Interesting Report from Far East Capital (6 March...

Interesting Report from Far East Capital (6 March 2006).

http://www.summitresources.com.au/

(Look for Reports).

Note that their latest calculations are based on a Uranium price=US$40. I mentioned that by the time mining would proceed, the U price would be closer to US$80 IMHO. That would double the E/S and halve the given P/E.

Extract:

"In June 2005, we released a research note listing the reasons why SMM at 32.5¢ was our preferred uranium stock, pointing to a number of fundamental features that made the Company stand out head and shoulders above other Australian uranium companies. This list is repeated in Appendix A, attached to this note.

Since that report there have been a number of significant achievements which seem to have gone unnoticed in the market place and these deserve some focus:
1. Exploration Expanding Resource Base: The official resource a year ago was 35,000 t U3O8 in three orebodies (SMM’s share), enough for a mine life of 10-20 years. Since then an aggressive $6m drilling programme on an additional 8 deposits has completed approximately 12,000m in 60 holes. Assays have been released for some of these. Although it is to early to guarantee results, reasonable speculation would suggest that there is the potential to double the resources at the completion of the program.

2. Open Pit Life Could Be Much Greater: The earlier estimates assumed an open pit life of three years, but the proving of the additional orebodies could increase the open pit life to a minimum of 10 years, and maybe even 15, at higher mining rates.

3. Throughput Could Scale Up to 4 mtpa: While SMM is still considering a start-up rate of 2.5 mtpa, it is considering boosting this to 4 mtpa after three years.

4. Earnings Estimate to Be Higher on Uranium Prices: Our previous number used a uranium price of US$28/lb. Long term contract prices have recently been as high as US$40/lb, 40% higher than when we last released a note. We previously estimated $62m p.a. net profit to SMM. The latest numbers estimate a net profit of $95m p.a. to SMM, placing the shares on a prospective PE of less than 2x (assuming 100% debt finance). An expansion to 4 mtpa in year four could see net profits to SMM of $155m p.a. (82¢ ps).

5. Numbers Include Doubling of Capex, and Treatment Costs up by 50%: The estimates have assumed an increase of capital expenditure from $140m to $250m (up 80%), and treatment costs have increased from $10 pt to $15 pt".
++++++++++++++++++++++++++++

COMMENT: As mentioned, based on a throughput of 2.5 mill tonnes, and US$80 U-price, the given P/E becomes about half of the given 2, ie :1. (based on the March 6 report price of 75 cents)

+ + + At a P/E of 15 and 20, the SMM share price becomes A$ 11.25 and A$15. Current share price: A$1.04 + + +

If approval of mining is given, we are likely to see a takeover proposal quite quickly IMHO.

Refer to Item 5: "An expansion to 4 mtpa in year four could see net profits to SMM of $155m p.a. (82¢ ps)".
Comment: If Uranium were to be US$80 instead of US$40, this report is based on, then the profit could be $2*$155 mill or A$1.64/ per share. You can then calcuilate the P/E=15 or 20.

The latter are astronomical numbers. The Report is based on 100% bank finance. In practice there will be some share dilution, I think.

Nevertheless, even if the numbers were reduced by a third, they would be still impressive.

Subject to audit,

Gerry
Readers, please do your own research and you decide if and when to buy, hold or sell any stocks or metals/commodities.