The following are two resent Brokers Notes from Ambriam, KAH's broker.
Regards
Steve
Extract Half Yearly Numbers
22 February 2011
Price: 252p Target Price: Under Review Recommendation: Under Review Market Cap: 617mGBP
Extract - Half Yearly Numbers
Extract Resources, in which Kalahari Minerals owns 42.79%, has announced its half-year results:
Exploration
Drilling over the year focused on a number of areas:
1. Infill resource definition drilling on Zones 1 and 2 aimed at increasing confidence levels by defining more Indicated and Measured Resources that are available for conversion to mining reserves.
2. Extensional resource definition drilling on Zones 1 and 2 aimed at increasing the global resource base.
3. Exploration drilling south of Zone 3, predominantly at the Salem, Central Dome and Pizzaro Prospects.
Finance
Aggressive resource delineation and a decision to advance the Zones 1 and 2 of Rossing South towards incorporation into a feasibility study have seen development expenditures and corporate overheads double since last year (net losses were A$33.5m as at 31 December). The remaining cash on the balance sheet was A$35.3m. This figure was supplemented by an additional A$60.9m (post the completion of the financial statements) via an equity raise subscribed to by Kalahari.
The company feels that these are sufficient funds to complete the DFS, but acknowledges that funding of the further project build will require additional dilution. To that end, Extract is currently considering financing options; presumably Rio Tinto fits in here, as well as the potential for an additional off-take party?
Comment
Today's news gives a succinct summary of the rapid development of the Rossing South Deposit. The project is now developing on multiple fronts, with processing infrastructural reviews becoming as important as the delineation of the deposits themselves. We were down on site last month and came away impressed by the calibre of the operational management now on site, juggling the multitude of differing site work for the DFS completion later this year.
Although the markets and Kalahari's price is off today, we think that yesterday's news that the company "is currently holding discussions with Rio Tinto around a potential combination of the Husab Uranium Project with the neighbouring Rossing Uranium Mine, with a view to capturing the significant potential synergies that could be generated from a joint development of the two projects.", warrants further review.
The reason we felt that this last comment was material (given that we understand Extract has been in near continual on/off discussions with Rio Tinto about Rossing South's development since it first bought in), is that its timing correlates with Rio Tinto's commentary from its full-year review last week. During the question round post Rio Tinto's results, Tom Albanese was asked about Rio's strategy for uranium going forward given that both ERA and Rossing are 'getting long in the tooth'.
Answers from Tom Albanese included:
Yes, both assets are mature and we need to do something about that if we are keen to maintain a position in the uranium market going forwards. And we are keen!
It's fair to say that both assets suffered under-funding during the 1990s when the uranium price led the company to question the asset's future.
So, to that end, a little more juice is yet to be squeezed from ERA and Rossing.
But, yes, with regards to our strategy going forwards, "watch this space"!
Recommendation
We are reviewing our recommendation, but would highlight that Kalahari and Extract are now looking cheaper than some uranium plays in their peer group. A point to note given the recent rally in the uranium price.
Company Main Deposit Secondary deposit Mlbs ppm EV/insitu Mantra Mkuju 84.3 467 12.42 Extract Rossing South Ida Dome 420 422 5.53 Deep YellowTumas / OmaholaMt Isa 90.8 260 3.97 ForsysValencia-86.7 146 2.81 BannermanEtango-161.8 222 1.06 A-Cap158 154 0.85 MarenicaMarencia-85 170 0.50
Price drivers from here:
News on Rio development partnership? Next resource update is planned for 2Q11 DFS - year-end 2011
Rossing South - Yet Another Mineralised Zone Discovered
24 February 2011
Yesterday, Extract Resources (in which Kalahari Minerals owns 42.79%) announced some blinding drill results in areas distinct - but on-trend - to the previously discovered Zones 1-5 at Rossing South.
Whilst almost every drill rig - there were 19 (!) on site when we visited a month ago - has been employed in infill work in preparation for the upcoming DFS (end-March 2011), one rig was apportioned to the sampling of prospective targets that the airborne geo-phys. had identified. The geophys. had suggested that the mineralised corridor that hosts Zones 1-5 continued to the south of these known areas.
The simply stunning assay results announced off the back on this recent testing support the hypothesis outlined by the geophys - in some style!
Chemical assaying of the newly identified targets yielded interceptions of:
20m @ 846ppm; 16m @ 246ppm and; 8m @ 493ppm from different holes at the Middle Dome Prospect 12m @ 191ppm; 16m @ 166ppm and 8m @ 638ppm from different holes at the Pizzaro Prospect 36m @ 178ppm from a hole at the Salem Prospect
Comment
Kalahari's share price has not been immune to the 'blood letting' in the market for all miners this week; it has slid having initially bounced up on the highly material announcement at the beginning of the week (that Rio Tinto was discussing the possibility of incorporating Rossing South into an expanded view of its own production base in the Husab Area).
This latest news, in conjunction with the Rio Tinto announcement, should have acted as a 'one-two' incendiary punch for its valuation, were it not for the unfortunate timing of the current bloodbath in the mining market. We expect that when the market gets a grip of itself again, investors will take stock of the materiality of these announcements and we therefore expect the stock to bounce aggressively when it does.
With Rio Tinto having made a clear indication (earlier this week) that it views Rossing South as a Tier One Asset, we feel it's only a matter of time before the equity market value also reflects this (note that on this basis, it should have a premium valuation to its peer group, yet other players are still valued higher on an EV/insitu basis).
Assets of this quality come around once in a blue moon and it's worth comparing the grades and lengths of the recent intercepts (on yet more targets!) against the head grades that Rio Tinto is currently mining... We are talking hits of +800ppm U3O8 over compelling distances vs. Rio's 300-350ppm at the Rossing Mine.
Recommendation
We are currently reviewing our price target (post a sight visit last month and the anticipation of a formal note in due course), but we retain our BUY recommendation, and would highlight that Kalahari and Extract are now looking cheaper than some uranium plays in their peer group.
We find this extraordinary given the size and quality of the deposit at Rossing South. Rio Tinto's continuing talks should demonstrate to the market that Rossing South is now clearly being viewed as a Tier One Asset by the players that count in the uranium market.
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