Extract may have to consider Husab JVAustralian Financial...

Extract may have to consider Husab JV

Australian Financial Review
PUBLISHED: 06 Apr 2011 Online
Angela Macdonald-Smith

The logic of a joint development of Extract Resources' Husab uranium deposit in Namibia with Rio Tinto has been reinforced by the news that the project would cost almost $US1.7 billion as a stand-alone mine.

Extract, whose biggest shareholder is the target of a proposed $1.2 billion bid from China Guangdong Nuclear Power, said on Tuesday the feasibility study for Husab confirmed the viability of an independent operation.

But analysts said the capital cost could fall to less than $US1 billion if ore from the deposit were to be processed at Rio Tinto's existing Rossing mine immediately to the north.

Adding to the pressure for a joint development is the global slump in uranium equities amid the unfolding nuclear crisis in Japan, which makes financing the huge project more difficult for Extract.

"The stand-alone is do-able however it's just blatantly obvious that the right thing to do is to have some tie-up with Rio," Foster Stockbroking research analyst Toni Addison-Lafferty said.

"In the current environment it is going to be very difficult for projects of this nature to go through, particularly projects like Extract's which is particularly expensive," she added.

The desire for control over Husab, the world's fifth-biggest pure uranium deposit, is driving China Guangdong's move on Kalahari Minerals which, if firmed up, is expected to be followed by a bid for Extract.

Rio Tinto has stakes in both Kalahari and Extract and has been in talks with the Australian company on a potential joint venture for Husab. Japanese trading house Itochu, which wants to buy uranium oxide from the venture, also owns stakes in both companies.

Extract chief executive Jonathan Leslie said on Tuesday that the company would weigh up the independent option against others, such as a potential venture with Rio.

"We've got that option to pursue the stand-alone but if we find that there's another way forward that gives us better economic value and that the government is happy with, then we'll pursue that as well," he said.

The great strategic importance of the world-class Husab resource means that even if debt and equity financing is more difficult for Extract, the project would still get developed, Mr Leslie said.

He declined to comment on China Guangdong's move on Kalahari, but Kalahari executive chairman Mark Hohnen said the board believes the Chinese firm is continuing to work on satisfying the conditions that would allow it to proceed with a firm offer.

The Husab project would become one of the three largest uranium mines in the world, involving open-pit mining of 15 million tonnes a year of ore to produce 15 million pounds a year of uranium oxide.

Merrill Lynch has calculated that a joint venture involving Rossing and Husab would result in production of about 10,000 tonnes (22 million pounds) per year of uranium oxide, compared with about 4000 tonnes at present from Rossing alone.

The estimated capital cost includes $US1.48 billion for mining and processing equipment and infrastructure, and $US179 million for pre-stripping and other costs before production begins.

Production costs are put at $US28.50 per pound, or $US32 per pound, including royalties, marketing and transport.

It is more than double an initial estimate in August 2009 of $US704 million, which excluded mining fleet and some other costs.

Extract needs to give the final go-ahead for the project by the end of June to meet its target of starting production in the first quarter of 2014.

The feasibility study is based on a maiden reserve estimate of 225 million pounds of contained uranium. An updated resource estimate due this quarter is expected to increase the resource and extend the mine life beyond the present 16 years.