ext valuations and thoughts on future drilling

EXT is now valued at about US$3 per lb based upon the JORC upgrade to ~400 Mlb dated 11 Aug 2010. This is quite low for a uranium company, especially one with such a strategically large resource well along the path towards mining. First mining is scheduled for end of 2013, only 3 years away.

We can expect further upgrades in 1Q 2011 to probably 450-550 Mlb based upon the company's target. This seems reasonable considering the last upgrade delivered an increase of ~100 Mlb. A similar increase again would bring us close to the 500 Mlb level, in the middle of the target. With so many more drills operating, it should happen more quickly, so an 8-month time between JORC upgrades seems reasonable.

Looking at the report 11 Aug 2010, the grades for the four zones are 450/420 ppm for Zone 1 indicated/inferred, 520/520 ppm for Zone 2, 250 ppm inferred for Zone 3, and 570 ppm for Zone 4. Grade is very important when it comes to costs per lb for extraction, and usually alaskite is around the 200-300 ppm mark, so these grades are exceptionally good. Notice that Zone 3 is disappointingly low, and it wouldn't surprise me if the company bypassed Zone 3 and started on Zone 4 instead.

This lower grade for Zone 3 may be one reason to explain the strategic decision the company took to concentrate on infill drilling Zones 1 & 2, rather than expanding the inferred category alone by drilling out Zones 3 & 4. The grade at Zone 3 doesn't seem worth it compared to the other zones.

The grade at Zone 4 is even higher than the already high grades in Zones 1 & 2. At 570 ppm this is extraordinarily high. I hope this is maintained with further drilling for Zone 4.

Another plus buried in the report is the slightly higher density for the ore. In the first JORC this was estimated at 2.65 t/cubic m. This has been revised upwards slightly to 2.68 for Zone 1 and 2.70 for Zones 2, 3 & 4. It's a small increase but it adds to the resource size when calculations are completed.

Coming back to valuations, a number of different techniques can be used. The last WH Ireland research report dated 7 June 2010 (before the last JORC upgrade) came out with a NPV of A$8.02 per share, with a 3 year target of A$12.37. Of more interest was the method used to determine this. They used a cost per tonne of US$34.40 in 2014 dropping to US$27.90 in 2017 onwards. This is hopefully on the high side (I am expecting about US$5 per tonne less than these figures). Also, the report uses a uranium sale price of US$55 per lb, which is also hopefully somewhat conservative, especially for later years towards 2020.

Nonetheless, using these figures the net profit after tax (NPAT) is A$168m in 2014 rising to A$470m in 2017 - very roughly A$0.60 per share rising to A$1.70 per share assuming 282 million shares (an increase due to capital raisings). This includes a share for the Namibian government of 10% under the BEE program, royalties, costs for desalination, etc. At $6-7 per share today this seems cheap given the anticipated revenue stream in 3 years time.

The opportunities with EXT lie in the size of the resource, as indicated by the following statement: "For example, assuming a 50% increase in capacity, additional capex of US$200m coupled with scalar increases in opex and repayments, etc., the three year price target would increase to A$17.73 per share. If we increased productive capacity by 100%, additional capex of US$350m, the three year target would increase to A$23.25 per share."

One can do even quick calculations on the back of envelope. For example, given a production rate of 15Mlb pa, extraction costs of US$25 per lb and sale price of US$55 per lb, the returns would be US$30 per lb or US$450m pa. After tax and royalties of say 33% (one-third, to make it easy) gives us US$300m pa. This is about A$350m or about A$1.50 per share. Broadly speaking in the same ballpark as the (much more) detailed WH Ireland report.

Is a share price today of A$6 worth a return per share of about $1.50 starting in 3 years time? It does seem undervalued to me...