Australia | Jul 13 2006
By Greg Peel
Will we or won’t we?
A nuclear power industry in Australia is looking doubtful so far and at best a very long way off. However, the federal government is happy to sell uranium to the likes of China so in terms of this country benefiting from its vast uranium resources, the ball is still rolling.
At least for the three mines currently sanctioned, that is. No state government is prepared to advocate further mining without the support of the electorate. That leaves us Ranger in the Northern Territory and Olympic Dam and Beverley in South Australia. A fourth mine, Honeymoon in SA, has been given approval, however. As far as reserves in Queensland and Western Australia are concerned, it may be a long wait yet.
As the federal government controls NT, more mines are cleared to open within its borders. Of particular note is the Jabiluka mine. This looks likely to go ahead, but still requires the approval of the traditional indigenous landowners.
JP Morgan is backing Jabiluka to go ahead, but realistically only in 2015, when Ranger is tipped to be exhausted. Nevertheless, Jabiluka is very much a part of Morgans’ valuation of uranium miner Energy Resources Australia (ERA), on which it initiated coverage on Tuesday.
As far as initiations go, it was hardly earth-moving (sorry). The analysts have rated ERA Neutral with a conservative $11.44 price target. Their indifference stems largely from their belief that ERA will benefit in the short term as old US$16/lb uranium contracts roll off, and spot levels of around US$40/lb will be negotiated, but that the uranium price will eventually fall.
Morgans has set a long term uranium price of US$36/lb.
Morgans’ view stands in contrast to that of its broking colleagues. Merrill Lynch has today declared its bullishness on the uranium price on the simple basis of global demand outstripping supply. Nuclear is the new coal.
Despite such bullishness, Merrill Lynch’s latest price assumption increases are not exactly spectacular. Spot moves from US$42/lb to US$45/lb and long term from US$24/lb to US$30/lb in real terms, or US$35/lb in nominal terms. This is still shy of a more circumspect Morgans.
Merrills does not cover ERA.
UBS does, and the analysts decided in May to move ERA up from Hold to Buy. At that time the analysts raised their 2006 uranium price forecast by 15% to US$44/lb, 2007 by 34% to US$57.50/lb, and 2008 by 50% to US$60/lb. Their long term price, however, sits at US$27/lb.
This had the dramatic effect of increasing UBS’ target price on ERA from $14.85 to $18.70. But not nearly as dramatic as the ABN Amro epiphany which occurred earlier in April. ABN lifted its ERA target from $7.20 to $15.70 on an assumption of the uranium price reaching US$51/lb within twelve months. As if some penny had dropped, ABN upgraded ERA from a Sell to $7.20 to a Hold to $15.70.
UBS, ABN and now Morgans are the only brokers covering ERA in the FN Arena database, giving the stock a 1/2/0 ratio. The average price target is $15.28. ERA is presently trading around $13.11, up from its Tuesday close of $12.87.