Stock Rotation Points To Extract Resources Coming Into Favour
Recommendation: Buy up to $0.11 Target: $0.17 Stop Loss: $0.09
The uranium sector has been a hot spot for investors over the past three months and we have benefited well from the huge re-rating Alliance Resources (AGS) has experienced. But as is the case when sectors enjoy a huge appreciation, investors rotate through the sector buying the large-caps first and then eventually taking profits and rotating through to the smaller cap stocks that have been lagging. This rotation can be quite easy to identify and at times no explanation for a lag to occur with specific stocks. It does however create some great opportunities for investors.
One of the stocks in the uranium space that has been lagging the broader sector is Extract Resources (EXT) but is now beginning to show signs of performing in line with its peers. EXT held its AGM last week, and we were particularly impressed with the opportunities present for the company.
EXT has two main activities; uranium in Namibia and the Burnakura Gold Project in Western Australia. The gold project requires more capital and as a result the company is considering the divestment of the asset in order to concentrate on its very exciting uranium activities in Namibia.
The chart below (taken from the AGM presentation) shows the close proximity of EXT’s tenements (Husab Project) to that of other key uranium players in the region including Paladin, Rio Tinto and smaller peers like Bannerman Resources and Deep Yellow, amongst other offshore players. EXT’s tenement (EPL3138) is the very centre of this region.
The strategic objective of the company is to target 40 million tonnes @ 0.4kg/tonne which compares with Paladin’s resource of approximately 72.3 million tonnes @ 0.7kg/tonne at the Langer Heinrich Project. Considering the region within which the tenement is located this is a realistic target.
The progress of the Husab Project over the past nine months is shown below and follows EXT’s path towards its first resource statement – after completing another 6 drill targets.
When looking at the performance of EXT, we can see that the share price has been consolidating now for the majority of the year after it reached a peak of $0.155 in April. While most of the other uranium players peaked at the same time earlier in the year, many have now reached new multi-year or record highs, surpassing their April peaks. EXT is only just beginning to break above the $0.10 level and is in the very infant stages of embarking on a healthy upward trend. Trending signals have already surfaced as shown by the green ADX line rising in the chart below, suggesting that momentum is rapidly increasing and a breakout is near. Once the $0.10/11 resistance is surpassed we would expect EXT to retest its $0.155 April high very quickly.
The best example of what the potential lies in EXT, can be seen in the chart of Deep Yellow (DYL) below, which holds the tenement next door to EXT in Namibia as highlighted earlier. DYL peaked in early April and once it completed its base formation/consolidation a sharp re-rating occurred. This is not too different to the formation currently underway with EXT – only there is an approximate 1-month lag.
We are therefore excited in the upside potential in EXT and considering the stock is only just beginning to break out from its base formation the risk of a sharp reversal are lower than with the other uranium plays that have experienced some strong price appreciations. In addition, we are able to redeploy some of the profits from our Alliance Resources trade (we took half profits at $1.50) into EXT.
We are adding EXT to the Mid-Cap Portfolio with a weighting of 10%.
4/12/2006 12:13:12 PM - Produced by Gregory Tolpigin Pg 1
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