Mixed Profit Result Poses Value Question For ERA

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

By Chris Shaw

For leading Australian uranium play Energy Resources of Australia ((ERA)) the first-half profit result was a mixed one as while realised sale prices were better than many in the market expected there was the corresponding negative of lower sales volumes.

Costs were the other issue with respect to the result, Macquarie suggesting here the company experienced an explosion in the period and JP Morgan pointing out the increase in costs that resulted from the flooding of the group’s Ranger mine have not gone away, leaving unit processing costs 41% higher than at the same time a year ago.

The higher than expected cost outcome has seen cuts to earnings estimates across the market, JP Morgan cutting its numbers this year by 29%, in 2009 by 17% and in 2010 by 16%, while Macquarie has adjusted its numbers down by 3%, 9% and 5% respectively.

In earnings per share (EPS) terms this leaves consensus forecasts according to the FNArena database at 45.5c this year and 95.2c in 2009, while forecasts for 2010 are as high as Citi’s 183.8c and as low as ABN Amro’s normalised forecast of 95.2c.

Assuming more market average numbers than ABN Amro’s the outlook is still for strong earnings growth in coming years and this is why several brokers continue to rate the stock as a Buy even though the half yearly profit result highighted some earnings issues.

For Deutsche Bank the company’s future continues to look bright given the outlook for strong earnings growth flowing from expectations of significant increases to production in coming years. It is a view shared by Citi as while the company sold 1,746 tonnes of ore in the period there is scope in the broker’s view for production to increase to as much as 8,000 tonnes per year or more in coming years.

As the broker points out the likelihood of a 10 million tonne heap leach facility being brought on-line at Ranger has the potential to add 3-4,000 tonnes annually to output, while there is still excess back-end plant capacity that would enable a further lift in production.

JP Morgan agrees the heap leach operation would likely prove to be a positive catalyst for the share price, while the broker also expects the group to announce further exploration success at its various prospects over the course of the next year as drilling continues.

But in the view of ABN Amro the half-yearly result implies a less aggressive expansion outlook than it had previously factored in, particularly as expanding Ranger to include underground mining now appears a long-term option rather than something that might occur in the next couple of periods.

This creates something of a value question in the market and the broker suggests given its new production expectations the stock is now currently at or around fair value. Merrill Lynch agrees as it has trimmed its 2009 earnings slightly to account for the impact of increasing costs, while JP Morgan and GSJB Were also rate the stock as a Hold at current levels.

Citi remains an out and out bull though as it continues to be positive on the outlook for both uranium prices and value creation within ERA itself. As an example of the potential upside the broker points out its current valuation on the stock is $19.00 but this implies Jabiluka is valued at only around $4.00 per share.

In contrast, if current industry transaction multiples are applied to the project and are based on a resource of 298 million pounds it is worth as much as $10-$13 per share. As a result there is no change to the broker’s price target on the stock of $26.00, which is above the average price target according to the FNArena database of $24.58.

UBS is the most aggressive with a target of $28.50, while JP Morgan is now the most conservative having lowered its target post the result to $21.20 from $23.00. Thomson One Analytics shows a median price target on the stock of $26.00.

Overall the FNArena database shows three Buy recommendations and six Holds, Macquarie the only broker to adjust its rating post the result in moving from Neutral to Outperform. Shares in ERA today are weaker in line with the broader market and as at 1.35pm the stock was down 95c or 4.2% at $21.70. This compares to a trading range over the past 12 months of $14.20 to $24.95.

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