Kalahari Minerals: Is the Rossing South story approaching a crossroads?

At Proactive Investors we’ve been talking about the Rossing South uranium deposit in Namibia since June 2007, shortly after Extract Resources (ASX:EXT, TSX:EXT) first began scout drilling on a previously untested part of the Husab uranium prospect.

In the years that have followed this early stage prospect has quickly become one of the most important deposits in the world.

As it stands Rossing South is currently the world’s fifth largest uranium deposit - with 257 million pounds of the radioactive element in the indicated resource category and 110.3 million pounds in inferred resource - and Extract is still finding more uranium as a 17-rig drill program keeps expanding the size of the deposit.

A new resource upgrade for Rossing South is expected later in the first half of 2011.

The project was discovered due south of Rio Tinto’s (LON:RIO, ASX:RIO) ageing Rossing mine - which currently supplies 8 percent of the world's uranium. The positioning of the mine is a very important point - which we will come back to later.

Most London-based investors will be familiar with Rossing South, and the Husab project, via Kalahari Minerals (LON:KAH) which is a cornerstone investor in Extract.

Kalahari currently has a 41.08 percent equity stake in Extract, but this will soon rise to 42.79 percent once Extract completes a recently announced fundraising.

Earlier this week, Kalahari confirmed that it is in talks with Extract to explore various options that might simplify the Extract/Kalahari shareholding structure. Such a rationalisation is thought to be long overdue.

However no precise details were given on what this simplification would look like. 

Investors have been left wondering whether it could be some kind of merger or other form of combination, a share buy-out by Extract, or an altogether more complicated transaction.

Rio Tinto & Extract: A potential combination to rejuvenate ageing Rossing Mine?

You’ll have seen it all before: the junior explorer making inflated claims about a strip of virgin ground in sniffing distance of a world-class mine or oilfield that’s run by a major international firm.

But location is never a cast iron guarantee of success. 

Early stage resource companies ride the coat-tails of the major producers in this way so often that one could be forgiven for overlooking such an obvious value-point. 

However it is satisfying when a bone-fide success story comes along.

A glance at the Husab project map tells you just how little subtlety was employed when Extract targeted their scout drilling in the northern part of Husab.

The company targeted an extension to the area that hosts Rio’s mine, and uranium is exactly what they found.

This initial piece of opportunism has been rewarded grandly, particularly given the scale of the Rossing South discovery in conjunction with declining output from Rio’s mature Rossing mine.

It is understood that Rio Tinto has held informal off-and-on talks with Extract about the deposit for years, but the major mining group confirmed its concrete interest in the project earlier this week.

On Monday Extract and Rio confirmed that they had begun talks to evaluate ‘significant potential synergies’ that could be generated from a joint development of both projects.

Duncan Hughes, mining analyst at Ambrian Capital, reckons this latest development is all the more material because its timing correlates with comments made by Rio chief executive Tom Albanese in the mining company’s full-year review last week.

The analyst highlights that in the post-results question round, Albanese admitted that Rio main uranium assets ERA and Rossing were getting ‘long in the tooth’. The Rio boss went on to say that the miner was keen to maintain a position in the uranium market and they need to do something about the two mature mines.

Albanese reportedly said that ‘a little more juice’ could be squeezed from ERA and Rossing, but investors should ‘watch this space’ on Rio’s strategy going forwards.

Hughes said: “(Extract) feels that these are sufficient funds to complete the DFS, but acknowledges that funding of the further project build will require additional dilution. 

“To that end, Extract is currently considering financing options; presumably Rio Tinto fits in here, as well as the potential for an additional off-take party?”

He adds: “The project is now developing on multiple fronts, with processing infrastructural reviews becoming as important as the delineation of the deposits themselves.

“We were down on site last month and came away impressed by the calibre of the operational management now on site, juggling the multitude of differing site work for the DFS completion later this year.”

There is more to Husab than Rossing South

Quite understandably the Husab project has been dominated by the exploration and development of the Rossing South deposit, but the advanced uranium deposit is just one part of a large project area.

This morning Extract revealed that continued reverse circulation exploration drilling has confirmed uranium mineralisation at several new targets within the wider project area.

The new targets, named Middle Dome and Pizzaro, are both beyond the Rössing South anticline.

Middle Dome is located about 4.5 kilometres north of the Salem prospect – a known prospect that is also being explored – while the Middle Dome prospect appears to be located on the concealed northern extension of the Ida Dome.

The Pizzaro prospect is located on EPL 3439 approximately 4.5 kilometres west of the Inca deposit.

The strike length of uranium mineralisation at Salem has now been extended to approximately 1 kilometre, Extract said. Salem is a potentially large but comparatively low grade deposit.

Kalahari chairman Mark Hohnen said:  “Husab continues to yield excellent results. The scale of the project continues to increase; with these results from Extract's exploration programme identifying a further two highly exciting target zones beyond the Rössing South anticline, at Middle Dome and Pizzaro. 

“Kalahari considers the size and significance of these new target zones to be extremely important, providing further potential uplift to what is already the world's largest new uranium discovery,” he added.

In Conclusion

Its easy to see just how far Extract, and by association Kalahari, have come since the Rossing South discovery.

When we began to follow the story they were trading at c.80 Australian cents and around 30 pence respectively. Now both stocks are worth many multiples more – Extract shares are currently worth A$9.25 each, while Kalahari trades at 230 pence a share. 

Furthermore with 17 rigs at work on Husab and each drilling update seemingly providing more encouragement, the project’s growth hasn’t looked like its going to plateau just yet.

That said with talks now underway with Rio Tinto, as well as those going on between Extract and Kalahari. This particular part of the Rossing South / Husab story could be approaching a crossroads.

In the meantime we shall have to take the advice of Tom Albanese and ‘watch this space’.