Australia | May 01 2007
By Greg Peel
When stock analysts at the senior global houses think about Australia and uranium they focus on Energy Resources of Australia (ERA) and its Ranger and Jabiluka mines, BHP Billiton (BHP) and Olympic Dam, and Paladin Resources (PDN) and its African assets. Little focus is given to uranium juniors, as they do not satisfy coverage criteria.
That said, it still took the big boys a long time to trip over Paladin. BHP and Rio Tinto (RIO) and their diversified portfolios were for a long time the only real uranium focus. Rio owns two-thirds of ERA, and there are still brokers who do not cover ERA separately.
But suddenly a penny has dropped – Rio owns a lot more uranium potential than just ERA. Instrumental in the dropping of the penny has been a briefing from Rio’s President of Energy, Preston Chiaro. Chiaro informed analysts of Rio’s plans for its other uranium assets.
Outside of ERA, the biggest uranium arrow in Rio’s quiver is the Rossing mine in Namibia, of which Rio similarly owns about two-thirds. Rossing is located not far from Paladin’s now famous Langer Heinrich mine. It currently has a production capacity of about 4,000tpa since Rio spent US$112m last year to extend the mine life out to 2016.
Reporting from the company briefing, Merrill Lynch’s resources team suggests a big announcement can be expected, perhaps on May 21. Rio has been conducting a major review of Rossing, and an announcement of a two-three times expansion is on the cards. This would take ultimate production to 10,000-12,000tpa. It would take four or five years to get to this level, but first new production could be seen within one year. This would be well ahead of BHP’s Olympic Dam expansion timetable.
To put this figure into perspective, last year Ranger produced 4748t of uranium oxide, Olympic Dam 3382t, and in FY07 Paladin hopes to produce around 225t from Langer Heinrich.
(Interesting fact: If Rio does plan to go ahead with expansion of Rossing, one party will no doubt be very pleased. One might suggest it may even be banking on it. That would be 15% Rossing shareholder, The Iranian Government. You can just imagine the sort of rumblings out of Washington, let alone Canberra, on that one.)
But wait, that’s not all.
Gathering dust in Wyoming, USA, is Rio’s Sweetwater operation. It was set to be sold last year but the prospective buyer did not take up the option, and now Rio will decide early next year whether it might fire the old girl back up.
In actual fact, the mine has been under “care and maintenance” and has a current capacity of 1,200tpa. There is potential to double its footprint and there is also a tailings repository on site. Rio is also drilling around the area as we speak.
Then there’s Rio’s Kintyre deposit. While Rio may still have to solve the indigenous landowner problem at Jabiluka, the Martoo people have approached the company and asked them to develop the Kintyre site. The only problem is Kintyre is in Western Australia, and as such will need to wait until Premier Alan Carpenter is either elected out of office or run over by a bus before any potential can be exploited.
So there you have it – Rio has a lot more going for it in uranium than just Ranger, a mine that is in decline. Ranger has recently had its life extended, through the now commercial processing of stockpiles, and further exploration is underway nearby. However, ERA’s future ultimately lies in Jabiluka – a deposit of similar capacity but controversial due to its location in the heritage-protected and indigenously-owned Kakadu National Park.
Rio’s Preston Chiaro is very upbeat about the uranium market, and the Merrill Lynch team are dancing to the tune. At the briefing he made various points.
The global uranium market should remain undersupplied at least until Olympic Dam is ramped up, several years from now. The dynamics of the industry are very favourable to suppliers, because so much is concentrated in so few hands.
Chiaro estimates hedge funds have stockpiled some 10,000t of uranium oxide, which is significant considering annual global production is about 50,000t and demand about 70,000t. The Russian and US governments both hold stockpiles, but Russian secondary supply is dwindling and what Russia does have will be jealously guarded. The US government is hardly about to go handing the stuff out either. In the case of the hedge funds, Chiaro thinks it unlikely they will do anything other than manage any selling to their greatest advantage.
While Chiaro wouldn’t speculate on where uranium prices were heading, he did say that a US$50/lb long term price would not be unreasonable and that nuclear power companies could afford to pay up to US$200/lb and still be competitive against fossil fuels. He did not suggest, however, that this price would be reached.
Chiaro also acknowledged that new supply was the big threat – Olympic Dam in particular – but that a Rossing expansion and ultimate Jabiluka ramp-up would put downward pressure on spot prices.
ERA’s biggest drawback in the great uranium price surge has been its long term contracts. This is why Paladin has received so much attention, coming on line, as it has, at the perfect time to extract the greatest contract value. ERA is still stuck with very low priced contracts that are yet to be delivered to.
Contracts are typically negotiated now for supply in 18-24 months time. Duration tends to be 3-5years, with 20% negotiated every year. However some buyers are now pushing for ten year contracts, Chiaro noted.
The latest development in supply contracts is the ceiling to floor switch. Previously, when spot uranium was less than US$20/lb, suppliers would have to sign up to contract prices that contained a ceiling but no floor. Now that the boot is on the other foot, and spot uranium has exceeded US$100/lb, suppliers have been dictating a floor price with no ceiling.
However, Chiaro explained that buyers have revolted somewhat, and are now insisting that unlimited ceilings must come with lower floors. Merrills determines that floors appear to be about 70% of spot.
Macquarie analysts also liked the Rio presentation, and reacted by increasing earnings forecasts based on the uranium outlook. However, as is the nature of a company that is the second largest diversified miner in the world, the impact is not huge. Macquarie has lifted 2007 earnings by 0.4% and 2008 by 0.8%.
It is this potential for a sharp increase in uranium supply in the next few years that has analysts at GSJB Were believing the current share prices of both ERA and Paladin are overdone (Beattie-ing Around The Bush; Commodities; 30/04/07).
The latest news on Paladin’s assault on Summit Resources (SMM) is that it achieved 58.2% of acceptances from Summit shareholders by the initial close last Friday. The offer now extends to May 11.
There was some confusion in the market surrounding Areva’s snapping up of 10.6% of Summit last week. Some reports even speculated that Areva was about to launch a takeover. It does not appear this is the case at all.
Before Paladin lifted its scrip offer on Summit, Summit was in defensive mode and had signed a deal with French energy company Areva such that Areva would purchase up to 18% of Summit in exchange for marketing rights. When Paladin upped the ante, management commented that it would both honour and welcome the Areva deal.
However, once Summit’s board had conceded that Paladin had them beaten, it was no longer interested in putting the Areva deal to a shareholder vote as it had originally intended. This suddenly left Areva out in the cold.
Hence Areva moved in to acquire 10.6% of Summit’s shares at $6.10 – the value of the original tranche it was to subscribe to. In so doing, it reinstated its position. The 10.6% is significant as it blocks Paladin from moving to 90% acceptances and thus compulsory takeover.
While this may have appeared it bit ominous, Paladin is seemingly unconcerned and analysts acknowledge that management will simply negotiate a similar marketing deal with Areva, allowing the takeover to proceed.
And while on the subject of Namibian uranium, FNArena noted last week that Bannerman Resources (BMN) was about to release a resource estimate on its Namibian project (Bannerman Looking To Fast Track Namibian Uranium; Australia; 27/04/07). A 25 million pound resource was expected to be confirmed in just a small portion of the overall tenement. Yesterday the company announced a figure of 27 million pounds.