Valuation Not Production The Issue For ERA

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

By Chris Shaw

Over the last three years uranium miner Energy Resources of Australia ((ERA)) has produced on average 32% less uranium in the March quarter than in the December quarter as the wet season impacts on the company’s ability to access high grade ore at the bottom of the pit at its Ranger mine.

JP Morgan notes the same has happened again this year as production for the March quarter was down 26% compared to the previous quarter largely due to wet weather impacting on operations, Bank of America-Merrill Lynch viewing the result as disappointing enough to cause minor changes to its full year production numbers.

In JP Morgan’s view, the company will be able to make up the difference over the remainder of 2009 and so it sees little earnings impact from the production report, a view shared by Bank of America-Merrill Lynch as it has cut its earnings estimate for this year by just 2%.

In earnings per share (EPS) terms BA-ML is forecasting 111c this year and 141c in 2010, JP Morgan is at 102.3c and 154.9c respectively, UBS expects EPS of 157c and 297c and consensus forecasts according to the FNArena database are 123.9c and 179.6c respectively.

Given no major earnings revisions post this week’s March production report, the issue then becomes one of valuation and there is a growing view the stock is now looking expensive. UBS argues the continued positive news flow regarding the group’s Ranger 3 Deeps project increases the likelihood of an increase in mine life and factoring this in sees the broker increase its price target to $22.00 from $21.00. At the same time the broker has downgraded the stock to a Neutral rating from Buy previously to account for recent relative share price outperformance.

JP Morgan suggests there is currently no more than a 50% change the Ranger project develops into a 10 million tonnes per annum project, while it views the possibility of a successful development outcome at Jabiluka as around the same level.

In the broker’s view the market at current levels is pricing in successful outcomes in both cases and as this is no certainty the shares are seen as expensive, which supports its Underweight rating. Macquarie argues much the same thing, noting while the stock is attractive for its defensive characteristics there is simply not the value at current levels to justify anything other than an Underperform recommendation.

BA-Merrill Lynch acknowledges the valuation upside is less apparent after the recent share price gains but retains its Buy recommendation, attracted to the company’s solid balance sheet and strong earnings growth potential. As well, the broker points out the Ranger 3 Deeps project could add as much as 39% or $5.30 to its current valuation as the project is currently not included in its valuation model.

Overall the FNArena database shows the stock is rated as Buy, Hold and Sell three times each with an average price target of $18.89, down from $19.29 prior to the quarterly production report. Shares in ERA today are trading higher and as at 2.10pm the stock was up 48c or 2.3% at $21.73. This compares to a range over the past year of $9.35 to $24.95.

In positive industry news, uranium consultant Ux Consulting announced this week the first increase for the U3O8 spot price in calendar 2009. UxC lifted its weekly spot price indicator by US50c to US$40.50/lb to bring its price benchmark in line with peer TradeTech’s.

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