Friday, 28 September, 2007

by Barry Fitzgerald
The Age - Business Day

RIO TINTO's uranium subsidiary, Energy Resources of Australia, has shot higher on the market after revealing a handy reserve increase and early expansion plans for its Ranger mine inside Kakadu National Park in the Northern Territory.

Shares in ERA rose $1.13 to $18.45 after it revealed total reserves had increased by 4857 tonnes of uranium oxide after the design of the open-cut was extended.

The increase represents about a year's production at the mine, Australia's biggest, and extends mining operations from 2008 to 2012, with processing operations continuing to at least 2020.

ERA will spend about $57 million to extend the open-cut and has approved expenditure of another $10 million for a study to extend mine life beyond 2012 and to increase production from the processing plant.

The company also told the market it believed it was on top of its water-handling difficulties. Heavy rain in February flooded one of the pits, which is now close to being emptied.

"Normal" production levels of about 5500 tonnes a year are now forecast for next year, up by 10 per cent on previous guidance.

The reserve upgrade at Ranger was not as big as BHP Billiton's uranium upgrade at Olympic Dam earlier this week but, in terms of share price celebration, it proved to be more rewarding for ERA.

That was because the revenue and profit impact of the extra uranium can be plugged in to broker valuation models for ERA with immediate effect. That compares well with Olympic Dam, where BHP has yet to detail its expansion for the project and doubts over whether the expansion will take effect in 2013 or 2015.

Extending the life of Ranger also means it will continue to produce after the last of its low-priced uranium contracts have expired. The group has been receiving about $US18 a pound for its uranium under contracts that were written when uranium was in the doldrums.

The spot price for uranium has since surged. Even after recent weakness, the spot price remains historically high at $US85 a pound. New supply contracts are generally being written with floor prices of $US50 a pound, with no cap on the upside.

ERA's main growth opportunity remains the development of the $15 billion Jabiluka deposit. But the group has yet to secure consent from the traditional owners for the development to proceed. The owners earlier this year disputed claims made by Rio in London that an agreement was close.