Australia | Apr 03 2007
By Greg Peel
Queensland premier Peter Beattie continued to confirm his role as the Viscount of Vacillation yesterday when he suggested he would prefer to keep the state’s “no uranium mines” policy “if he could”. Yet Beattie insisted to the Courier Mail that he would have to follow any federal conference resolution on the matter.
Given that Western Australia’s Alan Carpenter has absolutely no intention of following any federal ALP resolution lifting mining bans, and given that a federal government has no power to tell a state government what to do on the matter (except in some extraordinary circumstance, otherwise Howard would have opened the whole country to uranium mining by now), then it’s unclear as to why Beattie is suggesting the matter is out of his hands, other than in some weak attempt to appease the local coal industry.
Beattie made his policy u-turn two weeks ago after he was satisfied by a commissioned report that the state’s $7.4bn per year coal industry would not be threatened by the potential $3.2bn of a uranium industry. Apparently now, however, he is facing a caucus revolt.
Adding confusion to the mix were federal ALP leader Kevin Rudd’s comments yesterday that he would not force any of his state counterparts to abide by federal policy. Mind you, he was surrounded by burly coalminers at Queensland’s biggest coal mine when he said it.
So what will Beattie do? This much is now unclear. What is clear is that the fortunes of the likes of Summit Resources (SMM) are back in doubt. It is also clear that the Coalition is loving the total lack of commitment one way or the other from its opposition.
Paladin Resources (PDN) will also be watching developments in Queensland carefully as its ongoing battle with Summit will ultimately result in Paladin owning either 100, 50 or 0% of the significant Valhalla/Skal deposit. The company has also moved to increase its holdings in South Australia – the only state welcoming uranium miners with open arms – by increasing its shareholding in Deep Yellow (DYL) to 10.64%. In the meantime, Paladin has its own problems.
One noticeable factor of the great Paladin share price surge, driven by Langer Heinrich coming on line just as the uranium price is going through the roof, is that little consideration has been given to date to the ubiquitous production delays that beset any resource company large or small, new or old. Delays and downgrades in the industry are as certain as the sun rising tomorrow.
Paladin has encountered “tank liner failures” at Langer Heinrich which have led to a production downgrade from 0.9-1.0Mlbs in FY07 to 0.4-0.6Mlbs. UBS has responded by dropping its FY07 profit forecast by 67%.
It’s not as bad as it might seem, however, as FY07 profit was never expected to be spectacular in the start-up phase. Profit reduces from $12m to $4m. FY08 production is expected to make up the shortfall, such that the forecast 2.6Mlbs per annum can be achieved. Langer Heinrich is now at 70% capacity and climbing.
While Paladin’s share price enjoyed a spectacular 2006, the $10 mark seems to be somewhat of an obstacle, despite the spot uranium price being likely to head over US$100/lb next week. Is it because of some level of confusion over contracts, or just because full valuation is apparent?
Because Langer Heinrich came on line ready to do deals at the spot price, unlike deals connected with Ranger or Olympic Dam, euphoria had met every successive spot price rise. However, like its local counterparts, Paladin has already signed long term contracts. There has been some consternation about just what this might lock the company into, but Paladin’s Sales Manager James Eggins has provided some insight.
Paladin has tied up 7.7Mlbs of production out to 2012, or “50% of planned phase one production”. This does not, however, mean that spot price above US$100/lb now become irrelevant.
Long term uranium contracts still yet to expire for the likes of Energy Resources Australia (ERA) and BHP Billiton (BHP) were signed in a buyers market, and typically included a price cap but no price floor. Now that the sellers have the upper hand, new long term contracts feature less limited upside and more limited downside.
Eggins reports that Paladin’s contracts are priced “at market”, but subject to a floor and ceiling. (There has to be some ceiling in order for end-users to have a handle on costs). Both the floor price and ceiling price, notes Eggins, “‘escalate throughout the life of the contracts independently of uranium market conditions”. Sounds like the perfect deal.
Yet there is still no word on the important part – what are those prices? ERA has often come under criticism from analysts for being coy about contracts, leaving analysts to extrapolate prices only after periodic profit reports are released. Nevertheless, Eggins suggests that when it’s all said and done, the 2007-2012 price formulae only affect about 30% of production. Go figure all that out.
If Paladin, and analysts, are little concerned about production delays then the same can’t be said about ERA. If uranium has an arch-nemesis it is not coal, it is water. While the world waits impatiently for Cameco to tell it like it really is regarding forecast delays at the flooded Cigar Lake project, ERA has had soggy problems of its own. It’s all George’s fault.
Last month ERA was able to declare force majeure on its contract obligations following flooding at Ranger. This was possible because Cyclone George came out of the heavens, and not as a result of drilling under a lake. While Ranger was back in production within two weeks, ERA has only now revealed that water levels in the mine have led to more significant production downgrades. 2007 will likely match 2006, but 2008 will see some 25-30% less production. Stockpiled ore will be processed in an attempt to make good on sales contracts.
JP Morgan analysts have downgraded ERA’s earnings by 13% in 2007 and 43% in 2008, however, their NPV calculation only falls by 2% and their $31.00 target remains in place. The reason for this is the sublime difference in valuation affected by the analysts’ US$70/lb long term uranium price which they apply to production forecasts right out to 2035 (by when it is assumed Jabiluka will be with us).
The ERA share price is copping a bit of a bollocking this morning but an interesting dichotomy emerges. As there are so few major producers of uranium in the world, any delay to production from one has a manifest effect on the spot price, just as Cigar Lake has been significant in the recent price push. Thus, in theory, the less Ranger produces, the more the price goes up, the less effect lost production has on future profits.
Meanwhile, there is possibly still confusion reigning in the market with respect to the Four Mile uranium project in South Australia owned jointly by Heathgate and Alliance Resources (AGS). As late as yesterday’s closing market report from a government-funded national broadcaster that will remain nameless but is not SBS, the news was still being touted that the joint venture had stumbled upon possibly the world’s largest uranium resource just yesterday. While investors should appreciate that the find is not at all new, they should still be heartened that the real message between the lines of Premier Rann’s euphoric outburst was that test-drilling has revealed the site may yet prove to be the most significant in 25 years. Testing will continue.
No so forgivable, however, is that reports still suggest another South Australian uranium junior – Adelaide Resources (ADN) – has a claim in the site. It doesn’t.
Adelaide’s price peaked at 70c on the incorrect news yesterday (up 47%) before falling back to 56c – still up some 18% on the day despite a correcting announcement issued by the company yesterday. The irony is that while Adelaide acted responsibly in immediately rectifying the situation, the company does not begrudge the sudden attention granted as it has been disappointed to date that the market has failed to recognise the potential of its own uranium tenements, located not far from Olympic Dam.
Tune in again soon to catch the latest instalment of Australia’s popular soap opera that is the uranium market.
