Here is a scenario on the future valuation of EXT. I have drawn extensively on the WH Ireland Broker report dated 7 June 2010. This contains detailed costings out to 2040 based upon many assumptions, that I will summarise at the end of this post.
The costings give the following EPS per share, after interest and tax, based upon an increased number of shares due to capital raisings of 282 million:
What will the share price be for each year? I have assumed that the share price PE will be based upon looking ahead one year, with a PE of 12 in 2017 (ie a share price in 2017 based upon a PE multiple of 12 times 2018 - the next year's - EPS).
For earlier years the PE will probably be influenced to a greater extent by the increasing nature of future returns. So in 2016 I have assumed a slightly higher PE of 13, a year earlier in 2015 a PE of 14, in 2014 a PE of 15 and in 2013 a PE of 16. A PE of 16 is not excessively high for a miner with a strong future income stream.
So I can calculate my guess as to a rough share price as follows:
Note: share price is based upon a PE times next year's EPS. This is how we can get a share price in 2013 even though EPS in that year is zero - we are looking ahead one year to 2014's predicted EPS.
Now, let us look at a hypothetical situation where we buy $10,000 worth of EXT today at $6.39 = 1,565 shares. We also buy $10,000 worth of shares in a hypothetical company ABC which has a rate of return of 12%pa, every year without fail.
So our ABC shares are worth $11,200 in 2011, $12,544 in 2012, $14,049 in 2013, $15,735 in 2014, $17,623 in 2015, $19,738 in 2016 and $22,107 in 2017. An excellent return by any standard. What has happened to our EXT shares?
Well, sometime between now and 2013 our EXT shares were diluted due to capital raisings. I have assumed (somewhat unrealistically, but conservatively) that nothing was done - we accepted the dilution, gained nothing for it and spent nothing. I don't have a guide as to the share price in 2011 and 2012. But from 2013 onwards we can use our calculated share prices.
This shows that our 1,565 EXT shares are worth $14,899 in 2013 - slightly more but about the same as our ABC shares ($14.0k). In 2014 our EXT shares are now worth $15,478 - slightly less than but about the same as our hypothetical ABC shares ($15.7k).
From 2015 it becomes much more interesting. In 2015 our EXT shares are worth $26,668, well ahead of our ABC shares ($17.5k). Note that this is based upon a PE ratio for EXT of only 14, which I think is somewhat conservative.
In 2016 our EXT shares are worth $33,882 and in 2017 they are worth $33,553 (slightly less than 2016 because I have assumed a lower PE ratio of 12). Our ABC shares are now lagging significantly behind at $19.7 and $22.1k, respectively.
In summary, by 2013 the ABC shares at 12% pa are about as good an investment as EXT shares. But by 2015 the EXT shares have soared ahead. By 2016 our original investment has doubled in our hypothetical ABC shares, but more than tripled in EXT.
A nice scenario. How realistic are the numbers and assumptions?
Well, the return by hypothetical company ABC of 12% pa is probably on the high side. You would be doing very well to get that sort of return consistently year after year. It is unlikely that this would be just one company, rather a basket of shares that you would invest in, some doing better and some doing not so well. So this comparison is probably on the high side, ie conservative when comparing to EXT.
The assumptions on EXT's share price based upon PE are probably about right, and I think somewhat conservative. A PE of 12 for EXT in 2017, by which time Rossing South would probably be the biggest, or second biggest uranium mine in the world, is probably on the low side. Extract by then would be a uranium mining giant, that would probably command a higher PE due to it's market dominance. So this is probably on the low side, ie conservative when determining EXT's value.
My conclusions are at the end of this post, after the following broker assumptions:
General Assumed company's expenditure will average A$26.5m pa until commencement of mining activities in FY14 Corporate tax-rate is 35% Tax payments occur once a year, 12-months after incurred Borrowing rate is 8% pa, interest earned is 4% pa Desalination contribution est. at US$95m. Have assumed contribution will be 100% equity Nambian BEE 10% accounted for (29.1m shares at a raising price of A$9.83 for A$286m) Royalty rate is 3% of Gross Revenue pa Additional US$25m capital allocated for pre-strip EXT NPV calculated over a total issued capital of 281.874m shares
Rossing South 26 years of production (FY14 to FY40) Extraction covers 344Mt containing 464Mlb U3O8 Average grade for the life of mine will be 600ppm Capex estimated at US$704m, equating to A$903m using a 0.78 exchange rate Debt to equity ratio of 70:30 Zone 2 to be mined initially to facilitate rapid pay-back of capital Construction estimated to take 18 months - capital drawdown six monthly, with interest calculated from that point onwards Interest payments capitalised for the first year of operation (commissioning stage) Repayment is A$70m pa (including interest and principle) Maintenance capex for Rossing South estimated to be A$27m pa (3% capex) No depreciation or amortisation in the first year of operation (commissioning stage) Tax deductable expenditure for Rossing estimated at A$75m
Ida Dome Heap-leach operation 17 years of production (2018 to 2035) Extraction covers 87.6Mt containing 50.2Mlb of U3O8 Capex estimated at A$150m Assumed A$17.5m in unforeseen mining expenditures (A$15m in FY17 and A$2.5m in FY18) Source: WHI Securities
CONCLUSION
Buying EXT shares today at Friday's close of $6.39 will probably give about a 12% pa return if you intend to hold them until 2013. If you hold until 2015 or longer the return will be significantly greater - the numbers indicate a tripling of investment by 2016, approximately a 23% pa return. This is based upon developing a mine, with no premium for possible takeover activity and no bonus for Rossing South's dominant position in the uranium market.
I can only emphasise my own position - LT Buy
EXT Price at posting:
$6.39 Sentiment: LT Buy Disclosure: Held
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