partnership more likely than takeover

Rio/Extract 'partnership' seen more likely than takeover
By: Matthew Hill
25th February 2011

TORONTO (miningweekly.com) - Though Rio Tinto is rolling in cash, it won't likely make a bid for uranium junior Extract Resources, Haywood securities analyst Geordie Mark said on Friday.

Earlier this week, Extract announced it was in talks with the mining giant to combine its Husab uranium deposit with Rio Tinto's neighbouring Rossing mine. The TSX-, ASX- and Namibian-listed company is also seeking to simplify its shareholding structure with its biggest owner, Kalahari Minerals.

Partnerships seem a good way to way go. You will see relationships going forward for big assets between miners and utilities, Mark said.

He touted China Guangdong Nuclear Power Group, Korea Electric Power Corporation or Russia's Armz as utilities that might be keen on partnering with Rio Tinto and Extract in developing the junior's Husab deposit, which is the fifth largest uranium resource globally.

Countries like China and South Korea have embarked on aggressive nuclear power expansions, and need to secure uranium supplies for the plants they are building.

According to the World Nuclear Association, China is building more than 25 nuclear reactors, and will see a more than a ten-fold increase in nuclear capacity to at least 80 GWe by 2020. The association predicts that by the same time, Chinese uranium demand will be 44-million pounds yearly, while domestic production will only be around five-million pounds.

There is precedence in those utilities engaging in acquisitions and partnerships, Mark said.

Armz in December agreed to pay A$1,16-billion for Mantra Resources, which owns the Mkuju River uranium project in Tanzania. Chinese and Korean utilities have also been investing in international uranium projects.

LONG OVERDUE

London-based Fairfax said earlier this week that a simplification of the Extract/Kalahari shareholding was long overdue.

Kalahari in 2007 swapped its 49% ownership of Husab for shares in Extract. It will own 42% of the company once a recent financing is completed. Rio Tinto's 14,6% stake makes it the second-biggest shareholder.

How Husab will be developed remains unclear, but we would not be surprised if it became an asset joint-ventured by various majors in the industry, along with Extract, Fairfax analysts said in a note.

However, they believed it more likely that Extract would be acquired within the potential joint-venture agreement.

Mark said that in the end it just comes down to price and valuations, and that a potential acquisition of Extract would have to compete with Rio Tinto's internal growth options.

If the company made a bid to acquire Extract, it could find itself in a bidding war with a power utility that has less of a commercial motivation and simply needed to secure uranium supplies.

Earlier this month, Rio Tinto CEO Tom Albanese told investors the companies uranium mines at ERA and Rossing were getting long in the tooth. Rossing has been operating for 34 years.

Ambian Partners said this week that Kalahari and Extract were looking cheaper than some uranium plays in their peer group.

Extract expects to produce 15-million pounds yearly, with first output starting in 2014, when the company predicts global uranium demand will outstrip supply.

The path that Extract chooses is likely to emerge on March 1, when it holds its now twice postponed annual general meeting.

The company's shares were trading at C$9,30 each at midday on Friday, giving it a market capitalisation of C$2-billion. The stock has gained more than 30% since October.

The uranium spot price shed some of its sharp recent gains this week to trade at $68,75/lb. Earlier this month it reached $73/lb the highest level in over two years.

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