A Nash equilibrium is a term to describe a set of strategies, one for each player, in a scenario such that no player has the incentive to act unilaterally. In a sense players are in equilibrium, in that if any of the participants changed their strategy, it would leave that particular player to earn less. The end result is that there is an incentive to remain with his current strategy. In this particular game, there are three obvious players.
· Rio Tinto obviously has an appetite to acquire the Rossing South asset, but only if the price is right (we estimate between 121p and 204p ps). Given the recent Alcan fright, we believe that they are unlikely to purchase this deposit via a public takeover. According to our calculations, Rio effectively controls 19.5% of EXT, meaning they already retain the right to automatic block another major acquiring the asset in its entirety. We should also point out obvious, that Rio would have already gone through a series of “game scenarios” at a far greater level of sophistication and peer review than that attempted here. Consequently, they would have formulated a strategy that would be likely, under most circumstances, to maximise their objectives. ·
Polo Resources is probably best described as a selective resource based fund, with uranium and coal interests in Africa, Australia and Asia. Key personnel include Stephen Dattels and Neil Herbert, to-date have been best known for their entrepreneurial sale of Uramin to Areva for US$2.7Bn, at the height of the uranium boom in 2007. Since then they have had an eye for opportunity, making a number of judicious investments. We note, however, that they have remained professionally dispassionate, not falling in love with any particular stock, as witnessed in the sale of their stake in Berkeley Resources, and, more recently, A-Cap Resources and Impact Minerals. We have no doubt that if they determined that there was little additional capital growth at Rossing South, coupled with an opportunity to sell their holding, they would do so in a heart-beat.
· Unlike Polo, KAH’s key asset is Rossing South. At this juncture, we believe that the company has a bifurcated strategy. It, like Polo, would be a willing seller of Rossing South if it thought the price sufficient. If no offer eventuates, then the company would be willing to develop the deposit (although we suspect that no such wish exists within Polo). In evidence of KAH’s current intensions, we would point out that under ASX creep provisions (ASX rule 6.11, item 9), the company has had the opportunity to increase its holdings in EXT via on-market purchases every six months, once the company had crossed the 19.9% mandatory takeover threshold. To-date, the company has steadfastly refused this option. The cost benefit of this strategy, however, is probably long-gone. At current prices it would require KAH to undertake a capital raising of approximately in-excess of £30m (or A$70m) every six months to realise this opportunity. To determine future intent, we will continue to closely examine EXT’s announcements regarding appointments of operational personnel. If EXT continually engages contractors to cover technical, we would interpret this as a “Sell” intention from the company.
Rio Tinto would love to have this asset Polo wants to Sell the asset KAH is confused
The Plural of Spouse is Spice – Rio & China Anyone?
Game Theory does have some obvious short-comings, in areas of imperfect knowledge, irrational behaviour and potentially Black Swan events (hard to predict, rare events outside the normal realms of expectation). Despite this, outcome can be predicted solving a “finite extensive form game” (also known as a game tree) via the process of “backward induction”. The theory dictates that if one determines the optimal strategy of the player who makes the last move of the game, then the optimal action of the next-tolast moving player can also be predicted, and so on until all the players’ activities have been determined. Our belief now is that Rio Tinto or as yet an unknown third party will be the last mover.
· We don’t believe that either KAH or Polo Resources will ultimately be the long-term operators of Rossing South.
· For the reasons outlined previously, we don’t believe that Rio Tinto will be a buyer of EXT/KAH on market. They are in a very strong position, being a price maker rather than taker. Given that we do not expect Rio to increase its position materially, we are also convinced that it’s not in Rio’s best interest to reduce its holding either.
· We also do not believe that this project will be a toll-treatment operation. Although this option effectively has no upfront plant capex (which is substantial), or in most cases incur metallurgical or processing costs. Transportation costs would naturally be higher, and the miner would still incur extraction costs. At the end of the day, a toll-treatment option would mean that profits would be shared on some proscriptive joint basis. This outcome would be an unsatisfactory outcome for all parties.
· Therefore, we think it highly likely, evaluating various scenario analysis, that there is likely an additional player that has yet to show its hand. We hypothesis that this player would likely be vertically integrated, with an over-riding requirement to secure supply for a number of nuclear power plants.
The only other group other than Areva (who incidentally has financial issues associated with its purchase and the development of its Uramin asset) is China. China has notionally unlimited funds and is still running surpluses, albeit substantially smaller level than they were several years ago. The country also has the added impetus of wanting not to add to its holdings in US dollars, increasing its air quality of its cities, and potentially lessening its reliance of the petroleum based economy. Either via electrification of its transportation system, through electric or hybrid cars, or the adoption of a hydrogenbased economy.
If such a move were to occur, we would think it highly likely inside the next 6 to 12 months.
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