Miners operating in Africa have been keen to play up the benefits of owning assets on that continent as opposed to the local economy with its now threatening resource super-profits tax, but there still sovereign risks in the developing world.
Three weeks ago Extract Resources, one of the most successful emerging miners with its world-class Rossing South uranium deposit in Namibia, woke up to a rude surprise.
It came in the form of Russia’s Prime Minister, Vladimir Putin, and his state-owned Russian State Atomic Energy Corp (Rosatom).
Talks in Moscow on May 20 between Putin, Russian President Dmitry Medvedev and Namibian President Hifikepunye Pohamba resulted in a five-year memorandum of co-operation between the countries to develop Namibian uranium deposits.
Uranium is a natural resource with geopolitical issues unlike any other, thanks to its nature and the market structure – most buyers are state-owned or controlled.
That bilateral agreement may have been a worry for Extract’s chief executive, Jonathan Leslie, as it indicated a heavyweight encroachment into its region, but what came a few hours later would have been even more disconcerting. As reported by several Russian news agencies, including RIA Novosti, Rosatom issued a statement that same day in relation to the Namibian agreement saying that it had “sent an application on developing (the) Rossing South uranium deposit”.
Extract’s principal asset is the wholly owned Husab Uranium Project that contains the very same Rossing South deposit, as well as the Ida Dome deposit.
Senior uranium industry sources believe that Rosatom is seeking to exploit apparent frustrations within parts of the Namibian government at Extract’s slow pace in bringing the project through to production.
But Extract’s Leslie is emphatic that this is not the case.
“We have seen no evidence of (that frustration). We have also been assured at the very highest level that the Namibian government will not interfere with commercial negotiations with third parties,” Leslie told The Australian in an email from London.
Rosatom head Sergei Kiriyenko vowed his company was ready to invest $US1 billion (Australian$1.2 billion) in uranium deposits in Namibia.
“We are ready to guarantee investments,” he boasted, emphasizing that Rosatom could bring a deposit like Rossing South to production quickly and efficiently.
It is not known what rights the Namibian state would have to either appropriate the mine or transfer the mining rights to another company on the basis that Extract was not properly exploiting the deposit for the nation’s benefit.
But it appears to some industry watchers that Rosatom is encouraging that outcome.
“There can be no question of failure to develop the mine in a timely manner, and no suggestion from the Namibian government that this is the case,” Leslie says. “Extract keeps the government closely informed.
“The company has moved rapidly from the initial discovery in February 2008 to the current level of activity, where we have one of the largest drilling campaigns in Africa, with 19 drill rigs on site.
“The definitive feasibility study is due in the fourth quarter this year, with a clear timetable to commissioning in 2013.”
Extract owns an exploration prospecting license over the Husab Project, and Leslie reckons it has “far exceeded our renewal requirements”.
“As part of the normal process we will apply for a mining license,” he said.
Rossing South has the potential to produce 15 million pounds of uranium a year, which would be equivalent to the second-largest uranium mine in the world behind BHP’s Olympic Dam. It is, therefore, a strategic asset valuable to nations reliant on nuclear energy such as Russia, France, India and China.
Hype around the deposit fanned Extract’s shares to as high as $11.45, but they closed on friday at $6.98 for a still healthy market capitalization of $1.7 billion.
Last year Extract – which is 15 per cent owned by Rio Tinto and 41 per cent by London investor Kalahari Minerals – began seeking a partner to develop Rossing South through a process run by investment bank Rothschild.
Potential strategic partners included Korea Electric Power Corp and state-run Korea Resources Corp, which admitted in March that they were considering buying a stake from Extract in Rossing South as part of a consortium.
The Australian understands that Extract, as part of the Rothschild strategic review, also held informal talks to merge with Paladin Energy to create a $4 billion-plus independent uranium player, but the price expectations of shareholders such as Kalahari meant a deal was not possible.
Paladin owns the nearby Langer Heinrich project in Namibia, which is fully operational and running at near-capacity. A merger between the pair would make strategic sense and alleviate tensions with the Namibian government over the pace of development at Extract’s Rossing South.
According to Extract’s most recent investor presentation, the company aims to have Rossing South in production at the end of 2013. But the prolonged nature of the Rothschild review, and more specifically the lack of an outcome, is said to have Namibia anxious and frustrated.
The appointment in February of Leslie, a former manager of the nearby, established Rossing mine owned by Rio Tinto, should assist Extract. He told Boardroom Radio, ironically the same day as the Rosatom statement on May 20, that he “knows the Namibian government very well”.
“The proposals received through the Rothschild process have demonstrated the strong level of global interest in Rossing South, and the potential capabilities and value that partners could bring to the project,” Leslie told The Australian.
“Extract remains in discussions with potential partners, but they remain incomplete and no decision has been made by Extract to finalize discussions with one or more of the potential partners.
“The Namibian government has been kept closely informed of these discussions.”
The Namibian government-owned Epangelo Mining has signaled to Kalahari that it wants to take an ownership stake in Rossing South ahead of the project moving into production, according to a report in the Namibian newspaper New Era. Investors may well ask: is Rosatom talking about funding Epangelo into a minority stake in the project? Or is it a proposal to develop Rossing South with Epangelo and without Extract?
Whether the Rosatom application on Rossing South is simply a cheeky commercial broadside or a serious play threatening Extract’s interests, it will heap pressure on the Perth-based company to move swiftly to finalize a partnership deal or merger agreement to ensure its future.
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- Russians threaten Extract’s uranium site in Namibia - 6 June 2010