ERA Beats Brokers But Reactions Mixed

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED. For more info SHARE ANALYSIS: ERA

By Chris Shaw

Pleasant surprises have been few and far between in the Australian resources sector of late, but uranium producer Energy Resources of Australia ((ERA)) has delivered just that. Its quarterly production report was slightly better than most in the market had expected.

The company’s production for the quarter of 1,634 tonnes was up 21% in quarter on quarter terms and 5% in year on year numbers. The result was 8% better than UBS had expected and also above the forecasts of ABN Amro and GSJB Were, while the company was also able to deliver a modest increase in average head grades for the period.

According to Bank of America-Merrill Lynch, there is scope for 2009 production numbers to beat current expectations if these higher grades can be maintained through the period. ABN Amro sees scope for margins to come in a little better than expected as well.

One other surprise with the result, as noted by Citi, was a better than expected insurance win of around $188 million. This stemmed from storms the company experienced at its projects in 2006/07. The broker estimates this should deliver a post-tax gain of around $100 million to 2008 full year earnings.

While these are undeniably positives, JP Morgan is more cautious on the result, as it suggests the company has a history of strong December quarters given weather conditions are more favourable. However, conditions normally turn less favourable in the March quarter and production normally falls.

As a result, the broker sees any share price strength stemming from the quarterly result as an opportunity for investors to take some profits before the next quarter’s numbers come out. JP Morgan remains at a Neutral rating, while Macquarie recently downgraded the stock to Neutral from Outperform on valuation grounds given relative outperformance through much of 2008.

Others remain more positive. UBS has upgraded the stock to Buy from Hold post the quarterly, as not only was the production report solid, but in the broker’s view the market is gradually becoming more comfortable in ascribing value to the Ranger 3 Deeps project.

Deutsche Bank sees the initial resource for the project, expected to be announced this quarter, to be the key to the share price outlook. However, given the stock is close to its target price at present, the broker is sticking to its Hold rating. Highlighting the range of views on the stock, GSJB Were remains at Sell, as it sees a subdued outlook for the uranium sector generally given production continues to meet demand requirements.

On the broker’s numbers, the current ERA share price requires a realised uranium price of US$60 per pound to be justified. But with the company not delivering at this level, there is little value at current levels, in its view. The broker is the only one in the FNArena database with a Sell recommendation, compared to four Buy ratings and four Holds.

With relatively modest changes to earnings estimates following the quarterly report, the major changes have been to price targets. Citi has made the largest adjustment in lifting its target to $19.20 from $16.60. UBS upped its target to $21.00 from $19.50 and JP Morgan increased its target by around 30c. The average target according to the FNArena database increased to $19.02 from $18.31.

Today, shares in ERA are down in line with the broader market and as at 11.00am the stock was $1.03 or 5.6% lower at $17.25. This compares to a trading range over the past 12 months of $9.35 to $24.95.

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