ERA pulls production upgrade and profit out of hat
Friday, 27 July, 2007
by Jamie Freed
Sydney Morning Herald
The Rio Tinto-controlled company's shares rose 8.6 per cent to close $1.66 higher at $20.92 after it forecast production of 5000 tonnes of uranium this year and 5200 tonnes next year.
Following heavy rains earlier this year which flooded the high-grade portion of its open pit mine, ERA had predicted it would produce around 4750 tonnes this year and 3300 tonnes next year.
"It was surprising, wasn't it?" Macquarie analyst John Moorhead said. "I don't think many in the market would have had the production figures doing what they are doing."
ERA said it had received approval to use some surrounding land for irrigation and had made efforts to increase uranium recovery from ore in its processing plant.
"The issue was really about the movement of water," ERA spokeswoman Amanda Buckley said. "It's not just as easy as finding an engineering solution. We [had] to get regulatory approval for it."
ERA declared "force majeure" on its contracts after the rainfall, allowing it to deliver the uranium to customers later than expected. Given ERA signed its contracts during a time of historically low uranium prices, it received an average of only $US16.90 per pound in the first half.
Now that it has announced a production upgrade, it should be able to satisfy those contracts sooner than analysts had expected, replacing them with higher-priced contracts. ERA noted new long-term contracts were being signed at $US95 a pound. The spot price of uranium fell $US10 a pound to $US120 a pound this week but remains near record levels due to a shortage.
Along with the production upgrade, ERA reported a half-year profit of $5.7 million, down 71 per cent from last year's $19.9 million figure. Last month ERA predicted it would lose between $5 million and $10 million in the first half, but accounting adjustments instead led to a small profit.
Earlier this week UBS said it liked the outlook for ERA over the longer term due to continued strong uranium demand and potential mine life extensions.
"A key near-term risk is that spot uranium prices have declined for each of the last four weeks," UBS said. "While we think this is a short-term easing due to seasonality, it still represents a risk to sentiment."
ERA said it had received encouraging results from recent exploration drilling. A feasibility study on an extension to its Ranger pit 3 should be completed later this year. It has also begun construction on a plant meant to produce 400 tonnes a year from stockpiled lateric ore. The project should be commissioned early next year.