Re: MTN - Marathon Resources
Marathon Resources
Reflecting strong corporate interest in the uranium sector and the quality of its Mt Gee uranium deposit, Marathon Resources continues to trade well in advance of Crosby's $3.52 a share takeover offer. We see little downside for shareholders given current circumstances, including the possibility of rival bidders emerging. Reflecting its confidence, Marathon has appointed one of Australia's most experienced resource executives as its new CEO.
Fat Prophets first recommended Marathon Resources at 72 cents in March 2006 (Fat Mining 16). Our last review of this stock was in February (Fat Mining 68).
Since our last review in March, there has been a clear acceleration of the upward trend. As a result, the stock achieved a new all-time high of $6.42 last week. This represents a gain of 145% in just one month.
Following such rapid gains, the upward trend of any stock would be at risk of pausing for consolidation. Marathon is no exception. In the near term, we anticipate further consolidation with last week's low of $5.10 providing initial support.
Given the strength of the longer term trend, we believe the outlook for Marathon remains positive. In time, we expect prices to extend to new highs above $6.42.
As we have commented in our recent reports on Marathon, corporate activity in the uranium sector in Australia has grown to reach fever pitch. The best recent example of this is the takeover bid of Summit Resources by one of our uranium favourites, Paladin Resources.
Of course, Marathon Resources, with its large, flagship Mt Gee uranium deposit in South Australia, has been one of the companies in the best position of all to benefit from the frenetic sentiment in the sector.
Indeed, Crosby Capital Partners announced a substantial increase its cash takeover bid for Marathon, boosting its bid from $0.68 a share to $3.52 a share.
Marathon's directors have encouraged their shareholders to follow our advice and ignore the Crosby takeover bid.
Like us, they believe the offer price is inadequate compared to other recent uranium transactions, is opportunistic, and does not represent fair value for what is one of Australia's biggest undeveloped uranium deposits.
As we commented in our last note on Marathon, Crosby says its revised offer is in response to the strong increase in the price of uranium and the resulting strong performance of the uranium sector as a whole, particularly in Australia. Interestingly, they also believe the underlying fundamentals of Marathon have not changed since their original offer.
Our interpretation of all of this is that Crosby is trying to downplay any contribution that Marathon management has made in terms of adding value, as they push the line that the surging Marathon share price is due only to higher uranium pricing and favourable sentiment.
We reiterate our view that this is misplaced. Of course, uranium prices have surged to a record high of US$113 a pound and sentiment in the sector has never been better. But to suggest that Marathon management has done little to add value is laughable.
Marathon has made substantial progress in the development of its Mt Gee Project over the past six months. In particular, it has completed a major drilling program at Mt Gee and the Scoping Study is well advanced.
Management believes that the ongoing development at Mt Gee, with the announcement of a new resource estimate in around three months, along with the surging price of uranium, clearly reflects the opportunistic nature of Crosby's offer.
As we pointed out last time, Marathon is at an important stage. It is involved in an aggressive program of work to increase the confidence in the Mt Gee resource from Inferred to Indicated status, which is a major step towards a full Feasibility Study to assess mining options.
Earlier this month, the company provided an update on the progress of the Scoping Study being prepared by Coffey Mining. The results so far apparently reinforce the company's view of the development potential of the Mt Gee deposit.
The report examines a number of open-pit and underground mining and processing options, with the most prospective so far being underground mining. Furthermore, given the strong uranium price and high uranium grades, the best returns are likely to come from a leach processing facility situated on site.
The block model developed by Coffey mining for the report indicates that a cut-off grade of 400ppm U3O8 is viable for an underground operation targeting a production rate of over 1,000 tonnes U3O8 annually.
This estimate is also based on Marathon's August 2006 Inferred Resource estimate of 45.5 million tonnes of uranium mineralisation averaging 0.068% U3O8, or 69 million pounds of contained U3O8. This figure will be updated further following assessment of the results of the recent Mt Gee drilling program, and incorporation into a new resource estimate.
Uranium resource experts Hellman & Schofield will complete the new resource estimate, which Marathon anticipates will increase the deposit with respect to grade, tonnage and confidence. We anticipate the progressive release of drilling results to market, followed by completion of the resource upgrade within a three-month timeframe.
As our Members know, Mt Gee is in fact one of the biggest undeveloped uranium deposits in Australia, which is continuing to grow in size. It has the major added benefit of being located in South Australia, one of only two states in Australia amenable to uranium mining.
Marathon management began adding value very early on in the piece, when it essentially compiled the current Mt Gee uranium resource without drilling, through the clever utilisation of extensive historical data compiled by previous explorers from the 1960s to the late-1990s.
This data was of sufficient quality to enable Marathon to generate a 3D model of the Mt Gee deposit and the current +30,000 tonne U3O8 resource estimate. Marathon then commissioned independent industry experts, Hellman and Schofield, for an independent assessment of the robustness of its resource estimates, which was positive and verified the resource size.
Mt Gee is part of the 11-12km long uranium-rich Paralana Mineral System that falls within Marathon's 100%-owned EL 3258.
Adding to investor confidence is the fact that Marathon recently appointed Stuart Hall as its new Chief Executive Officer. He has more than 30 years experience in the resources industry in Australia, Africa and Europe, including senior positions with BHP Billiton, WMC Resources and Rio Tinto.
Given the way uranium prices are edging ever higher, along with the unprecedented level of corporate interest in the uranium sector in Australia, we believe Members should maintain their position in Marathon Resources. They are holding one of the sector's best uranium exposures in our opinion.
Accordingly, Marathon Resources will remain held within the Fat Prophets Mining & Resource portfolio.
