Extract Resources 01 Apr 09

A third party enters the fray

The sharemarket action with respect to the company is virtually relentless. Further great exploration news over recent days has been matched over the past week by even more intrigue with respect to the company’s share register. Rio Tinto has boosted its stake, whilst a third party, UK-listed Polo Resources, has joined the action. With the dynamic tension provided by three different listed resources groups, one must wonder where the Extract share price will stop. Whilst we retain an extremely positive view on the company and its outlook even at these lofty levels, we feel it prudent to lock in some profits for our Members.

Fat Prophets initially recommended buying Extract Resources around 98 cents in October 2007 (Fat Mining 97). We reviewed this stock was in February (Fat Mining 162).



From a charting perspective, Extract Resources’ performance over the past three months has been nothing short of spectacular. From around the $1.50 level in January, prices have rallied over 200%, reaching an all time high of $4.75 this week.

Upward trends rarely proceed in a straight line and in the case of EXT, the move since January has become exponential. Although we cannot rule out further gains over the coming weeks, once this rally is complete, we believe there is a high risk of lengthy correction or period of consolidation.



There continues to be action aplenty with respect to the company. Corporate activity with regard to the Namibian uranium sector and specifically Extract Resources has never been higher, as evidenced by the recent developments with respect to the company’s share register.

Just last week resource heavyweight Rio Tinto further boosted its position in the company, declaring that it had purchased approximately a further 4 million shares in Extract between 3 October 2008 and 24 March 2009, taking the company’s stake from 13.8% to 15.6% of Extract’s issued share capital.

And this week a new party has entered the fray, with AIM-listed (UK) company Polo Resources declaring that it has purchased a holding of 12.6 million shares, representing a stake of 5.7% in Extract. The purchases were primarily made since 18 February 2009.

All this share registry action is in addition to UK-listed Kalahari Minerals, which holds an approximate 39% stake in Extract.

So who exactly are Polo Resources? The company is a modest-sized (₤74 million) emerging resource player, which previously said it had an aim to become a major international coal mining and exploration group, with additional interests in uranium. The company currently holds a diversified portfolio of coal and uranium licences in Mongolia.

On its web-site Polo says it has specifically targeted areas of significant known coal resources that are near the necessary infrastructure to export coal into the growing energy markets of adjacent China and Russia and aims to define 1 billion tonnes of high quality coal resources by 2010. However the company’s most recent investment forays have been into the uranium sector, which is where its focus now firmly lies.

A little over a week ago Polo announced that it had signed a subscription agreement with ASX and AIM-listed Berkeley Resources (refer to our specific report in Euro Mining 113 on 23 March), under which Polo would subscribe for 10 million shares in Berkeley at A$$0.50 each, with a further 5 million attaching options over new shares at A$$0.75 each.

As our Euro Mining subscribers would know, Berkeley Resources is currently evaluating a restart of the Salamanca regional uranium mine in Spain. Polo Resources’ chairman is Mr Stephen Dattels, who was previously a founder and director of Uramin Inc, which was sold for US$2.5 billion to Areva in mid-2007.

So Polo Resources clearly know how to identify a quality project when they see one, and just as importantly know how to add value and find the right end-buyer. This brings us to the company’s investment in Extract Resources.



In a statement attaching to their initial shareholding disclosure in Extract, Polo says it has made a strategic decision to refocus its human and financial resources in the uranium sector. It says its previously-announced agreement with Berkeley Resources was the initial step in the company's programme of acquisitions.

The investment in Extract it says is a further major commitment of financial resources in what Polo’s directors believe could be the largest uranium discovery in the world. The group agrees that Rio Tinto's 15.57% stake in Extract represents an endorsement of the company’s prospects and of the Rossing South deposit in particular.

Polo clearly sees an opportunity to maximise its initial investment by ensuring that Extract Resources remains independent of Rio Tinto, effectively meaning that if Rio wants to acquire Extract or the Rossing South project in particular, then it is going to have to pay a hefty price. This is reflected in the comment by Polo “that there are many better alternatives to create value for Extract shareholders than a joint venture with Rio Tinto."

So there is no question in our minds that the competitive tension is likely to continue, or indeed escalate, reflecting the quality of the Rossing South project.

And the deposit’s quality is reflected in the relative market values of Extract and its neighbours in Namibia: Extract currently has a market value of around A$1.0 billion, whilst Bannerman Resources (BMN) has a market value of A$141 million and Canadian-listed Forsys (TSX: FYS) has a market value of A$355 million.

Although Extract currently hosts the smallest of the three resource bases in terms of tonnage at 115.6 million tonnes (compared to 290.1 million tonnes for Forsys and 236.6 million for Bannerman), it is the extraordinary grade that makes the difference. Rossing South hosts a grade of 0.043% compared to 0.0127% for Forsys and 0.0219% for Bannerman.

It is these numbers that differentiate Rossing South from not only its neighbours but also from virtually all other uranium projects worldwide. The supreme grade means operating cost right down at the bottom end of the cost curve and hence outstanding project economics. And this does not take into account the potential for further sizeable increases in resource tonnage in line with further drilling.

So the Extract Resources story remains hugely attractive and we see a lot more upside in the company’s share price. However, given that we have recommended the stock at much lower price levels, we feel obliged to take some profit off the table at current levels.

Accordingly, we recommend that Members Sell Half their Extract Resources shareholding at around $4.60, and that they retain the balance of their holdings for what we feel is sure to be more of an exciting ride.

This action is no way reflects a negative view of the company’s future prospects, but is simply a prudent measure that allows us to lock in some profits for our Members.

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