on). Trekkopje is a very low grade project. From its feasibility report: “Resources in the Measured and Indicated category increase over 200 per cent to 46.5 million lbs at an average grade of 146ppm U308 (using a cut-off of 100ppm):”

Sure Uramin has a lot of other projects, but its being valued on this primary project. Its average grade is only 140ppm and tonnage is about 190mT. So you can see that Erongo compares favourably with Uramin as it won’t have to process as much rock to produce uranium yellowcake. So far Erongo’s grades are looking better. Erongo’s market cap is only about 45million versus Uramin which is twenty times higher. What difference you ask? Uramin appears just to have done a Pre-feasibility and of course has an official JORC resource!

*Forsys Metals (TSX listed FSY). Market capitalisation 1000m AUD equivalent. Forsys’s main project is the Valencia project. It has about 42million contained pounds, the average grade is about 180-200ppm and its not all at surface(some mineral deeper than 50m). A rumoured resource upgrade to only 50 million pounds has underpinned a share price increase from $7 to $10. This upgrade did not eventuate and the share price has since fallen back from $10 to $8.90, and the market cap fallen to about 900million following the first version of this report. It has other EPLs but by and large their main project is the 40million pounder @ Valencia. This just shows how even 40-50million pounds in Namibia justifies an $1bn dollar valuation. Just because of the fact you can mine easily.

* Paladin resources (PDN) – Market capitalisation 5000m AUD equivalent. As we all know Langer heinrich makes up most of this valuation, about 3000m+ AUD in fact. it has a 100mT deposit at about 600ppm average grade or 60,000t or about 130million pounds at Langer heinrich.

* Deep yellow (DYL) – Market capitalisation 400 million. They have some QLD projects as well, but these have no resource estimates. They have about 50 million pounds of low grade uranium in Namibia but it is scattered throughout the country hence is not economic yet to process.

*Bannerman Resources(BMN) – Market capitalisation $400m. Indeed a potentially stunning resource they are sitting on at Goanikontes (another Rossing)– estimates range from 50 million pounds to over 200million pounds. It is still arguably undervalued at these levels. BMN just keeps increasing daily, due to impending resource estimates and upgrades.

* Extract Resources (EXT) – Market capital $169M. EXT does not have a resource, but have good quality tenements and some good historical drills at surface (alaskite style) similar to ERN. However the capitalisation gap between EXT and ERN is unjustified. Arguably ERN has better management and EXT management has so far gone slowly and is highly questionable. EXT needs runs on the board.

*A-Cap resources (ACB) – whilst not in Namibia it is another African play based in Botswana. Their market cap is over $220M, and does not have any JORC resources and is an explorer like ERN, but in Botswana. The market cap difference between ACB and ERN is unjustified. So far ERN’s historical drills are providing higher thicknesses than ACB(which are under 2 metres thick at low grades). ACB has run from 20c to over 2 dollars in 6 months.

*Xemplar Energy(TSX XE) – Market cap over $200m AUD dollars. Has a small 15mT resource at 0.03%, and numerous other high potential tenements similar in potential to Erongo. Again the price and market cap gap is unjustified as XE is mainly an explorer.

*Omegacorp (OMC) – Had an inferred resource of only 13 million pounds based in Zambia. Is in the process of getting taken over by Denison Mines for $180m dollars. So even a small jorc in a good jurisdiction (anywhere in Africa) will be valued extremely high. Ev/lb of this transaction is $14/lb on inferred resources.

CONCLUSION
ERN is one of the best value pure play uranium stocks not only on the Australian market, but in the world. A mere confirmation that the tonnage could exceed 100mT will act as a catalyst to possible extreme price gains. Its anomalies are clearly laid out and its projects are surprisingly well advanced. All targets are drill ready and they only want to concentrate on at surface uranium mineral. This will avoid expensive drilling and long drilling delays that for example Bannerman is currently facing (as it has to drill to 350m).

Namibia is a great place to be in uranium because the lead-time to production in is extremely short. There has also been a moratorium on new license applications which will assist Erongo who already have 4 granted licenses. I am wary of Australian explorers as we won’t see production for several years due to red tape, cost blowouts and lack of available labour supply. Uranium price is increasing rapidly and at an exponential rate. The price gap between ERN($50m mkt cap) and others is unjustified and will likely close once we get good drills from their drill program, confirming possibly 50million pounds+ potential. Just at Area 1, its potential resources is close to Forsys Metals(which has a 1billion dollar market cap). ERN has over 100mT of ore potential, and the management’s comment that it has large tonnage/resource potential is spot on. It has the ability to become another Uramin or a Forsys metals in the near term. A quick look at Forsys’s run shows it ran from about 70cents to $10 in about a year or so (and Forsys does not produce yet). This reflects the possibilities of extreme price gains with increasing velocity on even a sniff of substantial uranium.

Management have indicated they intend to keep the share structure tight to ensure leverage. Bear in mind ERN own 90% of these tenements ensuring good leverage and this is higher than BMN’s 80% owned.

The potential re-rating to production is also even higher, but we will not delve into that in this report.

If ERN is unable to find additional resources, the upside as a potential producer is still good. Look at OMC, it still rocketed on 13 million pound JORC(inferred!) and got taken over.

Key Risks: In my opinion the key risks is the risk of delay. In a mining boom everything is under pressure. However as their drilling is at surface they could proceed quickly and once they define a mineable resource that is good enough to be a target.


Disclaimer:

This report is made just for informative purposes only. Please note i am not a licensed financial advisor and it is recommended that one seek independent financial advice. However all observations have been made in good faith and are consistent with management’s views.

Suggested reading:

www.stockhouse.ca

For canadian stocks comparison.