Extract Resources 17 Oct 07

Another high-quality uranium exposure

We recently undertook a site visit to Extract Resources Husab Project in Namibia. Members will know that we have been extremely positive about the country as a uranium investment destination for some time, with both Paladin Resources and Bannerman Resources as long-time favourites in our portfolio. Well we can now add Extract Resources to that list.

"Extract Resources has all of the hallmarks of an outstanding uranium opportunity."

This is our first coverage of Extract Resources.

After several years of drifting sideways below 30 cents, Extract moved sharply higher in early 2006. By April that year, the stock had reached a major high of $1.55, representing a gain of more than 1000% in just 12-months.

Any stock would struggle to sustain such rapid gains. Extract is no exception. It is therefore not surprising that prices have been in a phase of volatile consolidation for the past 18-months.

More recently, a six-month decline in prices came to an end as prices lifted away from the August low of 46 cents. Following a brief period of consolidation around the 60 cent level prices have moved sharply higher, reaching 98 cents on Wednesday. This represents a gain of more than 88% since the October low of 52 cents.

Although we cannot rule out a brief period for consolidation in the near-term, the increase in daily trading volumes accompanying the latest gains reflect growing investor support for the stock. Accordingly, we believe that any near-term pause in the rally will be short-lived with further gains anticipated in the months ahead.

Members would be aware that we have been very careful with our uranium recommendations in the Fat Prophets Mining & Resources portfolio. Despite there being dozens upon dozens of uranium hopefuls on the ASX, we have so far recommended only three.

We have not been interested in 'penny dreadful' uranium hopefuls destined to run out of cash before anything meaningful is achieved. Nor are we interested in companies exploring in parts of the world where sovereign risk issues are high.

We maintain our position that investment in high-quality uranium situations will provide much higher returns for Members than the more speculative alternatives. Which brings us to Extract Resources.

Like two of our uranium favourites, it has its uranium activities focused on Namibia. But why is Namibia so attractive?

Well Rio Tinto has voted with its feet, recently committing to a major expansion of its Rossing uranium mine after earlier contemplating its closure. The current open pit (the biggest in the world for uranium at present) is 300 metres deep, with mineralisation continuing below the pit floor. Rio intends to expand the pit both in terms of strike extent and width and has numerous near-mine targets to follow-up.

This is important, as Rio recently elected to put its large Kintyre uranium deposit in Western Australia up for sale. Rio's actions speak volumes about where it sees its uranium business growing over the next decade and more. This is why we like Namibia as a uranium destination so much.

But there is also the lure of growing corporate appeal. French uranium heavyweight, Areva, recently announced a US$2.5 billion bid by for Uramin. Uramin owns the nearby Trekkopje deposit, to the northwest of Rossing.

According to Uramin's website, SRK Consulting has estimated a Measured and Indicated Mineral Resource of 18.4 million pounds of U3O8 at a grade of 0.014% and an Inferred Mineral Resource of 139.2 million pounds U3O8 at a grade of 0.013%), both estimated using an 80 ppm cut-off grade.

When it achieves production, Trekkopje is expected to become one of the world's top ten largest uranium mines, and will also join the ranks as one of the top five low-cost, open pit uranium operations. So the area can be classified as prime uranium acreage in development terms.

The other vitally important aspect of our site visit was Namibia itself. The country is safe from a personal security point of view and secure from a sovereign risk and tenure perspective. In fact, it ranks above Australia in terms of the most secure international destinations for investment.

We had the opportunity recently to visit Extract Resources' Husab Project in Namibia. We were accompanied on the visit by the company's Managing Director, Peter McIntyre, and Business & Investor Relations Manager, Richard Henning. Importantly, we also access to Extract's technical team that were on site and access to the company's exploration camp.

Husab lies 40km east of the coastal city of Swakopmund. The project is strategically situated within 50km of six notable uranium deposits. Of these, two are already in production, comprising Rossing (which supplies 8% of the world's uranium) and Langer Heinrich.

The map below illustrates the three prospects that comprise the Husab Project. We did not have time to visit all of these on our visit due to time constraints, and focused our attention primarily on the Ida Dome. In all, these prospects encompass an area of around 630 sq km, with 70% of the targets effectively concealed beneath surface cover.

The scale of these targets is enormous and is difficult to convey. Perhaps the photo below showing the Garnet Valley within the Ida Project gives the best representation of scale.

The Ida Dome is a synformal structure with approximately 10,000 metres of uranium mineralisation defined by ground radiometrics and follow-up ground spectrometer surveys. The area contains seven different prospects that are predominantly at the resource definition stage and include Ida Central, Swakop West, Garnet Valley, Hook, New Camp, Hollands Dome and Ida East.

Hildenhof is the eastern extension of the Goanikontes Dome and has an indication of anomalous uranium over 2,000 metres of strike length. There is the potential for additional extensions under the surface cover and surface mapping and ground magnetics have identified drill targets for the current programme.

Rossing South lies 5 km south of the Rossing Mine and shares the same stratigraphy, with potential extensions of 15km into EPL 3138. Extract is yet to fully explore the potential of Rossing South, although early investigation of previous drill holes and recent drilling has intersected alaskite with anomalous levels of uranium mineralisation.

The area lies beneath about 30-40 metres of cover. Extract is drilling here to test for the existence of uranium-bearing alaskites beneath the surface cover. We genuinely believe that there is the potential for a world-class uranium deposit to be hosted at Rossing South.

The 2006 drilling programme at Husab was extremely successful, with economic grade uranium mineralisation identified in virtually all of the holes assayed. Extract now has a very large drilling programme underway at the Ida Dome, predominantly targeting the Ida Central and Ida East prospects.

There are currently six rigs in operation to complete a planned 60,000 metres of drilling over the next 12 months. We keenly await the interim results from this programme.

There are three key milestones coming up for Extract Resources between now and the end of the year.

The first, which has generated tremendous market excitement over the past week, is the imminent listing of the company's shares on the Toronto Stock Exchange. This will occur on 22 October and is sensible considering the company placed a large portion of the $15 million capital raising it undertook in March this year with Canadian investors. It also gives the company greater flexibility with regard to future capital raisings. We would anticipate that Extract will undergo a steady re-rating once its shares list in Canada.

The second key milestone will be the release of the results of a Scoping Study commenced in June, which will identify the broad parameters for a potential mining operation at Husab. Tied in with this is the compilation of an initial resource estimate before the end of 2007, with a figure in the vicinity of 30-40 million pounds U3O8 more than likely in our view.

What can Extract Resources aspire to? Well its Namibian neighbours provide excellent role models.

Apart from Rio Tinto, Bannerman Resources presents an excellent and more relevant case study. In a general sense, Bannerman is probably 12-18 months ahead of Extract in terms of its exploration and development programmes.

Bannerman recently released the results of its own Scoping Study, which show that its project has the potential to be a mine similar to the nearby Rio Tinto-operated Rossing operation.

Bannerman is useful for a comparison basis as it has so far reported an interim Inferred Resource at its Goanikontes Project of 27 million pounds of U3O8. Although it will get progressively much bigger, this is useful as Extract is aiming for an initial interim resource of around 30 million pounds of U3O8.

In terms of production rates, the study looked at uranium production of around 4,000 tonnes (8.9 million pounds annually). Bannerman proposes contract mining via a conventional open-pit, with a low strip ratio of between 1.5:1 and 2:1. The use of radiometric sorting could lower operating costs to around US$25 a pound. Full production could commence by mid-2011.

To give Members an idea of the project's potential returns, assuming production of 8.9 million pounds a year and using a conservative operating cash margin of US$15 based on operating costs of US$30 a pound and a received uranium price of US$45 a pound, the project would generate operating cashflow of around A$160 million a year, before interest costs etc.

If we assume capital costs of around US$400 million, this would mean a pay-back period of just three years!

The planned listing by Extract on the Toronto Stock Exchange later this month will enable the company access to the appropriate equity and debt funding required to make the development of Husab a reality. Ongoing drilling work is also sure to provide enormous excitement for Members, with an initial resource estimate on the way. It seems as though this is just the beginning!

Accordingly, we recommend Extract Resources as a Buy to all Members around 98 cents.


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