Extract Resources Ltd 16 Jun 10

Russia has raised the stakes in Namibia

Russia has raised the stakes in Namibia by offering the government to develop the Rōssing South uranium deposit that sits within Extract’s Husab Uranium Project. The Russians are hoping that the Government of Namibia adopts a “use it or lose it stance”. The Russians are trying to take advantage of Namibia’s disappointment in the slow process of Extract finding a partner to develop Rōssing South.

Russia is making a big play to help Namibia develop energy projects. In mid-2009, Gazprombank and the National Petroleum Corporation of Namibia signed a deal to finance the construction of an 800MW gas turbine power station to supply electricity to South Africa. Russia is offering Namibia all sorts of deals and in return it wants to invest US$1 billion to mine uranium.

After talks between Russian Prime Minister Vladimir Putin, President Dmitry Medvedev and Namibia’s President Hifikepunye Pohamba, a 5-year memorandum of co-operation was signed to develop uranium mines in Namibia.

Russia is trying to chisel its way deeper into Namibia’s energy sector. This has raised questions concerning the Namibian Government’s right to appropriate foreign assets or transfer the ownership of assets to favoured parties.

It is of no surprise that Russia’s overtones have weighed on Extract’s share price, as has the price of uranium that is still not showing signs of a sustained recovery.


Turning to the charts, Extract Resources touched a recent low of $6.54 on May 7 and is currently forming a basing formation. However, the downtrend line in place since the September 16, 2009 high at $11.45 is currently suppressing prices. In addition, the 50 day SMA (green line) at $7.20, followed by the 200 day SMA (red line) at $8.08 will no doubt provide firm resistance. On the flipside, should Extract Resources break above both of these momentum indicators and above the March 19 high of $8.35, this will confirm the current basing pattern, which will result in a boost to bullish sentiment.

The weekly chart depicts the depth of the retracement from the September 18, 2009 high of $11.45 high. The decline lower saw a breach of the 40 week SMA (green line), which suggests short term momentum to favour the downside. Moreover, a descending triangle formation is currently forming. Should a break below the $6.54 low occur, a sharp move lower could potentially result. However, should an upward breakout from the downtrend line result, we should see the end of the correction and a continued move higher, in line with the broader uptrend.


For its part, Extract says it has far exceeded renewal requirements for its licences and as part of the normal process, the company will apply for a mining license. Members might recall that the Definitive Feasibility Study is due to be delivered in 4Q10, showing a clear time table to commissioning in 2013.

A big hurdle for Extract is that at the current price of uranium, bank finance will likely be as scarce as hens’ teeth. The price of uranium which is shown in the following figure went up as fast as it came down. It is interesting to note that the arguments for a hike in the uranium price are mainly focused on the demand side of the equation, with not so much effort put into the supply side. All that can be said at the moment is that the market is clearly being adequately supplied.

Russia has said that it will invest US$1 billion in Namibian uranium quickly and efficiently, probably funded from robust oil cash flows. The Namibian Government is rightly disappointed with Rothschild taking longer than expected to find Extract a partner to develop Rōssing South. The drawback in finding a suitable partner is the current spot price of uranium which is too low to justify major investment in new uranium mines.

Other carrots are being dangled in front of Namibia. Russian gas giant Gazprom has reportedly said that it will participate in building a new rail line in Namibia. Other Russian interests are keen to build two hydroelectric power stations. Russia has given Namibia a lot to think about and how Namibia responds remains to be seen.

Extract could do with a partner prepared to take a much longer term view of the uranium market. Such a partner could include Korea Electric Power Corporation. There has also been talk about a deal with Paladin Energy to create a new US$4 billion-plus independent uranium company.

A key problem with Extract is the company’s shareholding structure with Rio Tinto owning 15% of the company and Kalahari Minerals 41%. It is believed that Kalahari Minerals vetoed a deal with Paladin because the price was too low.

In FAT-MIN-217 we said that the appointment of Mr Jonathan Leslie to the position of CEO was a coup for the company to refocus investor attention on the company.

As usual, recent exploration results from Rōssing South have been excellent. Good results were obtained from Zone 1 and 2, including 73 metres grading 2,243 ppm U3O8. The company has 19 drill rigs operating at Rōssing South with the focus on resource drilling. Chemical assays from multiple drill holes have confirmed high grade mineralisation on the western limb of the Rōssing South antiform.

During 1Q10 the company spent A$11.4 million on exploration and evaluation bringing the total for the financial year to-date to A$27.4 million. At the end of 1Q10 the company had cash reserves of A$86.4 million and is well funded in the short to medium term.

The current resource of 249 million tonnes grading 487 ppm U3O8 for 267 million pounds of U3O8 is set to be increased from the programs of infill and resource extensional drilling that has being going on since July 2009. There is no doubting that Rōssing South is an exceptional uranium deposit but unfortunately there is one thing that markets do not like and that is uncertainty.

At this point in time the Russians are causing a lot of uncertainty as they attempt to persuade Namibia to oust Extract from Rōssing South. In any event, the Namibian government-owned Epangelo Mining has indicated to Kalahari Minerals that it wants a stake in Rōssing South before mining begins.

In FAT-MIN-217 we pointed out that Extract was not comfortable with its current shareholder structure. We still feel that it makes sense for Extract and Kalahari to merge. The larger the market capitalisation the easier it will be to fund the project.

But with bank finance unlikely to be available the situation could be solved by asking RIO to swap its equity stake for a direct interest in the project. Direct involvement with RIO assuming the role of the major partner alleviates the problem of financing and there can be no better person to try and make this happen than Jonathan Leslie who was a former employee of RIO.

Whatever course of action Jonathan Leslie chooses, Russia entering the fray to try and grab Rōssing South makes finding a suitable partner more urgent.

This is an unsettling matter and with the uranium price yet to recover we believe that it is in the interest of Members to SELL HALF their shares that they still own in Extract Resources.

We will revise our recommendation when it is clear how Rōssing South is going to be financed, and after the results of the Definitive Feasibility Study are released. Hopefully by then the spot price of uranium might be showing some sign of making a modest recovery.


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