Extract ‘Inundated’ by Potential Uranium Partners (Update1)
By James Paton
Oct. 16 (Bloomberg) — Extract Resources Ltd., a uranium explorer whose shares have surged almost eightfold in Australia this year, said it has been “inundated with requests” from companies proposing to join or take over its Namibian project.
“We’re looking at options to see whether one of the big players would want to come in on a strategic partnership level,” Chairman Steve Galloway said in an Oct. 13 telephone interview from Namibia. Extract is being advised by Rothschild, the largest family owned bank, and may ask shareholders in November to consider proposals to bring its Rossing South mine to production, he said. He didn’t name any potential partners.
Extract, 15 percent owned by Rio Tinto Group, has gained more this year than any other stock in Australia’s S&P/ASX 200 Energy Index as investors bet countries will turn increasingly to nuclear power, using fuel derived from uranium, in response to climate change. Drilling at Rossing South suggests it could become one of the world’s largest uranium mines, Galloway said.
Investors “are jostling for a piece of the action,” said Gavin Wendt, an independent resources analyst who has followed Extract for three years and met with executives from the explorer in the southwest African country about two months ago. A joint venture, possibly with Rio, may be the most likely scenario, he said, adding that the stock’s “remarkable ride” has driven up the potential acquisition cost.
Extract Resources has told suitors “we’re not for sale,” Galloway said. Rio Tinto doesn’t comment “on market rumors or speculation,” Tony Shaffer, a spokesman for the company, said by phone from Melbourne yesterday.
The stock gained 0.6 percent to A$10.06 at 12:50 p.m. in Sydney, valuing the company at almost A$2.4 billion ($2.2 billion), compared with about A$311 million at the end of 2008.
Extract said Oct. 9 it found new high-grade mineralization at Rossing South and estimated the total uranium resource could reach 500 million pounds. The deposit is about 7 kilometers (4.4 miles) from Rio Tinto’s Rossing mine and approximately 30 kilometers from Paladin Energy Ltd.’s Langer Heinrich project.
“We keep finding better and better resources,” said Galloway, a former mineral economist with the Namibian government. “We haven’t seen bad news yet.”
Gavin van der Wath, an analyst BBY Ltd. in Sydney who has a “hold” rating on Extract, said A$10 is a fair value for the stock.
Economies of Scale
“A larger resource would enable them to increase their yearly production, which would have economies of scale, and would in turn increase the valuation,” Van der Wath said by telephone today. “But at this point in time, no.”
Extract today named Norman Green head of the unit that will develop Rossing South, a statement to the Australian stock exchange shows. Extract expects to replace Managing Director Peter McIntyre, who stepped down in September, by early next year, Galloway said.
The Perth-based explorer may sell more than $700 million in shares and debt in 2011 to bring the mine into production, Galloway said. That’s in addition to A$91 million raised this year by selling equity.
London-based Kalahari Minerals Plc, which owns about 41 percent of Extract, said Oct. 9 the project potentially could rival the world’s biggest known uranium deposit at BHP Billiton Ltd.’s Olympic Dam.
While the target of 500 million pounds is “achievable” and would make the mine one of the world’s biggest, the idea of the resource rivaling Olympic Dam isn’t realistic, BBY’s Van der Wath said. He estimates the size of the Olympic Dam deposit at more than 16 billion pounds.
Rossing South may be able to produce more than 15 million pounds of uranium oxide a year, “a huge amount,” Galloway said.
Galloway said a possible risk is that “a lot of other uranium comes on stream,” curbing gains in the price of the nuclear fuel. “But I think, over the long run, uranium will be a very profitable business.”
The uranium market will have a surplus next year for the first time in at least three years as producers increase output faster than demand rises, the London-based World Nuclear Association said Sept. 10.
Uranium prices, which peaked at $136 a pound in 2007, rose 5.7 percent in a week to $46 a pound on Oct. 12, Ux Consulting Co. said Oct. 13.
Extract expects favorable supply and demand conditions when Rossing South is projected to begin production in 2013, Galloway said. “By 2013, 2014 there will be a space for new uranium on the market.”
Some 440 commercial nuclear power reactors operate in 30 countries, with a further 30 under construction and another 90 planned, the World Nuclear Association said on its Web site.
Galloway said Extract “is at a crossroads” as it explores partnership options and considers whether to expand beyond a single project in a single country. For now “we’re trying to get on with developing the resource as fast as we can,” he said.
To contact the reporter on this story: James Paton in Sydney [email protected]