Extract Resources In Play?

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            [1] => ((RIO))
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    [1] => Array
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            [0] => EXT
            [1] => RIO
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This story features EXCITE TECHNOLOGY SERVICES LIMITED, and other companies.
For more info SHARE ANALYSIS: EXT

– Macquarie and Merrills have both upgraded Extract to Buy
– CGNPC's bid for Kalahari Resources provides a positive read-through
– Rio is also a contender, possibly putting EXT "in play "

By Greg Peel

All uranium stocks have been hit hard since the Fukushima disaster raised concerns that the nuclear intentions of various countries might be rethought as a result. Such concerns have also flowed through to lower uranium spot prices.

But while Japan may clearly need to reassess its nuclear plans, and at the very least the location of its reactors, and some European centres such as Germany may now look to furthering developments in green energy instead, the world's swing factor in the nuclear energy race is China. And one is hard pressed to find anyone who suggests China will alter its nuclear ambitions. Indeed, Beijing has suggested only that safety checks and a more stringent review of new model reactors will follow.

Before the tsunami hit, the China Guangdong Nuclear Power Company had put in a bid for British-listed Kalahari Resources at 290p per share. Kalahari owns 42.8% of Extract Resources ((EXT)) to provide an interest in Extract's world class Husab uranium deposit in Namibia. Post tsunami, CGNPC and Kalahari had agreed to a reduced bid of 270p, representing a 7% discount.

Macquarie notes that the UK takeover panel is not allowing an adjustment to the bid but Kalahari is appealing. The important point, however, is that the new CGNPC bid still implies a read-through value for Extract shares of $9.95 on BA-Merrill Lynch's calculations and a range of $9.60 to $10.35 as far as Macquarie is concerned. EXT shares are currently trading at $7.72 having dropped around 20% post-Fukushima.

Macquarie has taken the opportunity to reassess its pre-production operating expenditure forecast for Husab and a blow-out leads to a 56% reduction in discounted cashflow valuation. Macquarie has thus reduced its target price for EXT but that reduction takes into account the implications of the CGNPC bid for Kalahari. The target falls to $9.60 from $10.82.

Not only is CGNPC a real contender to secure Husab by taking out Extract, another major EXT shareholder is one Rio Tinto ((RIO)). Rio also has Namibian uranium interest in the form of its Rossing mine but that project is nearing the end of its life.

Merrills concurs with Macquarie's takeover thoughts regarding either party and as such has not reduced its pre-Fukushima price target of $9.50 for Extract.

Merrills notes further that now that the Namibian government has confirmed that new mining regulations won't impact on the Husab project and that it has no intention of nationalising mining operations that element of sovereign risk is removed.

Macquarie and Merrills have both upgraded their Extract ratings to Buy this morning (Outperform in Macquarie's case).
 

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