A BEE in our Bonnet Although aware of proposed Black Economic Empowerment (BEE) legislation for some considerable time, we had thought, mistakenly, that given the apparent lack of success of its implementation in South Africa to achieve any measurable economic growth, poverty eradication... [or the] expansion of infrastructure..., without (to use words of former Namibian Prime Minister, Theo-Ben Gurirab) the self-enrichment of a few black fat cats. That BEE legislation would not see the light of day in Namibia. However, following public statements by MD John Borshoff (of Paladin Energy fame), we decided to re-evaluate our position. After canvassing a number of Namibian based mining executives as well as several board members of EXT, their responses confirmed our suspicions that the government are indeed moving to implement relevant BEE legislation. Although still at the formative stage, we are concerned by the wide discrepancy in proposed figures from feed-back that various parties have supposedly had with various government officials. After much deliberation, we settled on a 10% BEE figure which was EXT guidance. We believe that any eventual implementation of BEE in Namibia will be similar in scope to that in South Africa, where the relevant BEE group will purchase their share of the company via scrip, usually with some reference to the prevalent company share price, often using a five or ten day VWAP. Our personnel opinion is that it is not the governments role to be involved in private enterprise, as it inevitably raises conflicts of interest between various stakeholders, in particular, company shareholders and the representative populace that the government is accountable to. This potentially could make Namibia an anathema to investors. We think a better alternative would be to raise the corporate tax rate and/or royalties to the point where income matches expenditure to realise governments social aims. We would also be remiss not to point out the financial instability and, at times, the inability of many South African BEE partners to acquire to purchase their stake in the company, and secondly, to match on-going expenditures to maintain their relevant holding in order to be compliant with South African legislation guidelines. Furthermore, many BEE partners have learnt the hard lesson that not all projects are ultimately viable. Unfortunately, before the Global Financial Crisis many BEE investments were funded via debt, which now cannot be repaid, affecting the South African banking sector. We continue our Buy recommendation and value EXT at an after-tax NPV12% of $2.46bn or $9.04 per share fully diluted. Our 3-year value is based on after-tax cashflows from FY12 onwards, resulting in $13.88 per share target.
Black Economic Empowerment (BEE) legislation to be implemented in Namibia We have initially assumed BEE to be 10% via the purchase of issued equity Likely that BEE will eventually be implemented throughout Southern Africa Valuation revised modestly to an after-tax NPV12% of A$9.04 per share 3-year target now A$13.88 per share
Further comments regarding Nationalisation Events
It is important to remember that BEE, or nationalisation, in part, or in total, is not just an African phenomenon. The most controversial form of nationalisation is total expropriation where no compensation is paid. This is clearly not what the Namibian government is proposing. Rather the government appears to be following UN guidelines (resolution 1803), that in the event of nationalisation, the owner shall be paid appropriate compensation according to international law. In fact, many governments have historically regarded nationalisation as an integral part of economic development in the industrialisation their countries (recently challenged as a model given the success of the national champion route preferred by Asian countries). Various UK nationalisation activities include combining the inland telegraphs under the GPO (1868), National Grid (1926), Coal Commission (1938), Bank of England (1946), British Steel (1967), British Gas (1973), British Petroleum (1974), Johnson Matthey (1984) and Northern Rock (2008), among many others.
Recent Share Price Weakness
The recent weakness in share price is partially the result of a sloppy and ill thought-out announcement (17/11/09) by EXT seeking proposals for potential partnerships. The market interpreted this announcement that the company was willing to joint-venture (as opposed to off-take agreements) the Rossing South deposit to a third party, which if proved to be true, would dramatically impact the companys NPV negatively. Re-iterating what we have said previously, a toll-treatment or joint venture option would mean that profits would be shared on some proscriptive joint basis. This outcome would be an unsatisfactory outcome for all parties, especially to the management of Kalahari Minerals and Polo Resources.
Opex and Capex Considerations
On a positive note, Bannerman Resources (ASX: BMN) recently released its prefeasibility results. In particular, what caught our eye was the expected operating costs of flotation concentrate leaching at approximately US$41/lb U3O8. This compares very favourably with EXTs preliminary opex estimate of US$23.60/lb U3O8, which, following BMNs results, we now consider conservative given the similarity in the style of mineralisation, yet the difference in the economies of scale and grade (220ppm for BMN versus +490ppm of U3O8 of EXT) between the two projects. Conversely, given the BMNs higher than expected capex estimate, we feel that the Rossing South preliminary capex calculation (est. US$704m) could increase considerably. Our sensitivity analysis demonstrates, however, that a 5% increase in plant capex will only result in a -0.9% decrease in companys NPV, meaning that any project cost increase will only have a marginal effect on the projects viability. Furthermore, we have been conservative, not relying on the companys cost estimate (which does include a 10% contingency), rather, we have included a 33% contribution toward the construction of a desalination plant by Namwater, required for an off-take agreement (an upfront cost, assuming 100% equity funding with an additional 50% contingency) and the construction of a heap-leach operation at Ida Dome. This has resulted in our capex total being approximately 30% higher than the companys estimate, at around US$917m. We are therefore confident, that there is considerable scope for movement in project construction costs without materially affecting our NPV calculation.
EXT Price at posting:
$8.44 Sentiment: Buy Disclosure: Held
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