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« China and India: Still Hungry for Coal | Main | Quinn Kiley: MLPs Going Institutional »
Monday
Sep062010

Extract Resources is trading at a discount and has major upside potential.

EXT Chart 07 sep 2010.JPG





The following article was very kindly sent to us from one of our readers in Namibia, so its thanks to Grant for giving us his views on Extract Resources. His article is posted below in its entirety and has not been edited in any way.






    Extract Resources is trading at a discount and has major upside potential.




As the world looks to Uranium as the next phase in the move towards a cleaner energy source, investors need to be seeking out the best mining shares internationally.

Demand for Uranium is set to grow at an ever increasing pace in the next 20 years as countries such as China, India, Korea and Russia beef up the number of nuclear reactors to ensure power supply in their countries, which is cleaner than coal-fired power stations.

Based on current estimates there will be sufficient supply to satisfy world demand if all start up mines come on line and there are no major supply problems. If any major supplier such a Kazakhstan, Canada or Australia experiences political or production setbacks this would have a significant effect on the supply and consequently the price of Uranium.

Any spike in the Uranium price would have a marked effect on the profitability of the remaining producing mines and consequently the price of their shares.

One of the most significant uranium deposit discoveries in the world in the last 10 years has been discovered in Namibia in the form of Extract Resources Limited, which is listed primarily on the Australian Stock Exchange and dual listing on TSX & NSX. The primary focus of Extract is the company’s principle Uranium asset in Namibia which is 100% owned Husab Uranium project.

The share rose from below AUD1 in 2008 to AUD11.4 in late 2009 based on speculation. The share has over a period of the last year retracted some of the gains and has this week traded at the year’s low of AUD6. This should represent an opportunity for investors as the basic fundamentals have at least remained the same with some marked improvements in some factors.

The share is bathed in positive sentiment and facts surrounding the discovery of the resource are all positive.

A significant portion of the resource base has moved from inferred to indicated thus creating a much greater certainty and confidence in the existence of the resource base. Indicated resources has grown 10 fold since the last resource announcement. This moves the discovery into the top 6 global uranium deposits by contained metal. (See Extract website for details)

A better defined resource statement has ensured and underpins the finalisation of the definitive feasibility study which is planned for release in the last quarter of 2010. This will move Extract from a successful explorer to a major uranium producer. Unconfirmed reports indicate that production costs could be well USD30/pound based on current testing at a pilot level. With current long term supply contracts at between USD75 and USD80 per pound this implies significant profitability for the mine and significant upside for the share. With production targets of 15 million pounds per annum at full production, at a profitability of >USD50/pound the sums are compelling.

Large international investors hold a major portion of the share capital thus ensuring sufficient project capital and working capital ensuring viability of the mine from a financial perspective. One of the shareholders recently stated that raising of finance to bring the mine to production will not represent a challenge.

A recent change in shareholding to the extent of 10.3% has strategically moved to a Japanese based Company called ITOCHU Corporation & a wholly owned subsidiary Nippon Uranium. It is speculated that this is the forerunner to the finalisation of a long term off take agreement. This move will ensure sales for the future output of the mine thus removing a significant uncertainty in the DFS , thus ensuring the viability of the mine. (We have been unable to obtain comment from Extract on this detail and remains speculation)

The mine (Future mine expected to start up in 2012) is situated in Namibia which is a well known investor friendly country on the southern tip of Africa which boasts :

Namibia already world number 4 in Uranium production and rising.

Major mining companies such as Rio Tinto, Paladin Energy, Areva and Forsys Metals already well entrenched in Namibian Uranium Mining sector

Political stability since independence in 1990 with stable economic policies

World class telecommunication sector with annual investment in infrastructure, thus improving annually on reliability and speed.

Well developed transport, roads and rail network.

Well organised and developed port for importation of inputs and export of final product, within 30km of the mine.

Significant development plans agreed to ensure supply of water to the uranium sector through desalination plant. (Areva has already commissioned a desalination plant in Namibia with great success)

Sufficient power to ensure reliability in production.

Mining Ministry who are in touch with the investment community and have shown willingness to create a catalyst to growth the uranium sector in Namibia.

Friendly tax environment

Repatriation of profits , dividends and capital is guaranteed by the Government

It is clear from this summary that Extract have discovered a sufficiently large resource which will ensure the development a sizeable mine by 2012/13. Indicative values placed on the mine based on the indicated and inferred reserves of 367.3 Mlb U3O8 are conservatively valuing the mine at AUD2.65n. Based on current market capitalisation of AUD1.56bn it is apparent that the share is undervalued by a fair margin and could trade as high as AUD10.4/ share once the mining licence allocation and DFS are complete.

Extract Logo

So there you have it.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

On Friday, 27th August 2010, we closed another successful trade banking a profit of 79.46% on Call Options on Silver Wheaton. We cannot see such opportunities in the uranium sector just yet but no doubt they will present themselves in time. All the best, Bob.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09. On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days, with more positions opened yesterday. Drop by and take a look.


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Reader Comments (3)

Emerging Metals was the big seller . An alternative way of holding this stock is to buy Kalahari minerals on the AIM market in the UK which holds an even bigger slice at around 40%.
Dont hold your hats about a price rise. Tewnty years ahead is far too long for most investors to wait and the news that Cameco have suspended all uranium sales until the end of the year because there is such a glut does nothing for this matket.

September 7, 2010 | Unregistered Commenteruranium bug

I enjoyed your views on Namibia and its uranium potential.
Any thoughts on doing an analysis on Paladin?

September 7, 2010 | Unregistered CommenterRocky Douché

To Uranium Bug,

Cameco suspended ALL uranium sales until end of the year? I find this very news worthy and have not heard of it. Could you supply the source of this news, please?

Thanks
R.

September 11, 2010 | Unregistered CommenterRobert

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