some thoughts on the future...

Perhaps thinking a little ahead of ourselves, but anyway... consider the following...

I think if Rio are considering an offer, they have a difficulty working out the right price. Obviously, they don't want to offer too much. OTOH, if the offer is too low it may precipitate a counter-offer from elsewhere, leading to a bidding war. Rio would like to avoid that if they could.

From what I have read elsewhere, companies such as Rio are very conservative on future commodity prices when assessing valuations. They are in a different position to that of an end user, for whom security of supply is as important, if not more so. Thus we might find that an end user - such as the Chinese - prepared to bid higher.

However, Rio has an ace up their sleeve - the capital investment already extant at their Rossing plant. If some of this can be used to mine Extract's findings, then instead of a new mine requiring $1,000 m in capex, Rio would only need to spend on the capital required in addition to the existing plant at Rossing. I have no idea how much this might save them. To pick out a number, if use of the Rossing plant meant that capex was $500 m (50%), then that represents a saving of about $2 per share. In other words, Rio can afford to bid an extra $2 more than another player because their capex costs after acquisition of EXT will be $2 less.

I think present valuations of EXT - using discounted cash flow, net present values and the like - come up with a range of $10 to maybe as high as $12 per share. A lot depends upon the DFS. If that comes out with favourable figures - especially an increase in annual production - that will significantly improve the share price. However, in the absence of the DFS a figure of about $10 to $12 seems to be ball park. This is probably the minimum bid.

Mantra Resourecs was recently taken over. Mantra is remarkably similar to EXT in many ways - the grade is about the same, the DFS was about to be released. It was quite large, though not nearly as large as EXT. If the same valuation was used for EXT, then the bid offer would be about $15. This is probably close to the maximum bid... in the absence of any counter-offer.

I think that if any counter-offer came about, Rio could afford to go higher because they will be able to use the Rossing plant. And here is another thought... what if the counter-offer was too high for Rio... what would happen then? Would Rio really walk away? Rio currently has two uranium mines that are just about exhausted. If they want to stay in the uranium market, they would have to buy out smaller explorers - they're not doing any uranium exploration themselves. Who would they get if EXT falls through? Where else is a uranium find that has a twenty+ year life of mine with good economics? And one that can start producing in 2014?

In my view, I don't think there is one like that. Anything else is either too expensive to get out of the ground, or isn't nearly enough ready to produce, or is too small. Rio would have to spend some years finding perhaps three or more developments that together might be equivalent to Extract - I rather think that is optimistic; Extract is huge. So if Rio is outbid on EXT then they face several years of acquiring and developing several smaller targets, with production starting later than Extract, who would now be their competitor. They would also suffer from inefficiencies caused by having several smaller operations instead of one large one.

Rio has stated they like uranium, and would like to invest in uranium - see the Q & A after the latest results for an example. Rio has invested a lot into Extract, even if they have been rather passive. So I think Rio would be prepared to bid higher for EXT if pushed by an outside offer. While it may seem that Rio has it all their way when bidding for EXT, I do not think can afford to lose either. This is not saying that Rio would bid ridiculously high - I am only pointing out that Rio has a lot at stake here, and they won't let go of EXT without a fight.

It all depends on whether there is another party interested in acquiring EXT. After the first move, this may galvanise others who have expressed interest to either step up to the table with their own offer, or walk away.

I guess we all have to be patient to see what pans out...