Australia | Jul 20 2006
By Greg Peel
One of the biggest drawbacks to clean, safe, renewable (or more correctly, inexhaustible) energy source, solar power, is that it doesn’t work well when it rains. It seems the same can be said of clean, not all that safe, abundant but finite energy source, nuclear power.
Energy Resources Australia (ERA), Australia’s closest thing to a pure-play and world standard uranium producer, has just posted its worst quarterly production report in over ten years. Some of the shortfall can be attributed to problems with the acid plant, but the big problem has simply been rain – lots of it.
Various mines across Australia’s tropical belt were hammered by cyclonic rains in one of the worst wet seasons ever recorded, severely hampering second quarter production levels. As anyone who has ever built a swimming pool knows, big holes in the ground tend to fill with water.
Cyclone Monica was Huey’s piece de resistance. Although not quite passing over the Ranger mine, it passed close enough. Result – one bloody big mine filled to the brim. Just to cap things off the acid plant had been shut down for maintenance and then they just couldn’t get the damned thing started again. My car does that in the rain sometimes too.
ERA’s June quarter production of uranium oxide was down 52% on the June quarter last year and 68% on the March quarter. This has materially affected analysts’ earnings forecasts. The FN Arena database includes three brokers covering the stock.
ABN Amro has lopped earnings by 17%, now expecting $58.9m in 2006. UBS was more severe, slashing 30% to $40.1m. And JP Morgan obviously went out without an umbrella, needing to bring its forecast down by 40% to match UBS at $40m.
This did not encourage ABN to reduce its $12.20 price target however, nor Morgans its $11.43. UBS, on the other hand, had to rein in from a brave $18.70 to a slightly less brave $16.60, still a significant premium to the peloton. This drops FN Arena’s average target from $15.28 to $13.57.
No recommendation changes were made, however. This despite the fact it is unlikely ERA could make up such a production shortfall within the year. Apart from exploration upside, the main reason for the stay-put is the uranium price. The market is tight, and the spot price is strong. When ERA renews long term contracts it will be shifting from prices around US$16/lb to US$45/lb.
Hence ABN and Morgans are sticking to Hold, and bullish UBS to Buy.
The irony is that increased cyclonic activity may be due to global warming, and global warming may be alleviated – slightly – by nuclear energy. If Huey could just hold off until the stuff can be pulled out of the ground, it might help.
In the meantime, perhaps analysts now need to add a weather risk weighting to the other variables that make up the guess and giggle game called "value the miner".
Oh, and if you’re wondering who Huey is, ask an Aussie surfer.
