Stock of the Week – Energy Resources of Australia (ERA)
Energy Resources of Australia (ERA) is one of the largest uranium producers in the world, providing over 10% of the world’s uranium production through long-term contracts.
ERA sells its product, drummed uranium oxide, to power utilities in Asia, Europe and North America, under strict international and Australian Government safeguards.
The company is majority-owned by mining bigwig Rio Tinto (RIO), which has a 68% stake in the company.
ERA’s flagship asset is the Ranger mine (east of Darwin), the world’s second largest uranium mine, which currently accounts for 100% of ERA’s production.
The first three quarters of 2009 saw ERA making gains on an upbeat outlook for uranium, though since then the company has been struggling on renewed concerns about uranium’s strength.
The group’s FY09 failed to impress the market on unimpressive guidance and ERA’s 1Q10 results were similarly downbeat.
Uranium prices were dragged higher with overall commodity prices during the bull market, from 2003 to 2007 exploding from about US$10 to more than US$130 per pound.
However, the global financial meltdown sent uranium crashing down to as low as US$45 in October of 2008.
The Australian Bureau of Agricultural and Resource Economics (ABARE) forecast uranium to be the one resource gainer in 2009, in both volume and value terms.
However, uranium price movements stalled in 2009 and into 2010. A survey released last week by Resource Investing News revealed that fewer investors were placing their bets on uranium companies, down to 12% from 16.9% at the end of 2009.
Moreover, uranium spot prices have slipped almost 20% since October 2009.
By the end of last year, uranium production had responded to rising prices and a positive long-term demand outlook, increasing global uranium production to around 132 million pounds.
There are now rampant fears of a uranium surplus, explaining the cap on uranium spot price appreciation and the decreased interest from uranium investors.
ERA released a string of financial results across 2009, most of which were fairly decent.
Volatility has been evident across 2010, however, beginning with the company’s release of its fourth quarter results and a 1H10 production downgrade.
In the company’s fourth quarter, production from the Ranger mine fell 30% on year to 1,140 metric tonnes, well below market expectations.
On 29 January, ERA reported a 23% rise in annual profit to $272.6 million and declared a final dividend of 25 cents per share, up from 20 cents in 2008.
Earlier in the month, the company confirmed 2009 production fell 2% on year to 5,240 tonnes whilst sales rose 4% to 5,497 tonnes on stockpiled ore.
ERA forecast 2010 production, sales and average realised sale prices to be broadly similar to those of 2009 but expects the Ranger expansion plus higher maintenance costs to hit FY earnings.
The downbeat guidance did nothing to help support ERA’s stock halt its downturn over the last few months.
On 13 April, ERA reported a 27% on-year drop in uranium production for 1Q10.
The drop was largely due to seasonal rainfall resulting in lower ore grades.
In its outlook, ERA advised that 2Q production will be similar to 1Q, and that average realised sales for 1H10 were expected to be similar to 2009 levels.
ERA cited soft market conditions and lower spot prices as key factors behind the disappointing production numbers and weak sales outlook.
ERA’s 1Q10 result disappointed the market, helping the company’s stock slide further in 2010.
The group’s FY09 results were also disheartening, with production down slightly and a forecast for higher maintenance costs in FY10.
With the coming full year likely to be impacted by higher costs, ERA will no doubt also suffer from a sluggish market for uranium, which has seen uranium spot prices slipping almost 20% since October 2009.
ERA’s Ranger mine is showing signs of a slowdown, a worrying turn, as Ranger is ERA’s only operating production vehicle at present.
With uranium not making the impressive gains forecast by this time, and with production issues crimping ERA’s results, the short-term looks to be tough for the miner.
Australian share price for ERA has dwindled since October 2009 from over $25.00 to under $15 as of late. This may be one of the shares to sell if it continues to break lower.