Australia | Nov 18 2008
By Chris Shaw
Spot uranium prices have been recovering from their steep fall over the weeks past and while this suggests better times might be ahead for the sector as a whole, Energy Resources of Australia ((ERA)) yesterday reported some good news on its own.
The company announced a Ranger 3 Deeps exploration target of 15-20 million tonnes at 0.2% uranium (U3O8) which equates to 30-40,000 tonnes of material, far in excess of the 25,000 tonnes Deutsche Bank had suggested was likely from the prospect.
In the broker’s view there is scope for the Deeps project to effectively double the company’s high grade reserves to more than 50,000 tonnes, the other positive being the mineralisation is occuring along a strike length of more than one kilometre and at a depth of no more than 500 metres.
The Deeps extension could even result in a better increase than this, as Macquarie notes the resource remains open to the north end of the current drilling area and this implies further additions to resources as drilling continues. On the broker’s numbers, the news could add up to seven years of mine life, which would also improve earnings certainty for the company in future years.
Citi today made no chnages to its valuation for the company, but the broker did reiterate its Buy rating, pointing out the company will benefit from higher earnings as existing legacy contracts roll off and ERA will thus begin to enjoy higher prices for its material.
Both UBS and Deutsche Bank point out the potential of the Ranger 3 Deeps exploration program to be just as significant to the long-term prospects for the company, suggesting the exploration results to date mean the project has the potential to add dollars per share in value.
On UBS’s numbers the scope for Ranger to be extended to include an underground operation through an extention of reserves adds as much as $4.35 (per share) to the broker’s valuation, which currently stands at $17.11 on the basis of production continuing until 2020 through a combination of heap leaching, a pit push back and a laterite plant.
Deutsche Bank is equally as optimistic, estimating Ranger 3 Deeps could add as much as $6.80 per share in value to the company. Currently the stockbroker has 50% of this factored into its valuation of $16.51, meaning a total valuation of around $20 per share if things develop as indicated.
The broker estimates first production could occur as early as 2011/12, while this would likely add five years to both mine life and ore processing, extending these to 2017 and 2025 respectively. The next key in its view will be the release of an initial project resource, which Deutsche expects in the early stages of 2009. Approval for the development could come by the middle of next year.
Given the news has no immediate earnings impact brokers have not revised their earnings estimates in coming years, the FNArena database showing consensus earnings per share forecasts for the company of 58.6c this year and 130.3c in FY09.
The database shows ERA is rated as Buy six times and Hold three times, with an average price target of $18.44. Despite its Neutral rating JP Morgan leads the way in this respect with a target of $21.80, while GSJB Were is the most conservative at $15.15.
Shares in ERA today are virtually unchanged and as at 11.05am the stock was up 1c at $16.91. This compares to a trading range over the past year of $9.35 to $24.95.