Friday, 25 May, 2007

by Greg Peel
FN Arena

The eve of the 40th anniversary of the successful referendum to allow indigenous Australians to become citizens is probably not the best time Rio Tinto's (RIO) head of Energy, Preston Chiara, could have chosen to upset the Mirrar people of the Northern Territory.

Rio's 67% owned uranium subsidiary, Energy Resources of Australia (ERA), has been enjoying a solid run in the market these last couple of years on the back of the uranium boom, despite its legacy contracts. As uranium supply is expected to stay tight for several years yet, a lot of ERA's appeal has had to do with the fact it has a major deposit-in-waiting.

ERA's Ranger mine in the Northern Territory has been one of the more significant sources of the world's uranium for many years. Despite having its mine life increased due to the capacity to leach uranium oxide from previously uncommercial ore stockpiles, Ranger's uranium is like peak oil in Saudi Arabia - it's on the way out. But this has never bothered ERA too much, because up the road in the Kakadu National Park is another major resource in the form of Jabiluka.

Jabiluka may have become a working mine several years ago, but for its location. In the days when nuclear was still a dirty word, environmental protest managed to ensure the project did not go ahead. Then under Australia's three mines policy, Ranger remained in operation but Jabiluka remained a dream.

A relaxation of policy and a surge in the uranium price has brought Jabiluka back into calculation. Enough so that brokers such as UBS considered the possibility of the mine becoming operational some time around 2012-13 to be a 75% possibility. But apart from environmental sensitivity, there was one more hurdle ERA had to overcome. In order to mine Jabiluka, ERA needed the approval of the local indigenous landowners - the Mirrar people.

Perhaps Preston Chiara had become overly complacent given the attitude of the Martoo people of Western Australia. These indigenous landowners are champing at the bit for Rio to commence uranium production at its Kintyre site. Unfortunately for all concerned at present, WA does not allow uranium mining. But Chiara probably had the Martoo in mind when he told the gathered throng in London this week that the Mirrar would definitely "say yes" to Jabiluka.

Alas, he didn't think to check first.

Having been taken for granted, the Mirrar people have responded by refuting Chiara's claim. Clearly upset by the assumption, the Mirrar will now become a far more vigilant obstacle in the path to Jabliluka exploitation. Nothing means more to Australia's indigenous peoples than the land of their ancestors. Uranium spoils are not a sufficient carrot. Witness the indigenous of Alice Springs this week knocking back $60m of government money to upgrade housing on the caveat that the Northern Territory government would assume leasehold of the land.

Chiara's gaffe has been a driver of ERA's fall from $25 to under $22 in the last couple of days. UBS has responded this morning by reducing its "chance of Jabiluka going ahead" rating from 75% to zero. UBS is no longer factoring Jabiluka into its valuation. The analysts dropped their target price 20% from $30.60 to $24.50.

This follows an initiation of coverage on ERA (as distinct from Rio) by Macquarie on Monday with an Underperform rating. Macquarie is not happy with what it sees as an "opaque" industry highlighted by ERA's failure to reveal the truth behind its legacy contract commitments.

ERA's share price has today bucked the industry trend, however, and bounced 3% by lunch.