kalahari trumps rio tinto at rossing southj

April 19, 2010

Kalahari Minerals Trumps Rio Tinto At Rossing South By Bringing In Japanese Sovereign Interests

By Charles Wyatt

Companies that own a major shareholding in another company often struggle to get the value of that investment fully recognised in their own share prices. One example fresh in the mind following its presentation at the recent Minesite Forum is Anglesey Mining. Anglesey has a 41 per cent holding in Labrador Iron Mines, currently worth 52p per Anglesey share. The share price of Anglesey, however, is only 40p, which takes no account of the fact that Anglesey also has a 100 per cent interest in the Parys Mountain mine, a partially developed copper-zinc-lead mine in North Wales. The same goes for Kalahari Minerals which has a 40.3 per cent holding in Extract Resources, currently worth GPB460 million. Kalahari itself is only capitalised at GBP357 million. In the cases of both Anglesey and Kalahari the discount will narrow sharply as production looms.

Extract is developing the Husab uranium project, directly to the south and only five kilometres away from Rio Tinto's Rossing Mine, which is already in production. Work is focussing on three main prospects at Husab, Rossing South, Ida Dome and Hildenhof, and results continue to underpin the prospectivity of the region, particularly following the world class Rossing South discovery. Extract has reported a JORC compliant combined resource at Husab in excess of 292 million pounds U3O8 at a grade of 439 parts per million (ppm). Of that total, 267 million lbs U3O8 at a grade of 487 ppm is from two zones at Rossing South that run at a cut off of 100 ppm U3O8. These are both open ended at depth, and along strike. Mark Hohnen, executive chairman of Kalahari, believes Extract has the ground and potential to deliver a total resource of around 550 million lbs U3O8, which would make it the biggest uranium-only deposit in the world, and with excellent grades too. Rossing South alone has the potential to produce 15 million lbs U3O8 per year, and that would make Extract a Top Five global producer.

For a long time the betting has been that Rio Tinto, which has modest shareholdings in each company, making a bid for one or both of them. Rio's recent quarterly results demonstrate that the pressure on Rio to make a move is rising. Lower grades hit production during the first quarter of this year at both ERA and Rossing, which resulted in a 20 per cent fall in production compared with the same period last year. At the same time, good exploration progress was reported at the Z20 prospect which is a strike extension from Rossing South.

At the beginning of 2009 we gave an insight into the politics being played by Rio Tinto in an effort to get its way on the cheap, but Mark played a blinder, and Rio Tinto had to ditch the devious tactics. In fact they were a waste of time and, crucially, did nothing to improve relations between the companies.

Unfortunately for Rio Tinto, things have changed significantly as far as its two targets are concerned and it no longer has the stage to itself. For a start Jonathan Leslie has been appointed chief executive of Extract and Chris McFadden, a nominee of Rio Tinto, has resigned. This is in line with an agreement reached at the Extract AGM last November that he would go when a new chief executive was appointed. As Mark Hohnen points out, "Jonathan has an exceptional level of experience in the uranium sector, particularly in Namibia, where he was managing director of Rossing Uranium, Rio Tinto's subsidiary, which operates the producing Rossing Mine. He is an international expert in the uranium industry and a well-respected figure in Namibia, with outstanding relationships with the Namibian government and mining agencies. He joins at a crucial time, as the Rossing South project is in course of transforming itself from a pure exploration play to a tier one uranium production company."

Reiterating this plan to become an independent producer must get right up the corporate nose of Rio Tinto, but independent production has always been the intention of Kalahari and Extract, and a target date of end 2013 has been set. The project benefits from a prevalence of infrastructure and its proximity to the coast, as it's only 45 kilometres from Walvis Bay, Namibia's main port.

In the meantime Kalahari has played another trump card, by bringing ITOCHU Corporation onto its list of shareholders with a 15 per cent stake. ITOCHU has a history going back to1858 when it was founded as a linen trader by Chubei Itoh. It now has 150 operations in 75 countries involved in trading a wide range of products, but particularly commodities. It is a powerful company, no doubt about that, and Rio Tinto no longer has the game to itself as ITOCHU will not have bought these shares on a whim. It has been involved in uranium since 1998 as one of the world's biggest traders and delivered 4,000 tonnes to the market last year.

ITOCHU knows Namibia well, too, as it is involved in the offshore Kudu gas field, and this has also given it contacts with the Namibian government which could be useful. Mark Hohnen makes the point that ITOCHU has a strong relationship with the Japanese government, which will also provide vital financial support. This is being done through the Japanese state nuclear enterprise Japanese Oil, Gas & Metals National Corporation, or JOGMEC, the main aim of which is to ensure a stable supply of natural resources for Japan. At the moment Japan's nuclear power industry supplies 30 per cent of the country's electricity, but this is expected to rise to 40 per cent by 2017.

Poor old Rio Tinto. How it must wish it had made a move earlier, when it might have been able to acquire both Extract and Kalahari for pocket money. Now a big beast has entered the ring and corporate bullying is off the menu. Looks like Rio is going to have to watch Rossing South being developed as an independent producer, using funding from Japan, based around an offtake agreement negotiated by ITOCHU. Extract is hardly going to accept a bid from Rio Tinto with such a prize ahead of it and, anyway, it has Kalahari and its powerful friends to consult before any decision could be made. A fascinating situation and one that will enthral investors for some time to come.

http://www.minesite.com/nc/minews/singlenews/article/kalahari-minerals-trumps-rio-tinto-at-rossing-south-by-bringing-in-japanese-sovereign-interests/1.html